Depending on the amount of risk a company is willing to take, will determine the approach that is appropriate.
Depending on the amount of risk a company is willing to take, will determine the approach that is appropriate. The company can be risk-adverse, risk-natural, or risk-tolerant. A company that is risk-adverse “will sacrifice EV for lower variation” (Sharpe et al., 2019, pg. 24-6). A company that is risk-neutral “will try to maximize EV” (Sharpe et al., 2019, pg. 24-6). A company that is risk tolerant “may be willing to absorb greater variation in return for the chance of a higher payoff” (Sharpe et al., 2019, pg. 24-6).
Toy 1 will likely not have any competition for the upcoming holiday season, which means that Choice Toys could maximize profitability by going with toy 1, but it would be a risk due to the fact that the toy could be a failure and the company could lose money. Toy 2 already has competition in the market with two other competitors in the market currently. Toy 2 has less risk of failure in the marketplace since there are already other products that marketplace that are successful. The possible profits from toy 2 will be less than that of toy 1 due to the fact that Choice Toys has to share profits with the two other companies that currently have the product in the marketplace. The chance of either toy 1 or toy 2 being successful is unknown. It is a toss up if there will be success in the market for either toy. If toy 1 is successful, the company would be able to receive more profit than if they went with toy 2 and it was successful, because they would have less market share for the product. Toy 1 would provide Choice Toys the greatest revenue opportunity due to the lack of competition in the market. In order to create a successful decision analysis, more data in the area of cost and profit in the way of real numbers would be needed. Information in regards to the market would also be beneficial. I would want a market analysis conducted in regards to what toys are selling, what the profits look like, what the costs are, marketing dollars spent, etc. I would also need to know what the risk tolerance of the company is.
References
Sharpe, N. D., De Veaux, R. D., & Velleman, P. F. (2019). Business statistics (4th ed.). Retrieved from https://www.vitalsource.com/
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