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Decision Analysis for Competitive Strategies

The document analyzes different decision making criteria to determine the best course of action under conditions of uncertainty. It considers maximax, maximin, minimax regret, Hurwicz, equal likelihood, expected value, expected opportunity loss, and expected value of perfect information. Based on the estimated probabilities provided, expected value analysis indicates the best decision is to maintain the status quo, with an expected value of $865,000.

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Justine Ordonio
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67 views3 pages

Decision Analysis for Competitive Strategies

The document analyzes different decision making criteria to determine the best course of action under conditions of uncertainty. It considers maximax, maximin, minimax regret, Hurwicz, equal likelihood, expected value, expected opportunity loss, and expected value of perfect information. Based on the estimated probabilities provided, expected value analysis indicates the best decision is to maintain the status quo, with an expected value of $865,000.

Uploaded by

Justine Ordonio
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

08 Task Performance

Management Science
Justine Marla Ordonio BSMA 4

A.
Determine the best decision by using the following decision criteria:
a. Maximax
Good Foreign Poor Foreign
Decision Competitive Competitive
Conditions Conditions
Expand 800,000 500,000
Maintain Status quo 1,300,000 -150,000
Sell now 320,000 320,000
Maintain Status quo = 1,300,000

b. Maximin

Good Foreign Poor Foreign


Decision Competitive Competitive
Conditions Conditions
Expand 800,000 500,000
Maintain Status quo 1,300,000 -150,000
Sell now 320,000 320,000
Expand = 500,000

c. Minimax Regret

Good Foreign Competitive Conditions Poor Foreign Competitive Conditions


1,300,000 - 800,000 = 500,000 500,000 – 500,000 = 0
1,300,000 – 1,300,000 = 0 500,000 – (-150,00) = 650,000
1,300,000 – 320,000 = 980,000 500,000 – 320,000 = 180,000

d. Hurwicz (a=0.3)

Good Foreign Poor Foreign


Decision Total
Competitive Conditions Competitive Conditions
Expand 800,000*0.3 = 240,000 500,000*0.7 = 350,000 590,000
Maintain Status quo 1,300,000*0.3 = 390,000 -150,000*0.7= -105,000 285,000
Sell now 320,000*0.3 = 96,000 320,000*0.7 = 224,000 320,000
e. Equal Likelihood

Good Foreign Poor Foreign


Decision Total
Competitive Conditions Competitive Conditions
Expand 800,000*0.5= 400,000 500,000*0.5 = 250,000 650,000
Maintain Status quo 1,300,000*0.5 = 650,000 -150,000*0.5 = -75,000 575,000
Sell now 320,000*0.5 = 160,000 320,000*0.5 = 160,000 320,000

B. Assume that it is now possible to estimate a probability of 0.70 that good foreign
competitive conditions will exist and a probability of 0.30 that poor conditions will exist.
Determine the best decision by using expected value and expected opportunity loss.
Expected Opportunity Loss

Good Foreign Poor Foreign


Decision
Competitive Conditions Competitive Conditions
Expand 500,000*0.70= 350,000 0*0.30 = 0
Maintain Status quo 0*0.70 = 0 650,000*0.30 = 195,000
Sell now 980,000*0.70 = 686,000 180,000*0.30 = 54,000
EV(Expand) 500,000(0.70) + 0(0.30) =350,000
EV (Maintain status quo) 0(0.70) + 650,000(0.30) =195,000
EV (Sell now) 980,000(0.70) + 180,000(0.30) =740,000

The expected opportunity loss is 320,000.

C.
Expected Value
EV (expand) = 800,000 (0.70) + 500,000 (0.30) = 710,000
EV (maintain status quo) = 1,300,000 (0.70) +(-150,000) (0.30) = 865,000
EV (sell now) = 320,000 (0.70) + 320,000 (0.30) = 320,000

Expected Value of the decision, given perfect information


1,300,000 (0.70) + 500,000 (0.30)
= 910,000 + 150,000
= 1,060,000

EVPI = Expected Value - Expected Value of the decision, given perfect information
EVPI = 1,060,000 – 865,000
EVPI = 195,000
D. Decision tree

Good Foreign
Competitive
Conditions (0.70) 800,000
710,000 Poor Foreign
Competitive Conditions
Expand
865,000 Good Foreign (0.30)
Competitive 500,000
Conditions (0.70)
Maintain Poor Foreign Competitive
Conditions (0.30)
1,300,00
Decision status
quo

320,000 -150,000
Good Foreign Competitive
Sell now
Conditions (0.70)
Poor Foreign Competitive
Conditions (0.30) 320,000

320,000

Common questions

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The Maximax decision criterion involves choosing the option with the maximum possible payoff, reflecting an optimistic strategy. In the context of foreign competitive conditions, opting to 'Maintain Status quo' yields a potential payoff of 1,300,000 under good conditions, which is the highest among alternatives, assuming a very optimistic scenario .

The Hurwicz criterion involves weighing the best and worst outcomes by assigning a coefficient of optimism (0.3). For instance, the 'Expand' decision balances an optimistic payoff of 240,000 and a pessimistic adjustment of 350,000, totaling 590,000, which is more moderate than strictly optimistic or pessimistic criteria .

Assigning probabilities, such as 0.70 to good and 0.30 to poor conditions, helps to forecast expected outcomes accurately. It allows for computation of expected values, ensuring decisions are well-informed by likely market conditions rather than speculative assumptions .

The Maximin decision approach involves choosing the option with the best of the worst case outcomes, indicating a conservative strategy. In uncertain markets, 'Expand' is chosen as it offers the highest minimum payoff of 500,000, protecting against the worst outcomes .

EVPI measures the value of having complete information before making a decision. The EVPI of 195,000 represents the potential improvement in decision-making if perfect information about competitive conditions were available, highlighting the worth of acquiring additional data .

A decision tree visually maps possible decisions and their consequences. It helps to compare outcomes like 865,000 for maintaining the status quo and analyzing potential branches, thus clarifying complex decision paths under uncertain foreign market conditions .

Expected Opportunity Loss evaluates potential losses from not choosing the optimal decision. Calculating a loss of 320,000 for non-expansion highlights the financial impact of sub-optimal decisions, emphasizing proactive loss mitigation in strategic planning .

The Minimax Regret criterion assesses the smallest maximum regret by minimizing potential lost opportunities. The decision with the smallest regret, calculated as 0 for maintaining status quo under good conditions, leads managers to choose options that limit missed opportunities in changing conditions .

The equal likelihood criterion assumes all outcomes are equally probable, averaging potential payoffs without favoring extremes. 'Expand' results in a moderate expected value of 650,000, balancing outcomes between poor and good conditions and reducing biased decisions toward specific scenarios .

Expected value calculation considers probabilities of different states, providing an average outcome. In volatile markets, the 'Maintain status quo' strategy, with an expectation of 865,000, leverages both high and low probabilities to guide strategies under uncertainty .

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