Dell's Product Development Process
1. Using data in case exhibit 8 and making appropriate assumptions, perform a comparison of the three options for their expected profit. Which approach offers the greatest risk/reward? Why?
The following table makes a comparison of the three options available for Dell and their expected profits. As reflected, the greatest potential return comes from an investment in LiOn technology. However, this investment comes with a 60% probability the technology will be successful, and if it is, stands to return $584 M in net margin. If the technology is not successful, net margins drop to $234.5 M as significant rework would be required adding to the schedule and cost of product development. In addition, unit sales would be reduced by 4% for every month of delay. This option represents the greatest risk vs reward as you will see that other options either have no risk associated with them (Option 1) or have much less variance in the return differences between success or failure of the project (Option 3). Option | | Outcome | Probability of success | Project Cost | Gross Margin | Net Margin | Option 1: NiHi | | | 100% | $10 M | $495 M | $485 M | Option 2: LiOn | | Success | 60% | $10 M | $594 M | $584 M | | | Failure | 40% | $13 M | $247.5 M | $234.5 M | Option 3 : Defer | Over Design | LiOn Success | 60% | $22 M | $594 M | $572 M | | | LiOn Failure | 40% | $19 M | $495 M | $475 M | | Dual Path | LiOn Success | 60% | $12.5 M | $594 M | $582 M | | | LiOn Failure | 40% | $12.5 M | $495 M | $482.5 M |
2. What are the strengths and weaknesses of each of the options available to Mark Holliday? What are the pros and cons of freezing product specifications early in the product development process?
The three options available to Holliday are to 1) go to market with the proven NiHi technology, 2) go to market with the new LiOn technology, 3) defer a commitment to either technology by over-designing the product to work with either
The following table makes a comparison of the three options available for Dell and their expected profits. As reflected, the greatest potential return comes from an investment in LiOn technology. However, this investment comes with a 60% probability the technology will be successful, and if it is, stands to return $584 M in net margin. If the technology is not successful, net margins drop to $234.5 M as significant rework would be required adding to the schedule and cost of product development. In addition, unit sales would be reduced by 4% for every month of delay. This option represents the greatest risk vs reward as you will see that other options either have no risk associated with them (Option 1) or have much less variance in the return differences between success or failure of the project (Option 3). Option | | Outcome | Probability of success | Project Cost | Gross Margin | Net Margin | Option 1: NiHi | | | 100% | $10 M | $495 M | $485 M | Option 2: LiOn | | Success | 60% | $10 M | $594 M | $584 M | | | Failure | 40% | $13 M | $247.5 M | $234.5 M | Option 3 : Defer | Over Design | LiOn Success | 60% | $22 M | $594 M | $572 M | | | LiOn Failure | 40% | $19 M | $495 M | $475 M | | Dual Path | LiOn Success | 60% | $12.5 M | $594 M | $582 M | | | LiOn Failure | 40% | $12.5 M | $495 M | $482.5 M |
2. What are the strengths and weaknesses of each of the options available to Mark Holliday? What are the pros and cons of freezing product specifications early in the product development process?
The three options available to Holliday are to 1) go to market with the proven NiHi technology, 2) go to market with the new LiOn technology, 3) defer a commitment to either technology by over-designing the product to work with either