decide bus 606 project fall 2021 2 whether B u s i n e s s F i n a n c e

Performance Lawn Equipment Case Study
Performance Lawn Equipment (PLE), headquartered in St. Louis, Missouri, is a
privately owned designer and producer of traditional lawn mowers used by
homeowners. In the past 10 years, PLE has added another key product, a
medium-size diesel power lawn tractor with front and rear power takeoffs, Class
I three-point hitches, four-wheel drive, power steering, and full hydraulics. This
equipment is built primarily for a niche market consisting of large estates,
including golf and country clubs, resorts, private estates, city parks, large
commercial complexes, lawn care service providers, private homeowners with
five or more acres, and government (federal, state, and local) parks, building
complexes, and military bases. PLE provides most of the products to
dealerships, which, in turn, sell directly to end users. PLE employs 1,660 people
worldwide. About half the workforce is based in St. Louis; the remainder is split
among their manufacturing plants. 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,
PLE’s sales include a European market, a growing South American market, and
developing markets in the Pacific Rim and China.
PLE 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, PLE
faces two possible decisions: introduce the product globally at a cost of
$850,000 or evaluate it in a North American test market at a cost of $200,000. If
it introduces the product globally, PLE 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 $2,000,000 are expected;
with a low response, the figure is $450,000. If it starts with a North American test
market, it might find a low response or a high response with probabilities 0.3 and
0.7, respectively. This may or may not reflect the global market potential. In any
case, after conducting the marketing research, PLE next needs to decide
BUS 606 Project Fall 2021
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whether to keep sales only in North America, market globally, or drop the
product. If the North American response is high and PLE stays only in North
America, the expected revenue is $1,200,000. If it markets globally (at an
additional cost of $200,000), the probability of a high global response is 0.9 with
revenues of $2,000,000 ($450,000 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 0.05, with revenues of $2,000,000
($450,000 if the global response is low).
Apply decision analysis to the decision problem facing PLE and advise the
company on their decision problem. Evaluate the sensitivity of the optimal
strategy to changes in the probability estimates of the high response to the
product when the product is introduced globally