Wednesday, January 20, 2010

When All of the Choices Are Bad . . . What Do You Do?

Imagine that you are in a relatively small company called YOU, Inc. YOU has done a great job creating difficult to use, but innovative products in the past. You sell these products to very sophisticated users for huge profits since the users are willing to pay for the newest and most advanced stuff.

As your company has innovated, there has been a big company (named WOW, Inc.) that has been watching you closely and copying your innovations. They just make the product simpler to use and sell it to the mass market, but they've never bothered to innovate by themselves. They are very profitable following that strategy. There is no way that you can reach as many people as WOW does, and they produce things more cheaply than you do.

Recently, the WOW did something that seriously upset you, as a manager of YOU, Inc. WOW created a product that is better than your company's best product. It's not much better, but it is better. And they're going to sell it cheaply. With this new WOW product at such a cheep price, you guess that a huge portion of your customers will switch to it, costing you 75% of our profits. This would be a huge hit to your business, and might even kill YOU, inc. if you don't react.

As a manger, you have three choices:

  1. Give up on all of your current projects and make an all-or-nothing bet on a completely new product, which is better than WOW's product. However, this strategy only has a 40% probability of success.
  2. Shift your effort from developing a low risk, low profit Product A to focus entirely on developing a product that is better than Product A. This new product would be close to, but slightly inferior, to WOW's new product. Keep in mind, though, that this will probably upset some customers who have already ordered Product A.
  3. Finish developing Product A to ensure that you meet your promises to your customers and to preserve the morale of the staff who have been working on Product A.
Which option do you choose?

This was the case posed to 39 business students in one of my classes this morning. We were told that there is only one right answer to the question (and in reality there is only one right answer).

How did these brilliant business students decide?

Choice 1: 12 people.

Choice 2: 14 people.

Choice 3: 13 people.

More than half of the class was wrong (they had to be, given that there is only one answer).

Do you think you got it right?

I'm not going to give the answer here. It's a problem to think about. You can email me if you really want it.

A final note: the actual text of our problem was about 20 pages long so some details have been left out, but I think enough information is included in this story to reason to the right answer.