http www bized co uk Decision Trees Copyright
http: //www. bized. co. uk Decision Trees Copyright 2006 – Biz/ed
http: //www. bized. co. uk Decision Trees Copyright 2006 – Biz/ed
http: //www. bized. co. uk Planning Tool Copyright 2006 – Biz/ed
http: //www. bized. co. uk 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 Copyright 2006 – Biz/ed
http: //www. bized. co. uk Decision Trees • 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 Copyright 2006 – Biz/ed
http: //www. bized. co. uk Process Copyright 2006 – Biz/ed
http: //www. bized. co. uk The Process Economic growth rises 0. 7 Expected outcome £ 300, 000 Expand by opening new outlet Economic growth declines 0. 3 Expected outcome -£ 500, 000 Maintain current status £ 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: A square denotes the point where a decision is made, In this example, a business is contemplating There is also the outlet. option The to douncertainty nothing and current status– quo! wouldcontinues have an outcome opening a new is maintain the state the of the economy if the. This economy to grow of Economic £ 0. growth rises: 0. 7 x £ 300, 000 = £ 210, 000 healthily the option is estimated to yield profits of £ 300, 000. However, if the economy fails to grow as expected, the declines: potential 0. 3 lossxis£ 500, 000 estimated £ 500, 000. Economic growth = at -£ 150, 000 The calculation would suggest it is wise to go ahead with the decision ( a net ‘benefit’ figure of +£ 60, 000) Copyright 2006 – Biz/ed
http: //www. bized. co. uk The Process Economic growth rises 0. 5 Expected outcome £ 300, 000 Expand by opening new outlet Economic growth declines 0. 5 Expected outcome -£ 500, 000 Maintain current status £ 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! Copyright 2006 – Biz/ed
http: //www. bized. co. uk Advantages Copyright 2006 – Biz/ed
http: //www. bized. co. uk Disadvantages Copyright 2006 – Biz/ed
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