SYSTEM MODELING(INFORMATION SYSTEMS)

SYSTEM MODELING(INFORMATION SYSTEMS)

THE RACQUETBALL RACKET*

It is early in 2000, and a friend of yours has invented a new

manufacturing process for producing racquetballs. The

resulting high-quality ball has more bounce, but slightly

less durability, than the currently popular high-quality ball,

which is manufactured by Woodrow, Ltd. The better the

players, the more they tend to prefer a lively ball. The

primary advantage of the new ball is that it can be manufactured

much more inexpensively than the existing ball.

Current estimates are that full variable costs for the new ball

are $0.52 per ball as compared to $0.95 for the existing ball.

(Variable costs include all costs of production, marketing,

and distribution that vary with output. It excludes the cost of

plant and equipment, overhead, etc.)

Because the newprocess is unlike well-known production

processes, the only reasonable alternative is to build a manufacturing

plant specifically for producing these balls. Your

friend has calculated that this would require $4 – 6 million of

initial capital. He figures that if he can make a good case to

the bank, he can borrow the capital at about a 10 percent

interest rate and start producing racquetballs in a year.

Your friend has offered to make you a partner in the

business and has asked you in return to perform a market

analysis for him. He has already hired a well-known market

research firm, Market Analysis, Ltd., to do some data

gathering and preliminary market analysis. The key elements

of their final report are given below.

Your problem is to determine how the new balls should

be priced, what the resultant market shares will be, and

whether the manufacturing plant is a good investment. Your

friend is especially concerned about the risks involved and

would like some measures of how solid the investment

appears to be. He would like you to make a formal presentation

of your analysis.

*Adapted from a class assignment developed by Dick Smallwood

and Peter Morris.

RACQUETBALL MARKET ANALYSIS

Market Analysis, Ltd.

January 20, 2000

  1. Themarket for this typeofhigh-qualityball is currently

dominated by a single major competitor, Woodrow, Ltd.

Woodrow specializes in manufacturing balls for all types

of sports. It has been the only seller of high-quality

racquetballs since the late 1970s. Its current price to retail

outlets is $1.25 per ball (the retail markup is typically 100

percent, so these balls retail around$2.50 each, or $5.00 for

the typical pack of two).

  1. Historical data on the number of people playing the

sport, the average retail price of balls, and the (estimated)

total sales of balls is given in the following table:

  1. According to industry trade association projections,

the total number of players will grow about 10 percent a

Year

Number Players

(Thousands)

Retail Price

(per ball)

Balls Sold

(millions)

1985 600 $1.75 5.932

1986 635 $1.75 6.229

1987 655 $1.80 6.506

1988 700 $1.90 6.820

1989 730 $1.90 7.161

1990 762 $1.90 7.895

1991 812 $2.00 7.895

1992 831 $2.20 8.224

1993 877 $2.45 8.584

1994 931 $2.45 9.026

1995 967 $2.60 9.491

1996 1,020 $2.55 9.996

1997 1,077 $2.50 10.465

1998 1,139 $2.50 10.981

TABLE 3 Fuel Costs (»/km)

CurrentVolume (cu. meter)

100,000 1,000,000 10,000,000

Speed

1km/hr 8.4 10.5 12.6

3 km/hr 10.8 13.5 16.2

5 km/hr 13.2 16.5 19.8

480 MODELINGCASES

year for the next 10 years and then stabilize at a relatively

constant level.

  1. In order to assess relative preferences in the marketplace,

a concept test was performed. In this test, 200

customers were asked to use both balls over a threemonth

period, and then specify which ball they would

buy at various prices. Many customers indicated they

would pay a premium for the Woodrow ball, based on

their satisfaction with it and its better durability. Nevertheless,

about 11 percent of the customers interviewed

indicated a preference for the new, bouncier ball at equal

prices. The actual observed distribution of price premiums

is as follows:

Price Ratio*

PercentWhoWould

Buy New Ball

0.5 0

1.0 11

1.5 41

2.0 76

2.5 95

3.0 100

*Price of Woodrow ball / Price of new ball.

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