Craig Smith has a problem. He is in the bidding for the CEO position of the biomedical firm Costcore Technology. His division received an injunction from the FDA to halt production on its serum. There is an issue of whether hepatitis is a contaminant in the system.

Craig Smith has consulted his manufacturing people and to meet the FDA’s requirements would cost the division about $100MM. Craig Smith is in competition for the CEO position with a rival from another division. If this problem occurs during the CEO process, it has a 90% chance of killing his bid to become the next CEO.

Craig Smith is confident that its process kills the virus and this is mostly a documentation issue.

If he is wrong, this could be several hundred million dollars. The product brings in about $100MM in profit every year. Craig Smith doesn’t know what he should do. So he starts mapping out his options. He could do nothing and hope there will be no penalties. The maximum penalty that the FDA ever handed down was $50MM, but there is a 50% chance the penalty could reach as high as $100MM and they would still have to spend the $100MM to clean the facility up, which could take up to a year. There’s a 80% chance the product would get pulled off the market for 1 years and a 20% chance for 2 years. In this case, there’s a 70% chance FDA would rule in 10 months, 20% in 1 year and 10% in 2 years.

He could try and do a little (spend about $5MM/yr) and hope that will make the FDA happy. If he can string this process out, he can become CEO and deal with it then. However, companies that string along the FDA along tend to get hit with maximum fines ($100MM) and suspension of their products for 3 years. However, Craig Smith can string this process out for 2 years before the FDA would get impatient.

He could just try and be honest and fix the problem. It would cost the company $100MM, but at least the product would still be selling.

The CEO position will be decided in 1 year. There’s a 50% chance they could finish in 9 months.

Draw a decision tree based on the penalties to the company. Calculate the expected penalties for each option. What is the best decision for the company?

Draw decision tree based on Craig Smith getting the CEO position. What is the best decision for Craig Smith?