Part 1 – Splitting Decisions (10 points)
In lecture 14, we discussed how Costume Gallery “split” their manufacturing between China and New Jersey to change their relationship with demand risk and obtain both build-to-stock and build-to-order benefits. Then, in Lecture 16, we discussed how splitting business-model-design decisions is key in managing risk in new ventures.
The concept of “splitting a big bet into a sequence of smaller, less consequential bets” is instrumental in management. In this part of the exam, you will have to identify a case where “splitting decisions” was useful or could be useful. To do so, complete the following steps:
Describe a management decision and the information risks associated with this decision. This decision can be from an internship you have done, from a job you worked at, that you observed in practice, or from your personal life. (2 points)
What are the consequences and/or costs of getting this decision wrong? (2 points)
Describe how this decision can be “split” (2 points).
How does splitting this decision change the relationship with the risks you described in point 1? (2 points)
What are the costs associated with splitting this decision? (2 points)
Note: Please be succinct. A few sentences for each point suffices. Answers in bullet-point format are fine too.
Part 2 – Stanplus (15 points)
Across Asia, ambulance fleets are fragmented and uncoordinated. Ambulances struggle to respond to patients and suffer from low utilization rates. In India, the status of emergency response is particularly dire. Unlike other countries, there is no single emergency dispatch number in India. Every hospital, clinic, and nursing home has its own emergency number. This leads to confusion in case of an emergency. The caller has no idea of how far the ambulance is or what the response time will be.
Stanplus, a fast-growing startup, is attempting to address these problems. StanPlus is a platform that allows for efficient and central dispatching of ambulances and emergency care. Below is a slide from their pitch deck.
Here is a part of a news article about StanPlus:
StanPlus: The Uber for ambulances does much more than mere aggregation
Chhavi Tyagi, Economic Times, 2016/12/13
According to StanPlus, cofounder and CEO Prabhdeep Singh, 75% of the patients who need an ambulance use their own personal vehicle to reach a hospital and 30% of those brought in by an ambulance arrive dead. It is to change these horrific statistics that Singh started his ambulance aggregation and standardisation startup, StanPlus, along with two co-founders – Antoine Poirson and Jose Leon.
“We are building India’s largest private medical helpline and consolidating private ambulances to service this helpline. The objective is to reduce the time it takes for an ambulance to reach a patient from the current average time of 40 minutes to less than 15 minutes. These ambulances are optimised according to patients’ needs and use the power of network to match the patient with closest hospital that has facilities to take care of them. We are also standardizing the fare, care, and equipment,” explains Singh. “Customers can trust that, by calling our helpline in an emergency, they will have a high-quality ambulance readily available at a standardized and fair price”.
After months of detailed research and planning the company launched its commercial operations last month in Hyderabad. “Hyderabad is a very important medical market and we want to focus on it for the time being. We want to have the quality and the confidence of Hyderabad’s patients and ambulance providers before we engage other markets. We do not wish to grow too fast and then fail,” says Singh. The startup claims to have 50 ambulances on its network already and the ability to service 50% of Hyderabad’s population within 15 minutes and 85% of the population under 30 minutes.
The startup does not simply aggregate the available ambulances, but also standardizes, trains drivers on CPR and first aid, quality checks the inside of the ambulances, among other things. It also provides a live tracking feature to the patients through SMS.
“Ambulance market in India is fragmented and suffers from low asset utilization. The owners of the fleets are unable to upgrade the ambulances because of demand spreading very thin. By focusing the demand on standardized ambulances, we are increasing the asset utilisation and thereby incentivising the owners to improve the quality – both of hardware, and what we call ‘care-ware’,” says Singh. “We also give the option to ambulance providers to use our platform or their own dispatch system” he adds.
The company is in the process of partnering with corporates and hospitals to expand its reach and plans to engage patients directly through advertising once it finalizes its seed funding.
“We are already in talks with multiple players and expect to close the funding by February. We plan to raise anywhere between $600,000-1 million in the round,” Singh divulges. The next step for the startup is to provide a team of well-trained care staff including paramedics and nurses for the patients.
The company charges users a fair share per ride but plans to increase collaboration with insurance companies and hospitals to decrease the burden on the patients. It also offers fleet management to ambulance owners as a source of revenue.
Based on the information above, please answer the following questions. Short and objective explanations suffice.
Question 1 (10 points)
What are the benefits StanPlus (the intermediary) is bringing to this environment? How are they operationalizing these benefits? Structure your response using the marketplaces discussion from class. (Only limited information has been provided in the question statement, so answer as best as you can with the information available).
Question 2 (8 points)
After chatting with Techify’s COO, you come up with a third option for managing server and storage capacity. In this option, you would advance-purchase capacity from Alphabet (at $0.04 per streamed hour). Then, if needed, you purchase additional flexible capacity from Amazon (at $0.08 per streamed hour).
However, this option would require an investment of $50k per year to adapt Techify’s technology stack to run on both AWS and Alphabet. Should Techify pursue this option?
Question 3 (7 points)
The sales team from Microsoft Azure (Microsoft’s cloud service) contacts you with an alternative offer. In this offer, Techify can advance-purchase server and storage capacity for the next year at a cost of $0.0425 per streamed hour of content. Furthermore, if the advanced-purchase capacity is insufficient to meet demand, Techify can purchase additional “flexible” server capacity on-demand as needed for $0.09 per streamed hour.
However, unlike Amazon’s and Alphabet’s offers, in this new offer, any leftover capacity of the advance-purchase order is credited back to Techify for $s per hour (i.e., Microsoft “buys back” the streaming hours for $s per hour). What is the minimum value of $s for this offer to be better than the ones from Alphabet and Amazon? Note: if solving for s exactly is too complex, feel free to try s = 0.01, 0.02, 0.03, etc, and give your answer in cents.