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					Part I (Warm-up – Creation of a Basic Model).

Assortment Planning at The Ski House
                        “The Ski-House” is a retail chain that specializes in the sales of Alpine skis. The
                        Ski-House sells its own brand of skis in three styles: SX, DX and LX. The three
                        skis cost The Ski-House $260, $400, and $480, respectively, to purchase from the
                        manufacturer. Throughout the selling season the chain will sell them to consumers
                        for $300, $450, and $550, respectively. At the end of the season if the skis are not
                        sold then they will be sold to a liquidator for $50, $230, and $290. Skis for the
                        entire season are purchased from the manufacturer in a single order before the
                        before the selling season. This is good for the manufacturer as they get to “pre-
                        sell” their seasons production but not so good for the distributor or retailer as they
have to be a lot more accurate on their forecasts or they will have to carry or liquidate any excess
The Ski-House has identified two distinct segments of customers who purchase from the store: early
buyers who prefer top-of-the-line skis (Earlies) and bargain-hunters (Bargains). As their name implies,
Earlies arrive first in the season, and you may assume that all Bargains arrive at the end of the season,
after all Earlies.
The two segments have different preferences for skis. Earlies prefer to buy LX skis. If LX skis are sold
out, they will always buy DX skis, and if LX and DX skis are sold out, Earlies will always buy SX skis.
Bargains prefer SX, then DX, and will not buy LX skis. Assume each customer buys one pair of skis.
The Ski-House expects to see 5,000 buying customers during the season, of which 60% are Earlies and
40% are Bargains. The Ski-House’s purchasing manager plans to begin its season with 1,300 LX skis,
2,200 DX skis and 1,900 SX skis, but she is considering alternate order quantities.

Tip –Build a spreadsheet model that evaluates the base-case plan described above– you are not
handing in your model so you do not need full documentations or formatting.. The model should be
flexible, allowing all of the parameters and decisions to change. You may, however, assume here that
the preferences described above for each market segment will not change (e.g., you may assume in
your calculations that Earlies will always prefer LX to DX to SX).

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Part II – Case: Global Positioning Satellite (GPS) Environment

1.0 Introduction
  The GPS industry, more than most industries is driven by research and development (R&D). These
  firms typically invest a large portion of their annual profits in R&D and consider the management of
  the R&D process a strategic concern. GPS companies often engage in intense legal competition
  over the intellectual property they and their competitors develop. They also frequently undertake
  buyouts or joint ventures, sometimes to reduce the risks of their large and uncertain investments in
  technology and other times to share their unique capabilities in technology or marketing.
                     In this case, we consider two GPS firms that are developing technology for a new
                    class of GPS units. One of the firms, Garmin (http://www.qarmin.com ) is very large
                    and operates mostly in the consumer GPS market. Garmin is a Swiss company with
                    2010 revenues of around $2.5 billion Canadian. The company, which is
  incorporated in the Cayman Islands but has operational headquarters in Olathe, Kansas, USA, is
  very international and is currently enjoying growth in Asia, where its 2010 revenue grew 47 percent,
  and in Europe where 2010 revenue rose 2 percent. Revenue in North America fell 8 percent in 2010,
  as it is believed that the North American market for traditional GPS's is saturated as many people
  are using older models, so the time is ripe for a new improved model, but only if new features can be
  incorporated. One new product Garmin has recently released a GTU 10 a small GPS web based
  tacking tool to allow people to track the location of any personal assets.
  (https://buy.garmin.com/shop/shop.do?cID=209&pID=67686&ra=true )

  The other firm GPS-TO-GO (http://www.qpstogo.ca/ ) is quite small
  (revenues approximately $500 million per year) and operates mostly in
  the commercial and specialty market. This smaller firm has been
  around a much longer and has a lot of experience along with early patents in the airline and trucking
  industry. GPS-TO-GO because of its early experience is considered to hold a dominant patent
  position on certain pieces of the GPS technology. This means that any threat of a patent
  infringement lawsuit from GPS-TO-GO is credible. If GPS-TO-GO were to engage in such a suit and
  win, it could completely block Garmin from marketing a product it had spent millions to develop..
  Your client is Garmin, the large firm and as such you should take the large firm's (Garmin's)
  perspective, but a critical aspect of the analysis is to try to anticipate the
  small firm's negotiating position. You will be considering several
  different deals that Garmin could offer GPS-TO-GO to avoid a
  potentially devastating patent suit. This case requires you to structure
  the best possible deal for Garmin, but any deal that is proposed must
  also be acceptable to the smaller firm. You need to create a classic
  Win-Win case.
                                                                                A Win-Win Situation
  Garmin is developing a product, code-named XGPS, for incorporation
  into smart phones. XGPS is expected to reach the market in 2013.
  Recently, Garmin learned that a competitor, GPS-GO-TO, is developing a similar product, called
  YGPS, which is also expected to reach the market around the year 2013.

