Businesses must make major daily decisions about their processes and operations. These decisions must be taken carefully as they decide your organization’s future. To make the process streamlined and evade risks, businesses have started recruiting decision trees as a decision-making strategy. According to a recent study, Gerber Products recently used decision tree analysis to decide whether to use PVC in their products.
This article will discuss the importance of decision trees and how organizations can use them to improve their decision-making process.
What Is A Decision Tree?
Decision trees are a type of flowchart with one central idea from which several consequences of a decision branch out. It is called that because the branches make it look like a tree.
A decision tree can help you calculate the possible outcomes of a decision based on all the consequences that led to it. These trees are used for analysis, representing all the possible costs, results, and consequences. The different outcomes of each strategy can be compared to help you make a smarter decision.
A decision tree will use these symbols alongside notes explaining your decision and possible results and values to represent profits or losses. Creating a decision tree is no easy task, and several organizations often recruit the help of free decision tree templates to give them a starting point.
Decision Tree Analysis?
A decision tree analysis can decide on many areas, like cost management and company operations. Add as much data as possible, analyze it, and narrow it down to the best-case scenario. Including quantitative data to make for a thorough and more effective tree is in your best interest.
Steps To Make A Decision Tree
These five steps can help you create a decision tree that will ensure you make an effective model to help you make only the best decisions.
1. Begin With An Idea
Start your tree with a central decision; this means starting your decision tree with a decision node. Draw lines branching from this decision to show each possible outcome or consequence. Say you have decided to digitize all of your company’s transactions fully; in such a case, digitizing transactions will be your central idea. You will then make straight lines from this point to draw a few main factors affecting your decision. Make lines from each of these factors, highlighting each outcome or consequence.
2. Add Nodes
After your main idea is in place, your next step is to add decision and chance nodes to expand your tree. A chance node will often need more than a few lines branching from it to outline all of its potential outcomes.
3. Expand Till You Reach Endpoints
Continue adding decision and chance nodes to your tree until you cannot add any more. At this stage, begin adding end nodes to your tree to complete it.
Once you have completed your tree, you can begin analyzing each decision.
4. Calculate Values
An ideal decision tree has quantitative data associated with it; these are usually monetary values. You can also try adding estimated values for each decision. Once you are sure of the cost of an outcome and its probability of occurrence, you can calculate the estimated values using the following formula:
Expected value (EV) equals to (1st possible outcome multiplied by the likelihood of the outcome) + (2nd possible outcome multiplied by the likelihood of the outcome) – Cost incurred
5. Evaluate Outcomes
Assuming you have calculated the expected values, you can determine which will be best for your organization. Always consider the risks involved with each decision, as the expected value does not consider risks. Therefore, the highest value might not be the best decision. Knowing that the expected value uses an algorithm based on probability is necessary.
Decision trees are essential for organizations in every sector. These decision trees must be crafted carefully to get the maximum result. Several services offer templates to create decision trees to help you simplify the creation process. Incorporate a decision tree in your daily process to make your business grow exponentially.