Pina Colada Development Assessment

Pina Colada Development Assessment

ABC Beverage, Inc.

  1. Overview of Goal

ABC Beverage, Inc. is interested in developing a new instant pina colada. This initiative should be possible due to a new way to process and preserve the coconut, a vital ingredient in the drink. The objective of this project was to determine the financial requirements and potential payoffs for implementing a major program to develop the new pina colada product and to make a formal recommendation on how to proceed.

  1. Key Factors (Market Environment)
  2. Alternatives
    1. Orderly (12 month) development process
      1. Likelihood of success 90%
      1. Likelihood of competition 80%
    1. Modest development program (8 month) development process
      1. Reduced program to assess market competition
      1. Likelihood of success 90%
      1. Likelihood of competition in 8 months 60%
    1. Reduced research program (6 months)
      1. Wait to see if someone develops in six months and copy their product
      1. Likelihood of success 90%
      1. Likelihood of competition in 6 months 50%
    1. Do not proceed with pina colada project
  3. Dependencies
    1. Market success depends on acceptance by grocery stores and retail liquor stores and their willingness to carry the new beverage.
    1. Sales and profit success are dependent on whether or not ABC Beverage, Inc. is the first company to market with this product or if a competitor arrives in the marketplace first, which would cut potential profits by 50%.
  4. Requirements
    1. Development of the new pina colada beverage will require costs in the form of new production equipment ($100,000), research and development (up to $100,000) and the cost of introducing and marketing the new drink ($150,000).
  1. Preliminary Findings

The PrOACT decision method and decision trees were used to assess the problem, objective, alternatives, consequences, and tradeoffs of all of the applicable variables. Preliminary findings indicate that each one of the available alternatives returns a negative expected monetary value (EMV), indicating that each possible choice could result in a loss of money to the organization. Alternatives and EMVs are reflected in the table below.

Decision Analysis
  
AlternativeEMV
Orderly Development (12 month)-$6,400
Modest Development (8 month)-$64,160
Reduced Development (6 month)-$25,700
Do Nothing$0
  1. Managerial Recommendations

Based on the preliminary findings, each alternative had a negative expected monetary value (EMV) for the organization. Therefore, the recommendation is to forego the development of the new pina coloada drink at this time. Based on the findings from the decision tree and the PrOACT model, there is no alternative in which the organization appears to make a profit. The pina colada project should not proceed.

  • Support for Recommendations: When making decisions under risk where several states of nature are possible and the probabilities of those states of nature occurring are known, EMV is used to take the sum of the possible payoffs and weight them by the probability of that payoff occurring. Given that each alternative has a negative EMV, it is inadvisable to proceed with the pina colada project.
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