BUAD 311 Week 8 Notes
BUAD 311 Week 8 Notes BUAD 311
Popular in Operations Management
verified elite notetaker
Popular in Business Administration
verified elite notetaker
This 4 page Class Notes was uploaded by Emily Laurienti on Sunday October 16, 2016. The Class Notes belongs to BUAD 311 at University of Southern California taught by Prof. Hamid Nazer-Zadeh in Fall 2016. Since its upload, it has received 6 views. For similar materials see Operations Management in Business Administration at University of Southern California.
Reviews for BUAD 311 Week 8 Notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 10/16/16
10.13.16 Decision Trees A tool to design strategy in uncertain environments Squares = decisions Circles = scenarios Hotel Revenue Management Example One room left for tonight Normal rate = $350 Someone comes in asking for the room for $250 70% chance someone else arrives 30% chance nobody shows up Should you accept? Expected value of selling = 250 dollars Expected value of waitng = 30% * 0 + 70% * 350 = 245 According to the math, you should accept the offer and sell now HOWEVER, this trains customers to think that they can always do this, so most hotel chains will turn down any offer below asking price Drug Development Example Your drug has passed the first two phases of trial 90% probability for success of phase 3 Demand = 5 million Profit = $50 per person per year Total profit = 250 milliion Options Contract now for 150 million Wait until after phase three and contract for 180 million When do we contract? Contract now approved = 250 million – 150 million = 100 million profit Contract now not approved = -150 million Expected value = .9 * 100 million + .1 * -150 million = 75 million Contract later approved = 250 million – 180 million = 70 million Contract later not approved = 0 made Expected value = .9 * 70 million + .1 * 0 = 63 millon Therefore, it is more profitable to contract now. However, most execs would probably not make this decision What is the maximum manufacturing cost such that it is beneficial for us to wait to contract? We would contract later if our expected value was at least 75 million 75 million = (250 – p) *.9 P = 166.7 million is the highest cost we will pay in order to make it beneficial to wait to contract Market Research Example Two Decisions: Invest 200 million to introduce the new sandwich nationally 60% chance high response High response = 700 million revenue 40% chance low response Low response = 150 million revenue Invest 20 million to evaluate it in a regional test market 70% chance high response Remain regional = 200 million revenue Go national = invest 200 million 90% chance high response = 700 million revenue 10% chance low response = 150 million revenue 30% chance low response Remain regional = 100 million revenue Go national = invest 200 million dollars 5% chance high response = 700 million 95% chance low response = 150 million See Decision Tree Below Find expected values Go national first Cost 200 million High response profit = 700 – 200 = 500 million Low response profit = 150 – 200 = -50 million Expected value = 500 * .6 + -50 * .4 = 280 million Go regional first Low response Remain regional = 100 million – 20 = 80 million Go national High response = 700 million – 200 – 20 = 480 million Low response = 150 million – 200 – 20 = -70 million Expected Value = -42.5 million If we go regional and response is low, we will choose to remain regional High response Remain regional = 200 million – 20 = 180 million Go national High response = 700 – 20 – 200 = 480 million Low response = 150 – 20 – 200 = -70 million Expected value = .9 * 480 + .1 * -70 = 425 If we go regional and the response is high, we will go national Total regional Expected value .7 * 425 + .3 * 80 = 321.5 Regional first will make us 321.5 million, national first will make us an expected 280. We should go regional first.
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'