“Decision Trees”

SOMESH NAUTIYAL PRINCIPLES OF MGMT. PGPPE + MBA(FEB’11 ) RAI BUSINESS SCHOOL

Decision Trees

Planning Tool

Decision Trees

Enable a business to quantify decision making.

Useful when the outcomes are uncertain.

Places a numerical value on likely or potential outcomes.

Allows comparison of different possible decisions to be made

Limitations How accurate is the data used

in the construction of the tree?

How reliable are the estimates of the probabilities?

Data may be historical – does this data relate to real time?

Necessity of factoring in the qualitative factors – human resources, motivation, reaction, relations with suppliers and other stakeholders.

Process

Two symbols are used in decision trees:

Square : is used to represent a decision.

Circle : is used to represent a chance.

Constructing a decision tree

The Process

Expand by opening new outlet

Maintain current status

Economic growth rises

0.3

0.7

Economic growth declines

Expected outcomeRs.300,000

Expected outcome-Rs.500,000

Rs.00

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 Rs.300,000 = Rs.210,000

Economic growth declines: 0.3 x Rs.500,000 = -Rs.150,000

The calculation would suggest it is wise to go ahead with the decision ( a net ‘benefit’ figure of +Rs.60,000)

The Process

Expand by opening new outlet

Maintain current status

Economic growth rises

0.5

0.5

Economic growth declines

Expected outcomeRs.300,000

Expected outcome-Rs.500,000

Rs.00

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 Rs.300,000 = Rs.150,000

Economic growth declines: 0.5 x -Rs.500,000 = -Rs.250,000

In this instance, the net benefit is -Rs.100,000 – the decision looks less favourable!

Advantages

Disadvantages

Group Decision-Making Requirements

Effective decision-making in groups depends on:1) Developing a clear understanding of the decision situation.

2) Developing a clear understanding of the requirements for an effective choice.

3) Thoroughly and accurately assessing the positive qualities of alternative solutions.

4) Thoroughly and accurately assessing the negative qualities of alternative solutions.

1) Greater pool of knowledge Two minds are greater than one

2) Different perspectives Differing points of view

3) Greater comprehension Accepting/understanding final decision based on all options

4) Increased acceptance Sense of ownership

5) Training ground Hands on experience

Advantages of Group Decision-Making

1) Social Pressure Not wanting to “rock the boat”

2) Domination by a vocal few Controlled by the loudest and longest

3) Logrolling Putting ones’ vested interest ahead of the group

4) Goal Displacement Ignoring the primary task in favor of secondary considerations

5) “Group think” Putting unanimity before sound judgment

Disadvantages of Group Decision-Making

Group Problem-Solving Techniques

Consensus Everybody agrees

Brainstorming Generate a quantity of ideas Seven Rules of Brainstorming

Nominal Group Technique Generating ideas and evaluate solutions

The Delphi Technique Generating ideas from experts

Computer-Aided Decision Making

“Thank You”