Decision Trees
Decision Trees
Planning Tool
Decision Trees <ul><li>Enable a business to quantify decision making </li></ul><ul><li>Useful when the outcomes are uncert...
Decision Trees <ul><li>Limitations: </li></ul><ul><ul><li>How accurate is the data used  in the construction of the tree? ...
Process
The Process Expand by opening new outlet Maintain current status Economic growth rises Economic growth declines 0.7 0.3 Ex...
The Process Expand by opening new outlet Maintain current status Economic growth rises Economic growth declines 0.5 0.5 Ex...
Advantages
Disadvantages
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Decision Trees Powerpoint

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Decision Trees Powerpoint

  1. 1. Decision Trees
  2. 2. Decision Trees
  3. 3. Planning Tool
  4. 4. Decision Trees <ul><li>Enable a business to quantify decision making </li></ul><ul><li>Useful when the outcomes are uncertain </li></ul><ul><li>Places a numerical value on likely or potential outcomes </li></ul><ul><li>Allows comparison of different possible decisions to be made </li></ul>
  5. 5. Decision Trees <ul><li>Limitations: </li></ul><ul><ul><li>How accurate is the data used in the construction of the tree? </li></ul></ul><ul><ul><li>How reliable are the estimates of the probabilities? </li></ul></ul><ul><ul><li>Data may be historical – does this data relate to real time? </li></ul></ul><ul><ul><li>Necessity of factoring in the qualitative factors – human resources, motivation, reaction, relations with suppliers and other stakeholders </li></ul></ul>
  6. 6. Process
  7. 7. The Process Expand by opening new outlet Maintain current status Economic growth rises Economic growth declines 0.7 0.3 Expected outcome £300,000 Expected outcome -£500,000 £0 A square denotes the point where a decision is made, In this example, a business is contemplating opening a new outlet. The uncertainty is the state of the economy – if the economy continues to grow healthily the option is estimated to yield profits of £300,000. However, if the economy fails to grow as expected, the potential loss is estimated at £500,000. There is also the option to do nothing and maintain the current status quo! This would have an outcome of £0. The circle denotes the point where different outcomes could occur. The estimates of the probability and the knowledge of the expected outcome allow the firm to make a calculation of the likely return. In this example it is: Economic growth rises: 0.7 x £300,000 = £210,000 Economic growth declines: 0.3 x £500,000 = -£150,000 The calculation would suggest it is wise to go ahead with the decision ( a net ‘benefit’ figure of +£60,000)
  8. 8. The Process Expand by opening new outlet Maintain current status Economic growth rises Economic growth declines 0.5 0.5 Expected outcome £300,000 Expected outcome -£500,000 £0 Look what happens however if the probabilities change. If the firm is unsure of the potential for growth, it might estimate it at 50:50. In this case the outcomes will be: Economic growth rises: 0.5 x £300,000 = £150,000 Economic growth declines: 0.5 x -£500,000 = -£250,000 In this instance, the net benefit is -£100,000 – the decision looks less favourable!
  9. 9. Advantages
  10. 10. Disadvantages
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