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Managerial Economic Risks & Ford/Firestone Tire Scenario

1. List some categories of risk faced by managers. What categories of risk are most crucial for the firm's profit? Provide examples of strategies to eliminate, mitigate, or insure against these risks.

2. Review the scenario on page 576 of your text labeled "Discussion Question." Ford believed that the major fault was with Firestone's tires. Firestone contended that its tires were absolutely safe under its recommended operating conditions and that the Explorer's design and operation were major culprits. What kind of information would one gather to assess these rival arguments? Explain.

3. In the world of managerial economics, what is perfect information? What industry examples would you pose and why?

4. Consider the concept of maximizing the number of competitors and letting price be determined by "what the market will bear." How do you interpret this statement? What is a good example of this at play?

5. Many, if not most, investment projects have a time element with a typical investment project involving initial outlays followed by cash inflows. How is this time element best determined and why?

6. In order to make sound decisions, the manager must also assess his or her own (or the company's) attitude toward risk. What questions should a manager ask before assuming a risk and why? What example would you pose in deciding to take on risk?

7. In summarizing your experience with the concepts covered in this course, which do you think you will most practically apply and why?

8. Indicate what concepts of managerial economics and decision making you believe you will need to emphasize now and in the future. Why?

Samuelson, W.F. & Marks, S.G. (2009). Managerial Economics.(7th ed). Hoboken NJ: John Wiley & Sons, Inc.

Discussion Question

In August 1999, Bridgestone/Firestone Inc. recalled 6.5 million tires in the wake of a number of tire-related rollover accidents in the Explorer SUV produced by Ford Motor Company. Although Firestone tires have an admirable overall quality record and the Explorer ranks second in its safety record among eight leading brands of SUV, 88 fatalities in the United States and as many as 50 fatalities overseas have been linked to the combination of Firestone tires (three particular brands) mounted on the Explorer. A review of the Firestone/Ford debacle shows that both companies (as well as the National Highway Safety Administration) lacked the data to allow early recognition of this accident risk. (To this day, there is no way to "prove" the exact causes of the tire failures. Evidence and analysis of the safety risk is purely statistical.)

a. Ironically, the low overall rate of tire-related accidents made it more difficult to detect the particular Firestone/Ford risk. Why would this be the case? Until 1999, Firestone relied exclusively on the low rate of tire claims under warranty to conclude that its tires were safe. Why might reliance on warranty data alone be a mistake?

b. The rate of tire failure is associated with multiple factors. The Explorer accidents with Firestone tires tended to occur at high speeds and at high temperatures. In addition, low tire pressures, recommended by Ford to increase ride comfort, tended to create more road friction and heat. (Carrying heavy loads has the same effect.) Precisely because the risk was associated with multiple, simultaneous factors, it was much more difficult to detect. Why would this be the case? (Hint: Screening factors individually produced no obvious warning signals.)

c. Ford believed that the major fault was with Firestone's tires. Firestone contended that its tires were absolutely safe under its recommended operating conditions, and that the Explorer's design and operation were the major culprits. What kind of information would one gather to assess these rival arguments? Explain.

Solution Preview

Hope this helps-

1. List some categories of risk faced by managers. What categories of risk are most crucial for the firm's profit? Provide examples of strategies to eliminate, mitigate, or insure against these risks.

Managers face various categories of risk. These include enterprise risk, which involves risk related to resources, product, service or the market in which the organization operates. There are also operational risks, which include, "mistakes in execution, system failures, policy violations, legal infringements, rule breaches" (Finance: Maps of the World, 2013). There is also financial risk, which might be due to exchange rates, liquidity, inflation, interest rates or non-payment by clients. Market risk involves "interest rate risk, equity risk, commodity risk and currency risk" (Finance: Maps of the World, 2013). Technology risk involves issues regarding implementing-or not implementing- technology.

The categories of risk that are most crucial for a firm's profit are those that impact its livelihood. This would include financial risk, market risk, operational risk and enterprise risk. In order to eliminate, mitigate or insure against these risks, a manager must determine his (and his company's) aversion to risk. Next, the expected value criterion must be evaluated and compared to the amount of risk involved. Samuelson and Marks (2009) suggest a manager may want to use a decision tree or equivalent tree to evaluate the risks, and as a way to better identify choices, outcomes and probabilities to make a more informed decision. Utilizing the "basic steps in decision making" also helps to mitigate risks by helping a manager better define the problem and explore alternatives.

2. Review the scenario on page 576 of your text labeled "Discussion Question." Ford believed that the major fault was with Firestone's tires. Firestone contended that its tires were absolutely safe under its recommended operating conditions and that the Explorer's design and operation were major culprits. What kind of information would one gather to assess these rival arguments? Explain.

In order to assess the rival arguments it would be necessary to gather information regarding the speed and operating conditions motorists were traveling at the time of the accidents. Combining different variables would be a key factor... since the rate of tire failure was associated with multiple failures, according ...

Solution Summary

This detailed solution lists some categories of risk faced by managers and describes the categories of risk that are most crucial for the firm's profit. It includes examples of strategies to eliminate, mitigate, or insure against these risks. It also answers the case study questions regarding Firestone's tires. Also, it defines perfect information in the world of managerial economics, what is perfect information, and considers the concept of maximizing the number of competitors and letting price be determined by "what the market will bear" along with an example. It explains how most investment projects have a time element with a typical investment project involving initial outlays followed by cash inflows and how the time element is best determined. It discusses assessing one's own attitude for risk and assessing the company's attitude toward risk.

Based on the following book:
Samuelson, W.F. & Marks, S.G. (2009). Managerial Economics.(7th ed). Hoboken NJ: John Wiley & Sons, Inc.

Also answers questions based on following scenario:

In August 1999, Bridgestone/Firestone Inc. recalled 6.5 million tires in the wake of a number of tire-related rollover accidents in the Explorer SUV produced by Ford Motor Company. Although Firestone tires have an admirable overall quality record and the Explorer ranks second in its safety record among eight leading brands of SUV, 88 fatalities in the United States and as many as 50 fatalities overseas have been linked to the combination of Firestone tires (three particular brands) mounted on the Explorer. A review of the Firestone/Ford debacle shows that both companies (as well as the National Highway Safety Administration) lacked the data to allow early recognition of this accident risk. (To this day, there is no way to "prove" the exact causes of the tire failures. Evidence and analysis of the safety risk is purely statistical.)

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