- 25 Marks
QMDM – JULY 2020 – L2 – Q1 – Decision Alternatives for New Product Launch
Evaluate decision alternatives for launching a new banking product based on demand probabilities, calculate expected profits, determine the value of perfect information, define the complement rule, and discuss implications of decisions under uncertainty.
Question
A new commercial bank which has recently acquired license to operate as a bank in Ghana has developed a new product to position itself in the banking industry as a relevant player. It believes in a blue ocean strategy by creating its own market space to make competition irrelevant. As a marketing manager for the new bank, you have been asked to conduct a feasibility study of the new product. Management of the bank must make a decision with respect to the sales volume and ancillary resources that must be used to market this product for the ensuing year.
The least expensive decision alternative (d1) is to start selling the new product through existing sales channels and provide customer support as needed. The next alternative (d2) is to assign one full-time sales person to focus on this product. The third alternative (d3) is to have a team of six people dedicated to this product. Finally, a complete division (d4) consisting of about twelve people may be created to fully automate the product and engage in an extensive marketing campaign.
The potential profit from each decision alternative depends on the market acceptance or demand for this product which may be high, moderate or low depending on the circumstance. If market acceptance is high, each of the four decision alternatives, d1 through d4 will produce a profit of 200, 300, 600, and 900 thousand dollars respectively. If there is a moderate demand, the profits are likely to be 100, 100, 200, and 200 thousand dollars respectively. If the demand turns out to be low, then the profits will be 100, 100, -200 and -500 thousand dollars respectively. Anecdotal research in the banking industry suggests that with such products provides a probability estimate of demand to be high, moderate and low as 0.3, 0.5 and 0.2 respectively.
a) Which of the four decision alternatives should be selected by the bank and what will be the expected profit from this decision? (7 marks)
b) If a market research firm can provide perfect information about demand to the new bank (i.e. whether it will be high, moderate, or low) before a product launching decision is made, how much is that information worth to the new bank? (7 marks)
c) Define the complement rule of probability. (5 marks)
d) Discuss the implications of making decisions under conditions of uncertainty. (6 marks)
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