DukeScience97371
Background DBVac is considering adding an additional product to…
Background
DBVac is considering adding an additional product to their lineup. The
company’s Research and Development (R&D) team has come up with three
different concepts for new vacuum cleaners and assigned them the codenames
Fin, Snorkel, and Facemask. Each of the three proposed products has a number
of different characteristics (described below) that distinguish them from one
another. However, the company can only bring one of these three products to
market in the near future.
As such, DBVac would like you to evaluate the three products using a few
different analyses, then write a business case recommending which of the three
new products to bring to market, detailing the reasons behind your
recommendation, and providing expectations the company should have for the
new product (e.g., how much they should expect to profit from its release).
Further, they would appreciate your help in providing a data-centric
recommendation as to which of the company’s four available product managers
would be best equipped to lead the project.
In assessing DBVac’s situation, please carefully read the content in this
background section as your response is very dependent on the content herein.
You’ll need to come back to this background section to find the data needed to
perform the analyses required in the assignment.
Candidate Products
DBVac is considering developing and bringing to market one of three possible
products, code-named Fin, Snorkel, and Facemask. Fin would be a very low-cost
model, Snorkel would be a mid-range model with some innovative features, and
Facemask would be a top-of-the-line model built on a drone platform.
To understand what the initial (pre-launch) development cost would be for these
potential new products, the company thinks it would be worthwhile to consider
the pre-launch development cost for its four most recent new product
development projects: the FarmBunny, RapidBunny, BunnyKing, and the
disastrous CozyCony. The company has analyzed facets of each of the three
potential new models (Fin, Snorkel, Facemask) to get a sense for how similar
each of the three is to the four previous new product development projects. This
was done under the assumption that, if the development process for the new
product is exactly like, for instance, the FarmBunny development process, then
the initial cost of development should be the same.
The initial cost of development for these previous new product development
projects were as follows:
FarmBunny: $2.3 million
RapidBunny: $4.2 million
BunnyKing: $4.6 million
CozyCony: $13.7 million
Fin
Fin would be DBVac’s lowest priced entry into the vacuum cleaner market,
providing no advanced features but still being a vacuum cleaner, technically
speaking. R&D would consist of aggressive down-costing measures to ensure the
affordability of product manufacturing.
In considering Fin’s initial R&D cost, DBVac has provided the following
estimates of the project’s similarity to past new product development projects.
30% probability of being similar to the FarmBunny initial R&D cost.
38% probability of being similar to the RapidBunny initial R&D cost.
5% probability of being similar to the BunnyKing initial R&D cost.
27% probability of being similar to the CozyCony initial R&D cost.
No additional revenue or cost is expected to be accrued during the initial year
(i.e., the R&D year) beyond the initial R&D cost. After this initial R&D year, sales
net of unit cost are expected to total $2.5 million in the first year, then increase by
19% each year thereafter.
The company expects to incur a cost of $800,000 to train service and support
personnel in handling the product during the first year after introduction, then
$250,000 per year each year thereafter. Additionally, because this is a high-
volume product, DBVac expects to spend $1.2 million the third year after the
initial R&D year to expand their current service and repair facilities to
accommodate service claims.
Because the product is significantly down-costed, the company expects a high
failure rate. As such, the company foresees warranty and repair costs that total
27% of Fin revenue annually starting the first year after development.
On the other hand, because the product is made primarily of recycled materials,
DBVac expects to be able to recoup 4% of the total annual warranty cost each
year by selling the recyclable materials to recycling companies overseas.
Snorkel
Snorkel is foreseen as a vacuum cleaner that would fit in the middle of the
DBVac lineup in terms of price, settling in somewhere between the company’s
current MadHare and JackRabbit models. Using many of the same technologies
already available in other models, such as the patented turbo button found on
both the MadHare and JackRabbit, Snorkel would also include two new key
technologies: (a) reverse-thrust, which would allow the user to jettison collected
debris through the hose directly into a waste receptacle (e.g., a garbage can), and
(b) the carpet de-tangler, which would sense when a long carpet strand is getting
lodged within the vacuum’s roller, warn the user using a series of beeps, then
eject the strand.
In considering Snorkel’s initial R&D cost, DBVac provides the following
estimates of the project’s similarity to past new product development projects.
