Question

GALE 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, GALE faces two possible decisions: introduce the product globally at a cost of $900,000 or evaluate it in a North American test market at a cost of $300,000. If it introduces the product globally, GALE 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 $1,800,000 are expected; with a low response, the figure is $500,000. If it starts with a North American test market, it might find a high response or a low response with probabilities 0.5 and 0.5, respectively. This may or may not reflect the global market potential. In any case, after conducting the marketing research, GALE 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 GALE stays only in North America, the expected revenue is $1,000,000. If it markets globally (at an additional cost of $200,000), the probability of a high global response is 0.8 with revenues of $1,800,000 ($500,000 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 0.1, with revenues of $1,800,000 ($500,000 if the global response is low).

Your consulting team needs to perform the following task:

Evaluate the sensitivity of the optimal strategy to changes in the probability estimate of the response in the North American test market.

Answer 1

As the Expected Net Revenue is Highest In case of 2b), Its Recommended to Sell globally and North America after Making Testing Market in North America.

Caluculations Verify Below