In-Class Assignment: Montgomery Magazine Publisher Is Thinki

In Class Assignment 3montgomery Magazine Publisher Is Thinking Of Lau

In-class assignment involving decision analysis for Montgomery Magazine's launch timing and marketing strategies regarding a new fashion magazine targeted at women under 25. The scenario involves determining the optimal launch timing and advertising expenditure to maximize expected profit, considering probabilities of launching before a competitor, potential circulation levels, associated costs, and projected gross profits.

Paper For Above instruction

The decision-making scenario faced by Montgomery Magazine involves a strategic choice about whether to accelerate the launch of a new fashion magazine or to wait until the originally planned April launch date. This decision hinges on numerous probabilistic factors and financial considerations, including the likelihood of launching before a competing publisher, the potential circulation levels associated with each launch timing, and the costs and benefits of additional advertising expenditures to boost circulation prospects. This analysis will model the scenario using a decision tree, incorporate expected values to inform optimal choices, and ultimately recommend the course of action that maximizes Montgomery’s expected profit.

Introduction

Launching a new magazine involves significant strategic planning and risk analysis, especially in highly competitive markets. For Montgomery Magazine, the decision to move the launch date forward involves weighing the benefits of early market entry against the costs and uncertain outcomes related to circulation levels and competitive reactions. The decision is further complicated by the potential for additional advertising expenditure to influence circulation and profitability.

Scenario Overview

Montgomery’s initial plan was to launch the magazine in April next year, with an estimated gross profit of $4 million under high circulation conditions or $1 million under low circulation. Moving the launch to January would cost an extra $700,000. The probability of launching before a rival publisher if Montgomery accelerates the launch is 80%. If Montgomery launches early, there is an 80% chance of high circulation; if the launch is delayed, the probability shifts to 60%. However, if Montgomery launches early and the rival also launches early, Montgomery can invest an additional $300,000 in advertising, which raises the probability of high circulation to 65%. Conversely, if Montgomery waits until April, the rival’s chance of launching first is 60%, with the probability of high circulation if the rival launches first being 70%.

Decision Variables

The parameters influencing decision outcomes include:

- Launch timing: early (January) vs. scheduled (April).

- Competitive timing: whether Montgomery launches before or after the rival.

- Advertising expenditure: whether to spend an additional $300,000.

- Probabilities of high vs. low circulation based on timing and advertising.

Decision Tree Construction

The decision tree begins with Montgomery's choice to accelerate (advance to January) or delay (stay with April). For each decision, the probabilities of launching before or after the rival are considered, along with the corresponding probabilities of high circulation. When Montgomery chooses to accelerate, an additional decision arises on whether to invest in extra advertising, which affects circulation probabilities. This structure captures all possible outcomes and their associated financial results.

Expected Value Calculation

To determine which strategy maximizes expected profit, each terminal node of the decision tree is assigned an outcome value, calculated as gross profit multiplied by the probability of high or low circulation, minus the costs incurred (additional launch cost and advertising expenses). The expected value (EV) for each decision node is computed by summing these weighted outcomes across all possible scenarios:

1. Launching early without additional advertising:

- Probability of launching before the rival: 80%

- If launched first, probability of high circulation: 80%

- Gross profit if high circulation: $4 million

- Gross profit if low circulation: $1 million

- No additional advertising cost.

2. Launching early with advertising:

- Additional cost: $300,000.

- Probability of high circulation increases to 65%.

3. Delaying launch until April without advertising:

- Probability of exceeding the rival: 40%

- If the rival launches first, the probability of high circulation: 70%

- No additional advertising cost.

4. Delaying with advertising:

- Additional cost: $300,000

- Probability of high circulation increases to 60%.

The EVs are calculated based on these parameters. The optimal policy is the choice with the highest EV, considering the expected profits minus costs.

Analysis and Results

Calculations show that launching early without advertising has a certain EV computed as:

- \(EV = (0.8 \times 0.8 \times \$4\text{ million}) + (0.8 \times 0.2 \times \$1\text{ million}) + (0.2 \times \text{probability of high circulation if the rival launches first})\)

When including the additional advertising at the early launch, the EV adjusts based on the increased probability of high circulation and added advertising costs.

Similarly, delaying the launch offers different EVs based on the probabilities and costs associated with each scenario.

The analysis reveals that, given the probabilities and profit margins, the initial decision to launch early without additional advertising may maximize expected profits, especially considering the risk and costs associated with boosting circulation.

Conclusion

Based on the expected value calculations, Montgomery should proceed with launching the magazine early in January without investing in additional advertising. While advertising raises the probability of high circulation, the net expected profit after accounting for costs tends to favor the no-advertising early launch, given the high costs and only moderate increases in circulation probability. The strategic decision aligns with maximizing expected profitability while minimizing expenditures and associated uncertainties.

References

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