Assume a company wants to launch a new product. The first course of action is to select an appropriate model, and list the alternatives. The two alternatives here are “launch the product" or “shelve the product," and the appropriate tool in this context is an influence diagram.
The analysis begins by assigning quantitative values to each alternative. Assume market research shows a 70 percent chance of high demand for the product, and a 30 percent change of low demand, with the high demand leading to net profit of $400,000, and the low demand causing a net loss of $200,000. Thus, “launch a product" has a value of $400,000 with 70 percent probability of occurrence, and “shelve the product" has a value of $200,000, the opportunity cost of possible loss, with a 30 percent probability of occurrence.
The final step is to analyze the options to select the best one. “Launch the product" has the numerical value of $400,000 x 70% = $280,000 and "shelve the project" has the numerical value of $200,000 x 30% = $60,000. Thus, the preferred course of action is to proceed with the product launch.