Decision-making and simulation

List and describe the stages of the decision-making process: define the problem, gather information, generate alternatives, assess them, choose, implement, and monitor.

Distinguish between strategic decisions (long-term, hard to reverse) and operational decisions (day-to-day, reversible), and classify these four: opening a new shop, changing opening hours, launching online sales, and changing coffee supplier.

Classify these decisions of a bakery as strategic or operational and justify your classification: buying a new industrial oven, answering a customer complaint, launching a gluten-free product line and deciding next month's menu.

The diagram shows a decision tree: a company is undecided whether to open a second location and, if it opens, the outcome depends on demand. Calculate the expected value of opening and explain whether, based on those data, it is advisable to open or not.

Distinguish between deciding under risk (the probabilities are known) and under uncertainty (they are not known), with the example of an ice cream parlour that decides how much ice cream to produce according to the summer that is expected.

A company is considering launching a product: if successful (60% probability) it will gain $50.000\ \text{€}$, and if it fails (40% probability) it will lose $20.000\ \text{€}$. a) Calculate the expected value of the launch as the sum of each outcome weighted by its probability. b) Reason whether the expected value is sufficient to make a decision or if more data are needed.

A patisserie is choosing premises between three options with these weighted criteria: rent ($40\ \%$), footfall ($35\ \%$) and size ($25\ \%$). The scores, from 0 to 10, are: premises A — 7, 9 and 5; premises B — 5, 6 and 9; premises C — 8, 7 and 8. a) Calculate the weighted score of each premises. b) Explain which premises this method chooses and what limits trusting only the numbers has.

A factory must choose how much to produce of a new product without knowing the probabilities: if it produces little it earns $10.000\ \text{€}$ for sure; if it produces a normal amount, it earns $30.000\ \text{€}$ with high demand, $15.000\ \text{€}$ with medium and $5.000\ \text{€}$ with low; if it produces a lot, it earns $50.000\ \text{€}$ with high demand and loses $10.000\ \text{€}$ with low. Apply the optimistic criterion (maximax) and the pessimistic one (maximin) and explain what type of decision-maker chooses each one.

An agricultural cooperative must decide which crop to plant ahead of an uncertain weather season (dry, normal, or rainy year), with no probability estimates. The matrix of forecasted net profits (€) is as follows:

• Wheat: 8.000 € (dry), 8.000 € (normal), 8.000 € (rainy).

• Corn: 4.000 € (dry), 14.000 € (normal), 14.000 € (rainy).

• Avocado: -5.000 € (dry), 11.000 € (normal), 28.000 € (rainy).

1. a) Determine which crop to choose according to the optimistic criterion (Maximax), the pessimistic criterion (Wald), and the opportunity cost or minimax regret criterion (Savage), constructing the regret matrix for the latter.
2. b) The cooperative holds an undeferrable bank debt of 6.000 € due at the end of the season; defaulting would result in the seizure of machinery. Justify which crop the governing board must select taking this financial constraint into account, and argue why applying the Laplace criterion (equiprobability) would be dangerous in this case.

Explain what a "what if...?" simulation is with a simple example: a kiosk wants to know how its monthly profit changes if the price of soft drinks rises by 10% and it sells 5% fewer units.

A spreadsheet allows you to simulate 'what if...?' scenarios. Explain what this type of simulation is and design, by describing it, a simple spreadsheet for a coffee shop that wants to see how its profit changes if it increases the price of coffee by 10% and sales fall by 5%.

List the basic parts of a business plan (idea and team, market analysis, marketing plan, operations plan, and financial plan) and explain what question each part answers.

Analyse the following statements made during the management committee meeting of a textile company:

1. Expansion Director: "The first consultant estimated that entering the French market would cost €500 000. Although subsequent, more detailed reports raise that figure to €800,000, we must stick to the initial €500 000 because that was the agreed benchmark."

2. Production Director: "Our team never misses deadlines; there is no need to budget contingency funds or take out delay insurance on the new assembly line."

3. Managing Director: "We have already invested €200 000 in developing our own sales platform. Even though customers prefer to buy through third-party distributors and our own website fails to attract traffic, cancelling the project now would be throwing that money in the bin; we need to contribute another €50 000."

1. a) Identify and justify the cognitive bias distorting each executive's stance, explaining the potential economic harm to the company.
2. b) Design a specific decision-making protocol or technique to neutralise each of these three biases in future committee meetings.

Last year, a software company allocated 40.000 € to develop an application for sports centres. After a free international competitor entered the market, the project was frozen. The technical lead proposes continuing: «If we invest an additional 10.000 € to finish it, we will obtain 7.000 € in future net income. With that, we will recover at least part of the 40.000 € we have already spent». In contrast, the marketing lead suggests cancelling the app and allocating those 10.000 € to promote an established line of business, which will generate 14.000 € of net income with certainty.

1. a) Refute the technical lead's argument: identify the economic fallacy on which it relies and formally demonstrate why continuing to invest destroys value.
2. b) Reasonedly determine the optimal financial decision by applying the concepts of relevant costs and opportunity cost, indicating the differential economic outcome between both options.

Marcos wants to open a gourmet shop. When looking for a location, he accepted the rent of the first commercial property he visited (2.400 € per month) because the real estate agent assured him it was «an exceptional price for the area», so he did not visit any other property or compare prices per square metre. Likewise, to calculate revenue in his cash flow plan, he projected for the entire year the sales volume his uncle achieved at a three-day Christmas fair, arguing: «If he did so well in December, with my dedication I will easily hit those numbers on a daily basis».

1. a) Identify the two biases present in Marcos's planning and explain how each will affect the economic viability and liquidity risk of his business.
2. b) Design a rigorous data collection method and a scenario analysis (pessimistic, expected, and optimistic) that Marcos should apply to formulate realistic forecasts before committing his funds.