Business Management Toolkit: Decision Trees (DP IB Business Management): Revision Note

Clarifies complex decisions

• Constructing a decision tree diagram may reveal alternative options that managers had not previously considered

Forces managers to evaluate risk

• Managers must assign probabilities to outcomes, encouraging realistic thinking about uncertainty

Encourages research-based decision-making

• Reliable probability estimates require careful market research (e.g., forecasting gold prices or construction demand)

Provides clear financial comparison

• EMV calculations allow ABC to compare diversification into e-waste with improving its core concrete operations

Estimates may be inaccurate

• Probabilities are based on forecasts, which may not fully reflect changes in metal prices, environmental regulations, or global construction demand

External factors are difficult to predict

• Political decisions, environmental laws, or economic recessions may significantly affect outcomes but are hard to quantify

Qualitative factors are not included

• Impacts on employees, company culture, brand reputation, and CSR are not easily measured in financial terms

• For example, diversification into e-waste may improve reputation, but this is difficult to calculate precisely

Time lag reduces reliability

• By the time ABC implements its decision, market conditions may have changed

• For example, gold prices may fluctuate between the planning stage and the factory opening

Requires expertise and time

• Constructing an accurate decision tree requires skill and reliable data

• Bias in probability estimates may lead to incorrect conclusions