DECISION TREE

ANALYSIS IN
PROJECT
MANAGEMENT
GROUP No.6
SUB: PROJECT
MANAGEMENT
 TEAM MEMBERS
NAME ROLL NO.
SAURAV CHAMOLI 118
AJINKYA DIGHE 119
YOGESH DUBLA 120
ATHARVA GADRE 121
DYUTI NAIDU 122
VINIT PARMAR 123
TUSHAR PASHTE 124
 INTRODUCTION
● A Decision Tree Analysis is a pictorial representation of various
alternative solutions that are available to solve a problem.
● It is created by answering a number of questions that are continued
after each affirmative or negative answer until a final choice can be
made.
● It is a widely used technique for taking crucial decisions like project
selection, cost management, operations management, production
method, and to deal with various other strategic issues in an
organization.
WHAT IS DECISION TREE?
● A decision tree is a decision support tool that uses a tree-like model of
decisions and their possible consequences.
● The graphic representation of tree-like structure is the problems in
decision making can be seen in the form of a flowchart, each with
branches for alternative choices.
● Decision Tree makes a good use of ‘what-if’ thought and hence the
result is a well-informed choice.
● Decision trees allow project managers to distinguish between decisions
where we have control and chance events that may or may not happen.
ANATOMY OF DECISION TREES
● Decision tree comprises of 4 vital elements :
○ Decision Nodes
○ Chance Nodes
○ End Nodes
○ Branches.
● Splitting (Decision and Chance forks)
● Pruning

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STEPS IN DECISION TREE
ANALYSIS
1. Defining the decision making problem
2. Drafting a decision tree with all possible outcomes
3. Putting in relevant data with probable values
4. Determining and allocating payoffs for each possible
outcomes
5. Determining and allocating payoffs for each possible
outcomes.

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TYPES OF DECISION
TREES
There are two main types of decision trees that are based on the target variable.
1. Categorical variable decision tree
A categorical variable decision tree includes categorical target variables that are
divided into categories. For example, the categories can be yes or no. The
categories mean that every stage of the decision process falls into one of the
categories, and there are no in-betweens.
2. Continuous variable decision tree
A continuous variable decision tree is a decision tree with a continuous target
variable. For example, the income of an individual whose income is unknown
can be predicted based on available information such as their occupation, age,
and other continuous variables.

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TOOLS FOR DECISION TREE
ANALYSIS
● Pen and Paper
● Whiteboard
● Sticky Notes
● Microsoft Excel
● Decision Tree Softwares

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DECISION TREE SOFTWARES
● Decision tree software is a software application/tool used for simplifying the
analysis of complex business challenges and providing cost-effective output for
decision making. The purpose is to ensure proper categorization and analysis of
data, which can produce meaningful outcomes.
● Decision tree softwares provide analysis results based on the input data.
Therefore, the effectiveness of the output depends upon the volume and
accuracy of data.
● Decision tree tools provide highly configurable structures where users can select
options and check the possible results. It helps users to verify the pros and cons
of various options and make proper decisions.

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APPLICATIONS OF DECISION
TREE
● Assessing prospective growth opportunities
● Using demographic data to find prospective clients
● Logistics planning and strategic management.
● Investment decisions
● Serving as a support tool in several fields

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ADVANTAGES OF DTA
Decision Trees are used for handling non-linear data sets effectively. It is an effective tool that is used in many areas,
such as engineering, civil planning, law, and business since decision tree analysis is one of the prominent ways of
finding out the right solution to any problem.

Easy to read
and interpret

Decision tree is Easy to prepare

non-parametric

Advantages of
Decision Tree
Analysis

Depicts Most
Useful in data
Suitable
exploration
Project/Solution

Less data
cleaning
required

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DISADVANTAGES OF DTA
● Unstable nature
● Inappropriate for Excessive Data
● Expensive Process
● Difficult to handle numerous outcomes
● Less Effective in predicting the outcome of a continuous variable

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STRATEGIES IN DECISION TREE
When decisions are made, there is seldom one right course of
action and your final choice will be driven by the criteria that
you use to help make the decision.
There are a set of strategies that can be used with Decision
Trees to help select the best alternative that reflect common
decision criteria.

