UNIT 3: BUSINESS ANALYSIS AND STRATEGY

Decision Trees
GG Adventure Holidays Ltd is thinking of ways of
advertising its next year’s programme, but is not sure
which media to use. It has narrowed them down to three Evaluative Considerations
Decision Trees options: advertising in a Sunday newspaper, advertising on The predicted outcomes and estimates need to be based
commercial radio or using direct mail.
Definition: A method of tracing the alternative outcomes on valid data and research if they are to have any real
of any decision. The costs, probability of success and estimated revenues quantitative value.
for each option are shown in the table below.
Advantages: As with all decision-making methods, decision tree
analysis should be used in conjunction with other types of
• Clearly lay out the problem so that all options can be Estimate Revenue (£)
considered. Probability decision-making. Decision trees are just one important part
Cost (£) of a business decision-making tool kit.
• Allow managers to analyse fully the possible of success
Success Failure
consequences and risks of a decision. Qualitative factors will also have an influence on the
• Provide a framework to quantify the values of outcomes Sunday decision made, such as:
120 000 0.6 600 000 120 000
and the probabilities of achieving them. Newspaper
• the effects of decisions on stakeholders e.g., employees,
• Decision trees give an easy-to-understand visual Commercial management, suppliers and customers
representation of the problem. 100 000 0.4 700 000 150 000
Radio • training costs
Disadvantages:
Direct Mail 70 000 0.5 500 000 100 000 • recruitment costs
• Can oversimplify a decision and focus too much on the
• capacity management
financial outcome.
(a) Use the information provided to create a decision tree • marketing impacts.
• Don’t include other factors such as manpower
diagram and recommend which one of these media
considerations, managers’ opinions and marketing
the company would be best advised to use. [7] All these need to be considered before a final decision is
issues.
made.
• Probabilities are difficult to predict and may reflect bias.
• There may be other options that are not included in the
decision tree.
Sunday Success
£600K
• Can be time consuming to construct and may be 0.6
B
Newspaper 0.6 * £600 = £360K
interpreted with bias.
• Time lags often occur in decision-making so information £120K 0.4 * £120 = £48K
Failure
may be out of date. EP = £408K - £120K £120K
= £288K 0.4 EV = £360 + £48 = £408K
• Use probabilities which only gives an estimate which
may be inaccurate. Success
Commercial £700K
0.4
A C
Radio 0.4 * £700 = £280K

£100K 0.6 * £150 = £90K

Failure
EP = £370K - £100K £150K
= £270K
0.6 EV = £280 + £90 = £370K

Direct Success
£500K
0.5
D
Mail 0.5 * £500 = £250K

£70K 0.5 * £100 = £50K

Failure
EP = £300K - £70K £100K
= £230K 0.5 EV = £250 + £50 = £300K