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Decision trees are flowchart graphs or diagrams that explore all potential decisions and their possible outcomes.
In business, many decisions must be taken seriously because they have wide-reaching implications for the company, its employees, its customers or the public. For these decisions, it’s essential for business leaders to examine all of their options. One business decision-making tool is a decision tree.
Decision trees help professionals and company leaders make more informed choices by allowing them to weigh and visualize various options and outcomes. Here’s how to use a decision tree at your business.
A decision tree is a flowchart graph or diagram that explores all potential decisions and their possible outcomes.
Each “branch” of the tree represents one of the decision’s potential outcomes. The branches can be extended when one alternative outcome leads to another decision you’ll need to make. Incorporated into each branch are the costs associated with each choice and the likelihood of its occurrence.
Because decision trees require numerous calculations, many businesses use dedicated decision tree software to help them with the process. Decision tree software helps businesses draw their trees, assign values and probabilities to each branch, and analyze each option. There are both free and paid versions of decision tree software available from vendors such as IBM, TreeAge, SmartDraw, Palisade, Angoss and Edraw.
Decision trees help business owners and leaders understand the risks and rewards associated with each decision. These include all possible outcomes, both positive and negative. Here’s how to create a decision tree.
Once you’ve drawn the tree, analyze it to determine what each branch and outcome means. Assign values to the possible outcomes, and estimate the probability of each one. With those numbers, you can calculate which option is best.
Using a decision tree to explore and compare potential outcomes can provide many advantages.
Decision trees can help companies make informed choices about a wide range of business areas, including the following:
To better understand how decision trees work, consider some examples. For instance, say you’re deciding between hiring a full-time employee and working with a contractor. For this decision tree, separate your two options into different boxes. Then, branch those out into various outcomes, including some benefits or downfalls you might experience from making that particular choice.
Alternatively, create two separate decision trees — “Should I hire a full-time worker?” and “Should I hire a contract worker?” — and then dive deeper into each choice. Then, break down the question into two boxes: “Yes” and “No.” From there, explore the outcomes by asking further questions, like “Is this necessary for our company’s workload?” Then, add “Yes” and “No” boxes. Continue this until you’ve exhausted all options and solutions and have determined all possible outcomes.
Using a decision tree is a great way to make more informed decisions for your business. No matter how many options you’re weighing, breaking them down into different branches and boxes will allow you to understand any potential outcome that might benefit or harm your company.
If you have a business idea or question regarding your business operations, consider turning to a decision tree as your solution. You can use a decision tree template or simply create your own decision tree using the above tips and examples.
Chad Brooks and Sean Peek contributed to this article.