Expert Advice

Decisions, do they grow on trees?

Laura Rudman, Founder and business
trainer of Red Apple Consulting

Business owners have to choose between several courses of action - more so at the start of their business. Continuously you are having to choose between different strategies, products, investments and this is always having to be done against limited resources. It is particularly useful to have a tool you use to assess and make decisions to ensure you don’t waste time and money.

Decision Trees are useful tools for helping you choose between several courses of action. They provide a highly effective structure within which you can explore options, and investigate the possible outcomes of choosing those options. They also help you to form a balanced picture of the risks and rewards associated with each possible course of action.

The Decision Tree assumes that there are 2 types of situations:

1 – The decision maker has the power to determine what happens next. This is known as a decision. On a Decision Tree, a decision is depicted by a square / rectangle.

2 – The decision maker does not have control over what happens next. This is known as an event. On a Decision Tree, an event is depicted as a circle. For each event the decision maker needs to know what the possible outcomes are and the probability of each outcome. (Determining the probability can be tricky; past experience may provide some guidance but judgement is usually
also required.)
Using the probabilities for each event you calculate the Expected Values (EVs) of each of the events. This is the way the Decision Tree is evaluated. Starting from the right-hand side of the tree, the data to the right of every event is simplified into a single figure based on EVs. When you have evaluated the node at the left-hand side of the tree, you have the information you require to make the decision.

There is some concern about using them for big one-off decisions, Decision Trees are usually more suited to repeated decisions. Some business decision-making scenarios where it is suitable to be applied are:

• Whether or not to launch a new product, should the launch me local or national? Should the launch then be extended to national and/or international?

• Should the increase in demand be met by
increasing your production facilities or subcontracting?

• Which marketing and advertising options would best increase demand and revenue?

The insert provides a worked explanation of how a Decision
Tree is used.

The graph explaned:
The square is a point at which a decision has to be made – here the choice is options 1, 2 and 3.
The circle represents an event whose outcome is uncertain. Doubtful outcomes (4, 5, 8 and 9 ) have probabilities assigned to them. To reach the decision the various outcomes must be evaluated using expected values
Point B: (0.75 x 11,000) + (0.25 x 9,000) = 10,500
Point D = (0.6 x 21,000) + (0.4 x (5,000) = 10,600
Point C: Choice between 10,600 and 12,000
Point A: Choice between B (10,500), C (10,600 or 12,000 ) and choice 3 (10,000)
If you are trying to maximise then option 2 and then option 6 should be chosen.
If you are trying to minimise then choice 3 is the one to choose.

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Red Apple Consulting specialises in business skills training for start-up and small businesses. Our courses are exclusively designed to give you, the business owner, a strong proficiency in the skills that you will need to make your business more successful. If you found this business skills article useful, you will be interested in our ‘Maximise Your Profit’ course. Please go to www.redappleconsulting.org for more information on this course and others

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