Speed Venture

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Introduction

This case undermines the decision making challenges which can range from time, pressure, risk and ambiguity in data with which a manager has to make decisions from. BJ James and Chris James, Owners of Speed Ventures had the same dilemma with their business which is to decide whether or not to participate in the upcoming Pocono race. Speed Ventures, which is based in California, has been in operation since 2001 in the area of organizing motorsports events. The Pocono race is extremely important to the siblings as it was followed with a baggage of sponsors, profit opportunities and a stage at one of the major racing events.

The current season has been favouring the company as they were successful and through this race their chance of entering the major leagues increases. However, there is a lot of risk riding on this company for this race. If the company were to lose the race, the company would face the threat of completely running out of the racing business and lose out on the oil contract. Beyond this the company would face engine failure costs and a hefty sum of wasted sponsorship and entry fees especially the recent acquisition of the Goodstone Sponsorship worth $2 million per year and additional incentives. Both qualitative and quantitative factors must be considered before making the final call. We start our analysis with the decision tree. [pic 4]

Analysis of decision Tree

Let us look at the pros and cons of our decision of whether to participate or not in the Pocono race. At present, we have $40,000 of sponsorship money from Goodtire, have paid $30,000 for participating in the race and an existing oil sponsorship of $800,000.If we do not participate, then we will get back $15,000 from the race but have to pay back $25,000 to our sponsor Goodtire. So in the end we will have a net loss of $10,000, which is not favourable for us given the current situation.

If we decide to participate then there are 2 scenarios, where we either finish (62.5% probability) or not finish (37.5% probability) the race. If we finish, there are 2 scenarios: i) if we finish in top 5, then we get a new sponsorship for the next season worth $2 million plus incentives which has a 80% probability or ii) if we do not finish in top 5 which has a 20% probability, then we don’t get the sponsorship, but nothing else is at stake.  On the other hand, if we don’t finish the race, there are 2 scenarios: i) if the reason is an engine failure (77.78% probability) then we stand to lose the $800,000 oil sponsorship that we currently have and also suffer a cost of $50,000 for engine repurchase or ii) if there is some other failure(22.22% probability), we don’t have to suffer some other major costs.So, to summarize if we participate, the expected loss would be $10,000 while if we participate, then the expected earnings would be more than $750,000. So, the final expected value is coming out to be on the positive side, but that does not mean we should go ahead with the project.