Question

A national restaurant chain has developed a new specialty sandwich. Initially, it faces two possible decisions: introduce the sandwich nationally at a cost of R180 000 or evaluate it in a regional test market at a cost of R29 000. If it introduces the sandwich nationally, the chain might find either a high or low response to the idea. Probabilities of these events are estimated to be 0,6 and 0,4, respectively. With a high response, gross revenues of R650 000 (at NPV) are expected; with a low response, the figure is R120 000. If it starts with a regional marketing strategy, it might find a low response or a high response at the regional level with probabilities 0,3 and 0,7, respectively. This may or may not reflect the national market potential. In any case, the chain next needs to decide whether to remain regional, market nationally, or drop the product. If the regional response is high and it remains regional, the expected revenue is R195 000. If it markets nationally (at an additional cost of R210 000), the probability of a high national response is 0,9 with revenues of R650 000 (R140 000 if the national response is low). If the regional response is low and it remains regional, the expected revenue is R95 000. If it markets nationally (at an additional cost of R210 000), the probability of a high national response is 0,05 with revenues of R650 000 (R140 000 if the national response is low).

(a) Using TreePlan, construct a decision tree and determine the optimal strategy.

(b) Conduct sensitivity analyses for the probability estimates using both one- and two-way data tables as appropriate.

(c) Develop the risk profile associated with the optimal strategy.

(d) Evaluate the risk associated with this decision, considering that it is a one-time decision.

(e) Summarise all your results, including your recommendation and justification for it, in a formal report to the executive in charge of making this decision.

Answer 1