Construct decision tree and determine the optimal strategy
Golden Gate Lawn Equipment (GGLE), headquartered in San Jose, California, is a privately owned designer and producer of traditional lawn mowers used by homeowners. GGLE provides most of the products to dealerships, which, in turn, sell directly to end users. In the United States, the focus of sales is on the eastern seaboard, California, the Southeast, and the south central states, which have the greatest concentration of customers. Outside the United States, GGLE’s sales include a European market, a growing South American market, and developing markets in the Pacific Rim and China. The market is cyclical, but the different products and regions balance some of this, with just less than 30% of total sales in the spring and summer (in the United States), about 25% in the fall, and about 10% in the winter. Annual sales are approximately $180 million. GGLE has developed a prototype for a new snow blower for the consumer market. This can exploit the company’s expertise in small-gasoline-engine technology and also balance seasonal demand cycles in the North American and European markets to provide additional revenues during the winter months. Initially, GGLE faces two possible decisions: introduce the product globally at a cost of $850,000 or evaluate it in a North American test market at a cost of $200,000. If it introduces the product globally, GGLE might find either a high or low response to the product. Probabilities of these events are estimated to be 0.6 and 0.4, respectively. With a high response, gross revenues of $2,000,000 are expected; with a low response, the figure is $450,000. If it starts with a North American test market, it might find a high response or a low response with probabilities 0.7 and 0.3, respectively. This may or may not reflect the global market potential. In any case, after conducting the marketing research, GGLE next needs to decide whether to keep sales only in North America, market globally, or drop the product. If the North American response is high and GGLE stays only in North America, the expected revenue is $1,200,000. If it markets globally (at an additional cost of $200,000), the probability of a high global response is 0.9 with revenues of $2,000,000 ($450,000 if the global response is low). If the North American response is low and it remains in North America, the expected revenue is $200,000. If it markets globally (at an additional cost of $600,000) the probability of a high global response is 0.05, with revenues of $2,000,000 ($450,000 if the global response is low). Your consulting team needs to perform the following tasks:
1. Construct a decision tree and determine the optimal strategy. (A hand-drawn tree is fine.) Make sure that you specify a complete sequence of decisions.
2. Evaluate the sensitivity of the optimal strategy to changes in the probability estimate of the response in the North American test market.