Week 8: Decision Trees and Scenario Planning
Lesson Overview
This lesson focuses on Decision Trees and Scenario Planning, two powerful tools for strategic decision making.
Students will learn about the structure and application of decision trees, techniques and benefits of scenario planning, and will analyze case studies to understand practical applications of these tools.
Learning Objectives
By the end of this lesson, students will be able to:
- Understand the structure and components of decision trees.
- Apply decision trees to analyze and solve business problems.
- Understand the principles and techniques of scenario planning.
- Develop and evaluate different scenarios for strategic planning.
- Apply decision trees and scenario planning in real-world case studies.
Key Concepts and Terminology
- Decision Tree: A graphical representation of possible solutions to a decision based on different conditions. It is used to identify the best course of action.
- Nodes: Points in a decision tree where a decision must be made or an outcome occurs.
- Branches: Paths representing different decisions or outcomes.
- Leaves: End points of the decision tree representing final outcomes.
- Scenario Planning: A strategic planning method used to create flexible long-term plans based on different future scenarios.
- Scenarios: Plausible and detailed descriptions of how the future might unfold based on different assumptions.
Lesson Content
1. Introduction to Decision Trees
Definition and Explanation:
- Decision trees are tools used for making decisions by mapping out different possible outcomes and the paths leading to them.
- They help in visualizing the consequences of different choices and identifying the best option.
Structure of a Decision Tree:
- Root Node: Represents the initial decision or starting point.
- Decision Nodes: Nodes where a decision must be made, typically represented by squares.
- Chance Nodes: Nodes where an outcome is uncertain, typically represented by circles.
- Branches: Paths that stem from nodes, representing different decisions or outcomes.
- Leaves: End points of the tree that show the final outcome of a decision path.
Example of a Decision Tree:
- Present a simple example of a decision tree, such as deciding whether to launch a new product.
- Root Node: Decision to launch a product
- Decision Nodes: Options to launch or not launch
- Chance Nodes: Market acceptance (high, medium, low)
- Leaves: Outcomes (profit, break-even, loss)
Activity:
- Students work in pairs to create a decision tree for a given business scenario, such as expanding into a new market.
2. Application of Decision Trees
Steps to Create a Decision Tree:
- Identify the Decision: Define the decision to be made.
- Determine Alternatives: List possible choices or actions.
- Evaluate Outcomes: Identify possible outcomes for each alternative.
- Assign Probabilities: Estimate the likelihood of each outcome (if applicable).
- Calculate Payoffs: Determine the value or payoff for each outcome.
- Analyze the Tree: Use the tree to evaluate and compare different paths.
Case Study:
- Present a detailed case study where a company used a decision tree to make a strategic decision. Discuss the steps taken and the outcomes achieved.
Activity:
- Students create a decision tree for a more complex scenario, such as deciding on an investment in new technology.
3. Introduction to Scenario Planning
Definition and Explanation:
- Scenario planning is a method used to explore and prepare for multiple future possibilities.
- It involves creating detailed and plausible scenarios based on different assumptions about key drivers of change.
Importance of Scenario Planning:
- Helps organizations anticipate and prepare for uncertain futures.
- Encourages strategic thinking and flexibility.
- Enhances risk management by identifying potential threats and opportunities.
Techniques for Scenario Planning:
- Identify Key Drivers: Determine the critical factors that will influence the future (e.g., economic trends, technological advancements).
- Develop Scenarios: Create a range of plausible scenarios based on different combinations of key drivers.
- Analyze Implications: Evaluate the potential impact of each scenario on the organization.
- Develop Strategies: Formulate strategic plans that are robust across different scenarios.
- Monitor and Update: Continuously monitor changes in key drivers and update scenarios as needed.
Example of Scenario Planning:
- Present an example of scenario planning for a company facing uncertainty in market demand due to technological changes.
Activity:
- Students work in groups to develop scenarios for a given business context, such as the impact of regulatory changes on the industry.
4. Case Studies and Practical Applications
Case Study 1: Decision Tree Application
- Present a case study where a company used a decision tree to decide on a new product launch.
- Discuss the decision points, probabilities, and outcomes.
- Analyze how the decision tree helped in making an informed choice.
Case Study 2: Scenario Planning Application
- Present a case study where a company used scenario planning to prepare for future market conditions.
- Discuss the key drivers identified, scenarios developed, and strategies formulated.
- Analyze the effectiveness of scenario planning in enhancing the company’s strategic planning.
Activity:
- Students apply decision trees and scenario planning to a comprehensive case study. They will:
- Create a decision tree for a key strategic decision.
- Develop multiple scenarios for the future and formulate strategies for each.
- Present their analysis and recommendations to the class.
5. Conclusion and Takeaways
Summary:
- Recap the structure and application of decision trees.
- Highlight the principles and benefits of scenario planning.
- Emphasize the value of these tools in strategic decision making.
Reflection:
- Ask students to reflect on how they can apply decision trees and scenario planning in their own professional or academic projects.
Next Steps:
- Assign readings on advanced decision-making techniques and strategic planning tools.
- Prepare for the next lesson, which will cover other strategic decision-making frameworks and their applications.
Additional Resources
Readings:
- “Decision Analysis for Management Judgment” by Paul Goodwin and George Wright
- “Scenario Planning: A Field Guide to the Future” by Woody Wade
Tools:
- Decision Tree Software (e.g., TreePlan, Lucidchart)
- Scenario Planning Templates
Online Resources:
- Harvard Business Review articles on decision trees and scenario planning
- Online workshops and webinars on strategic decision making
Instructor Notes
- Preparation: Ensure availability of case studies and materials for group activities.
- Engagement: Encourage active participation and real-world application of concepts.
- Follow-Up: Plan follow-up activities to reinforce the application of decision trees and scenario planning in strategic planning.
Visual Aids and Diagrams
- Decision Tree Diagram: Display a visual representation of a decision tree to help students understand the structure.
- Scenario Planning Framework: Provide a visual framework for scenario planning, showing the steps involved.
- Case Study Analysis Charts: Show how decision trees and scenario planning were used in real-world case studies.
Classroom Setup and Materials
- Smartboard or Projector: To display diagrams, charts, and example analyses.
- Group Workstations: Arrange seating to facilitate group discussions and activities.
- Handouts: Provide templates and worksheets for creating decision trees and developing scenarios.
- Laptops/Tablets: Ensure students have access to devices for research and presentation purposes.
This lesson on Decision Trees and Scenario Planning will equip students with practical tools for making strategic decisions.
By integrating these tools into their decision-making processes, students will be better prepared to navigate uncertainty and enhance their strategic planning efforts in a dynamic business environment.
