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Expanding Business Operations in Barcelona

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Task
• individual• Submission format: pdf or doc file
Formalities:
• Wordcount: no more than 2000 words• Cover, Table of Contents, References and Appendix are excluded of the total wordcount.• Font: Arial 12,5 pts. • Text alignment: Justified.• The in-text References and the Bibliography have to be in Harvard’s citation style.
CASE INSTRUCTIONS:
Case Study: Expanding Business Operations in Barcelona
Company XYZ, a local coffee shop chain based in Barcelona, is considering expanding its operations by opening a new flagship store. The goal is to increase brand visibility and market share in a competitive environment. The decision involves several uncertainties, and the company’s management must weigh different options carefully using a decision tree.
The Decision:
Should XYZ proceed with opening the new store?
Key Considerations:
The management identifies two major uncertainties that will influence the decision:
First is the state of the economy:
Strong Economy: There’s a 60% chance the economy will be strong, leading to increased consumer spending.
Weak Economy: There’s a 40% chance the economy will weaken, which could negatively impact consumer spending.
Second is the demand for premium coffee:
High Demand: A 70% chance that there will be strong demand for premium coffee, benefiting XYZ’s upscale offerings.
Low Demand: A 30% chance that demand for premium coffee will be low, potentially reducing the profitability of XYZ’s premium products.
Demand forecasts are the following:
The expected demand for each scenario is projected as follows (in terms of annual revenue):
• Strong Economy & High Demand: €1.2 million in annual revenue.• Strong Economy & Low Demand: €800,000 in annual revenue.• Weak Economy & High Demand: €700,000 in annual revenue.• Weak Economy & Low Demand: €400,000 in annual revenue.
Costs:
• The upfront investment to open the new store is €500,000.• Maintaining the current operations incurs no additional cost
Decision Tree Analysis:
Management needs to assess whether to proceed with opening the new store or just maintain current operations. For each scenario, students should use the probabilities and revenue projections to calculate the expected value of each option and recommend the best course of action.
You should perform the following tasks:
1. Create a decision tree that incorporates the two sources of uncertainty and their respective probabilities.2. Calculate the expected value for each branch of the decision tree.3. Based on the analysis, recommend whether XYZ should proceed with the expansion or not.
Submission: 26th of January, Time 23:59.
Weight: This task is 60% of your total grade for this subject.
It assesses the following learning outcomes:
• Outcome 1: Ability to describe and analyze the decision problem.• Outcome 2: Apply instruments of Decision Analysis to real-life situations.

To analyze whether XYZ should proceed with opening the new store, we’ll follow the decision tree analysis method based on the provided information. Below is a step-by-step breakdown of the analysis.

Step 1: Create the Decision Tree

The decision tree consists of two primary decisions influenced by two uncertainties:

State of the Economy:
- Strong Economy: 60% probability
- Weak Economy: 40% probability
Demand for Premium Coffee (under each economic scenario):
- High Demand: 70% probability
- Low Demand: 30% probability

The expected revenue projections for each scenario are as follows:

Strong Economy & High Demand: €1.2 million
Strong Economy & Low Demand: €800,000
Weak Economy & High Demand: €700,000
Weak Economy & Low Demand: €400,000

Costs:

Upfront Investment for New Store: €500,000
Current Operations: No additional cost

We can draw the decision tree as follows:

Step 2: Calculate the Expected Value for Each Branch of the Decision Tree

Now, we’ll calculate the expected value (EV) for each branch. The expected value is computed as the sum of the possible outcomes weighted by their probabilities.

Strong Economy

High Demand: $\, \text{million} \times 0.70 = 0.84 \, \text{million}$
Low Demand: $\, \text{million} \times 0.30 = 0.24 \, \text{million}$

Total expected value for Strong Economy:

$millionEV_{\text{Strong Economy}} = 0.84 \, \text{million} + 0.24 \, \text{million} = 1.08 \, \text{million}$

Weak Economy

High Demand: $\, \text{million} \times 0.70 = 0.49 \, \text{million}$
Low Demand: $\, \text{million} \times 0.30 = 0.12 \, \text{million}$

Total expected value for Weak Economy:

$millionEV_{\text{Weak Economy}} = 0.49 \, \text{million} + 0.12 \, \text{million} = 0.61 \, \text{million}$

Step 3: Calculate the Total Expected Value (EV) for Opening the Store

Now, we will calculate the total expected value for opening the store by considering the probabilities of the economy’s state.

Strong Economy (60% probability):
$millionEV_{\text{Strong}} = 1.08 \, \text{million} \times 0.60 = 0.648 \, \text{million}$
Weak Economy (40% probability):
$millionEV_{\text{Weak}} = 0.61 \, \text{million} \times 0.40 = 0.244 \, \text{million}$

Total expected value for opening the store:

$millionEV_{\text{Store}} = 0.648 \, \text{million} + 0.244 \, \text{million} = 0.892 \, \text{million}$

Step 4: Subtract the Upfront Investment

Now, subtract the upfront investment of €500,000 (or 0.5 million) from the total expected value to account for costs.

$millionEV_{\text{Store}} – \text{Investment} = 0.892 \, \text{million} – 0.5 \, \text{million} = 0.392 \, \text{million}$

Step 5: Compare with Current Operations

The expected value for maintaining current operations is zero since there are no additional costs and no revenue from the new store.

$Operations=0EV_{\text{Current Operations}} = 0$

Step 6: Decision and Recommendation

Based on the calculations, the expected value of proceeding with the store expansion is €0.392 million. Since this value is positive, XYZ should proceed with opening the new store.

Final Recommendation

XYZ should proceed with opening the new flagship store, as the expected value of the expansion is positive, and the financial returns outweigh the costs involved in the new store setup.