***The following story is a hypothetical scenario created for a real industry company with sample data. The author of this blog does not have any affiliation with 3DR nor is the author getting paid by a third-party vendor to post this content.
As a dreamer, it would be cool to see a technical blog with business case scenario’s that apply decision models to its data to inform others. Well, well, well…MAGIC it is! Here’s one for the books.
CEOs at 3DR responded that during a growth phase, decisions need to be made about how to handle new business. For starters, it would be wise if 3DR got their affairs in order by hurdling all the leaders in one place to discuss future opportunities to grow the business. Some people would consider this the planning phase of a larger organizational effort. During this phase, 3DR leaders could organize their thoughts by using a decision table and decision tree to conduct a preliminary visual analysis. In addition, 3DR could use other forms of decision model approaches as well… such as figuring out the Estimated Monetary Value (EMV) of each COA and/or the opportunity loss method.
So…what are the decisions that 3DR needs to make?
3DR needs to make the following decisions in order to handle new business:
Outsource software engineer roles by tapping into network’s capacity?
It’s also important to note the other factors that could influence decisions based on the uncontrollable state of the market. According to Black (2020), these are often referred to as states of nature. For 3DR, a few states of nature that need to be considered would be:
Increased customer demands,
Stable customer demands, and
Decreased customer demands.
With the decisions and states of nature in mind, 3DR also leverages market research to identify that there are conditional probabilities for the customer demands. For this scenario, if 3DR decides to create additional in-house software engineer capacity, research identifies there’s a 20% chance that the customer demand will increase, a 60% chance it will remain in stable condition, and a 10% chance it will decrease within the next 12 months. For in-house capacity building over the next 12 months, 3DR has an opportunity to profit by $500,000 if the customer demand increases, profit by $300,000 if the customer demand remains in stable condition or lose $125,000 if the demand decreases. On the contrary, if 3DR decides to go the outsourcing route, they have an opportunity to profit by $15,000 regardless of the customer demands. So, what’s the better choice here? Let’s help 3DR figure out the best COA by reviewing the table and tree diagram below.
Decision Table & Decision Tree
In this case, the decision tree is used by 3DR leadership to help them identify the best course-of-action (COA) given the two decisions they need to make to support new business. Decisions trees are often depicted with decision nodes and projected outcomes. Leaders can identify which COA to use based on a variety of decisions that can be made using this concept. But since the events indicated by outcome nodes are speculative in nature, chance nodes also specify the probability of a specific projection coming to fruition.
Expected Monetary Value (EMV)
If 3DR was looking at increasing in-house capacity, the EMV would be:
For outsourcing and leveraging the network’s capacity, the EMV would be:
As shown, increasing in-house capacity may be the best COA for 3DR because forecasts project profits estimated at $267,500 compared to $13,500 profits if 3DR decided to outsource and leverage their network’s capacity. When it comes to risk, the safer bet for 3DR should be creating in-house capacity to grow.
This allows 3DR to focus on existing operations and slowly implement modifications to the original business model to support growth efforts.
Looking at increasing in-house capacity, the projected expected opportunity loss for 3DR is (using the sample data):
For outsourcing and leveraging the network’s capacity, the expected opportunity loss would be:
As highlighted above, the expected value of perfect information (EVPI) is $280,000. According to Black (2020), “the expected profit under certainty represents the expected profit that you could make if you had perfect information about which event will occur.”
With all things considered, 3DR has an opportunity to profit over the course of the next 12 months, if they prepare for new business growth by creating in-house capacity for software engineers to support customer demands. Regardless of the economic conditions (i.e. states of nature), 3DR only looks to profit if they choose to build capacity in-house with projections as high as an EMV of $267,500 and on the lower end an EMV of $13,500.
Clearly, business growth requires proper planning and execution from dedicated employees to maintain a balance between new and old processes to meet high customer relationship standards. Likewise, new growth initiatives require decision to be made. For 3DR, deciding to create in-house capacity seems to be the most appealing approach given the data provided.
Although risks are present regardless of which direction they go, 3DR stands to benefit the most by building their team in-house and consider where to expand in terms of their state-side office footprint. If competitors decide to expand their operations, 3DR will be in a similar position within the marketplace to meet the ever-changing customer demands. With more control over in-house operations versus outsourced operations, 3DR will have more flexibility to adapt to market changes/shifts.
If 3DR fails to meet customer demands, they could lose out on opportunities associated with market growth.
Black, K. (2011). Business Statistics: For Contemporary Decision Making, 7th Edition. Wiley.