How does the optimal course of action change

Assignment Help Project Management
Reference no: EM131439668

Decisions at BLEW

Blenheim Electric Works (BLEW) manufactures small diesel-powered electric generators for the home, farm and light-industry markets. It is based in the UK, but 90% of its business is overseas, mostly with rural developing countries. The company produces a range of six products, the smallest being the "Villum", which generates 500W for lighting, and the largest being the "Monsted", suitable for small irrigation pumping. Competition had traditionally come from a German company, but recently from several manufacturers in Japan, Korea and Taiwan. Most recently the Spanish company Solares has become very competitive in the South American market.

It is with one particular South American country that the current decision problem arises. It is a small, somewhat reclusive, but politically stable country, which we shall refer to as Coronado. BLEW has had 40% of the Coronado market for the past 10 years. The government is socialist, but has recently been liberalising its position. In fact, it has just approached BLEW with the request that it consider setting up a factory in Coronado to produce generators both for the host Coronado market and for export to the rest of South and Central America. The advantages to BLEW are strategic and largely long term. Operationally, the shortage of skilled labour, support facilities and the small factory operation would make it more expensive to produce there, notwithstanding the transportation savings. However, if BLEW were not to do this, it seems that Solares could.

The terms that the Coronado Government are offering BLEW, in return for a 50% co-ownership of the factory, involve help with training a workforce, the setting up of support facilities, and import protection through quotas and tariffs for the first 7 years. In Present Value terms, over a 10-year horizon, this proposition appears to be worth £9.5 million to BLEW, compared to £18 million for the scenario of Coronado continuing as presently to import. However, if BLEW turned the offer down and Solares accepted it, then BLEW could only expect to make £2.5 million in the Coronado market over this period. The marketing director of BLEW thought the probability of Solares accepting this offer was about 0.5. If Solares turned it down, then in a second round of negotiations, Coronado would offer better terms with BLEW on quotas and tariffs, giving a present worth of £13 million. If BLEW turned these improved terms down, the probability of Solares then accepting would be about 0.6, and in this situation BLEW could expect to make only £2 million. These would be the best terms that Coronado could offer, and if both BLEW and Solares turned them down, it is not considered likely that Coronado and any other manufacturer would negotiate an agreement. The country would continue to import, at least in the short-term.

Address the following questions, making sure to describe the modeling approach used:

(i) Using only the information presented so far in the case, draw a decision tree for the BLEW decision problem. Based on an expected value criterion, provide advice as to what BLEW should do.

(ii) How does the optimal course of action change with respect to the probabilities of Solares accepting the offers?

(iii) What is the most that would be worth paying for information regarding whether or not Solares will accept the initial offer?

In the course of discussions with Easy Money Banking plc (EMB), who would help BLEW finance the project, it became apparent that some consideration of political risk would be prudent. EMB maintained a special advisory group for these purposes. They agreed that Coronado was currently reasonably stable by South American standards, but over 10 years it is by no means certain that it can escape the problems that beset its neighbours. Overall, the advisors suggested that there was a 0.75 probability of no change, a 0.15 chance of a swing to the left through revolutionary extremism, and a 0.1 chance of a swing to the right through military coup. EMB suggested that BLEW think of several adverse changes in policy, namely, expropriation of assets, "creeping" expropriation (increased taxation of profits and control of remittances back to the UK), and removal of tariffs and quotas. Scenarios for each of these were then computed giving present value payoffs for the various combinations of decisions and outcome scenarios. These are shown in Table 1. Table 2 shows the probabilities of each of these political risks conditional on the three scenarios of government change.

Table 1: Present value payoffs (in £ millions) for BLEW resulting from the different scenarios

Political Risk Scenario

  BLEW Build Factory

Initial              Revised

Terms             Terms

 BLEW Continue to Export & Solares Build Factory

Initial                  Revised

Terms                  Terms

No one Builds

Current Situation Maintained

Expropriation

Creeping Expropriation

Removal of Tariffs and Quotas

9.5

-22

-5

-7

13

-20

-4

-6

2.5

1

2.2

14

2

0.8

1.9

13

18

18

18

18

Table 2: Probability of each political risk scenario conditional on each scenario for government change

Government Change

Political Risk Scenario

Conditional Probability

 

 

None

 

 

Current Situation Maintained

0.7

Expropriation

0

Creeping Expropriation

0.2

Removal of Tariffs and Quotas

0.1

 

Left

 

 

Current Situation Maintained

0.45

Expropriation

0.1

Creeping Expropriation

0.45

Removal of Tariffs and Quotas

0

 

Right

 

 

Current Situation Maintained

0.5

Expropriation

0

Creeping Expropriation

0.1

Removal of Tariffs and Quotas

0.4

Address the following questions, making sure to describe the modeling approach used:

(iv) Using all the information presented in the case, draw a decision tree for the BLEW decision problem. Based on an expected value criterion, provide advice as to what BLEW should do.

