Introduction
The scenario of the case is based around the fact that the chief researcher of the beverage production company Drink-At-Home, Inc Mrs. Lee, and her team discovered the possibility of making an instant pina colada. However, the development of the final product may take a year and significant expenditure with no assurance of 100% success or a guarantee that the competitors would not do the same beverage first (Pearson Education par.2). This paper is to define the factors that may result in either successful, or unsuccessful implementation of the product, to provide the quantitative analysis for the possible case scenarios, and to present the optimal solution for the management.
Factors for success of the product development
The specifics of the product development in the food and beverage industry are classified as technical, thus, an external factor of production (Davis, Lockwood and Stone 20). In other words, the large influence lies in the competitor’s actions, technical and legal regulations, and both financial and technological resources.
To analyze the risks of product development, the manager is to define the disturbing factors (Hakes 74), that include inner disturbances, outer disturbances, and manufacturing variations (Kanji and Asher 112). In the case of the Drink-At-Home, Inc. those factors are the possibility of the final product not corresponding to the developers’ conception and the possibility that the other companies develop a similar product faster.
The major dilemma for the management, in this case, is what amount of costs spent on product development is justifiable, considering the risks (Doeg 43). This is why considering the existing risk factors for the success of the product the financial forecasting of its development should be based on the ratio of which product development strategy has lesser expenditure with the higher possibility of success (Wood 192).
Quantitative analysis of possible scenarios
There are four possible decisions for the management in this case. The orderly development will take $100,000 for the research and development itself, 100,000$ on the required equipment, and $150,000 on the material and its handling. Thus, it will cost $350,000 with the 90% possibility of success. In this scenario, the management counts on the substantial consumer acceptance with the profits of $800,000.
The second scenario presupposes $80,000 of all the development costs for 8-month research, plus $60,000 more only if success is guaranteed by the initial research. The success possibility is 60%. The expected profits with moderate acceptance are $600,000.
In the third scenario, the reduced development program will cost $60,000 for six months, plus additional costs of $30,000 in a case of success. The possibility of success is 50%. The expected profits are $500,000.
The ratio (the highest profit with the lowest risk) is the discounted value of profit divided by expenditure and multiplied by risk percentage of the expenditure. The table illustrates the indexes for all the scenarios.
Fig. 1. Table of the ratio (the highest profit with the lowest risk).
Conclusion
In conclusion, the option of the reduced research program and maintaining awareness of the developments of the similar products provide the highest profits with the lowest cost of the research in case of an unsuccessful product.
Works Cited
Davis, Bernard, Andrew Lockwood, and Sally Stone. Food And Beverage Management. Oxford [England]: Butterworth-Heinemann, 1998. Print.
Doeg, Colin. Crisis Management In The Food And Drinks Industry. New York, NY: Springer, 2005. Print.
Hakes, C. Total Quality Management: The Key To Business Improvement. New York, NY: Springer Science & Business Media, 1994. Print.
Kanji, Gopal K, and Mike Asher. 100 Methods For Total Quality Management. London: Sage, 1996. Print.
Pearson Education. “Internet Case – Drink-At-Home, Inc.” Quantitative Analysis for Management, 2015. Web.
Wood, Roy C. Strategic Questions In Food And Beverage Management. Oxford: Butterworth-Heinemann, 2000. Print.