Assignment 1b: Case Study - BMAC Research & Development Decision

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Following on from what you have learnt about the key elements of decision problems and Structuring/Modelling Decision Problems from your readings and lectures, this activity provides you with the opportunity to apply your knowledge to a case study on BMAC research and development (R & D) decision problem.

Read the BMAC research & development (R & D) decision case study below and address the following questions related to the case study (Approximately 500 words in total, excluding diagrams and references).

(1)   What were the fundamental objectives of BMAC in their decision problem

(2)   Construct an influence diagram to represent BMAC’s decision problem

(3)   Construct a decision tree to represent BMAC’s decision problem

(4)   Reflect on the roles that the two diagrams play in helping to understand/clarify and communicate the structure of BMAC’s decision problem?

(5)   Briefly discuss at least one example from your reading of the academic literature (published journal articles) in which influence diagrams or decision trees have been applied to structure a decision problem. Provide appropriate references in Harvard referencing format.

1

 Case study: BMAC Research & Development decision BMAC, a research and development (R & D) company, must decide whether to spend \$2 million to continue with a particular drug development research project. The success of the project (as measured by obtaining a patent) is not assured, and at this point the decisionmaker judges only a 65% chance of getting the patent. If the patent is awarded, the company can either license the patent for an estimated \$25 million or invest an additional \$10 million to create a production and marketing system to sell the product directly. If the company chooses the latter, it faces uncertainty of demand (categorized as high, medium or low demand) and associated profit from sales. The probabilities of the three levels of demand and associated revenues are summarised on the Table below. Probability                                    Revenue (\$M) Demand High 0.2 50 Demand Medium 0.5 35 Demand Low 0.3 15

Note/Reference

It is possible to construct the decision trees required in the assignment manually or by hand (i.e., without the need for specialised software).