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BMT - Decision Tree & Question 49.2

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25 views3 pages

BMT - Decision Tree & Question 49.2

Uploaded by

sswcherine.chen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BMT: DECISION TREE

1. What is it?
- Decision tree is a quantitative decision-making tool which represents
different options that are available to a business in decision-making
process, showing outcomes from different strategic options.

2. What is it for?
- Allows managers and entrepreneur to calculate expected value of each
decision in order to choose the best option to pursue
- To help decide whether the expected net financial gain from a decision
is worthwhile

3. How does it work?

The key elements in a decision tree diagram are:

● Decision nodes
Points where decisions need to be made are called decision nodes and
are represented by squares. Square A represents the fact that a choice
is required on opening a new store or expanding the website.

● Outcomes
Points where there are different outcomes are represented by circles
are called Nodes. Circles B and C represent points at which the
different options have a range of outcomes - success or failure.
● Chance nodes (probabilities)
The probability or likelihood of each outcome is shown on the diagram
A certain outcome has a probability of 1. An impossible outcome has a
probability of 0. Opening a new store has a 0.7 probability of success
and a 0.3 probability of failure. Expanding the website has a 0.6
probability of success and a 0.4 probability of failure

● Expected monetary values


● The monetary value of each decision is based on the expected
profit or loss of the outcome
● If opening a new store is successful a £420,000 profit is expected
● If opening a new store is unsuccessful a £24,000 loss is expected
● If expanding the website is successful a £480,000 profit is
expected
● If expanding the website is unsuccessful a £32,000 loss is
expected

Advantage and Disadvantage

Advantage
● They allow managers to present problems in a visually clear and logical
manner
● All potential options and outcomes can be seen at the same time, helping to
speed up decision-making
● They consider the risks involved in decision making, including potentially
negative outcomes

Disadvantage
● The probabilities in a decision tree are only estimates and subject to
forecasting errors
● Assigning probabilities can be subjective to results can be deliberately biased
to justify the preferences of the management
● The technique does not necessarily reduce the scale and scope of risks
involved in decision-making
Exercise
Question 49.2
(a) Secondary research (desk research) is the assembly, collation and analysis
of existing or ‘second-hand’ marketing data. This process is cheaper than
primary research, but the data may be less relevant as it was not collected for
the specific needs of the firm and may be out of date.

(b)

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