Saturday, June 4, 2016

MEM: New Technology Case study solution

Mem case study solution

Introduction:
MEM is a medical device producer. They are looking forward to gain entry in to the MIS market through an emerging technology that can accurately place an artificial socket during hip implant. The production cost might be very high and there are number of competitors with similar products or product pipeline. The Vice President of the company, Susan Jones along with the Marketing and Design team, is trying to decide whether or not to invest in this product and take it to the market.

Problem Statement:
1.       MEM should decide whether the new Hip Socket placement Technology has any potential to be a key product in the MIS arena and hence help MEM gain huge market share.
2.       The firm should decide whether or not to invest in the new technology based on the fixed and variable costs of the product in relation to the expected profit. The company needs to calculate the accurate fixed costs from licensing, developing and installing in order to determine the expected profit.
3.       The company should determine the amount of competition in this market. If product is successful, competitors will have products that compete for the same market. As a result, MEM will not be able to capture the complete market. So, MEM should decide how the presence of competition will impact their market share.  It should also decide how the market will become divided among the various players. What are the expected market share and the expected gains for MEM from pursuing this new technology if the market share is or is not divided equally?
4.       If MEM enters the market, the company should also devise its exit strategy. It should decide when to stop focusing on the Hip Replacement Product and concentrate on new technology.

Competition Analysis:
1.       Market share is divided equally among all the competitors:

If the product is successful, the number of competitors that MEM expects to face is determined by simulating it based on the cumulative probabilities.
In 80% of the simulations, it lies between 2 and 3 (2.37). The total number of expected competitors in the MIS market is 2. We used the VLOOKUP (=VLOOKUP(RAND(),$B$4:$D$8,2)) function to simulate the no. of competitors 1000 times and took the average value. The profit was calculated as Present value ($200 Million)/ (No.of competitors from VLOOKUP + 1) – Fixed cost of $55 Million. After doing this simulation 1000 times, we were able to find the expected number of competitors, 2.39, which including MEM would be 3.39. Considering 90% chances that MEM will launch the product successfully and 10% chances for not launching it, we were also able to find the market share, 29.7% and the expected profit, $4,789,000.

2.       Market share is not divided equally among all the competitors:

The market share distributions for each no. of the competitors were simulated using the RiskBetaSubj(Min,Most Likely,Mean,Max) to determine the average and standard deviations of the market shares. Please, see the graphs below for the market share analysis with distributions for the no. of competitors. The average market shares were used with the respective probability estimates in the VLOOKUP simulation to determine the average profit (considering 90% chances that MEM will launch the product successfully and 10% chances for not launching it) as shown below.
The expected market share is determined by RiskDiscrete simulation on the market distributions with their corresponding probabilities.

3.       Uncertainty in Production cost and market potential:

Simulation was done on the cost of licensing and cost of developing and installing the manufacturing processes using the RiskTriang(Min,Most Likely, Max) to determine the respective average and standard deviation costs. Please, see the graphs below for their distributions.
RiskGeneral simulation on Profit and RiskCumul simulation on annual growth rate were also done to determine the average profit in the first year and the average growth rate (constant for the 5-yr period).
The profits for the consecutive years were calculated by multiplying with the average growth rate and then the average profits were discounted by 10% in the initial calculation.
Considering a market share of 33.3% and 90% chances that MEM will launch the product successfully with 10% chances for not launching it, the profit evaluates to $4.4 million.




As we see here in the below graph for the sensitivity analysis of the net profit with the no. of competitors, the Net profit goes down as the no. of competitors increases or the market share of MEM decreases. So, we see a negative correlation (correlation coefficient of -0.68) between the no. of competitors and the net profit of the company. We see a positive correlation between the market share and the net profit. Given the important negative correlation, MEM needs to defend its market share to maintain the profitability.

The below two graphs show how the net profit changes when the number of competitors change from 2 to 3 (apart from MEM):





The following graph shows how the Mean of our expected EMV changes with the percentage change of inputs:




The Sensitivity Tornado for the Mean of our expected EMV if successful with the profit is as shown below:



Summary of results:

In order to simulate the number of competitors, we first created a table with cumulative probabilities associated with each possibility of competitors, from zero to four. Using the v-lookup function in excel, we were able to find the number of competitors, without including MEM. The v-lookup function looks at our cumulative probability table and returns a value of zero to four, depending on the range of the probability. For example, if it found a probability between 0 and 0.05, it would return a value of 0 for the number of competitors. After finding that value for number of competitors, we added one to include MEM. To find the present value, we took the Present Value of revenue- variable costs and divided that by the number of competitors just found using v-lookup. This would leave us with $200 million divided by the previous cell, number of competitors. From this value, we subtracted $55 million, or the fixed cost, which then gave us the profit. After doing this simulation 1000 times, we were able to find the expected number of competitors, 2.37, which including MEM would be 3.37. We were also able to find the market share, 29.2% and the expected profit, $4.6M.
The product should be launched because MEM earns a profit whether the market is equally or unequally divided. The expected market share when the market is equally divided is 29% and the profit is US$ 4.6 million and when it is not equally divided the profit is US$ 5.2 million. The simulated market share is about 33% and the expected competition is about two competitors.

The probabilistic estimates of the number of competitors in the market affect the analysis significantly because the market share and hence profit is dependent on this. We would like further study the effect of the amount of competition to strengthen our case.

Recommendations:
1.       MEM should definitely enter the market. The entry of the competitors is also based on the success of MEM’s Technology. Therefore, any period during which MEM can capitalize on its new invention would be highest advantage it can gain. Therefore, MEM should enter the market and gain the first mover advantage. Since the profitability decreases with the number of competitors, MEM needs to defend its market share by aggressive marketing of the unique MIS products and also patenting them.
2.       MEM should try to reduce the fixed cost which involves the licensing cost and development and installation cost. Keeping this at the lower end equivalent to $38 million ($17 million + $21 million) will help the company increase its profit. Therefore, MEM should investigate and invest in reduction of the fixed costs.
3.       MEM needs to reconsider the discount rate of 10% in their initial calculations as a lower discount rate would yield higher net profits in the long run and the company would eventually benefit.
4.       Leveraging on the above recommendations, MEM can strategize to increase the annual growth rate of the market and hence the profits.

(Attached is the excel version of our analysis for your reference)


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