(v) How does the optimal course of action change with respect to the present value payoff that no one builds a factory?

(vi) How would the decision taken in Question (iv) change if you use a maximal criterion? Provide critical discussion on the pros and cons of acing a minimax criterion versus an expected value criterion, and make reference to pertinent literature to support your reasoning. (Assume the value given in the case for the present value payoff that not one builds a factory.)

Reference no: EM131439668

Questions Cloud

How might reading the literature in your field assist you : Using the information you provided in your application to the GCU Doctoral Program, briefly describe a potential topic of interest for your dissertation. How do you believe this research will contribute to the body of knowledge in your field? How ..
How does methodology of the study come into play : What process would you use to determine what literature to use for your literature review? How does methodology of the study come into play? How might you use questions to determine what literature to use in your review?
Discuss ethics concepts and principles : LDR 800 : Drawing upon your knowledge from Ethical Dilemmas and Stewardship, studies and literature research you have completed, and the readings and lecture in this module, reflect upon the role of ethics in the research process.
Derive the plant model for an automatic transmission system : Derive the plant model for an automatic transmission system. Design a state space controller with state feedback based on the performance objectiveof minimizing the peak shift jerk.
How does the optimal course of action change : Using only the information presented so far in the case, draw a decision tree for the BLEW decision problem. Based on an expected value criterion, provide advice as to what BLEW should do. How does the optimal course of action change with respect t..
What are some of the ethical issues that can arise : What are some of the ethical issues that can arise during a research study? What tools are available to research institutions to assure ethical compliance of the researchers?
Describe interpersonal conflict that not handled effectively : Watch one episode of one of the above television programs and identify and describe one interpersonal conflict that was not handled effectively.
Why is it important to know the variables within research : At this point you should be narrowing in on potential topics for your dissertation. The specifics may not be targeted but you should know the general area you wish to research. Using the topic area you are considering, explain how the measurement ..
Discuss operationalization choices and offers research : Babbie discusses operationalization choices and offers four research questions and ways to address them. Choose two of the questions and discuss how the applications mentioned are good choices or how they may not bring about the expected results.

Reviews

len1439668

3/25/2017 1:26:23 AM

Course objectives: Display knowledge of Multivariate Statistical Theory, especially Regression Analysis in Decision Making, and apply this knowledge in areas such as Business Forecasting Display knowledge of Optimization Theory as it pertains to Decision Making, and apply this knowledge in areas such as Portfolio Optimization Display knowledge of Risk Analysis in Decision Making, such as in Financial Investment Demonstrate awareness of the application of Decision Analysis in Decision Making, such as in Project Management Be confident users of package computer programs that are widely used in industry for Regression Analysis, Optimization, Decision Analysis and Risk Analysis Appreciate the wider implications of uncertainty in Decision Making and the related need for solutions that are both flexible and robust Literature is parts of the following books: Wisniewski, M. (2016), Quantitative methods for decision makers, 6th edn. Pearson. Albright, S.C., Winston, W.L. and Zappe, C. (2011), Data Analysis, Optimization, and Simulation Modeling (UK: Thomson Southwestern). ISBN 978-0538476768.

Write a Review

Project Management Questions & Answers

  Create a project schedule and align resources

Create a project schedule and align resources, Analyze project schedule and resource allocation

  Managerial roles and gap analysis

Write a report on Managerial Roles and Gap Analysis

  Questionaire on project management

Questionaire on Project Management

  Describe the market growth rate for product

Describe the market growth rate for product and service.

  Prepare a work plan and project schedule - gantt chart

Design an online system for the human resources department to manage available job positions.

  Project risk management approach

How does a project risk management approach pro-vide an early warning signal for impending problems or issues

  Black-scholes options pricing model

Calculate the payoff and the profits for investments

  Describe the features or characteristics of product

Describe the features or characteristics of your product or service.

  Write paper on inventory management system

Write paper on Inventory Management System.

  Analysis of the overall project risk

Analysis of the overall project risk

  Investment and performance analysis

Evaluate the usefulness of ROCE

  Distribution strategy and project management

Distribution strategy and project management

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd