Decision of Uncertainty Paper

Decision of Uncertainty

Internet has become a way of life because of the convenience and flexibility that comes with it. One can do a whole lot of things including comparing different products and buying the right product that perfectly fits their needs. This widespread use of Internet has led many businesses to have Internet as an important medium to sell their products to customers located in different parts of the country, or even around the world. It has transformed the way businesses conduct their operations.

Business Scenario

A company in the wholesale segment of business wanted to evaluate whether it is a good idea to have an e-commerce site that can boost its sales among its existing customers and help it to get a higher market share by bringing in more customers. A survey was conducted among a sample of its existing customers to see the response. It was mixed as most of the younger customers preferred to use the online option while the older customers opted to use the traditional way of ordering products in person or through the telephone. The sample size was 780, out of which 436 customers fell in the age group of 18-40 while 344 customers fell into the age group of 40-65. The people in the age group of 18-40 wanted the e-commerce site because of its convenience while the 40-65 age group customers wanted to continue business the old-fashioned way. In terms of ratio, 56% wanted the e-commerce site while 44% did not want to do business through the site.

Another element of uncertainty that the management had to take into account was the overall sales. The 44% of people accounted for more than 60% of the sales, though the marketing team believed that the e-commerce site can boost the sale among the 18-40 age group of customers. So, the management considered using the different probability techniques to make the right decision that will augur well for the company. They wanted to understand if the amount of money spent in building and maintaining the e-commerce site will translate into higher revenue for the company. The marketing team wanted to use this site as a tool to bring in more and more young customers. It was estimated that the cost of building an e-commerce site wold be close to $400,000 and the yearly maintenance including the salary for the staff would amount to $100,000. So, the company was looking to make at least $1,000,000 more every year through this product, which is 24% of its annual sales.

A combination of techniques was used to evaluate, the most important being Bayes Theorem.

Bayes Theorem

"In its simplest algebraic form, Bayes' theorem is concerned with determining the conditional probability of event A given that event B. has occurred." (Kazmier, Staton & Fulks, 2003; p. 43). In this case, the event A is the increase in sales through the e-commerce site while event B. is the implementing of the decision to create a site. The probability for the sales to increase, according to the marketing team data analysis, is 54.2% and the probability for the site to be created is 58.6%. So, the probability for event B. To not happen is 41.4% and the possibility for sales to improve without the e-commerce site is 45.8%.

The general form of Bayes theorem is:

P (A

B) = P (A and B)/P (B).

P (A1B1)= P (A1 and B1 ) / P (B1 ) and P (A2B2) = P (A2 and B2) / P (B2).

When substituted, P (A1B1) is 0.5477 while P (A2B2) is 0.4523.

Based on this formula, the overall probability that the company will make good profits from the e-commerce site is 54.77% while the probability that the company will make profits without the e-commerce site is 45.23%. Using Bayes Theorem, the uncertainty was eliminated and the management has a good idea of the probability of making profits with or without the site. There is more than 50% chance that the company is going to make profits using its e-commerce arm. This was exactly what the company was looking and it made its decision easy.