2.4.3 Analyze the changes

The motion detector has now become the better choice. The new information dramatically reduces the EV for the smoke and fire detector. What is the main reason for the lower EV?

Figure 2.4.3

2_4_3


One million dollars revenue is still possible with a commercial grade safety certification, but the likelihood of that outcome is only 30%. Substantial revenue of $800,000 with a 60% outcome is still possible with a residential grade certification. However, that is not enough to offset the resulting lower EV at this node. Since you must use this EV as the input for the development outcome chance node (with only a 50% chance of success) the overall EV for the smoke and fire detector falls below that of the motion detector.

The certification process itself is not the culprit in reducing the EV for the smoke and fire detector. The $5000 investment cost barely affects the EV calculations. The small chance of no certification is also only a small factor.

Instead, the main reason is the relatively modest probability of obtaining the optimal commercial certification. This lowered probability multiplied by the anticipated revenue significantly lowers the overall EV for that branch. Even if the probability of obtaining a commercial-grade certification increases to 50% the resulting EV is still less than that for the motion detector.

This analysis suggests two main factors that readily affect the EV for the smoke and fire detector. One factor is anticipated revenue. The other is the chance of obtaining the optimal commercial-grade certification.

You can confidently summarize your report to Really Big Ideas with these presentation points:
  • The smoke and fire detector is now significantly more risky since greater uncertainty exists in knowing which certification grade may be obtained.

  • The smoke and fire detector profits are also potentially lessened, especially if a commercial grade certification is not obtained.

  • Together, this combination of greater risk and potentially fewer profits from a less desirable market significantly reduces the attractiveness of the smoke and fire detector project.

This page concludes the decision scenario exercise.

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