Question

The directors of fast food chain of restaurants based in Barcelona named El Mejicano were considering whether to begin the promotion for their new line of menus than originally planned. "I think we should go ahead with the price cuts," Pedro Morales said. "After all, it couldn't hurt! At the very worst, we'll sell these menus cheap for a little longer than we had planned, and on the other side we could beat Panchito to the punch. Panchito is the most important competitor of El Mejicano in Barcelona and they are also a fast food chain specialized in Mexican food. "That's really the question, isn't it?" replied Ana Perales, the marketing manager of the firm. "If Panchito really is planning their own menus promotion, and we start our promotion now, we would beat them to the punch. On the other hand, we might provoke a price war. And you know what a price war with that company means. We spend a lot of money and resources fighting with each other. There's no real winner. We both just end up with less profit." Manuel Pereira, the finance manager for El Mejicano, piped up, "The consumer wins in a menus price war. They get to buy things cheaper for a while. We ought to be able to make something out of that." Antonia Lozano, CEO for El Mejicano, looked at the finance manager thoughtfully. "You've shown good horse sense in situations like these, Manuel. How do you see it?" Manuel hesitated. He didn't like being put on the spot like this. "You all know what the sales projections of menus are for the 4-week promotion as planned. Ana Perales tells us to expect sales of 2 million euros. The objective is to gain at least 2 percentage points of market share of the fast food market in Barcelona, but our actual gain could be anywhere from nothing to three points. Profits during the promotion are expected to be down by 10%, but after the promotion ends, our increased market share should result in more sales and more profits." Pedro Morales, the sales manager, broke in. "That's assuming Panchito doesn't come back with their own promotion in reaction to ours. And you know what our report is from Laura Valencia. She says that he figures Panchito is up to something." "Yes, Laura did say that. But you have to remember that Laura works for our advertising agent. Her incentive is to sell advertising. And if she thinks she can talk us into spending more money, she will. Furthermore, you know, she isn't always right. Last time she told us that Panchito was going to start a major campaign, he had the dates right, but it was for a different menu line altogether." Antonia wouldn't let Janice off the hook. "But Janice, if New Morning does react to our promotion, would we be better off starting it early?" Manuel thought for a bit. If he were working at Panchito and saw an unexpected promotion begin, how would he react? Would he want to cut prices to match the competition? Would he try to stick with the original plans? Finally he said, "Look, we have to believe that Panchito also has some horse sense. They would not want to get involved in a price war if they could avoid it. At the same time, they aren't going to let us walk away with the market. I think that if we move early, there's about a 30 % chance that they will react immediately, and we'll be in a price war before we know it." "We don't have to react to their reaction, you know," replied Antonia. "You mean," asked Ana Perales, "we have another meeting like this to decide what to do if they do react?" "Right." "So," Manuel said, "I guess our immediate options are to start our promotion early or to start it later as planned. If we start it now, we risk a strong reaction from Panchito. If they do react, then we can decide at that point whether we want to cut our prices further." Ana Perales spoke up. "But if Panchito reacts strongly and we don't, we would probably end up just spending our money for nothing. We would gain no market share at all. We might even lose some market share. If we were to cut prices further, it might hurt profits, but at least we would be able to preserve what market share gains we had made before Panchito's initial reaction." At this point, several people began to argue among themselves. Sensing that no resolution was immediately forthcoming, Antonia Lozano adjourned the meeting, asking everyone to sleep on the problem and to call her with any suggestions or insights they had.

1. Develop and draw a decision tree and an influence diagram for this decision analysis. What roles do the two diagrams play in helping to understand and communicate the framework and structure of this decision- making to the team of directors?

Answer 1

The unique feature of the decision tree is that it allows management to combine analytical techniques such as discounted cash flow and present value methods with a clear portrayal of the impact of future decision alternatives and events. Using the decision tree, management can consider various courses of action with greater ease and clarity. The interactions between present decision alternatives, uncertain events, and future choices and their results become more visible.

Influence diagrams are a conceptual modeling tool that graphically represent the causal relationships between decisions, external factors, uncertainties and outcomes. It helps in building a common understanding of “how things work, facilitating communication among technical experts, decision makers and stakeholders, encouraging disciplined thinking about cause and effect relationships, being explicit about uncertainty, in particular, emphasizing the existence of competing hypotheses and facilitating informed debate about them.