CASE STUDY #1: DECISION ANALYSIS AT SCHAUMBURG EQUIPMENT MANUFACTURING Schaumburg Equipment Manufacturing (SEM), headquartered in Schaumburg, Illinois, is a privately owned designer and producer of traditional lawn mowers used by homeowners. SEM 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, SEMs 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 55% of total sales in the spring and summer (in the United States), about 30% in the fall, and about 15% in the winter. Annual sales are approximately $190 million. SEM has developed a prototype for a new snow blower for the consumer market. This product can exploit the companys 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, SEM faces two possible decisions: introduce the product globally at a cost of $750,000 or evaluate it in a North American test market at a cost of $300,000. If it introduces the product globally, SEM might find either a high or low response to the product. Probabilities of these events are estimated to be 0.5 each. With a high response, gross revenues of $1,700,000 are expected; with a low response, the figure is $600,000. If it starts with a North American test market, it might find a high response or a low response with probabilities 0.6 and 0.4, respectively. This may or may not reflect the global market potential. In any case, after conducting the marketing research, SEM 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 SEM stays only in North America, the expected revenue is $1,000,000. If it markets globally (at an additional cost of $500,000), the probability of a high global response is 0.75 with revenues of $1,750,000 ($650,000 if the global response is low). If the North American response is low and it remains in North America, the expected revenue is $350,000. If it markets globally (at an additional cost of $500,000), the probability of a high global response is 0.25, with revenues of $1,700,000 ($600,000 if the global response is low). Your consulting team needs to perform the following tasks: 1. Construct a decision tree, compute the relevant expected values, and determine the optimal decision strategy. (A hand-drawn tree is fine, but make sure that it is neat.) 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 (currently estimated to be 0.6 for high and 0.4 for low). 3. Summarize all of your results, including your recommendation and justification for it, in a formal memo to the SEMs executive committee. In addition to the correctness of your answers, your write-up will also be evaluated on how well you communicate the responses, including any assumptions that you need to make. You do not need to repeat background material in your write-up assume that the reader is familiar with the basic facts of the case. The write-ups will be evaluated on their content and presentation, including logic, organization, grammar, and spelling