ACE Company Harvard Case Solution & Analysis

Introduction

ACE company was one of the leading company in the technology industry, making portable electronic games. The company was enjoying high sales of its Model X which was introduced some years back, but the management were concerned about the about the future prospects of the model X because of the increased competition from other types of entertainment. After the estimation of the future of the Model X, the management decided to introduce new project in the market by the name of Model Z.

Problem Diagnosis

After the decision to introduce another product, the management of the ACE Company had to decide when to launch the product. They had two options, either introduce the new product after 1 year from now (i.e. At the beginning of the year 2) or introduce it after 2 years (i.e. At the beginning of year 3). There were some cost and benefits associated with the timely introduction of the new product. Selecting one option means to forego some opportunity cost of another option.

Analysis

After conducting analysis of both projected way to introduce Model Z, we have noticed that the net present value of the second option (introduction of model Z at the beginning of the year 3), produced higher NPV than the first option, because of the two main advantages. The late introduction will benefit the sales of model X and it will not erode its sales. Another benefit of late introduction of model Z was the reduction in the initial investment cost associated with the 1 year plan.

First Option

In the option one, the company was generating no money in year 0, but afterwards 400 in the years 1, $500, $600, $300 and $100 (all in millions) in the year 2, 3, 4 and 5 respectively. On the other hand. The outflows were $550 million at the end of the year 0 which were associated with the development and introduction of model Z.

After discounting it with discount rate of 10%, we have found the NPV of  $858.8 million at the end. The opportunity cost associated with this option was savings in the development and introduction cost and non cannibalization of model X sales by $100 million.

Second Option

In the second option, i.e. the late introduction of the model Z was producing 0 in year 0, $400, $300,$600,$300 and $100 (all in million) in the years of 1, 2, 3, 4 and 5 respectively. The outflows were $300 million split into 2 years.

After discounting it with a 10 % discount rate, the project produced a positive NPV of $948.2 million. The opportunity cost associated with this option was $300 million sales value in the year 2, which will be lost if model Z was introduced early.

Conclusion

After conducting careful analysis and evaluation of the project, we have concluded that ACE Company should introduce model Z after 2 years, as that option provides higher net present value and higher cash flows to the company than the first option. So, the company will be in favorable conditions if it introduces model Z after 2 years.

Modification

Since, the nature of the industry was fast moving, so at the time of the proposal, the supporters of the one-year plan argued about the potential loss of market share in case of introduction of model Z over 2 years as they thought that then this would allow the competitors to bring a comparable product in the market before the ACE Company and that can create a problem of loss in market share and that would be dangerous.

Although, the engineers of the company concluded that the current abilities of the competitor will not allow them to introduce their product before the ACE’s model Z, but on the more extreme side, the proposer or management of the ACE Company should focus on introducing model Z after one year to stabilize and secure its current market position and market share because, as shown in the appendices, the difference in both plans net present value was not so significant.

So it is assumed that our conclusion will change according to the scenario and in the case of competition from the competitors, the management of the ACE Company can also go for proposed one year plan rather than wait for the competitor............................

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