Decision tree analysis Essay

Decision corner analysis known as an analytical tool applied to finis-making under condition of uncertainty, also clarifying where in that location are many possible outcomes for various alternatives and some outcomes are dependent on previous outcomes. further, decision point will present as a diagram by showing the relationship among possible courses of action, possible events and the potential outcomes for each course of action in the decision (Drury, 2012). So decision guide analysis is useful for merchant navy confederation to understand in what direction their chance events are and what their mensurates in terms of profits and losings are for each of the two tooling alternatives, also visualize the outcomes of different prospects in order make better decision under uncertainty Strengths of decision tree analysisDecision tree analysis will show all the alternatives, probabilities, costs and the possible outcomes that are not even consider by the company. The company e nkindle add the possible scenario into decision tree diagram, through the diagram can calculate the anticipate values and a probability distribution in more complex situations and the attributes can be chosen in any desired order (Kirkwood, 2002). Weaknesses of decision tree analysisHowever decision tree analysis brings sequential decisions and class-overlap problem that including categorical variable with different number of levels, and the information gain in decision tree analysis are biased in favour of those attribute with more levels. Also correlated data and complex production rules will occur in decision tree analysis, it can get very complex particularly if many values are uncertain and/or if many outcomes are linked (Kirkwood, 2002). Merchant navy pains backgroundMerchant navy industry plays an important role in both domestic trade and international trade by transporting goods or passengers via sea to all around the world. There are different types of shipping return a nd kinds of cargo in order to serve different needs including feeder vessel, tankers, container ships, quite a little carries and specialist ships (World fare Council, 2014). According to china occasional Information Co. (2012), on that point is high demandin merchant navy industry due to lode transport capacity and loading volumes steadily rising in the moment. Therefore, it is important for merchant navy company to invest in current shipping service to cope with the demand. Company Background mainland China Shipping (Group) CompanyChina Shipping (Group) Company is one of the largest shipping companies in China with approximately 47,000 employees worldwide. It was interconnected as international shipping line since 1997 and operates under the direct administration of Council of the Peoples Republic of China. Mr. Li Shaode is the chairman of the company and it has over snow branches across different regions and countries, also is headquartered in Shanghai, China. The anoth er five holding companies owned by China Shipping (Group) Company are located in Hong Kong, north America, Europe, Southeast Asia and West Asia. The core business activities of China Shipping (Group) include shipping of oil tankers, special cargo ship passenger ships and container vessels as well as other related businesses like terminal management, finance and investment, engineering, integrated logistics, shipping agency, air cargo forwarding, container manufacturing, human resources, trading and information engineering (China Shipping, 2012). Case studyChina Shipping (Group) Company currently wants to decide whether to merchandise upstart shipping service now. The foodstuffing management estimated that if performs a merchandise study (at a cost of 30,000), there is a 60% chance that the study will return in favorable results (referred to as a local anaesthetic achievement) and a 40% chance that the study will return in unfavorable results (referred to as a local failure). I f a local success is observed, there is an 80% chance that wise shipping service will be national success. If a local failure is observed, there is only a 30% chance that new shipping service will be national success. The marketing management thinks that market shipping new service nationally productive that the evaluate profits (excluding the cost of the market study) will be 1,600,000 however if the market shipping new service nationally failure then it judge loss of 700,000(excluding the cost of the market study). However absence seizure of market study, there are equal chances of national success and national failure after(prenominal) if China Shipping (Group) Company decide to market nationally.Therefore now the marketing management has to determine the best strategy that China Shipping (Group) Company should adopt. outmatchAccording to the decision tree above, the best decision for China Shipping (Group) Company is to carry out test market and then market nationally if national success then the company will lead return in expected profit of 654,000 compared to do not conduct test market only assume expected profit of 450,000. Sensitivity analysisAssuming the probability of national success after the market study will subside by 15% and the probability of national success without market study will increase by 10%. If