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THE POSSIBLE
STRATEGIES
Maximin:
A maximin strategy is a strategy in game theory where a player makes a decision that
yields the ‘best of the worst’ outcome. All decisions will have costs and benefits, and a
maximin strategy is one that seeks out the decision that yields the smallest loss. It is
also referred to as a pessimistic or conservative strategy.
Maximax:
A maximax strategy is a strategy in game theory where a player, facing uncertainty,
makes a decision that yields the ‘best of the best’ outcome. All decisions will have
costs and benefits, and a maximax strategy is one that seeks out where the greatest
benefit can be found. It is often referred to as an aggressive or optimistic strategy.

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THE POSSIBLE
STRATEGIES
Minimax:
In decision making, a tactic in which individuals attempt either to minimize their own
maximum losses or to reduce the most an opponent will gain. For example, a health
researcher may propose an intervention that would be the least aversive treatment for a
serious disease, thereby minimizing the adverse effects patients may expect to
experience as a result of the disease.
Expected Monetary Value:
Expected Monetary Value (EMV) is a project management metric used in risk analysis
for determining the overall contingency reserve required for a project plan.
EMV = Probability of occurrence * Impact of occurrence

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THE POSSIBLE
STRATEGIES
Expected Opportunity Loss:
Expected opportunity loss (EOL) is a statistical calculation used primarily in the
business field to help determine optimal courses of action. Doing business is full of
decision making. Any decision consists of a choice between two or more events. For
each event, there are two or more possible courses of action that you might take.
Calculating the EOL is an organized way of using a mathematical model to compare
these choices and outcomes, to make the most profitable decision.
Utility:
The utility function describes the utility of an outcome at the point of indifference, that
is, the point at which the decision maker is indifferent to the risky option or to the
certain option. The value of an outcome is transformed into a utility by the utility
function.
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WHEN TO USE A ‘DECISION TREE’ FOR BUSINESS
PLANNING
● Downsizing
● Outsourcing critical functions
● Expanding into new markets
● Changing pricing models
● Relocating
● Selling the business

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WHEN TO USE A ‘DECISION TREE’ FOR
BUSINESS PLANNING
● Changing product offerings
● Expanding research and development efforts
● For instance, a decision tree can aid in succession planning
by allowing business owners to evaluate possible options
like passing the business onto an heir, selling to a co-owner,
selling to a third-party, or selling an ownership stake back
to the company.

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DECISION TREE ANALYSIS
EXAMPLE
● To enlighten upon the decision tree analysis, let us
illustrate a business situation.
● ABC Ltd. is a company manufacturing skincare products.
It was found that the business is at the maturity stage,
demanding some change.
● After rigorous research, management came up with the
following decision tree:

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Expansion of Business Unit:
● If the company invests in the development of its business unit, there can
be two possibilities, i.e.:
1. 40% possibility that the market share will hike, increasing the overall
profitability of the company by Rs. 25,00,000;
2. 60% possibility that the competitors would take over the market share
and the company may incur a loss of Rs. 8,00,000.
To find out the viability of this option, let us compute its EMV (Expected
Monetary Value): EMV = 40% (2500000) + 60% (-800000)
EMV = 1000000 – 480000
EMV = Rs. 5,20,000

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New Product Line of Shower Gel:
● If the organization go for new product development, there can be
following two possibilities:
1. 50% chances are that the project would be successful and yield
Rs.18,00,000 as profit;
2. 50% possibility of failure persists, leading to a loss of Rs.6,00,000.

