Trendy’s Pies Case Study

Trendy’s is a national chain specializing in selling pies, either whole or by the slice, from small facilities with drive-through
capabilities. Trendy’s corporate kitchen staff has developed a new type of pie and needs to make a decision on whether to introduce it nation- ally across the chain or to try a regional test market first. Tina Trendy, the franchise founder, and her staff sketched out the decision tree described earlier in the chapter in Exhibit E.6.

Based on various research
reports and industry knowledge, and judgment, Trendy
and her staff came up with the
following financial estimates and risk probabilities. If they decide to roll the product out nationally, they would incur costs of $200,000. A high consumer response would result in expected revenues of $700,000, with a .6 probability; whereas a low consumer response would result in only $150,000 of revenue, with a .4 probability. If they first introduce the product in a regional test market, they would incur $30,000 in costs and expect a 70 percent chance of a high regional response and a 30 percent chance of a low regional response. Regardless of the outcome, they still have to make a decision on whether to remain regional with the product (thereby avoiding potential risks of national failure), market the product nationally, or drop the idea. If the regional response is high, they anticipate that remaining regional would result in revenues of $200,000; remaining regional with a low regional response would result in revenues of only $100,000. If they decide to market nationally after a high regional test-market response, Trendy estimates that there is a .9 probability of a high national response that would result in revenues of $700,000, and a .1 probability of a low national response with revenues of $150,000. If they market nationally after a low regional test-market response, the probability of a high national response is only .05; the probability of a low national response would be .95 (revenue estimates would remain the same).

Case Questions for discussion

1. Use these cost, revenue, and probability estimates along with the decision tree to identify the best decision strategy for Trendy’s Pies.
2. Suppose that Trendy is concerned about her probability estimates of the consumer response to the regional test market. Although her estimates are .7 for a high response and .3 for a low response, she is not very confident of these values. Determine how the decision strategy would change if the probability of a high response varies from .1 to .9 in increments of .1. How sensitive is the best strategy in part a to this probability assumption?

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