- Mostly Nuts is considering introducing a new chocolate-covered candy bar called Mostly Chocolate Nuts, which would cost $1 million to develop. - The profitability depends on whether their main competitor, Galaxie Candy, introduces a similar product and what type of advertising each company uses. - If Galaxie does not introduce a similar product, Mostly Nuts can maximize profit through advertising; if Galaxie does introduce one, profit depends on the advertising battle between the companies.

1. Exercise on Decision Tree Analysis <br />For<br />MOSTLY NUTS OF GEORGIA, INC.<br />William Joseph operates the family-owned peanut farm and the nut factory, Mostly Nuts of Georgia, Inc. Mostly Nuts, as the company is known nationwide, is a major producer of cocktail nuts, beer nuts for airlines and peanut butter. The company is seriously considering a new product, a chocolate-covered candy bar with the label of Mostly Chocolate Nuts.<br />The developmental cost involved in introducing this new product is estimated to be $1.0 million. This cost includes marketing research, new equipment, new personnel and training programmes for the employees. The profit from Mostly Chocolate Nuts depends primarily on three things: (1) whether Galaxie Candy Company, the chief competitor of Mostly Nuts, would introduce a similar product or not, (2) the type of advertising campaign that Mostly Nuts launches and (3) the type of advertising campaign that Galaxie uses to counter the promotional effort of Mostly Nuts.<br />If the company introduces Mostly Chocolate Nuts and Galaxie does not introduce a similar product, Mostly Nuts can launch an advertising campaign and maximize profit. However, if Galaxie introduces a similar candy bar, the profit will depend on the advertising efforts of the firm and that of Galaxie. Mostly Nuts is considering three types of advertising campaigns based on the costs involved: a major campaign with a cost of $0.5 million, e.g. and a minor campaign with a cost of $0.1 million.<br />Joseph has asked Jim, VP of Marketing, to determine whether or not the new product should be introduced and if so, which advertising campaign the company should adopt. Jim, after spending considerable amount of time reviewing his management science text books, has formulated the problem as a multi-stage decision making process. At the first stage (or the decision point), Mostly Nuts has two alternatives: the firm may introduce the product or it may not introduce the product. If Mostly Chocolate Nuts is not introduced, the conditional profit will, of course, be zero. If the company introduces Mostly Chocolate Nuts, Galaxie Candy Company has two alternatives as its reactions: (1) it may introduce a similar candy bar or (2) it may not introduce a similar product. The probability of Galaxie introducing a similar candy bar is estimated to be 0.6 and thus the probability is 0.4 for not introducing the product.<br />At the second stage (or the decision point), Mostly Nuts has three advertising strategies: a major campaign, a regular campaign or a minor campaign. If Galaxie does not introduce a similar candy bar, the advertising efforts of Mostly Nuts will not bring any reaction from Galaxie. However, if Galaxie introduces a similar candy bar, the advertising campaign selected by Mostly Nuts is expected to be challenged by one of the identical three types of advertising campaign of Galaxie' sown.<br />For example, if Mostly Nuts launches a major advertising campaign, the probabilities of Galaxie's responses are: 0.5 for a major advertising campaign, 0.3 for a regular campaign and 0.2 for a minor campaign. If Mostly Nuts' major campaign is answered by a major campaign from Galaxie, the condional profit is estimated to be $1.0 million. The major-regular campaign combination results in $1.4 million and the major-minor combination has a conditional profit of $2.5 million. These profit figures do not include the total developmental cost of $1.0 million. Similarly Mostly Nuts' regular campaign is answered by a major, regular and minor campaign from Galaxie with a probability of 0.5, 0.3. and 0.2 respectively. The regular-major combination results in $0.8 million, the regular-regular combination yields $1.2 and the regular-minor combination provides $2.3 million.<br />Further Mostly Nuts' minor campaign is answered by a major, regular and minor campaign from Galaxie with a probability of 0.5, 0.3 and 0.2 respectively. The minor-major combination results in $0.5 million, minor-regular combination gives rise to $1.0 million and finally minor-minor combination yields $2.1 million.<br />If Galaxie does not introduce a similar product, the maximum conditional profit is $4.2 million, when Mostly Nuts adopts a major advertising strategy. Likewise (when Galaxie does not introduce a similar product) the profit will become $3.0 million and $2.5 million respectively, when Mostly Nuts adopts regular and minor advertising strategies.<br />In the light of the above information, you as a decision-maker, have to decide as to whether it is advisable to introduce the new candy bar, i.e. Mostly Chocolate Nuts.<br />