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Decision tree analysis Essay

Decision tree analysis known as an analytical tool applied to decision-making under condition of uncertainty, also clarifying where there are many possible outcomes for various alternatives and some outcomes are dependent on previous outcomes. However, decision tree 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 tree analysis is useful for merchant navy company to understand in what direction their chance events are and what their values in terms of profits and losses 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 analysis

Decision tree analysis will show all the alternatives, probabilities, costs and the possible outcomes that are not even consider by the company. The company can add the possible scenario into decision tree diagram, through the diagram can calculate the expected 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 analysis

However 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 industry background

Merchant 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 service and kinds of cargo in order to serve different needs including feeder vessel, tankers, container ships, bulk carries and specialist ships (World Shipping Council, 2014). According to China Daily Information Co. (2012), there is high demand in merchant navy industry due to freight transport capacity and loading volumes steadily rising in the moment. Therefore, it is important for merchant navy company to invest in new shipping service to cope with the demand. Company Background – China Shipping (Group) Company

China Shipping (Group) Company is one of the largest shipping companies in China with approximately 47,000 employees worldwide. It was incorporated as international shipping line since 1997 and operates under the direct administration of Council of the People’s Republic of China. Mr. Li Shaode is the chairman of the company and it has over 100 branches across different regions and countries, also is headquartered in Shanghai, China. The another 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 technology (China Shipping, 2012). Case study

China Shipping (Group) Company currently wants to decide whether to market new shipping service now. The marketing management estimated that if performs a market 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 success) and a 40% chance that the study will return in unfavorable results (referred to as a local failure). If a local success is observed, there is an 80% chance that new 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 successful that the expected profits (excluding the cost of the market study) will be ¥1,600,000 however if the market shipping new service nationally failure then it expected loss of ¥700,000(excluding the cost of the market study). However absence of market study, there are equal chances of national success and national failure after 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. Excel

According to the decision tree above, the optimal decision for China Shipping (Group) Company is to carry out test market and then market nationally if national success then the company will have return in expected profit of ¥654,000 compared to do not conduct test market only have expected profit of ¥450,000. Sensitivity analysis

Assuming the probability of national success after the market study will decrease 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 base case 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 base 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) Company’s 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 of sensitivity analysis and compare to the base case. It allows the company to understand the overall decision whether market new shipping service 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. Conclusion

To 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. Recommendation

From 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 national 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) Company’s 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 the probabilities of each decision and the expected value from its probabilities in order to maximize the investment with optimal decision.

List of references

Drury, 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 shipping 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]. Bibliography

Lucey, 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].

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