9% probability of being similar to the FarmBunny initial R&D Cost.
48% probability of being similar to the RapidBunny initial R&D cost.
29% probability of being similar to the BunnyKing initial R&D cost.
14% probability of being similar to the CozyCony initial R&D cost.
No additional revenue or cost is expected to be accrued during the initial year
(i.e., the R&D year) beyond the initial R&D cost. After this initial R&D year, sales
net of unit cost are expected to total $3.0 million in the first year, then increase by
12% each year thereafter.
Further, based on the level of innovation involved in the development of the
product, the company is 40% confident that it will qualify for an $800,000
research innovation grant from the federal government, which would be paid
out the second year after development.
The company expects to incur a cost of $950,000 to train service and support
personnel in handling the product during the first year after introduction, then
$450,000 per year for each year thereafter. Further, to service what is expected to
be an unusual technology, the company will need to spend $750,000 to improve
its current service and repair facilities the first year after the R&D year.
Additionally, DBVac expects to need to spend $400,000 the fourth year after the
initial R&D year to expand their service and repair facilities.
Given the unique nature of the product, the company expects warranty and
repair costs that total 15% of unit sales revenue annually starting the first year
after development.
Facemask
Facemask would be the company’s most technically advanced product it
would be the company’s “flagship”, the kind of awe-inspiring product that
would be valuable not only in terms of its own sales, but in its ability to bring
new customers to consider the entire DBVac family of vacuum cleaners. In
addition to the always-on, dirt-anticipating TruSentience® capabilities already
found in the company’s BunnyKing model, Facemask would work in three
dimensions. Incorporating military-grade drone technology, Facemask would be
able to fly through the household, cleaning window coverings and crown
moldings as needed and could even capture dust and dirt mid-air before it has a
chance to land on things.
In considering Facemask’s initial R&D cost, DBVac provides the following
estimates of the project’s similarity to past new product development projects.
2% probability of being similar to the FarmBunny initial R&D Cost.
39% probability of being similar to the RapidBunny initial R&D cost.
45% probability of being similar to the BunnyKing initial R&D cost.
14% probability of being similar to the CozyCony initial R&D cost.
No additional revenue or cost is expected to be accrued during the initial year
(i.e., the R&D year) beyond the initial R&D cost. After this initial R&D year, sales
net of unit cost are expected to total $1.9 million in the first year, then increase by
20% each year thereafter.
Further, based on the level of innovation involved in the development of the
product, the company is 100% confident that it will qualify for an $800,000
research innovation grant from the federal government, which would be paid
out the second year after development.
The company expects to incur a cost of $500,000 to train service, support, and
repair personnel in handling the product during the first year after introduction,
then $240,000 per year for each year thereafter. Finally, the company expects
warranty and repair costs that total 16% of sales revenue annually starting the
first year after development.
Candidate Product Managers
In addition to identifying which of the three products should be taken forward
and developed, DBVac wants to know which of four product managers is best
suited to guide the product through development and into the marketplace. The
company is considering four candidates:
Veronica Abernathy, current product manager for the MadHare and the
CEO’s sister.
Torsten McDuck, current product manager for warranty products and the
CEO’s stepson.
Eunice Stark, current product manager for the FarmBunny and the CEO’s
cousin.
Serge Costa de Souza, current product manager for both the BunnyKing
and the RapidBunny and the CEO’s third-cousin who grew up in Brazil.
To help motivate the eventual product manager toward a successful product
development, the company plans to incentivize the product manager by giving a
bonus equal to 6% of the product manager’s annual gross salary if the newly
launched product breaks even during its first year of sales.
In selecting a product manager, the company has compiled a set of wishes that
come from the company’s top executives regarding the kind of person they’d like
to see managing the development of this new product. The quotes below are
attributed to those executives; these quotes are listed in order based on the
importance to the company of the individual being quoted.
Chief Executive Officer (CEO): “I really like people I can trust, and, let me
tell you, in this industry, blood is thicker than water. Family is really
where it’s at, that’s very important. I call that the ‘dust factor’ it’s what
makes DustBunny Vacuums great. That said, it’s definitely not the most
important thing we also desperately need this product development
process to succeed. It’s incredibly important that the product manager in
charge of this new product knows how to bring a product from its very
infancy up until it hits the market and dominates its competitors. Also, we
want someone in this role for whom crushing the competition is
incredibly important; I’ve grown tired of our competition not being
crushed sufficiently. We need someone who can do that, maybe even
someone who has demonstrated it at a recent sporting event.”