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These two products are instances of a new class of GPS that will deliver location based
advertisements to any smart phone. This means if you are in downtown Kamloops around noon
hour, your smart phone will know that you are standing outside of Boston Pizza and it will service up
a time based discount coupon. If you accept the coupon it will automatically text Boston Pizza and
send them your name so they can book a reservation. It is believed that no other companies are
thought to be developing competitive products.
Patent experts at Garmin believe that GPS-GO-TO is likely to get a patent on this new technology,
so GPS-GO-TO stands a good chance of preventing Garmin from marketing its own GPS unit.
(Note: GPS-GO-TO can only receive a patent and sue Garmin for patent infringement if GPS-GO-
TO is successful in developing a marketable product.).
Garmin executives are considering making a deal with GPS-GO-TO that will allow both companies
to profit from the sale of this new technology without getting tied down in litigation or other costly
competitive actions.
A typical GPS based Technology product goes through a standard series of development phases,
as follows:
       I.  Bandwidth Application to North American Governments (typically 10 weeks)
      II.  Phase 1: Consumer Usability Studies (typically 3 to 6 weeks)
     III.  Phase 2: Negotiation with major Smart Phone manufacturers (typically 3 to 6 months)
     IV.   Phase 3: Test market Trials (typically six to nine months)
      V.   Phase 4: Patent Submission & Review: preparation of all documents for new technology
           (typically 1 to 2 months
Note: Both XGPS and YGPS are currently about to enter Phase 2.
Garmin believes its product has a 50 percent chance of success in Phase 2 and an 80 percent
chance of success in Phase 3. The likelihood of Smart Phone manufacturers in the major markets
(the United States, Europe, and Japan) will reject it the application is negligible given successful
Phase 3 results. Phase 2 studies will cost $10M, and Phase 3 studies will cost $40M. Phase 4 -
patent submission review is a very simple process and only costs $5,000 and is really just an
automatic acceptance.
The Marketing, Development and legal team believe that the GPSX product should be able to be
launched two years from now in 2013. According to Garmin's marketing staff, sales of the new GPS
products represented by XGPS and YGPS are expected to peak at $500M worldwide two years after
the 2013 launch date. Sales should stay near the peak until the patent expires, which, for both
products, will occur in 2020. After that, sales will taper off over the next five years as competing
technologies bring out new products. The contribution margin over the product's lifetime is expected
to be 75 percent of sales revenues. ("Contribution margin" measures revenues net of variable costs,
such as manufacturing and marketing expenses.) Garmin believes that its market share of the new
XGPS product worldwide will be 50 percent if YGPS is also in the market but 100 percent otherwise.
Since the products are almost identical, they will very likely succeed or fail together; therefore if one
product is brought to market successfully, there is a 90 percent chance the other will succeed
Patent infringement litigation typically begins when a new product is first introduced and marketed to
the consumers. Garmin believes that GPS-GO-TO will almost certainly sue (90% probability) if it can
and has a 50 percent chance of winning the suit, thereby entirely preventing Garmin from marketing
its product.
At Garmin, decisions to develop technology are based on an internal process they call “Net

