Case Study

Ski Right Corp.

After retiring as a physician, Bob Guthrie became an avid downhill skier on the steep slopes of

the Utah Rocky Mountains. As an amateur inventor, Bob was always looking for something new.

With the recent deaths of several celebrity skiers, Bob knew he could use his creative mind to

make skiing safer and his bank account larger. He knew that many deaths on the slopes were

caused by head injuries. Although ski helmets have been on the market for some time, most

skiers consider them boring and basically ugly. As a physician, Bob knew that some type of new

ski helmet was the answer.

Bob$$s biggest challenge was to invent a helmet that was attractive, safe, and fun to wear.

Multiple colors and using the latest fashion designs would be musts. After years of skiing, Bob

knew that many skiers believe that how you look on the slopes is more important than how you

ski. His helmets would have to look good and fit in with current fashion trends. But attractive

helmets were not enough. Bob had to make the helmets fun and useful. The name of the new ski

helmet, Ski Right, was sure to be a winner. If Bob could come up with a good idea, he believed

that there was a $25\%$ chance that the market for the Ski Right helmet would be excellent. The

chance of a good market should be $35\%.$ Bob also knew that the market for his helmet could be

only average $(30\%$ chance$)$ or even poor $(10\%$ chance$).$

The idea of how to make ski helmets fun and useful came to Bob on a gondola ride to the top of

a mountain. A busy executive on the gondola ride was on his cell phone trying to complete a

complicated merger. When the executive got off the gondola, he dropped the phone and it was

crushed by the gondola mechanism. Bob decided that his new ski helmet would have a built$-$in

cell phone and an AM$/$FM stereo radio. All the electronics could be operated by a control pad

worn on a skier$$s arm or leg.

Bob decided to try a small pilot project for Ski Right. He enjoyed being retired and didn$$t want a

failure to cause him to go back to work. After some research, Bob found Progressive Products

$($PP$).$ The company was willing to be a partner in developing the Ski Right and sharing any

profits. If the market was excellent, Bob would net $$5,000$ per month. With a good market, Bob

would net $$2,000.$ An average market would result in a loss of $$2,000,$ and a poor market would

mean Bob would be out $$5,000$ per month.

Another option for Bob was to have Leadville Barts $($LB$)$ make the helmet. The company had

extensive experience in making bicycle helmets. Progressive would then take the helmets made

by Leadville Barts and do the rest. Bob had a greater risk. He estimated that he could lose

$$10,000$ per month in a poor market or $$4,000$ in an average market. A good market for Ski

Right would result in $$6,000$ profit for Bob, and an excellent market would mean a $$12,000$

profit per month.

A third option for Bob was to use TalRad $($TR$),$ a radio company in Tallahassee, Florida. TalRad

had extensive experience in making military radios. TalRad could also make the helmets, and

Progressive Products could do the rest of production and distribution. Again, Bob would be

$2$

taking on greater risk. A poor market would mean a $$15,000$ loss per month, and an average

market would mean a $$10,000$ loss. A good market would result in a net profit of $$7,000$ for Bob.

An excellent market would return $$13,000$ per month.

Bob could also have Celestial Cellular $($CC$)$ develop the cell phones. Thus, another option was to

have Celestial make the phones and have Progressive do the rest of the production and

distribution. Because the cell phone was the most expensive component of the helmet, Bob could

lose $$30,000$ per month in a poor market. He could lose $$20,000$ in an average market. If the

market was good or excellent, Bob would see a net profit of $$10,000$ or $$30,000$ per month,

respectively.

Bob$$s final option was to forget about Progressive Products entirely. He could use Leadville

Barts to make the helmets, Celestial Cellular to make the phones, and TalRad to make the

AM$/$FM stereo radios. Bob could then hire some friends to assemble everything and market the

finished Ski Right helmets. With this final alternative, Bob could realize a net profit of $$55,000$ a

month in an excellent market. Even if the market was just good, Bob would net $$20,000.$ An

average market, however, would mean a loss of $$35,000.$ If the market was poor Bob would lose

$$60,000$ per month.

DISCUSSION QUESTIONS

$1.$ What do you recommend?

$2.$ Compute the expected value of perfect information.

$3.$ Suppose Bob does not know the chance of the outcomes of the market $($being poor, average,

good, or excellent$),$ what do you recommend with a decision$-$making methodology of Minimax

Regret