Decision Tree Analysis Samples

A. Business Question

A business question that can be solved through the application of the decision tree analysts provided in the excel file is the determination of the most optimal business solution for a business operating in the pharmaceutical sector. The decision tree analysis illustrates a scenario involving a business decision that revolves around two options of either embarking on the creation and investigation of a novel pharmaceutical intervention and medication or directing the attention of the business towards capitalizing on innovative medical applications and enhancements for drug that is already in the market but needs improvement to meet the needs and expectations of patients. Based on these two options, the decision tree analysis is pivotal model for the pharmaceutical company to ascertain the most profitable avenue that aligns with its strategic goals and market potential. It thus illustrates how the decision tree can be used to asses both innovation and market demand and justifies why the company must carefully weigh the risks, rewards, and alignment with its competitive advantages in the industry to make an informed and impactful decision.

B. Relevant Data Values

• Probabilities

Under probabilities, the relevant data for the decision tree analysis is based on the assumption that the market conditions will remain exceptionally positive resulting in a 69% probability of a successful entry into the research and development of a new pharmaceutical product. The company will have a 61% probability of achieving success should it chose to pursue the alternative option of modifying or exploiting a drug that currently exist in the market. Should the company decide to remain silent and maintaining the status quo by not taking any action, the probability of success would be 77%. Given these three probabilities, the company will carefully evaluate its options while taking into consideration the prevailing market trends and competition so that it can align the three alternatives with its long-term objectives.

• Payoffs

The potential gain associated with the option of pursuing an exploration of a new drug is a payoff of $2,126.68 while the option of exploiting an existing drug in the market through modifications is a payoff of $3,193.39. The third option of maintaining the status quo and continuing with the current drug line in the market without making any adjustments will yield a payoff of $491.75.

• Profits

The profits generated from the three options will come from both favorable and unfavorable markets, reflecting the intricacies of the decision-making process for the company. The potential profit associated with the option of pursuing an exploration of a new drug is $2,686.45 in the favorable market and $880.75 in the unfavorable market while the option of exploiting an existing drug in the market through modifications is a profit of $4,294.29 in the favorable market and $1,471.47 in the unfavorable market. The third option of maintaining the status quo and continuing with the current drug line in the market without making any adjustments will yield a profit of $571.59 in the favorable market and $224.46 in the unfavorable market

• Demand

Just like in the case of profits, the demand for the three options will vary from favorable and unfavorable markets, reflecting the intricacies of the decision-making process for the company. The demand associated with the option of pursuing an exploration of a new drug is 4,133 in the favorable market and / 1,355 in the unfavorable market while the option of exploiting an existing drug in the market through modifications is a profit of 5,577 in the favorable market and 1,911 in the unfavorable market. The third option of maintaining the status quo and continuing with the current drug line in the market without making any adjustments will yield a profit of 657 in the favorable market and 258 in the unfavorable market.

C. Report on how the data was analyzed using decision tree analysis

Answers are in the attached excel file

2. Justification on the appropriateness of a Decision Tree Analysis

Decision tree analysis in the above case scenario is the most appropriate analytical tool because it allows the company to evaluate multiple options and possible outcomes. A decision tree analysis provides financial outcomes of a scenario that reflect the intricacies of the decision-making process and underscores the importance of analyzing the probabilities of success of any option and the potential rewards that come with every option so that the company can make an informed decision. Using a decision tree analysis technique also enables the company to explore both risks and rewards associated with each option, thus making it a viable business decision-making tool. Above all, a decision tree analysis determines probable courses of action and then suggests the best ways of that the company can explore the potential outcomes.

D. Summary of the implications of your decision tree analysis

1. The role of probabilities and the role of demand for each branch.

The role of probabilities is to serve as a tool for gauging the likelihood of each of the three options yielding profits and returns for the company to claim success across favorable and less favorable market conditions. On the other hand, the role of demand in the scenario if to provide a basis for ascertaining the potential profits that the company stands to enjoy from the three options of exploration, exploitation, and remaining static by maintaining the status quo. The demand quantities from the three options are then multiplied by the projected profits per unit linked to each option to ascertain the potential profits that the company stands to earn from each option.

2. Determination of the Expected Value of Every Node Based on Payoffs

The calculation of expected value linked to each node begins with summation of all potential payoffs associated with every node and then using the corresponding probability of occurrence linked to each payoff to measure the nodes likelihood of occurrence to assess the expected value resulting from different outcomes within the decision-making process.

3. One limitation of each of the following:
• The Data Elements

The limitation of data elements is that they can be restricted by inadequate sample sizes that weakens the reliability of the outcome.

• The Decision Tree Analysis

The limitation of decision tree analysis is that small alterations in data can misrepresent outcomes and result in entirely diverse tree diagrams.