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Productivity Index (NPI)”, which is the ratio of the contribution margin to the development costs. The
reason management does not simply evaluate projects on the basis of Net Present Value (NPV) is
that development funds are limited, so there is an opportunity cost (not reflected in the NPV)
associated with spending money on one project because it cannot be spent on another. The NPI
allows management to compare the net returns from various projects with the net development costs
each project incurs.
The NPI is calculated by determining the flow of contribution that can be expected from the product
after launch, discounting this to the present at an appropriate discount rate, and then taking an
expected value over different possible scenarios. Similarly, development costs are discounted over
time and an expected value is taken over all future scenarios. Generally speaking, Garmin
management would like to see the NPI exceed five, but there is no specific hurdle rate.
Analysts at Garmin believe the same success probabilities and cost estimates apply to both
companies because their products are so similar. The contribution GPS-GO-TO receives differs
slightly from Garmin's case in that the smaller firm does not have the marketing strength to sell its
product in Japan or Europe. It will need to find a partner in those markets and likely will receive a 10
percent royalty on sales as opposed to a 75 percent margin. Garmin anticipates 50 percent of total
sales will come from the United States, 30 percent from Europe, and 20 percent from Japan.
Several months ago, Garmin decided to offer GPS-GO-TO $50M for the rights to YGPS but the offer
was declined. Garmin executives believe the reason was that GPS-GO-TO expects this new class of
GPS's to out compete any traditional units or other smart phone apps. One GPS-GO-TO executive
suggested annual peak sales for the new location based GPS advertising market would likely be
$900M (rather than the $500M Garmin's marketing department estimated).
Garmin executives have asked us to work on this problem and report back in a week when the
executive team meets to prepare for the next round of negotiations with GPS-GO-TO. The following
issues particularly interest them".
      Is there a dollar amount Garmin should be willing to pay for the rights to YGPS that GPS-GO-
       TO would be likely to accept? (If Garmin buys the rights to the technology, GPS-GO-TO will
       agree not to develop it and not to sue.)
      Rather than buying outright the rights to the technology, is there a possible deal in which
       Garmin could purchase a license from GPS-GO-TO to avoid a patent battle? (Under a
       license agreement, Garmin would pay GPS-GO-TO a percentage of its revenues if GPS-GO-
       TO is successful in the market. GPS-GO-TO could still develop its own product but could not
       sue.) This would allow both companies to market their products separately. If this option is
       viable, how much should Garmin be willing to pay and GPS-GO-TO be willing to accept?
      Garmin's CEO is interested in whether a co-development deal could be struck—a joint effort
       in which Garmin and GPS-GO-TO would share development costs and commercial returns.
       Under such an agreement, both development labs could continue to operate in parallel or
       could be combined as a single team.
Your task is to develop recommendations for the negotiation team as to which of the various
alternatives might be best for Garmin and acceptable to GPS-GO-TO.

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The case statement gives us quite a bit of information about the two firms and the GPS product
development process. We anticipate that both firms will analyze the choices open to them in the light
of the scientific and market uncertainties they face. For example, Garmin must recognize that GPS-
GO-TO has a strong patent position. GPS-GO-TO, on the other hand, must recognize that Garmin
has a large international marketing advantage.
Since Garmin uses the NPI criterion, we assume GPS-GO-TO uses it as well. The executives of
Garmin also reserve the possibility of looking behind the NPI to its components, the present value
(PV) of contribution and PV of costs, since these details may reveal deeper insights. A related issue
has to do with how we might incorporate risk into our evaluation. Risk may play an important role in
this analysis, and the risks Garmin faces may differ from those faced by GPS-GO-TO. For example,
Garmin has much larger revenues and may be better able to take on financial risks. The NPI is an
expected value criterion, so it does not directly measure risk. Therefore, we may want to broaden our
outcome measures to include a risk measure.
Another assumption is needed to help us analyze deals between the two rivals. The question we
face is how does each party decide whether to accept an offer? A simple and plausible assumption
is that any firm will potentially accept an offer that leaves it better off than it would be without the
deal. This requires us to estimate the NPI that each firm could achieve on its own, without a deal.
These estimates provide the baselines against which the companies will measure proposed deals.
Presumably, they also want to get the best deal they can, so they will bargain for the highest NPI
they can get.
Some other assumptions are implicit in the case, but as a general rule, we try to make assumptions
explicit in the problem-framing process. For example, it seems both firms face the same economics,
but their estimates of total market size differ (between $500M and $900M).
We summarize the essential features of the problem in the problem kernel:
    “Two firms are developing products that could compete in the same market. Each
    company has strengths the other lacks. Garmin is large and has major international
    marketing strength. GPS-GO-TO is small but has a strong patent position. Each firm
    must evaluate its options and decide whether a deal with the other firm is preferable to
    going at it alone.”
Your client Garmin has sent you this information and wants to set up a meeting with Garmin
executives on Wednesday, April 21, 2011 at 9:00 am. At this meeting you will have to answer a
series of questions put to you by the Garmin executive team, so you MUST be fully prepared to
answer any question that they may ask. This meeting will last a maximum of 3 hours, at the end of
this meeting, Garmin executives will ask you to submit your models so they can use them when they
enter into the actual negotiations with GPS-GO-TO

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   I would strongly suggest you start with a basic Influence Diagram to understand the factors
  that go into the NPI calculations and then prepare a couple of models that you can use to use
  to answer the questions and explore the sensitivity of the various answers and inputs. You
  will need to look at risk, the 3 different options that Garmin could offer GPS-GO-TO. You will
  need to build a strong case and be certain of your recommendations and even be prepared to
  present your analysis with a 4-6 slide presentation. you will need to create a series of very
  flexible, easy to use, proper formatted and easy to understand models (lots of comments
  boxes) as you will have to submit your spreadsheet file into a Moodle Dropbox.

