Decision Making And Decision Analytics: Provide Answers To Q

Decision Making Decision Analytics Provide Answers To Questions 1 Thro

Decision Making Decision Analytics Provide answers to questions 1 through 2 in their corresponding worksheet . Westward Magazine Publishers are thinking of launching a new fashion magazine for women in the under-25 age group. Their original plans were to launch in April of next year, but information has been received that a rival publisher is planning a similar magazine. Westward now have to decide whether to bring their launch forward to January of next year, though this would cost an additional $500,000. If the launch is brought forward it is estimated that the chances of launching before the rival are about 70%. However, if the launch is not brought forward it is thought that there is only a 40% chance of launching before the rival. For simplicity, the management of Westward have assumed that the circulation of the magazine throughout its life will be either high or low. If Westward launch before the rival, it is thought that there is a 65% chance of a high circulation. However, if the rival launches first, this probability is estimated to be only 50%. If the rival does launch first then Westward could try to boost sales by increasing their level of advertising. This would cost an extra, but it is thought that it would increase the probability of a high circulation to 80%. This increased advertising expenditure would not be considered if Westward’s magazine was launched first. Westward’s accountants have estimated that a high circulation would generate a gross profit over the magazine’s lifetime of $6 million. A low circulation would bring a gross profit of about $2 million. It is important to note, however, that these gross profits do not take into account additional expenditure caused by bringing the launch forward or by increased advertising. a. Assuming that Westward’s objective is to maximize expected profit, determine the policy that they should choose. (For simplicity, you should ignore Westward’s preference for money over time: for example, the fact that they would prefer to receive a given cash inflow now rather than in the future.) b. In reality, Westward have little knowledge of the progress which has been made by the rival. This means that the probabilities given above for launching before the rival (if the launch is, or is not, brought forward) are very rough estimates. How sensitive is the policy you identified in (b) to changes in these probabilities?2. ABC Chemicals are planning to start manufacturing a new pharmaceutical product. Initially, they must decide whether to go for large-scale or small-scale production. Having made this decision, the profits that they make will also depend on (i) the state of the economy over BUS 606 Fall 2021 the next 2 years; (ii) whether or not a rival manufacturer launches a similar product; and (iii) the amount which ABC decides to spend on advertising the product (this decision will itself be influenced by the scale of production which ABC opt for, whether a rival product is launched and the state of the economy). a. Use an influence diagram to represent the above decision problem, stating any assumptions you have made. b. Use your influence diagram to derive the outline of a decision tree which could be used to represent ABC’s problem

Paper For Above instruction

The decision-making process in uncertain and competitive environments often involves complex analyses that require quantitative and qualitative tools. Two prominent cases exemplify such processes: one involving a magazine publisher contemplating a strategic launch against competitors, and another concerning a pharmaceutical manufacturer evaluating scale, market conditions, and competitive responses. This paper explores these decision problems through expected utility analysis, influence diagrams, and decision tree modeling to demonstrate how systematic decision analysis can optimize outcomes amidst uncertainty and strategic complexities.

Case 1: Westward Magazine Launch Decision

Westward Magazine Publishers face a critical strategic decision regarding the timing of their new fashion magazine targeting women under 25. The core decision revolves around whether to accelerate the launch from April to January, which entails an additional cost of $500,000. The primary uncertainty is the likelihood that either Westward or a rival publisher will be first to market. The probability of launching before the rival if the launch is expedited is 70%, while delaying reduces this probability to 40%. These probabilities significantly influence the competitive advantage and the potential circulation of the magazine.

Furthermore, market success hinges on circulation levels, categorized as high or low, with associated profits of $6 million and $2 million respectively. Launching before the rival has a 65% chance of resulting in high circulation, which diminishes to 50% if the rival launches first. However, Westward can attempt to offset the disadvantage of being second by increasing advertising efforts, which costs additional money (unspecified in the problem but presumed significant), increasing the probability of high circulation from 50% to 80%. This strategic boost entails an additional expenditure without considering the future profit implications.

Using expected profit calculations, Westward's optimal policy can be identified by weighing the probabilities of each scenario against their respective payoffs. An expected profit analysis reveals that launching early without extra advertising yields an expected profit of:

Expected profit = (0.7 0.65 $6 million) + (0.7 0.35 $2 million) + (0.3 0.5 $6 million) + (0.3 0.5 $2 million) - $500,000 (additional launch cost)

Similarly, launching later or using advertising to influence market position involves evaluating the marginal benefits against the additional costs.

Sensitivity analysis suggests that the optimal decision depends heavily on the accuracy of the estimated probabilities of launching first and circulating success rates. Small changes in these probabilities could tilt the expected profits enough to suggest a different strategy. For instance, if the probability of winning the race to market when not expedited drops below a critical threshold, delaying the launch might become more attractive.

Case 2: ABC Chemicals and Pharmaceutical Product

The pharmaceutical company ABC Chemicals faces a multi-stage decision involving permanent choices on production scale, and subsequent decisions influenced by external market conditions. An influence diagram offers an effective visual and analytical tool to model such a complex scenario. Key nodes include the initial decision on scale (large or small), subsequent variables such as the state of the economy (favorable or unfavorable), the competitor’s action (launching a similar product or not), and the advertising expenditure.

Assumptions made in creating the influence diagram include that the decisions are sequential, with the initial scale decision preceding other uncertainties, and that the state of the economy and competitors’ actions are independent chance nodes with specified probabilities. The advertising decision is conditioned on the initial choices and external factors, making it a strategic decision that aims to optimize profit based on anticipated market response.

The influence diagram allows for a structured derivation of decision trees. The first branching point is the choice of scale, leading to two different branches. From each branch, subsequent chance nodes represent the possible states of the economy and the rival's decision. The final payoffs depend on these combined outcomes and the advertising spend, which influences sales success and overall profit.

Conclusion

Both cases underscore the importance of systematic decision analysis under conditions of uncertainty and strategic competition. Expected utility calculations facilitate optimal decision-making for Westward Magazine, while influence diagrams and decision trees serve as vital tools for delineating complex strategic problems such as ABC Chemicals’. Incorporating probabilistic reasoning and structured models enables firms to identify strategies that maximize expected outcomes, adapt to uncertainties, and respond effectively to competitive pressures.

References

• Clemen, R. T., & Reilly, T. (2014). Making Hard Decisions with DecisionTools. Duxbury Press.
• Howard, R. A., & Matheson, J. E. (1984). Influence Diagrams. In R. V. Howard & J. E. Matheson (Eds.), Readings in Decision Analysis.
• Pearl, J. (1988). Probabilistic Reasoning in Intelligent Systems: Networks of Plausible Inference. Morgan Kaufmann.
• Luenberger, D. G. (1997). Optimization by Vector Space Methods. Wiley.