To determine the profitability of this idea, let us evaluate its EMV:

EMV = 50% (1800000) + 50% (-600000)
EMV = 900000 – 300000
EMV = Rs. 6,00,000
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Do Nothing:
● If the company does not take any step, still there can be two outcomes,
discussed below:
1. 40% chances are there that yet, the organization can attract new
customers, generating a profit of Rs.10,00,000;
2. 60% chances of failure are there due to the new competitors, incurring a
loss of Rs.4,00,000.
Given below is the EMV in such circumstances:
EMV = 40% (1000000) + 60% (-400000)
EMV = 400000 – 240000
EMV = Rs. 1,60,000
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INTERPRETATION

● From the evaluation, we can easily make out that the option
of a new product line has the highest EMV. (Rs.6,00,000).
● Therefore, we can say that the company can avail this
opportunity to make the highest gain by ensuring the best
possible use of its resources.

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CASE
STUDY
● There is a Power Plant Project, it must be completed in limited time period and there is a
penalty in contract with the main client for every day when he delivered the project late.
Project manager need to decide which sub-contractor is appropriate for projects execution. But
while selecting a sub-contractor, project manager should take into consideration the costs and
delivery dates.
● Sub-contractor 1 bids Rs.280,000. Project manager estimate that there is a 25% possibility of
completing 12 days late. As per contract with the client, he must pay a delay penalty of Rs.
5,000 per calendar day for every day when he delivered the project late.
● Sub-contractor 2 bids Rs.265,000. Project manager estimate that there is a 20% possibility of
completing 20 days late. As per contract with the client, he must pay a delay penalty of
Rs.5,000 per calendar day for every day when he delivered the project late.
● Sub-contractor 3 bids Rs.245,000. Project manager estimate that there is a 35% possibility of
completing 40 days late. As per contract with the client, he must pay a delay penalty of
Rs.5,000 per calendar day for every day when he delivered the project late.
● Project manager need to determine which sub-contractor is appropriate for projects critical
path activities. Both sub-contractors promise successful delivery and high-quality work.
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Step 1: List decisions and prepare a decision tree for a project management situation

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Step 2: Assign the probability of occurrence for the risks.

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Step 3: Assign the impact of a risk as a monetary value.
● Sub-Contractor 1
Path value of completing on-time = Bid Value = Rs.280,000
Path value of being late = Bid Value + Penalty = Rs.280,000 + 10 x
Rs.5,000 = Rs. 330,000
● Sub-Contractor 2
Path value of completing on-time = Bid Value = Rs.265,000
Path value of being late = Bid Value + Penalty = Rs.265,000 + 20 x
Rs.5,000 = Rs.365,000
● Sub-Contractor 3
Path value of completing on-time = Bid Value = Rs.245,000
Path value of being late = Bid Value + Penalty = Rs.245,000 + 40 x
Rs.5,000 = Rs. 445,000

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Step 3:

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Step 4: Calculate the Expected Monetary Value (EMV) for each decision
path.
Sub-Contractor 1
EMV = 75% x Rs.280,000 + 25% x Rs.330,000 =
Rs.292,500
Sub-Contractor 2
EMV = 80% x Rs.265,000 + 20% x Rs.365,000 =
Rs.285,000
Sub-Contractor 3
EMV = 65% x Rs.245,000 + 35% x Rs.445,000 =
Rs.315,000

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INTERPRETATION: Now we are selected Sub-contractor 2 because low cost and
low possibility of being late. 31
REFERENCES
● https://www.toolshero.com/decision-making/decision-tree-analysis/
● https://theinvestorsbook.com/decision-tree-analysis.html
● https://en.wikipedia.org/wiki/Decision_tree
● https://www.projectcubicle.com/importance-of-decision-tree-analysis-example/
● http://www.syque.com/quality_tools/tools/Tools23.html
● https://toggl.com/blog/decision-tree-analysis
● https://corporatefinanceinstitute.com/resources/knowledge/other/decision-tree/
● https://www.economicsonline.co.uk/definitions/maximax_and_maximin_strategies.html/
● https://dictionary.apa.org/minimax-strategy

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THANK
YOU!