Orion Controls Case

Topics: Expected value, Random variable, Probability theory Pages: 2 (653 words) Published: November 1, 2014

Orion Controls Case
Answer 1
I would say we should sell existing valves than develop an improved model and sell it at increased price if you simply look at the decision tree I made based on the assumption and information the case provides. The Expected Monetary Value (EMV) of building new model is $105,500, whereas we can earn $100,000 payoffs by selling current model (see Figure 1). When considering the situation the Orion Controls faces, however, I should reconsider my decision. Orion has established its reputation in leading-edge technology, product reliability, customer relations and willingness to design customized products. For such reputation, Avion Chemicals approached to Orion and asked them to develop a new valve with the offer of paying higher premium. To meet Avion’s expectation as well as to leverage Orion’s brand equity, building new “supersmart” valve seems inevitable. There are two factors we need to reconsider and evaluate if we go for building new valve: percentage of premium and the possibility for successful shortcut software development. One of Orion’s biggest risks involves the software development. Using a short-cut approach and developing the software within three months, the software development phase of the project has a 75% chance of being completed at a cost of $120,000. However, if they are unsuccessful, it will cost Orion three times as much, i.e., $360,000 and take eight months to complete. If the possibility for success will increase from 75% to 80%, the EMV of building new valve will go up from $105,500 to $117,500. In addition, if both Gide and Armstrong agree to pay a 110% premium for a dramatically improved valve and 10% premium for a modestly improved one instead of the original proposal, the EMV will significantly go up to $144,500 (See Figure 2). In conclusion, if these two can be changed, I will support Armstrong’s decision. This may possibly result in a competitor developing the product before...
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