Decision Tree Analysis for Decision-Making
Making decisions is an integral part of life. Decisions may be small or big, but we are making them all…
September 28, 2020 | 4 mins read
Making decisions is an integral part of life.
Decisions may be small or big, but we are making them all the time in both our professional and personal lives.
One of the most effective and widely practiced decision-making processes is Decision Tree analysis. Decision trees are a great tool to objectively select an option from all available alternatives. Decision Tree modeling helps us create an objective structure comprising all possible options and the various possible outcomes.
By undertaking a Decision Tree analysis, we get a clear picture of the pros and cons of all the available choices. Let’s go ahead and discuss Decision Tree analysis in detail.
Decision Tree analysis is a fact-based tool that is regularly used in making decisions within business organizations. When the need arises, the management provides alternatives and potential solutions. Subsequently, the process of Decision Tree modeling is undertaken to create a graphic representation of all available options and their possible outcomes.
The graphic takes the shape of a tree—the problems are depicted in flow chart form and each block has branches that point to possible alternatives or solutions. To further discuss the Decision Tree analysis, let’s see how the model is made.
The first step in Decision Tree modeling is to mark the decision that you have to take. On the left side of a large piece of paper or the whiteboard, a small square is drawn to represent the decision that has to be taken.
The next step is to draw lines towards the right. Each line depicts a potential solution or alternative. Make sure to keep as much gap as possible between the lines to further expand the thoughts or add notes.
The end of each line is where we have to focus on the results. Uncertain results are depicted by a small circle. If the decision requires you to make another decision, a square is drawn. Each circle represents uncertain results and each square represents another decision. This is how Decision Tree modeling is done. Once we are done with decision-making, the line’s end is left blank.
Each line is accompanied by a brief note about its meaning. The idea is to create as many lines, circles, and squares as needed to reach the final decision. a
After completion of the drawing, it is time to analyze it. Each of the decisions is challenged and each circle is analyzed to identify whether any potential solution is missing. If something is found to be missing, then it can be added to the diagram and if need be, the whole tree can be redrawn. The idea is to create a clear tree that helps us understand all possible options and their foreseeable outcomes.
Now let’s discuss the Decision Tree analysis with the help of a Decision Tree analysis example.
Let’s assume that a leading FMCG company wants to grow its sales and profits in the year ahead. In such a scenario, Decision Tree analysis is a strategy that can help the company evaluate various options.
In fact, a discussion on how to increase sales and profits is one of the commonest decision tree analysis examples. It is an ideal Decision Tree analysis example to learn about the process.
The various alternatives available can be described by using the Decision Tree.
For instance, generally, there are two possible actions that can be taken to boost sales and profits:
1. Increasing marketing expenditure
2. Increasing sales activities
If the marketing expenditure is meant to be increased, then the organization might choose to create specialized marketing campaigns by hiring an advertising agency. Another option would be to entrust the company’s own marketing department to carry out the campaigns.
For sales, the company can establish a network of commission agents to expand market coverage or, alternatively, use its own sales teams.
The Decision Tree analysis would further branch into the outcomes of each of the marketing options:
1. Hiring a marketing agency: expenditure grows by 12%, sales by 25%, and profits by 10%
2. Own marketing team: expenditure grows by 5%, sales by 20%, and profits by 8%
Further, the tree would branch into the following outcomes for the increase in sales activities:
1. Setting the agent network: expenditure grows by 10%, sales by 50%, and profits by 20%
2. Own sales team: expenditure grows by 5%, sales by 30%, and profits by 15%
This tree will continue branching out until the management is able to arrive at a final decision for achieving the organization’s goals.
In the above Decision Tree analysis example, the company used the process of Decision Tree analysis to finalize the strategy to achieve its business goals.
Such an approach is useful when there are many alternatives and corresponding outcomes with respect to a given problem. bIt helps in the validation of each idea and critical evaluation of each option. Even in the healthcare sector, doctors often use the Decision Tree analysis process to contemplate various outcomes of a particular medical condition and decide on the best possible procedure.
Harappa Education’s Making Decisions course has a section on the Good Decision Process that can help learners understand the effectiveness of the Decision Tree technique. It helps you learn the techniques for drawing the Decision Tree and analyzing the available options in a systematic manner.
Explore topics such as Decision Making, the Steps of Decision Making, How to Make Decisions, the Decision Making Methods & the Types of Decision Making from our Harappa Diaries blog section and develop your skills.