greater than the alternative. Thus, regardless of the outcome of the biochemi-
cal program, the biogenetic program also should be pursued.
The drug company’s overall expected profit at the outset, that is, at the
tree’s initial chance node is: (.7)(82) (.3)(50) $72.4 million. The expected
profit from this sequential strategy is exactly the same as under simultaneous
development. This result may seem surprising until we note that the two strate-
gies call for the company to take exactly the same actions. Even under sequen-
tial development, the company’s best strategy is to pursue both R&D methods,
just as under simultaneous development. Despite the apparent differences in
the decision trees, the strategies must have the same expected profit because
they call for the same actions in all cases. Thus, this sequential strategy offers
no advantage over committing to simultaneous development in the first place.
In contrast, the reverse sequential strategy—pursue the biogenetic program
first, then the biochemical program if necessary—is advantageous. Figure 12.5
depicts this strategy. The tree shows that if the biogenetic program is success-
ful, it should be commercialized (for an expected profit of $180 million).
Otherwise, the biochemical program should be pursued and brought to mar-
ket (for an expected profit of $48 million). To calculate the firm’s expected
profit when it first embarks on this sequential program, we average these two
results. Thus, the overall expected profit is (.2)(180) (.8)(48) $74.4 mil-
lion. This sequential strategy provides $2 million more profit on average than
the next-best alternative.514 Chapter 12 Decision Making under Uncertainty72.4(^82) Biogenetic
fails
Biogenetic
succeeds
$60
$170
50
Pursue
biochemical
program
first
82
Biochemical
succeeds
Biochemical
fails
.7
.3
Commercialize
biochemical
Pursue
biogenetic
Commercialize
biochemical
Pursue
biogenetic
.2
.8
Biogenetic
fails
Biogenetic
succeeds
$20
$170
50
.2
.8
$80
$40
FIGURE 12.4
Sequential R&D:
Biochemical First
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