a local success is observed, the new probability will decrease from 80% to 65% that new shipping service will be national success. If a local failure is observed, the new probability will decrease from 30% to 15% that new shipping service will be will be national success. However absence of market study and immediately market nationally, the new probability will increase from 50% to 60% to be national success. According to the sensitivity analysis above, after market study and market nationally the expected monetary value (EMV) of local success will decrease from profit 1,110,000 to 765,000 compared to the constitute character re ference however the expected monetary value (EMV) of and market nationally after local failure will remain the same as loss of 30,000 compared to the dwelling house case. The final expected monetary value (EMV) of conduct test market decision will have an expected profit of 447,000 compared to the base case have 654,000. However absence of market study and whether market nationally, the final expected monetary value (EMV) of local success will increase from profit 450,000 to 680,000 compared to the base case.Comparing the decision of conduct or do not conduct test market from the new probabilities, China Shipping (Group) Companys optimal decision is do not conduct test market and then market nationally then the expected profit will be 680,000. However according to the base case, China Shipping (Group) Company will only get the expected profit of 654,000 after conduct test market and market nationally. Therefore, with the changes will allow the marketing management sees the impact o f sensitivity analysis and compare to the base case. It allows the company to understand the overall decision whether market new shippingservice nationally with or without market study. Through sensitivity analysis, the company know that the value of the probabilities are sensitive and it will affect the expected profit and decision of the company market the new shipping service with or without test market. ConclusionTo conclude, if a small change in the value of one of the causes a change in the recommended decision alternative, the company will have different outcome. However, the expected value is highly sensitive to the changes of probabilities and it will have significant effect on the decision making of the company. Therefore the expected values of each decision are evaluated to determine optimal model in order for company to do decision making. Decision tree is a diagram that shows the possible courses of actions, the potential event which is states of nature for each outcome together with the potential outcomes and associated possibilities. It is a useful analytical tool for carrying range of alternative courses of actions and the possible outcomes, also allow company to understand the uncertainty in decision making (Drury, 2012). Therefore, decision tree analysis is important for China Shipping (Group) Company to understand the how the different probabilities will affect the expected value under risk and uncertainty in order to make optimal decision in the investment. RecommendationFrom the decision tree analysis above carried out, it suggested China Shipping (Group) Company have to understand the risk and uncertainty in order to choose the optimal decision in the investment. However comparing the scenario to base case, if a local success is observed and the new probability will be 65% that new shipping service will be national success if a local failure is observed and the new probability will be 15% that new shipping service will be will be nationa l success. Absence of market study and immediately market nationally, the new probability will be 60% of national success. It showed that with the new probabilities, China Shipping (Group) Companys optimal decision is do not conduct test market and then market nationally then the expected profit will be 680,000. However according to the base case, China Shipping (Group) Company will only get the expected profit of 654,000 after conduct test market and market nationally. Therefore, it suggested that China Shipping (Group) Company to look into theprobabilities of each decision and the expected value from its probabilities in order to maximize the investment with optimal decision.List of referencesDrury, C. (2012) Management and cost accounting. 8th edn. Andover Cengage Learning, pp. 278-292. World Shipping Council. (2014) About the industry. online Available at http//www.worldshipping.org/about-the-industry. Accessed 31 March 2014. China Daily Information Co. (2012) China leads in shi pping industry. online Available at http//www.chinadaily.com.cn/business/2012-08/04/content_15644653.htm. Accessed 29 March 2014. China Shipping. (2012) Company Profile. online Available at http//www.cnshipping.com/en/aboutus/companyprofile/index.shtml. Accessed 29 March 2014. Kirkwood, C.W. (2002) Decision Trees. online Available at http//vserver1.cscs.lsa.umich.edu/spage/ONLINECOURSE/R4Decision.pdf. Accessed 31 March 2014. BibliographyLucey, T.(2003). Management and cost accounting. 5th edn. London Cengage. pp. 321-343. Pannell, David J.(2013). Sensitivity analysis strategies, methods, concepts, examples. online Available at http//dpannell.fnas.uwa.edu.au/dpap971f.htm.Accessed 31 March 2014.