Product design strategy , capacity planning, and decision analysis

answer the following questions which are given in writing

1. PRODUCT DESIGN STRATEGY 

Creative Technology (CT) has just pioneered a high-performance disk drive for engineering workstations. The market for this product is highly lucrative because very few companies have the technology to develop a competing product. Storage Technology (ST) has the needed design expertise and has decided to enter the market to compete with Creative Technology. After careful screening of different new product ideas, Storage Technology finds the following three product design options attractive:

Option	Development Cycle Time (months)	Product  Performance  Rating	Project Development Expense ($ Millions)
I	20	160	5.0
II	15	120	4.5
III	10	80	4.0

Strategy option I is a "revolutionary" strategy because it employs a technology that is new to the company and the industry. The strategy will develop a product that has a performance rating of 160 but it requires a long development cycle of 20 months. Strategy option III is an "evolutionary" design. Option III makes use of proven technology and requires 10 months to launch the product. The performance rating of the product is 80 (on a consumer satisfaction scale). Strategy option II is in between I and III in terms of performance and development time. Development expense includes capital and labor costs and increases with the development cycle as indicated.

According to industry experts, Creative technology's current product has a performance rating of 100. The company sells its product for $2,000. The demand window for this product is expected to last for another sixty months. Demand is assumed to be constant over the entire demand window and total market sales are estimated to be 2,000 units/month. Storage Technology also plans to sell its new product for $2,000. The unit production cost of the product excluding the development expense is $1,500 regardless of the development option selected. Assume that market share for Storage Technology is determined by the following function:

Storage Technology Market Share =

STp = Storage Technology's Product Performance Rating

CTp = Creative Technology's Product Performance Rating

Thus, if Storage Technology adopts strategy option I, it will capture a market share of 160/(100 + 160) = 8/13 for a period of 40 months (60 - 20) since 20 months has been spent in development.

Assume that Creative Technology does not introduce a new product during the entire demand window and that both firms keep their prices at $2,000.

What is the most profitable strategy option for Storage Technology?

2. CAPACITY PLANNING. 

A manufacturer of dishware is considering modernizing its current manufacturing facility which makes the most popular line of dishware. The modernization of the facility will dramatically decrease the manufacturing cost for large production volumes.

The annual demand for this line of dishware along with its probability distribution is given in Table 1 (column 1 and 2 respectively). The current variable manufacturing cost per each unit produced varies according to the demand volume (as given in column 3 of Table 1). Each unit is sold for $35 per unit. The existing facility has annual fixed operating cost of $200,000.

After modernization, the manufacturing facility will require higher annual fixed operating cost of $240,000. Variable manufacturing cost per units will change according to the last column in Table 1 (notice that it is considerably lower for the higher demand volumes).

Demand (units per year)	Probability	Current variable cost ($ per unit)	New Variable cost ($ per unit)
8,000	0.5	7.75	9.40
10,000	0.2	5.00	5.20
15,000	0.2	5.40	3.80
20,000	0.1	7.50	4.90

Table 1.

Should the company modernize its current facility based on the annual net expected profits?

3. DECISION ANALYSIS. 

A company is deciding whether or not to go ahead with a project. If the project is successful, the company will make $500,000 profit. If the project fails, the company's net loss will be $250,000.  The probability of the project’s success is 0.5.

a) If perfect information about the success or failure of this project was available, how much would this information be worth?

The company occasionally hires consultant to update their estimates of success/failure. Consultant predicts either success or failure for the project; in either case the company must decide whether or not to go ahead with the project. The company is considering hiring Harry who charges $10,000 for his services. 

The probability of Harry predicting success is 0.5. The following probabilities were determined based on Harry’s previous predictions:

P(project succeeds when Harry predicts success) = 0.8

P(project fails when Harry predicts failure) = 0.8

b) Should Harry be hired? If yes, what is the value of his prediction to the company?