Chief Marketing Officer (CMO): “We need this project to be led by
someone that everyone knows and trusts, someone for whom everyone in
the company would bend over backward to ensure the project succeeds.
Obviously, it’s important that they understand the type of product it is
and are intimately familiar with any new technology that might be going
into it. I also think, and I’m sure the CEO agrees with me, that we need
someone we can trust a product manager whose promises mean
something. That’s crucial for the success of a product like this, particularly
when the product manager has to work with factory supervisors and our
external vendors to ensure a successful launch.”
Chief Financial Officer (CFO): “It’s crucial that this product succeeds and
that the person leading it is someone who knows how to ensure that it
succeeds past success, in my mind, is an absolute must! That said, I’d
rather not have to pay out much on the bonus, since we need to be frugal
with our expenses. I was pretty leery of offering a bonus at all, but maybe
we can help ensure that it’s not a big bonus through our choice of the
project lead (the product manager). Also, just given the culture of the
company, I think the product manager should be someone that everyone
loves. We all want to help our friends, particularly if they’re very good at
softball. This is a very softball-driven company, believe it or not. In fact,
the entire vacuum cleaner industry is very softball-driven.”
Chief Technical Officer (CTO): “I don’t care. Wait, I really do care. I need
this job. Make sure it’s someone who’s got good experience in developing
new products preferably ones that actually succeeded. And they should
know the technology of the product like the backs of their hands,
otherwise the people down in R&D will run amok and we’ll have another
CozyCony situation on our hands. No one wants that. Also, it’s good to
remember how much this company wants to completely crush all our
competitors it’s maybe not the most important thing, but it really is
something that’s valued at DBVac. Crushing. Well, that and being well-
liked.”
Corporate Attorney (Lead Counsel): “I’m hoping we don’t get sued as a
result of this product, so, from that standpoint, we need to have a product
manager who really understands the technology going into it, otherwise
they might develop something that causes damage and lawsuits. Would
also be good if they had some real, positive experience with new product
development. I think we have people like that. We also like winners here,
particularly if they destroy the competition when playing softball. Over
the last 12 years of working here, one thing that’s become clear to me is
that the people who succeed at softball are the ones who succeed at
vacuum cleaners every time.”
Chief Operating Officer (COO): “Well, obviously, if it makes sense, you
want to pick someone who’s a close relative of the CEO you know, the
‘dust factor’. Based on my experience working for DBVac and no other
company ever in my life, I find that it’s only natural. Beyond that, though,
this is a place that responds well to people we can trust and people with
good, relevant experience. So look for someone with good, relevant
experience, particularly if they know their way around a softball field. I
mean, experience is more important than softball, but they both have their
place in this decision, I think. Also, since we might be entering a recession,
it’d be good if we didn’t have to pay out a whole lot for the product
manager’s bonus. Further, it’d be great if it were someone I really liked. I
think whatever product goes forward, it’s going to succeed, and everyone
wants to see someone they like be successful. It’d be great for the morale
of the company as a whole.”
Veronica Abernathy
Veronica has worked at DBVac for over 20 years (her entire career) and was
recently voted the most popular employee at the entire company, receiving votes
from 79 of her fellow employees. That said, she was only recently promoted to
the position of product manager, and has only managed the MadHare line for six
months she has never taken part in the development of a new product at the
company. Her current annual gross salary is $94,000.
Before becoming a product manager, Veronica spent most of her career in the HR
and legal departments, where she was well-liked for her impersonations of
famous tennis players. During this time, her job consisted primarily of dealing
with employee discipline (i.e., deciding whether to place employees on probation
or to fire them), legal disputes that occurred following employee discipline
decisions, and coaching one of the two teams during the summer softball game
(Veronica’s record as manager is 18 wins, 1 loss).
While working in HR, she instituted the company’s trustworthiness training
regime, which included the establishment of an annual trustworthiness test taken
by all employees. Most recently, she scored a 73 on this exam.
