Case $16\mathrm{.}2$ Smart Steering SupportOn a sunny May morning, Marc Binton, CEO of Bay Area Automobile Gadgets $($BAAG$),$ enters theconference room on the $40$th floor of the Gates building in San Francisco, where BAAGs offices arelocated. The other executive officers of the company have already gathered. The meeting has only oneitem on its agenda: planning a research and development project to develop a new driver supportsystem $($DSS$).$ Brian Huang, Manager of Research and Development, is walking around nervously. Hehas to inform the group about the R&D strategy he has developed for the DSS$.$ Marc has identifiedDSS as the strategic new product for the company. Julie Aker,Vice President of Marketing, will speakafter Brian. She will give detailed information about the target segment, expected sales, and marketingcosts associated with the introduction of the DSS$.$BAAG builds electronic nonaudio equipment for luxury cars. Founded by a group of Stanfordgraduates, the company sold its first producta car routing system relying on a technology calledglobal positioning satellites $($GPS$)$a few years ago. Such routing systems help drivers to finddirections to their desired destinations using satellites to determine the exact position of the car. Tokeep up with technology and to meet the wishes of their customers, the company has added a numberof new features to its router during the last few years. The DSS will be a completely new product,incorporating recent developments in GPS as well as voice recognition and display technologies. Marcstrongly supports this product, as it will give BAAG a competitive advantage over its Asian andEuropean competitors.Driver support systems have been a field of intense research for more than a decade. Thesesystems provide the driver with a wide range of information, such as directions, road conditions,traffic updates, etc. The information exchange can take place verbally or via projection of text onto thewindscreen. Other features help the driver avoid obstacles that have been identified by cars ahead onthe road $($these cars transmit the information to the following vehicles$).$ Marc wants to incorporate allthese features and other technologies into one support system that would then be sold to BAAGscustomers in the automobile industry.After all the attendees have taken their seats, Brian starts his presentation: Marc asked me toinform you about our efforts with the driver support system, particularly the road scanning device. Wehave reached a stage where we basically have to make a go or no$-$go decision concerning the researchfor this device, which, as you all know by now, is a key feature in the DSS$.$ We have alreadyintegrated the other devices, such as the PGS$-$based positioning and direction system. The question wehave to deal with is whether to fund basic research into the road scanning device. If this research weresuccessful, we then would have to decide if we want to develop a product based on these resultsor ifwe just want to sell the technology without developing a product. If we do decide to develop theproduct ourselves, there is a chance that the product development process might not be successful. Inthat case, we could still sell the technology. In the case of successful product development, we wouldhave to decide whether to market the product. If we decide not to market the developed product, wecould at least sell the product concept that was the result of our successful research and developmentefforts. Doing so would earn more than just selling the technology prematurely. If$,$ on the other hand,we decide to market the driver support system, then we are faced with the uncertainty of how theproduct will be received by our customers.You completely lost me$.$ snipes Marc.Max, Julies assistant, just shakes his head and murmurs, those techno$-$nerds. $...$Brian starts to explain: Sorry for the confusion. Lets just go through it again, step by step.Good ideaand perhaps make smaller steps! Julie obviously dislikes Brians style ofpresentation.OK$,$ the first decision we are facing is whether to invest in research for the road scanningdevice.How much would that cost us$?$ asks Marc.Our estimated budget for this is $$300,000.$ Once we invest that money, the outcome of theresearch effort is somewhat uncertain. Our engineers assess the probability of successful research at $80$percent.Thats a pretty optimistic success rate, dont you think? Julie remarks sarcastically. She stillremembers the disaster with Brians last project, the fingerprint$-$based car security system. Afterspending half a million dollars, the development engineers concluded that it would be impossible toproduce the security system at an attractive price.Brian senses Julies hostility and shoots back: In engineering we are quite accustomed tothese success rates something we cant say about marketing. $...$What would be the next step? intervenes Marc.Hm$,$ sorry. If the research is not successful, then we can only sell the DSS in its current form.The profit estimate for that scenario is $$2$ million, Julie throws in$.$If$,$ however, the research effort is successful, then we will have to make another decision,namely, whether to go on to the development stage.If we wouldnt want to develop a product at that point, would that mean that we would haveto sell the DSS as it is now? asks Max.Yes, Max. Except that additionally we would earn some $$200,000$ from selling our researchresults to GM$.$ Their research division is very interested in our work and they have offered me thatmoney for our findings.Ah$,$ now thats good news, remarks Julie.Brian continues, If$,$ however, after successfully completing the research stage, we decide todevelop a new product then well have to spend another $$800,000$ for that task, at a chance of $35$percent of not being successful.So you are telling us well have to spend $$800,000$ for a ticket in a lottery where we have a $35$percent chance of not winning anything? asks Julie.Julie, dont focus on the losses, but on the potential gains! The chance of winning in thislottery, as you call it$,$ is $65$ percent. I believe that thats much more than with a normal lottery ticket,says Marc.Thanks, Marc, says Brian. Once we invest that money in development, we have twopossible outcomes: either we will be successful in developing the road scanning device or we wont. Ifwe fail, then once again well sell the DSS in its current form and cash in the $$200,000$ from GM forthe research results. If the development process is successful, then we have to decide whether tomarket the new product.Why wouldnt we want to market it after successfully developing it$?$ asks Marc.Thats a good question. Basically what I mean is that we could decide not to sell the productourselves but instead give the right to sell it to somebody else, to GM$,$ for example. They would pay us$$1$ million for it$.$I like those numbers! remarks Julie.Once we decide to build the product and market it$,$ we will face the market uncertainties andIm sure that Julie has those numbers ready for us$.$ Thanks.At this point, Brian sits down and Julie comes forward to give her presentation. Immediatelysome colorful slides are projected on the wall behind her as Max operates the computer.Thanks, Brian. Well, heres the data we have been able to gather from some marketingresearch. The acceptance of our new product in the market can be high, medium, or low, Julie ispointing to some figures projected on the wall behind her. Our estimates indicate that high acceptancewould result in profits of $$8\mathrm{.}0$ million, and that medium acceptance would give us $$4\mathrm{.}0$ million. In theunfortunate case of a poor reception by our customers, we still expect $$2\mathrm{.}2$ million in profit. I shouldmention that these profits do not include the additional costs of marketing or R&D expenses.So$,$ you are saying that in the worst case well make barely more money than with the currentproduct? asks Brian.Yes, thats what I am saying.What budget would you need for the marketing of our DSS with the road scanner? asksMarc.For that we would need an additional $$200,000$ on top of what has already been included inthe profit estimates, Julie replies.What are the chances of ending up with a high, medium, or low acceptance of the new DSS$?$asks Brian.We can see those numbers at the bottom of the slide, says Julie, while she is turning towardthe projection behind her. There is a $30$ percent chance of high market acceptance and a $20$ percentchance of low market acceptance.At this point, Marc moves in his seat and asks: Given all these numbers and bits ofinformation, what are you suggesting that we do$?(10\%)($a$)$ Organize the available data on cost and profit estimates in a table.$($b$)$ Formulate the problem in a decision tree. Clearly distinguish between decision and eventNodes.