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Steve owner of Blake Electronics needs to decide the new market for the company, He do the
research and has two concerns before he makes any decisions, there are 3 types of methodology
for decision and has 6 steps to be followed.
The Result of the research after following the methodology and the steps, the conclusion is He
need to launch the project, based on the decision tree calculations.
2. INTRODUCTION
To save the company, Steve as the owner of Blake Electronics decided to look at the possibility of
manufacturing electronic components for home use, which would be a totally new market for
Blake. The R&D team at Blake then came up with an idea to develop Master Control Center.
Steve want to know if he should invest in the new product development or not and if he could rely
only on his R&D team or if he should pay Market Research Firm to conduct survey so he could
get additional information regarding the new product., Steve then sent 30 RFP to 30 firms, but
only two research firms replied sent their proposal. One was Marketing Associates, Inc. (MAI)
and the other was Iverstine and Walker (IAW). Although MAIs record is better than IAW, IAW
seems to offering some information better than MAI.
This case objective is to answer Steves biggest two concerns before he makes any decision:
Concern 1: Does Steve need additional information from Iverstine and Walker?
Concern 2: What is the best recommendation?
3. METHODOLOGY
Decision theory is an analytic and systematic approach to the study of decision making. A good
must be based on logic, considers all available data and possible alternatives, and the
quantitative approach.
Decision maker might face different decision-making environment based on each problem. In
general, there are 3 types of environment that the decision maker might face, such as:
Type 1: Decision making under certainty
Means the decision maker knows with certainty the consequences of every alternative
or decision choice
In this type of environment, decision is easier to take rather than in other types of
environment. Knowing the consequences of each alternative means decision maker
should be able to take the right decision.
The third or last method is by calculating the Expected opportunity loss (EOL) which
is the cost of not picking the best solution. Then we can choose the alternative with the
lowest EOL.
However, it is already proven that the EVPI will always equal the minimum EOL and
the minimum EOL will always result in the same decision as the maximum EMV. This
is why it is not necessary to calculate all these three things as we could get the result
by only calculating the EMV.
When the decision maker need to take sequence of decisions, it will be more beneficial
and easier to him if he creates the decision trees. Any problem can be graphically
represented in this decision tree. All decision trees contain decision points or nodes and
state-of-nature points or nodes. In decision tree, squares represent decision nodes while
circle represent states of nature nodes and lines or branches connect the decisions and
the states of nature.
After the decision maker define the problem, he might draw the decision tree, then
assign probabilities to the states of nature, and estimate the payoffs for each possible
combination of alternatives and states of nature and finally solve the problem by
computing expected monetary values (EMVs) for each state of nature node.
To apply the mathematical theory above and get the right result in decision making, there are
6 recommended steps to be followed:
Step 1: Clearly define the problem at hand
Step 2: List the possible alternatives
Step 3: Identify the possible outcomes or states of nature
Step 4: List the payoff or profit of each combination of alternatives and outcomes
Step 5: Select one of the mathematical decision theory models
Step 6: Apply the model and make the decision
4. RESULT AND ANALYSIS
Step 4: List the payoff or profit of each combination of alternatives and outcomes
ALTERNATIVES Favorable (+$2,000,000) Unfavorable (+$0)
Do Nothing 0 0
Launch with info from
R&D $1,500,000 -$500,000
(-$500,000)
Launch with info from MAI
$1,400,000 -$600,000
(-$500,000 + -$100,000)
Launch with info from IAW
$1,200,000 -$800,000
(-$500,000 + -$300,000)
Step 5: Select one of the mathematical decision theory models
With current information, it is very clear that Steve faces the Type 3 decision-making
environment or Decision making under risk, in which Steve knows the probabilities of the
various outcomes.
For this type of environment, Steve could choose the most popular method which is
expected monetary value (EMV), and since there are sequence of decisions Steve should
take, it is better if he makes decision tree.
PROBABILITIES BY MAI
Survey Result
Total
Favorable Unfavorable
Successful Venture 35 20 55
Unsuccessful Venture 15 30 45
P(Successful Venture | Favorable Survey) 35/(35+15)=0.7
P(Unsuccessful Venture | Favorable Survey) 15/(35+15)=0.3
Based on the table above, the highest EMV is from the Alternative 2 which is launch the
product relying on the information from Blakes R&D Team. It is clear that Steve does
need to do something to save the company and should not do nothing. The EMV and
decision tree also tells us that Steve does not need to hire external Marketing Research Firm
either MAI or IAW to conduct the survey.
6. REFERENCES
Quantitative Analysis for Management, Tenth Edition, by Render, Stair, and Hanna