Decision Trees

SOMESH NAUTIYAL PRINCIPLES OF MGMT. PGPPE + MBA(FEB11 ) 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

Constructing a decision tree

Two symbols are used in decision trees: Square : is used to represent a decision. Circle chance. : is used to represent a

The Process
Economic growth rises 0.7 Expected outcome Rs.300,000

0.3 Expand by opening new outlet Economic growth declines Expected outcome -Rs.500,000

Maintain current status 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
Economic growth rises 0.5 Expected outcome Rs.300,000

0.5 Expand by opening new outlet Economic growth declines Expected outcome -Rs.500,000

Maintain current status 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.

Advantages of Group Decision-Making

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

Disadvantages of Group DecisionMaking

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

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