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.