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CASE STUDY |
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Market Entry
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At the height of the dotcom boom, a DPL customer was assessing a technology company's market entry strategy (call it EST, Inc.).
EST Inc. had core technology in the embedded systems market and had connections in the automotive
and telecoms sectors. EST's technology also positioned them well in the as of yet non-existent internet
appliances market. Although most of EST's technology had been developed in-house, a crucial piece of
intellectual property was licensed. Final negotiations on the IP were on-going. EST needed to
know where to concentrate its resources and needed to present a convincing case to investors. DPL helped provide them with
this information. To see the final version of the model developed in DPL, click on the image at the left.
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Sensitivity analyses were run in DPL to prune the model to its final version. After assessing probabilities,
gathering data for the variables in the model and iterating, the Risk Profile at the right
was produced using DPL. As the Risk Profile indicates, expected NPV was positive (the vertical black line). There was
approximately a 25% chance of losing money and 80% of the probability mass fell between roughly -25 and 75 million.
EST believed and the data indicated that there was a fair bit of upside in the business with a 10% chance that
the business was worth 125 million or more. But where was the money coming from?
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DPL's Policy Summary output indicates which decision alternative is optimal for the initial decision and
how often each decision alternative is optimal in downstream decisions. DPL's Policy Summary for EST's
business indicates that EST should focus on the established embedded systems
market, though internet technologies were red hot at the time. In under 5% of the scenarios, EST should
switch its focus to the internet appliance market in the mid-term. The Policy Summary also
indicates that the internet appliance "option" has value. Management should not completely drop
the internet appliance market but rather should keep the option open. This is indicated in the Policy
Summary by the fact that in none of the cases should EST drop the internet appliance market in the
Resource Allocation Decision in Period 2. When should EST exercise this option?
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DPL's Policy Tree output helps determine under which circumstances to exercise an option (or select a downstream decision alternative).
Contrary to what one might expect, EST should not necessarily exercise the internet appliance option when early stage adoption
is faster than the central estimate (although the company is more likely to exercise the option
in these cases). The internet appliance market is simply a very long term bet even with faster than expected adoption
in the near term. The main driver of when to exercise the internet appliance option is the size of the embedded market
and how well the company is competing in it. If the embedded market is smaller than expected and EST's share is
lower than expected, then it is time to exercise the internet appliance option by shifting resources to it. The section
of DPL's Policy Tree output at the right shows (indicated by the bold lines) that EST should shift resources to the internet appliances market
if the embedded market size is small and the company's share is low or nominal or if the embedded market size is nominal
and the company's share is low (other conditions apply from further back in the tree).
The analysis provided EST with the clarity it needed and helped convince them not to chase the more speculative (yet highly fashionable)
internet appliances market. EST stuck to the more established embedded systems market and demonstrated
to investors that it had a sound plan.
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