Blake Electronics case
Case: Blake Electronics
Statement of the problem:
a. Should Steve contract the services of an outside research agency?
b. If survey is warranted, should he employ MAI or I&K?
c. Should the new product line be introduced?
MAI’s proposal directly gives Steve the conditional probabilities he needs (e.g., probability of a successful venture given a favorable survey). Although the information from Iverstine and Kinard
(I&K) is different, we can easily use Bayes’ theorem to on I&K information to compute the revised probabilities (see file P8-Blake.XLS, sheet
Posterior
). As such, does not need any additionalinformation from I&K.(2)
Steve’s problem involves three decisions. First, should he contract the services of an outsideresearch agency? Second, if a survey is warranted, should he employ MAI or I&K? Third, in anycase, should the new product line be introduced?
The TreePlan solution for Steve’s problem is shown in file P8
-Blake.XLS.If Steve decides not to conduct a survey, the decision is to introduce the product with an EMV of $700,000 [= (0.6)($1,500,000) + (0.4)(-$500,000)].If Steve decides to conduct the survey, he has to choose between MAI and I&K. If he chooses MAIfor the survey, the best choice is to introduce the product irrespective of whether the survey resultsare favorable or unfavorable. The EMV is $800,000 if the survey results are favorable, while theEMV is only $200,000 if the survey results are unfavorable. The overall EMV of hiring MAI is$500,000 [= (0.5)($800,000) + (0.5)($200,000)].If Steve chooses I&K for the survey, the best choice is to introduce the product if survey results arefavorable, for an EMV of $940,000. On the other hand, if the survey results are unfavorable, the bestdecision is to not introduce the product for an EMV of -$300,000 (the cost of the survey). The overallEMV of hiring MAI is $468,800 [= (0.62)($940,000) + (0.38)(-$300,000)].Comparing these alternatives, Steve should not hire either firm to do the
Statement of the problem:
a. Should Steve contract the services of an outside research agency?
b. If survey is warranted, should he employ MAI or I&K?
c. Should the new product line be introduced?
MAI’s proposal directly gives Steve the conditional probabilities he needs (e.g., probability of a successful venture given a favorable survey). Although the information from Iverstine and Kinard
(I&K) is different, we can easily use Bayes’ theorem to on I&K information to compute the revised probabilities (see file P8-Blake.XLS, sheet
Posterior
). As such, does not need any additionalinformation from I&K.(2)
Steve’s problem involves three decisions. First, should he contract the services of an outsideresearch agency? Second, if a survey is warranted, should he employ MAI or I&K? Third, in anycase, should the new product line be introduced?
The TreePlan solution for Steve’s problem is shown in file P8
-Blake.XLS.If Steve decides not to conduct a survey, the decision is to introduce the product with an EMV of $700,000 [= (0.6)($1,500,000) + (0.4)(-$500,000)].If Steve decides to conduct the survey, he has to choose between MAI and I&K. If he chooses MAIfor the survey, the best choice is to introduce the product irrespective of whether the survey resultsare favorable or unfavorable. The EMV is $800,000 if the survey results are favorable, while theEMV is only $200,000 if the survey results are unfavorable. The overall EMV of hiring MAI is$500,000 [= (0.5)($800,000) + (0.5)($200,000)].If Steve chooses I&K for the survey, the best choice is to introduce the product if survey results arefavorable, for an EMV of $940,000. On the other hand, if the survey results are unfavorable, the bestdecision is to not introduce the product for an EMV of -$300,000 (the cost of the survey). The overallEMV of hiring MAI is $468,800 [= (0.62)($940,000) + (0.38)(-$300,000)].Comparing these alternatives, Steve should not hire either firm to do the