   If you feel like you are stuck then take a step back and simplify the model. Once you have a
  simple model you can then make it more complete.

   Some discuss questions:

a) What is an appropriate discount rate?

Garmin uses a Discount rate for the NPV of 10% as this is the rate that
Garmin can get from other investments.

b) How much would we anticipate that the lawsuit would be for?

The lawsuit from GPS-TO-GO would likely be two parts. part (a) would be an
injunction which would stop us from producing GPSX, thus we would lose
the entire development cost to date, with no hopes of getting any more
sales. Part (b) would be fine which would be equal to all court costs and any
revenues that we have earned on the product. Since the court case will
likely be over before the end of our first year of sales we can assume the
total lawsuit would be for $5 million plus the injunction preventing us from
selling GPSX.

c) Is there a range of penalty should we lose the suit?

There is no range if we lose the suit as the best estimate is we will lose $5
million for legal costs and fine.

d) Is there a cost of litigation?

Our lawyers are employees of our firm, there may be some expert witnesses
called that we will have to pay but the cost of this will be minimal. So you
can assume the cost of litigation is $0.

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a) Page 3 Paragraph 2 describes GPSGO TO is LIKELY to get a patent. What
percentage does that equate to?

Well done - perhaps the most critical question. We at Garmin have been
trying to get at this number for quite a while. It seems that the
patent position of GPS-TO-GO is very strong and as such it is felt that we
should assume that there is a 90% chance that GPS-TO-GO will get a patent
on this new technology.

b) Having larger R and D potential would indicate Garmin might be able to dedicate
more facilities and beat YGPS to Market. What chance is there of beating them to
market and does that affect the chance of success in a trial should there be one?

Even if we assign more resources to this project and soundly beat GPS-TO-
GO to the marketplace we still have the problem of GPS-TO-GO successfully
suing us for patent infringement. If this is the case then the courts will
award GPS-TO-GO all the revneue3s we have to date. So there is really no
reasons to reassign resources

c) Are development costs the same for a joint venture?

Yes we assume that the costs for a joint venture are the same. This is
because we are so much larger and different than GPS-TO-GO and they could
not work in our environment and vice versa. So if there is a joint venture we
will just share the technology but we expect both firms to produce their own
product. Also it might be perceived as good to have two different products
from effectively the same company in the market at the same time. Sort of
like Chevrolet and General Motors.

d) What would be a reasonable royalty to assume under a license situation?

That is also a million dollar question, one with no answer I am afraid. This
was a question that I was intending you to answer for us. Here are a couple
of facts:

i) All our projects are compared on the basis of NPV and you should be able
to calculate the expected NPV independent of what GPS-TO-GO does.

ii) Using this NPV as a minimum I hope you can tell us how much royalty we
could afford to pay and keep this baseline NPI.

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e) Whose analysts have a better track record? Do we assign any more weight to one
estimate than the other?

      The marketing forecast specialists at Garmin are very conservative -
      they will always use the worst case scenario. This is because we have
      drilled into their heads that fact that if you can make $ at the worst
      case then you can make lots more at the best case! The GPS-TO-GO
      analyst (they only have 1) is quite good but can be very optimistic

$500M peak sales: is that each product or total for XGPS AND YGPS?

Great question: yes this is the total market estimate for this new

Is there a probability whether or not Garmin will succeed once they pass the 4 th phase?

      Phase IV is just a patent submission and review and since our lawyers
      have done many, many patent searches we expect this to just be a
      rubber stamp process so the probability of passing Phase IV, assuming
      we get that far is 100%. Once we are finished this Phase IV hurdle
      Garmin will release the product commercially as all our tests and trails
      will have been completed - so GPSX will go to market and it will not
      fail, unless GPS-TO-GO sues us successfully.

a) If sales are $500 million worldwide from 2015-2020…. What are they for 2013/2014?

Annual Projected 2013 sales are expected to be 10% of the peak sales for
2015 to 2020 Annual Projected 2014 sales are expected to be 50% of the

peak sales for 2015 to 2020

What rate are sales tapering off over 2021-2025? What happens to sales after 2025?

      2020 are expected to be the last year that sales are at 100% of
      peak. 2021 they will decrease to 80% of peak 2022 they will decrease

      to 60% of peak 2023 they will decrease to 40% of peak 2024 they will

      decrease to 20% of peak 2025 they will decrease 0. The technology

      will be outdated by then.

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