Decision trees are a graphical representation of different opportunities or decisions a business owner or manager can make regarding her company’s operations. This graph gets its name from the tree-branch design that owners and managers use to assess various business opportunities. The chart typically attaches a percentage value indicating the likelihood an event will occur. Although this method can present information in a detailed manner, it can present some disadvantages for owners and managers.
Business owners and managers must have a certain level of experience to complete decision-tree analysis, a technique often used in finance or management accounting-related business functions. Decision trees typically require a certain knowledge of quantitative or statistical experience to complete the process accurately. Failing to accurately understand decision trees can lead to a garbled outcome of business opportunities or decision possibilities.
Decision trees typically require internal and external information relating to the business and its operating environment. Owners and managers must be able to gather the basic pieces of information to assess accurately the opportunities listed on the decision tree. It can also be difficult to include variables on the decision tree, exclude duplicate information or express information in a logical, consistent manner. Owners and managers must also decide whether the decision tree should represent dollars, percentages or a combination. The inability to complete the decision tree using only one set of information can be somewhat difficult.
Too Much Information
While incomplete information can create difficulties in the decision-tree process, too much information can also be an issue. Owners and managers can create a “paralysis of analysis,” where these individuals face too much information when making a decision. Rather than making a decision and advancing their company’s mission or vision, owners and managers spend more time looking at decision trees. Decision trees can require more analysis than other analysis methods and slow down the decision-making process.