CHAPTER 8 DECISION ANALYSIS

Internet Case Study: Drink-At-Home In!" Drink-At-Home, Inc. (DAH, Inc.), develops, processes, and markets mixes to be used in nonalcoholic cocktails and mixed drinks for home consumption. Mrs. ee, !ho is in char"e of research and development at DAH, Inc., notified the president, Mr. Dick #ones, this mornin" that excitin" developments in the research and development section indicate that a ne! bevera"e, an instant pina colada, should be possible because of a ne! !a$ to process and preserve coconut. Mrs. ee is recommendin" a ma%or pro"ram to develop the pina colada. &he estimates that expenditure on the development ma$ be as much as '()),))) and that a $ear*s !ork !ould be re+uired. In the discussion !ith Mr. #ones, she indicated that she thou"ht the possibilit$ of her outstandin" people successfull$ developin" such a drink no! that she*d done all the reall$ important !ork !as in around ,) percent. &he also felt that the likelihood of a competin" compan$ developin" a similar product in (- months !as .) percent. Mr. #ones is strictl$ a bottom line "u$ and is concerned about the sales volume of such a bevera"e. /onse+uentl$, Mr. #ones talked to Mr. 0esnette, his market research mana"er, !hose specialt$ is ne! product evaluation, and !as advised that a market existed for an instant pina colada, but !as some!hat dependent on acceptance b$ both "rocer$ stores and retail li+uor stores. Mr. 0esnette also indicated that the sales reports indicate that another firm !as considerin" a line of tropical drinks. If the other firm should develop a competin" bevera"e the market !ould, of course, be split e+uall$ amon" the firms. Mr. #ones pressed Mr. 0esnette to make future sales estimates for various possibilities and to indicate the present (discounted value of future profits) value. Mr. 0esnette provided the follo!in" table. /onsumer Acceptance (&ales 1otential) &ubstantial Moderate o! 1robabilit$ ).() ).4) ).5) 1resent 2alues (Discounted 2alue of 3uture 1rofits) '.)),))) '4)),))) '6)),)))

Mr. 0esnette*s fi"ures did not include (() cost of research and development, (-) cost of ne! production e+uipment, or (5) cost of introducin" the pina colada. 7he cost of the ne! production e+uipment is expected to be '6),))) because of the special !a$ the coconut needs to be handled, and the cost of introducin" the ne! product is expected to be another '6),))) because of the point-of purchase displa$s that !ould be necessar$ to introduce the ne! product. Mrs. ee has indicated that she does have t!o alternative development proposals, as follo!s8 A reduced research pro"ram for the first ei"ht months (at a cost of '(),))) per month) to see if someone else comes out !ith a similar product first. If no competitor does, and the .-month stud$ indicated a success, DAH !ould then proceed !ith a crash pro"ram that !ould take place in months , throu"h (- at a cost of an additional '4),))). Ho!ever, if a competitor does come out !ith a similar product first, or if the .-month stud$ indicated a failure, DAH !ould abandon its efforts. 7he likelihood of success under this reduced research pro"ram is the same as the more orderl$ development, and the likelihood of a competin" compan$ introducin" a product in . months is 4) percent.

9se a reduced research pro"ram for 4 months (at a cost of '(),))) per month), and maintain an a!areness of industr$ developments to see if someone else develops a product. If someone else has developed a product at the end of six months it !ould cost onl$ an additional '5),))) to anal$:e their product and duplicate it. If no competitor has developed a product in 4 months, DAH could continue their reduced research pro"ram for - more months at !hich point, the previous alternative (.-month pro"ram) !ould appl$.

Mr. 0esnette, bein" the "reat marketer that he is, is of course reluctant to be second on the market !ith a ne! product. He sa$s that the first product on the market !ill usuall$ obtain a "reater share of the market, and it !ill be difficult to !in those customers back. /onse+uentl$, he indicates that onl$ about 6) percent of the sales that he indicated in the table could be expected if Drink-at-Home !aited until competin" brands !ere alread$ on the market. Moreover, he suspects that there is onl$ a 6)-6) chance that the competitor !ill be out !ith a product !ithin the next six months. ;hat do $ou recommend<