IB Business Management SLTopic 6 — The Business Management ToolkitPaper 1 & 2Core skill~12 min read
Using Decision Trees
Most business tools organise your thinking. Decision trees go further: they put a single number on each option so two very different choices can be compared side by side. That number is powerful and slightly dangerous, because it looks like a fact when it is really a set of estimates multiplied together.
📚 What you need to know
A decision tree is a quantitative method of tracing the possible outcomes of a decision.
Squares are decision points (where the business chooses). Circles are chance nodes (where outcomes are uncertain).
Each branch has a probability. The probabilities at any one node must add up to 1.
The expected value of an option is (value of success × its probability) + (value of failure × its probability).
If the diagram shows revenues, you must then subtract the cost of that option to get the expected value.
Choose the option with the higher expected value — on financial grounds only.
The numbers are estimates, so the whole tree is only as reliable as the research behind it.
Reading a decision tree
Trees are drawn left to right. The square on the left is the moment the business has to choose. Each branch leads to a circle where luck takes over, and each circle splits into the possible outcomes with their probabilities and values.
Read it left to right: choose at A, then find out at B or C whether it worked. The money at the far right is revenue, not profit.
Calculating an expected value
Expected value of an option
(value of success × probability) + (value of failure × probability) − cost
🧩 The four steps, every time
Multiply the success value by its probability.
Multiply the failure value by its probability.
Add the two results together.
Subtract the cost of that option. Repeat for the other option, then compare.
Step 4 is where marks disappear. If the tree gives revenues, an answer that stops at step 3 has calculated something real but has not answered the question. Check the far-right column heading before you start.
WE 1
Calculate the expected values from the tree above
Case study: Bramble Foods must choose between launching a new sauce range or refitting its kitchen. The figures are in the decision tree above.
Use the decision tree to calculate the expected value of each option, and state which Bramble Foods should choose on financial grounds. [6]
Option B — the new sauce range($900,000 × 0.6) + ($150,000 × 0.4)= $540,000 + $60,000 = $600,000$600,000 − $300,000 costExpected value = $300,000Option C — refit the kitchen($620,000 × 0.7) + ($200,000 × 0.3)= $434,000 + $60,000 = $494,000$494,000 − $180,000 costExpected value = $314,000Decision
The refit has the higher expected value, so on financial grounds Bramble Foods should refit the kitchen.
the gap is only $14,000 — close enough that other factors should decide it.
An expected value is not a forecast. Bramble Foods will never receive $314,000. It will receive either $620,000 or $200,000. The expected value only exists to let two options be compared.
What the tree does not tell you
This is where evaluation marks live. A decision tree answers one narrow question well and stays silent on everything else.
✓ ADVANTAGES
Two options with very different costs become directly comparable.
Drawing it can reveal options nobody had thought of.
It forces managers to put a number on risk before spending money.
The quantitative approach demands proper research.
✗ LIMITATIONS
Built entirely on estimated probabilities, which can be guesses dressed as data.
Ignores qualitative factors such as staff morale, brand image and customer loyalty.
Rarely includes every possible outcome — real life is not just success or failure.
There is a time lag between drawing it and acting, and conditions change.
WE 2
Explain one advantage and one disadvantage of decision trees
Explain one advantage and one disadvantage to Bramble Foods of using decision trees to decide business strategy. [4]
Advantage
It lets Bramble compare a $300,000 launch against a $180,000 refit on the same basis, even though the two options need very different amounts of investment. ✓✓
Disadvantage
The probabilities are estimates, and with only $14,000 between the two expected values a small error in the 0.6 success estimate would reverse the recommendation entirely. ✓✓
using the closeness of the two answers as the disadvantage is a strong, specific point.
💡 Exam tip
Check whether the far right shows revenue or profit. Revenue means you subtract the cost; profit usually means you do not.
Lay the working out in lines, one step per line. Method marks are given for the steps.
Write the currency and the full figure in your final answer.
Always state the decision. Two correct expected values with no conclusion is an unfinished answer.
Say “on financial grounds”, then mention one qualitative factor the tree ignores.
Check the probabilities sum to 1 at each node — occasionally a question tests exactly that.
⚠ Common mix-up
Forgetting to subtract the cost when the diagram shows revenues.
Treating the expected value as money the firm will actually receive. It is a comparison figure only.
Adding the probabilities instead of multiplying. Multiply each outcome by its own probability.
Ignoring the negative outcome because it is in brackets. A bracketed figure is a loss and must be included.
Stopping at the numbers. The recommendation is worth marks.
Trusting the tree completely. Saying the probabilities are estimates is a required evaluation point.
Up next: Working With Descriptive Statistics — where those probabilities and forecasts come from in the first place.
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