(Solution ) C207 Task 2; Decision Tree Analysis

Decision Tree Analysis

1. Describe a Business Question

In this study, the MPC contracted Drug Markets Analysts, Inc. (DMA). Based on competitive research, DMA has found that there are new competing drugs recently granted FDA approval. MPC needs to be aware of the competition in the market as they consider whether to develop a new drug line, exploit the existing drug line for potential new applications, or continue with the current drug line at this time. The business question in this study is: What is the optimal strategic decision for MPC to maximize profits given the emergence of new FDA-approved competing drugs: developing a new drug line, exploiting the existing drug line for new applications, or continuing with the current drug line?

1. Identify the Relevant Data Values

Probabilities

The relevant probability values required for decision tree analysis are that a favorable market is one with high demand, while an unfavorable market is one with low demand. The favorable market probabilities for the three choices are 77% for creating a new drug formula, 61% for using the existing formula for new applications, and 89% for making no changes to MPC’s business process. The unfavorable market probabilities for the three choices are 23% for creating a new drug formula, 39% for using the existing formula for new applications, and 11% for making no changes to MPC’s business process.

Payoffs

The relevant payoff values required for this decision tree analysis are based on demand and profit per unit for each strategy. There, payoff amounts are calculated by the percentage rates and the demand for units in both markets. The payoff for creating a new drug formula is $3,327.22 in a favorable market, while in an unfavorable market, it is $807.35. In a favorable market, to use the existing drug for new applications, the amount is $5,323.23; in the event of an unfavorable market, the payoff is $1,788.93.