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BLAKE ELECTRONICS

DECISION MAKING CASE

Group:
Priscilla
Reynaldi
Teofilus

MM BATCH 76 BUSINESS DECISION MAKING CLASS


Table of Contents
1. ABSTRACT ............................................................................................................................ 2
2. INTRODUCTION ................................................................................................................... 3
3. METHODOLOGY .................................................................................................................. 4
4. RESULT AND ANALYSIS .................................................................................................... 6
5. SUMMARY AND RECOMMENDATION ......................................................................... 10
6. REFERENCES ...................................................................................................................... 11
1. ABSTRACT

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.

Type 2: Decision making under uncertainty


Means the decision maker does not know the probabilities of the various outcomes.
There are several criteria for making decisions under this type of environment:
Maximax (optimistic): find the alternative that maximizes the maximum payoff
Maximin (pessimistic): find the alternative that maximizes the minimum payoff
Criterion of realism (Hurwicz): A weighted average compromise between
optimistic and pessimistic
Equally likely (Laplace): considers all the payoffs for each alternative
Minimax regret: based on opportunity loss or regret, the difference between the
optimal profit and actual payoff for a decision

Type 3: Decision making under risk


Means the decision maker knows the probabilities of the various outcomes.
For this type of environment, most popular method is to choose the alternative with the
highest expected monetary value (EMV).
Second method is by calculating Expected Value of Perfect Information (EVPI) which
places an upper bound on what we should pay for additional information.

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.

Figure 1: Decision Tree

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

Applying the theory mentioned in previous chapter to Blake Electronics case:


Step 1: Clearly define the problem at hand
To manufacture it or not, and to do market survey before launch or not.
At this beginning point, Blake has known some information:
R&D team estimated that it would cost $500,000 to develop the equipment and
procedures needed to manufacture the master control box and accessories,
If successful, this venture could increase sales by approx. $2 million.
There is 60% chance of success estimated by the research team.
Survey Cost by first option of Marketing Research Firm called Marketing
Associates, Inc (MAI) would be $100,000, with success figures as follow:
Survey Results
Total
OUTCOME Favorable Unfavorable
Successful venture 35 20 55
Unsuccessful venture 15 30 45
Survey Cost by second option of Marketing Research Firm called Iverstine and
Walker (IAW) would be $300,000, with the chance of getting a favorable survey
result, given a successful venture is 90% and the chance of getting an unfavorable
survey result, given an unsuccessful venture is 80%

Step 2: List the possible alternatives


At this point, Blake has 4 alternatives:
Alternative 1. To do nothing
Alternative 2. To develop product without additional information from Marketing
Research Firm
Alternative 3. To develop product with information from MAI
Alternative 4. To develop product with information from IAW

Step 3: Identify the possible outcomes or states of nature


Possible outcomes are either successful venture or unsuccessful venture.

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.

Step 6: Apply the model and make the decision


Applying EMV and decision tree model to this case:
Steve has defined the problem, so the next step is to draw the decision tree. Steve could
assign the probabilities to the states of nature, then 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.
PROBABILITIES BY BLAKES R&D TEAM
P(Successful Venture) 0.6
P(Unsuccessful Venture) 0.4

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

P(Successful Venture | Unfavorable Survey) 20/(20+30)=0.4


P(Unsuccessful Venture | Unfavorable
30/(20+30)=0.6
Survey)
P(Favorable Survey) (35+15)/(55+45)=0.5

P(Unfavorable Survey) (20+30)/(55+45)=0.5


PROBABILITIES BY IAW
Since there is limited information, we are using prior probability(*) -in this case refers to
the probability of successful and unsuccessful venture provided by Blakes R&D team-
and posterior probability which is the revised probability and calculated after updating the
prior probability.
Survey Result Tota
Favorable Unfavorable l
Prior P(Successful Venture)* 0.6 1
Prior P(Unsuccessful Venture)* 0.4 1
P(Successful Venture | Favorable
0.9
Survey)
P(Unsuccessful Venture | Favorable 0.2
Survey)
P(Successful Venture | Unfavorable
0.1
Survey)
P(Unsuccessful Venture | Unfavorable
0.8
Survey)
0.9*0.6+0.2*0.4 =
P(Favorable Survey)
0.62
0.1*0.6+0.8*0.4 =
P(Unfavorable Survey)
0.38
Posterior P(Successful Venture |
0.9*0.6 / 0.62 = 0.87
Favorable Survey)
Posterior P(Unsuccessful Venture |
0.2*0.4 / 0.62 = 0.13
Favorable Survey)
Posterior P(Successful Venture | 0.1*0.6 / 0.38 =
Unfavorable Survey) 0.16
Posterior P(Unsuccessful Venture | 0.8*0.4 / 0.38 =
Unfavorable Survey) 0.84
DECISION TREE
EMV CALCULATION FOR EACH ALTERNATIVE:
ALTERNATIVES EMV
Do Nothing 0
Launch with info from R&D (Do not
$700,000
survey)
Launch with info from Marketing
Research Firm $500,000

Hire MAI for survey $500,000


Hire IAW for survey $468,800

5. SUMMARY AND RECOMMENDATION

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