Exercises: 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.

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.

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.

A coffee shop is losing customers around midday. Apply the first two stages of the decision process: formulate the problem precisely (which time slot, which customers, since when) and propose two different alternatives to study.

Explain what a decision criterion is and propose three criteria for choosing a fruit supplier for a shop (price, delivery reliability, quality), ordering them by importance and justifying the order.

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.

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%.

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.

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.

A company is considering setting up a stall at a festival: if it is sunny (probability of $70\ \%$) it will earn $12.000\ \text{€}$, and if it rains ($30\ \%$) it will lose $4.000\ \text{€}$. a) Calculate the expected value of setting up the stall as the sum of each outcome weighted by its probability. b) Reason whether, with that figure, you would set up the stall and what other information you would ask for (how much can be lost at most, what alternatives there are that weekend).

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 shop is unsure whether to spend $10.000\ \text{€}$ on an advertising campaign: it estimates that with a $50\ \%$ probability it will increase sales and earn an additional $30.000\ \text{€}$, and with another $50\ \%$ the campaign will barely work and it will only recover $4.000\ \text{€}$. a) Draw, describing it in words, the decision tree (running the campaign or not). b) Calculate the expected value of running the campaign and decide.

You can do it on paper and send a photo with your answer.

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.

Design, describing it, a simulation spreadsheet for a stationery shop: what input cells it would have (average price, units sold, fixed costs, variable cost per unit), what formula would calculate the profit and what two "what if...?" experiments you would run with it.

"Dulces Artesanos" operates at 100% capacity in its single workshop and turns away orders every weekend. Management is debating three expansion alternatives: A1) Expand the current premises by renting the adjacent ground-floor unit (high fixed investment and building work, but direct control over artisan quality); A2) Outsource the base dough to an industrial factory and only perform the final baking in-house (minimal fixed costs and fast delivery, but risk of losing exclusivity and reputation); A3) Open a large central workshop in an industrial estate to supply this and future shops (requires a substantial bank loan that jeopardises short-term liquidity). Design a multi-criteria decision matrix: define three justified quantitative or qualitative criteria, assign a coherent percentage weighting to each, and explain which alternative the company should choose if its immediate strategic priority is to protect its brand image without taking on a high risk of insolvency.

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.

An electric mobility startup applies for a €200 000 loan from a bank and submits a business plan containing the following assumptions:

• Marketing plan: projects doubling subscription sales every month during the first year based solely on spontaneous word-of-mouth on social media, with an advertising budget of €0.

• Operations plan: outsources 100% of scooter assembly to a single overseas supplier with sea freight delivery times of 60 days, with no safety stock planned in Spain.

• Financial plan: projects a net profit margin of 35% starting from the second month and includes no provision for working capital requirements or credit lines for contingencies.

1. a) Identify and explain the inconsistencies and feasibility flaws that exist among these three sections of the business plan.
2. b) If you were the bank's risk analyst, justify whether you would approve or reject the loan application, and identify which two sections you would review in greater detail to assess the actual debt repayment capacity.

The bicycle repair shop «BiciRío» is weighing three alternatives for its digital channel given the drop in foot traffic in-store: A1 (maintain only a static web showcase without online sales), A2 (online store with mandatory collection and assembly at the local workshop), and A3 (full e-commerce with home deliveries throughout the mainland). Management evaluates three criteria: Investment and operational cost (weight 20 %), Unit profit margin (weight 30 %), and Impact on local customer loyalty (weight 50 %). The ratings from 1 to 10 are:

• A1: Investment: 9; Margin: 6; Loyalty: 5.

• A2: Investment: 6; Margin: 8; Loyalty: 9.

• A3: Investment: 3; Margin: 5; Loyalty: 4.

1. a) Solve the weighted decision matrix, identify the winning alternative, and justify why it is the most suitable for «BiciRío»'s current model.
2. b) A new investor proposes reorienting the company towards the nationwide market, modifying the weights: Investment 30 %, Margin 50 %, and Loyalty 20 %. Calculate the new winning alternative and analyze which financial and logistical risks the workshop would face if it undertakes this change of direction.

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.

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.

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.

The chief strategy officer of a retail chain states before the shareholders: «Thanks to big data analytics over the last five years, business risk when choosing new store openings has been completely eliminated; the figures guarantee success with zero margin for error».

1. a) Refute this statement in a well-founded manner, clearly differentiating conceptually between «making decisions under risk» and «making decisions under uncertainty».
2. b) Propose two critical factors in the business environment (economic, regulatory, or competitive) that no historical data record can anticipate and that could ruin an investment.
3. c) Justify why the control and feedback stage within the decision-making process remains mandatory, even when advanced predictive algorithms are used.