When trying to make an important decision, it is critical business leaders examine all of their options carefully. One tool they can use to do so is a decision tree. Decision trees are flowchart graphs or diagrams that help explore all of the decision alternatives and their possible outcomes.
Each "branch" of the tree represents one of the possible options that are available when making a decision. The branches can be extended when one alternative outcome leads to another decision that must be made. Added into each branch are the costs associated with each choice and the probability each is likely to occur. With these numbers, leaders can calculate the value of each set of branches to determine the best choice.
"The simplest definition of a decision tree is that it is an analysis diagram, which can help aid decision makers, when deciding between different options, by projecting possible outcomes," according to the Decision Tree Model blog. "The decision tree, gives the decision maker an overview of the multiple stages that will follow each possible decision."
The Decision Tree Model blog highlights several benefits to using this technique, including that decision trees are easy to understand and interpret, small details that may have been missed are taken into consideration and that it helps save time because once the decision is laid out, the path to success is easy to follow.
Since there are a lot of calculations involved in creating decision trees, many businesses use dedicated decision tree software to help them with the process. Decision tree software helps businesses draw out their trees, assigns value and probabilities to each branch and analyzes each option.
Decision tree software, both free and paid for versions, is available from a variety of vendors, including IBM, TreeAge, SmartDraw, Palisade, Angoss and Edraw.
Drawing a decision tree
The Mind Tools website believes decision trees are a useful technique because they help business leaders form a balanced picture of the risks and rewards associated with each possible course of action.
When drawing a decision tree, leaders should start with a square box, which represents the decision that needs to be made, either at the top of left hand side of a page. From that box, each option should be drawn out from there, either down if starting at the top of the page or to the right, if starting on the left hand side. On each line, write what the option is.
According to Mind Tools, leaders should then consider the results at the end of each line. If the result of taking the option is uncertain, they should draw a circle, if the result is another decision that needs to be made, a small box should be drawn.
"Starting from the new decision squares on your diagram, draw out lines representing the options that you could select," Mind Tools writes on its website. "From the circles draw lines representing possible outcomes."
Decision makers should continue this process until they have drawn as many of the possible outcomes and decisions they believe can come from the original decision that must be made.
Once the tree is drawn, decision makers must analyze it to determine what each branch and outcome means. Leaders should assign values to the possible outcomes as well as estimate the probability of each outcome occurring. With those numbers, they can then calculate which option is best.
Decision tree examples
To better understand how decision trees work, it is best to consider some examples. One example MasterClassManagement.com provides its students is on a company trying to decide whether or not to invest in an online training program.
The main decision to be made, which starts in the first box, is whether or not to spend money on a new training program. From that box, the two options are yes or no, so one branch is drawn from the first box with a "yes" on it and another with a "no" written on it. Since the outcome from each is still unknown, circles are drawn at the end of each branch
From the yes branch, there are then two options for different training programs, system 1 and system 2. So, from the circle at the end of the yes branch, two more branches are drawn: one for system one and the other for system two. From there, branches are drawn out of for how the system will be paid for, either in full or monthly installments.
On the "no" side of the tree, branches are drawn to continue using the existing training method or hire live training experts. Since the existing plan is already in place, no more branches are drawn out from that branch. From the hiring live trainers branch, two more branches are drawn for those to be either field technicians or sales engineers.
Once the tree is complete, the costs and probabilities are assigned to each branch in order to calculate and evaluate each option.
To help further illustrate how decisions tree work, other examples can be found online by visiting:
- Mind Tools
- Logan Mediation
- Management and Accounting Web
- MIT Sloan Management Review
Decision tree templates
For those businesses interested in trying to work through the decision tree technique on their own, without the help of dedicated software, free templates can be found online at: