Research: Decision Theory and Pilot Testing

Chapter 4 Terms in Review 1. Some questions are answerable by research and others are not. Using some management problems of your choosing, distinguish between them. When management wants to find out which method of a production process is the most efficient in terms of operational productivity we can use research to provide usable results. When management wants to know if now is a good time to take on debt for equipment upgrades is, research may not be able to provide usable results.
Due to the extensive number of variables affecting financing decisions research will likely not be able to assist in this decision. The current market conditions, economy, interest rates, industry competition, and many other items require a type of analysis that research can not provide. 2. Discuss the problems of trading off exploration and pilot testing under tight budgetary constraints. What are the immediate and long-term effects? The text discussed that often pilot testing is not done to both reduce costs and also to reduce the total research time.
Not conducting pilot testing can then immediately progress the research process or reduce the total cost of the research but it can possibly have negative long-term effects. By not conducting pilot testing your research results may suffer because the proper information is not being gathered. A pilot test often provides indication of problems with the data gathering process. There may also be an overall increased cost with no additional benefit when no pilot testing has been completed.

The pilot test can not only indicate incorrect information be gathered but can also provide some indication as to whether the proper research questions have been asked. When the research questions being asked do not answer the true management questions then the conducted research will be useless. Useless research is a wasted expense. Pilot testing can indicate whether more in-depth research is required thus providing a possible cost reduction or a better justification for proceeding with a higher cost project. 3.
A company is experiencing a poor inventory management situation and receives alternative research proposals. Proposal 1 is to use an audit of last year’s transactions as a basis for recommendations. Proposal 2 is to study and recommend changes to the procedures and system used by the materials department. Discuss issues of evaluation in terms of (a) Ex post facto versus prior evaluation, and (b) Evaluation using option analysis and decision theory. Both of these proposals are going to be quite difficult to evaluate.
The need of the research will determine which method will be followed. Ex post factor or after-the-fact evaluation will determine the total cost of each proposal after the research studies are completed. This makes it quite difficult to determine whether the research is providing enough benefit to make it worthwhile until after the cost has been incurred. Thus for either of these systems it may be a better decision to proceed with a prior or interim evaluation method.
Under this method the research is designed in stages and an ex post facto evaluation is performed at the end of each stage. Then a determination is made deciding if enough benefit has been generated to proceed to the next stage thus allowing management to get results while also controlling cost. Option analysis may also be used to evaluate the two proposed studies. With option analysis the studies are designed in a very explicit manner thus allowing an organization to compare estimated costs (based on prior research approximations) versus an expected benefit.
Management will then select one proposal over another depending on the cost benefit ratio and current need. Decision theory allows management to make decisions based on defined criteria. Each criterion consists of a decision rule and a decision variable. The selection process then consists of analysis determining which proposal either increases the decision variable or which follows the decision rule. This information is considered with a choice being determined by the rules and current management need.

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