Ferrara Calabria Is An Outdoor High-End Seafood Restaurant

The Ferrara Calabria Is An Outdoor High End Seafood Restaurant Locat

The "Ferrara Calabria" is an outdoor high-end seafood restaurant located in a small resort town on the shore of the Mediterranean Sea. The restaurant is considering whether to sign a contract with the jazz quintet "Solerno Jazz" to perform for 12 summer weeks from June to August 2021. The decision involves choosing between two options: performance on Friday nights only or performances on Saturday and Sunday nights. The contract must be signed by the end of December 2020. The "Solerno Jazz" consists of five members, with varying charges for performances depending on the day. Performance costs on Friday nights are specified, while charges for Saturday and Sunday performances are higher by 70% and 200%, respectively. The restaurant's accountant, Emily Bronte, has estimated the potential increase in attendance and revenue resulting from live music performances, considering probabilities of additional clients and their spending behavior. Moreover, additional costs such as renting a stage and space are involved. The decision to hire the jazz band also involves considering potential reactions from competitors, with estimated probabilities of competitive responses and their impacts on the restaurant's revenues. Based on these data, the restaurant aims to determine whether hiring "Solerno Jazz" is financially advantageous and, if so, which contract option should be selected. Additionally, the limitations of using a decision tree method in risk-based decision making should be discussed.

Paper For Above instruction

The decision of whether to engage "Solerno Jazz" for the summer season at "Ferrara Calabria" involves extensive financial and strategic considerations. The management must analyze not only the direct costs of hiring the band but also the potential increases in customer attendance, revenue, space utilization, and the possible reactions from competitors. This complex decision-making process can be effectively approached through a systematic evaluation of the expected monetary outcomes associated with each alternative, underpinned by probabilistic estimates.

Financial Analysis of Hiring the Jazz Band

The core financial comparison revolves around two main options: performing on Friday nights only, or performing on Saturday and Sunday nights. The costs and expected benefits of these options are influenced by several variables, including the charges of the jazz band, anticipated increases in customer spending, costs related to space rental, and competitive reactions.

Performance Costs and Revenue Implications

The charges for the band are specified; on Friday nights, the costs are known, while Saturday and Sunday costs are augmented by 70% and 200% respectively. The restaurant estimates that the presence of live jazz music will elevate customer numbers—though this is probabilistic—by factors associated with specific probabilities for each day. These attendance probabilities are crucial for calculating the expected number of additional clients, thereby estimating potential incremental revenues.

The expected increase in customer spending due to live music is estimated at 20% for Fridays and 25% for Saturdays and Sundays. Combined with the baseline average expenditures—EUR 95 on Fridays, EUR 102 on Saturdays, and EUR 109 on Sundays—these adjustments provide an estimation of incremental revenue attributable to live performances.

Calculating the sum of these expected increased revenues minus the sum of performance and space rental costs yields the expected net benefit of each option. For example, if the anticipated additional clients on Friday are relatively low, but the cost of performance is also low, the net benefit may be marginal or negative. Conversely, more significant attendance and spending increases could justify the expense.

Cost Analysis: Stage and Space Rental

Accounting for accommodation, the costs for space rental are EUR 220 for Fridays and EUR 300 for Saturdays and Sundays. These fixed costs need to be included in the anticipated expenses of hosting the band, further refining the net expected gain calculations.

Impact of Competitors' Reactions

An essential aspect of the decision involves potential competitive responses. There is an estimated 55% probability that competitors will react if the band performs on Fridays, and a 75% probability for Saturdays and Sundays. These reactions could diminish the expected incremental revenue by attracting away some customers or reducing the effectiveness of the jazz performances. The impact of such reactions is estimated with probabilities indicating that either no impact occurs (30–35%) or revenues could be compromised partially (50%) or entirely (35–35%). These should be incorporated into the expected value calculations by adjusting anticipated revenue figures according to these probabilistic impacts.

Expected Value and Decision Utility

By aggregating all these probabilistic estimates, the expected monetary value (EMV) of each contract option can be computed. The EMV accounts for the likelihoods of customer attendance increases, costs, and competitive responses. The optimal choice, based on maximizing EMV, is the most financially advantageous strategy.

Suppose the calculations reveal that the EMV for Saturday and Sunday performances exceeds that for Friday-only performances, given the higher but potentially offset costs and competitive risks; the restaurant should prefer the Saturday and Sunday contract. Conversely, if the net expected benefit for Friday performances is higher, considering lower costs and smaller competitive threats, then the Friday-only contract would be advisable.

Limitations of the Decision Tree Method in Risk Contexts

While decision trees provide a structured approach to evaluating uncertain outcomes, they possess limitations that may affect their practical utility. Firstly, decision trees assume that probabilities are known with certainty, which is rarely the case in real-world scenarios, especially in dynamic markets with rapidly changing competitive landscapes. Misestimations of probabilities can significantly skew the expected values.

Secondly, decision trees tend to oversimplify complex decisions by assuming independent events and linear relationships, whereas actual strategic environments involve interdependent factors and nonlinear interactions, such as reputational effects or long-term brand positioning. Furthermore, the method can become unwieldy when multiple stages of decision-making or a multitude of possible outcomes are involved, leading to computational complexity and increased risk of misinterpretation.

Another drawback involves the static nature of decision trees, which often overlook the possibility of learning or updating probabilities based on new information over time. In the context of environmental risks and market reactions, this static framework may limit adaptability, potentially leading to suboptimal decisions if initial estimates are inaccurate or if unforeseen changes occur.

Lastly, decision trees focus on quantitative analysis, often neglecting qualitative factors like brand value, customer loyalty, or strategic positioning, which are difficult to quantify but crucial in competitive hospitality environments. As such, while decision trees are valuable tools, relying solely on them without considering broader contextual insights can lead to incomplete decision-making.

Conclusion

The decision for "Ferrara Calabria" to hire "Solerno Jazz" should be guided by a comprehensive expected value analysis that systematically accounts for costs, revenue increases, probabilistic outcomes, and competitive responses. Employing decision trees allows for a structured risk assessment but must be complemented by qualitative judgment and awareness of the method's limitations. Ultimately, a nuanced approach that balances quantitative rigor with strategic insight will best support optimal decision-making under risk.

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