Torsten McDuck
Mr. Torsten, as he insists other employees refer to him, is relatively new to the
company, having arrived only two years ago after a long career in aerospace
designing and developing medical emergency drones and other small flyable
devices for a local aerospace company. With a degree in electrical engineering, he
claims to have personally shepherded over nine different drone platforms
through the R&D process and into production during that stage of his career.
Now the product manager for warranty products, Mr. Torsten’s salary is
$115,000 annually. While not very well known in the company, most employees
who meet Mr. Torsten like him (in fact, 35 named him the most popular
employee in a recent survey), although they get kind of sick of calling him “Mr.
Torsten” like he’s some sort of camp counselor. Interestingly, Mr. Torsten was
once a camp counselor at a major east coast softball camp. He plays
competitively on a traveling team, but doesn’t really care about winning or
losing he just likes hitting the ball really far. He usually ends up on the team
not being coached by Veronica Abernathy.
While Mr. Torsten was initially put off by having to take the trustworthiness test,
he scored a 62 on it, which was above the company’s minimal threshold of 50 to
be able to work there.
Eunice Stark
Eunice has worked at DBVac for seven years, ever since graduating summa cum
laude from Clementine College, a small liberal arts school located in West
Mifflin, Pa. where she majored in modern dance with a minor in interpersonal
aggressiveness. While generally inexperienced at softball, her inner competitor
has lifted her to the status of above-average at the annual softball game, with the
other team’s pitcher often electing to give her an intentional walk just out of
respect and/or fear.
Four the last two years, Eunice has been the project manager for the FarmBunny
project, the development of which she participated in. Previous to that, she was
heavily involved with the CozyCony, a product that was wildly unsuccessful in
the marketplace. She also worked as assistant product manager on the highly
technical BunnyKing product, though she was not part of its introduction. That
said, she considers herself very technically savvy, and recently researched and
published a peer-reviewed scientific paper detailing how the behavior of certain
freshwater tank fish that like to clean various filth in all corners of their tanks
could be adapted into a semi-autonomous, artificial intelligence-driven, free-
hovering cleaning system.
While more feared than popular within the company, Eunice has a small but
close circle of friends with whom she likes to go to lunch sometimes two
employees in the company have named her the most popular employee. With an
annual gross salary of $103,000, she makes more than these friends, but never
offers to pay for lunch. Her friends say they don’t care, but some at the company
believe they secretly do care. But, while some may view her as a little cheap, few
see her as dishonest, as witnessed by her score of 88 on her most recent company
trustworthiness test.
Serge Costa de Souza
Originally from Brazil, Serge has been at DBVac for the last six years, and is
currently the product manager for both the BunnyKing and RapidBunny
products. Having spent time working for a company that manufactures wind
tunnels, Serge is very well versed at how to make wind go both forward and
backward using blades and turbines. While at the wind tunnel company, he was
part of a very large team that saw out the development of a new kind of fan
blade fastening device, which cost 3% less than the previous fastening device
used by the company.
Serge is well-liked by almost everyone inside the company 55 of them named
him the most popular employee and is considered by the HR department to
be very trustworthy, having scored a 77 on the trustworthiness test. His love of
beaches and small dogs endears him to pretty much everyone, not including
those who really just adamantly dislike small dogs. Of course, it also helps his
popularity that he makes only a relatively modest salary of $80,000, despite the
fact that he manages twice as many products as any other product manager.
While Serge doesn’t mind crushing the competition, he isn’t well versed in
American sports, and thus typically (and controversially) opts out of the annual
company softball game.
1. Calculate the NPV for all three options using the data provided in
the background section and using the expected initial cost of
development for each of the three options. Use
a discount rate of 10% and calculate the NPV inclusive of the initial
investment and the five years that follow a five-year time-
horizon
2. Explain for DBVac what these values tell us and how they
might be useful in comparing the three possible choices.
3. Conduct a sensitivity analysis using the product with the highest
NPV as calculated above. In the sensitivity analysis, provide three
different calculations of NPV: (1) based on the expectations noted
above (i.e., reiterate the calculation), (2) based on
sales growth that is half as great as that predicted by the company
and used above, and (3) based on -5% (negative 5%) annual
sales growth after the first year.
4. Explain for DBVac what the difference is between the three
different NPV calculations and why it’s useful to consider all
three possible outcomes.
