Assignment Task: Research and Development At ICI: ANTHRAQUINONE
Describes the business model, simulation model, and results.
Anthraquinone (AQ) was an agent used to reduce pollution in the effluent of a pulp mill. Addition of AQ to the waste stream precipitated out certain paper and pulp waste products allowing them to be filtered out of the mill effluent.
AQ was produced by distilling coal tar, a by-product of coke production at a steel works, with the result that the amount of AQ produced was highly dependent on the demand for steel. AQ had uses in dyestuffs as well as pulp mill waste control, but developing new uses for AQ was contingent on development of a new process to manufacture AQ synthetically. BASF, one of ICI's competitors, was known to have developed such a process.
ICI's research division had discovered a new, but unpatentable, use for AQ. Without its own process to synthesize AQ, this discovery was unexploitable, and would only benefit BASF which would have an uncatchable head start. ICI had to decide whether to accelerate research on a process to synthesize AQ and develop the commercial application, or to terminate the on-going modest R&D effort. A decision to go forward would have to be approved by the Board.
The Costs and Benefits of the R&D:
The costs and benefits of R&D were subject to considerable uncertainty. If successful, the benefit of the new venture into AQ was estimated to have a net present value of $25 million, plus or minus 50%. If the venture was unsuccessful, even after successful process development and best efforts at commercial development, a break-even outcome was expected.
The research expenses to find a new process were estimated at $0.8 million ± 25%; if successful, this research would be followed by process development expenses of $3.0 million ± 25%. Research on the new production process would need to be accompanied by some preliminary market development at a cost of $200,000 ± 25%. If this initial market development suggested significant market potential, preliminary commercial development would have to be undertaken at an estimated cost of $0.5 million ± 25%.
Additional commercial development expense of $1.0 million ± 25% would be necessary after the Board approved full-scale commercialization of the product.
Quantifying the Uncertainties:
Any R&D project is subject to a high degree of uncertainty. The project team assessed the conditional probabilities for the AQ R&D project as follows:
Probability that research would find a new AQ synthesis process: 0.6 ± 0.15
Probability that initial market development would indicate a significant market: 0.6 ± 0.15
Probability that the Board would approve final commercial development (if market and initial commercial development were successful): 0.8 ± 0.2
Probability of final commercial success: 0.8 ± 0.2.
Note: Please submit your report (a two-page word file and your excel file). The report describes the business model, simulation model, and results. You can use tables and figures to help the readability of your report.