Revision sheet: Business Decision-Making Techniques

📋 Course Outline

1. Decision Tree Structure and Purpose
2. Decision Tree Strengths and Limitations
3. Decision Tree Evaluation
4. Cost-Benefit Analysis Framework
5. Cost-Benefit Analysis Appraisal
6. Critical Path Planning
7. Critical Path and Float
8. Critical Path Calculation
9. Critical Path Benefits and Limits

📖 1. Decision Tree Structure and Purpose

🔑 Key Concepts & Definitions

• Decision tree : A map of the possible outcomes of a series of related choices, allowing actions to be compared using costs, probabilities and benefits.

★ Must-know

• A decision tree starts with one decision node, branches into possible outcomes, and continues through further nodes representing additional possibilities.

• In a decision tree, the square marks the point where a decision is made and the circles mark the points where outcomes are realised.

Further detail

• Decision trees can support informal discussion or map an algorithm that predicts the best choice mathematically.

📖 2. Decision Tree Strengths and Limitations

★ Must-know

• Decision trees are easy to understand and interpret, require minimal data preparation, and force decision-makers to consider multiple possible outcomes.

• Decision trees may become too complex, may rely mainly on expectations that produce unrealistic outcomes, and may narrow attention to critical decisions and objectives.

Further detail

• Decision trees can be combined with many other decision tools and help compare likely results between alternative decisions.

• Decision trees help distinguish controlled events from uncontrolled events and support best guesses using available information.

📖 3. Decision Tree Evaluation

🔑 Key Concepts & Definitions

• Expected value : Of a decision is the result obtained by combining each possible outcome with its probability to estimate the decision's likely financial outcome.

★ Must-know

• Decision-tree analysis compares alternatives by assigning their possible outcomes, probabilities, costs and benefits before selecting the option with the most favourable expected result.

Further detail

• For Project X, a 60% probability of success gives a success pay-off of $60,000 and an unsuccessful pay-off of $3,000, while Project Y has a 50% probability of success, an $85,000 success pay-off and a $(20,000) unsuccessful pay-off.

💡 Memory Hook

List options, branch outcomes, attach probabilities and pay-offs, then compare expected values.

📖 4. Cost-Benefit Analysis Framework

🔑 Key Concepts & Definitions

• Cost-benefit analysis : Compares the projected costs and benefits of a project or decision to determine whether it makes business sense.

★ Must-know

• Cost-benefit analysis requires a comprehensive list of relevant costs and benefits, after which total costs are subtracted from projected benefits or expressed as a ratio.

• Direct costs include manufacturing expenses, raw materials, direct manufacturing labour and inventory, while indirect costs include utilities, rent, overheads and electricity.

Further detail

• Other relevant costs include competition, regulatory and environmental risks, opportunity costs, and intangible costs such as employee impact, delivery delays, construction and a new business strategy.

• Benefits may include competitive advantage, intangible benefits from customer satisfaction and improved employee safety, and increased revenues or sales from a new product or higher production.

📖 5. Cost-Benefit Analysis Appraisal

★ Must-know

• Cost-benefit analysis provides an evidence-based evaluation that reduces personal bias and simplifies complex decisions by expressing them as costs versus benefits.

• Cost-benefit analysis is limited because market demand, material costs and the global business environment can be difficult to predict, especially over long periods.

• The quality of a cost-benefit analysis depends on the accuracy and completeness of the data used to prepare it.

Further detail

• Cost-benefit analysis can reveal hidden indirect or intangible costs and benefits that are not initially obvious.

• Cost-benefit analysis is better suited to short- and medium-length projects because long-term forecasts may fail to account accurately for inflation and other changes.

• Cost-benefit analysis should not be the only tool used to determine the future direction of a business because moral and human considerations may not be captured by the business case.

📖 6. Critical Path Planning

🔑 Key Concepts & Definitions

• Critical path method : A project-planning technique that identifies the activities determining project duration and the tasks that must be completed before dependent tasks begin.

★ Must-know

• Critical path analysis represents the entire project as a network of smaller activities that are linked according to their dependencies and required completion order.

• Critical path analysis helps managers predict project timescales, show how each activity affects later work, and assign appropriate teams or departments to tasks.

Further detail

• The duration of each activity is initially an estimate and may need to be reassessed during the project when conditions change.

📖 7. Critical Path and Float

🔑 Key Concepts & Definitions

• Critical path : The series of activities that determines the length of a project, so delaying any activity on it delays the whole project.
• Total float : The amount of time an activity can be delayed before it affects the duration of the entire project.

★ Must-know

• Total float is calculated as $\text{latest finishing time} - \text{duration} - \text{earliest start time}$.

Further detail

• Activities on the critical path have identical earliest and latest start times and identical earliest and latest finish times.

📖 8. Critical Path Calculation

★ Must-know

• To find the critical path, managers list activities with their predecessors and durations, draw the network, calculate earliest and latest times, and trace the activities with no available float.

Further detail

• Working backward from the final activity helps identify the connected line of activities that have no float and therefore must remain on schedule.

• In the Hunter Ltd building project, activity A takes 10 weeks, B takes 5 weeks after A, C takes 4 weeks after A, D takes 3 weeks after B, E takes 2 weeks after D, F takes 3 weeks after D, G takes 1 week after E, H takes 6 weeks after C and F, and I takes 2 weeks after G and H.

💡 Memory Hook

Map activities, identify dependencies, calculate earliest and latest times, then trace zero-float activities.

📖 9. Critical Path Benefits and Limits

★ Must-know

• Critical path analysis can reduce delays by involving managers in detailed planning and ensuring that resources are available for activities at the appropriate time.

• Critical path analysis can save time by allowing suitable activities to operate simultaneously, while also clarifying dependencies and identifying activities requiring attention.

• Critical path analysis may fail when complex activities cannot be represented accurately, activity-time estimates are inaccurate, external factors change, or projects are chaotic and allow frequent changes in duration.

Further detail

• Critical path analysis presents projects graphically, supports deadline management and high-quality decisions, and allows planned progress to be compared with actual progress.

📊 Synthesis Tables

Comparison of Decision Techniques

Technique	Main use	Key strength	Main limitation
Decision tree	Compare choices through probabilistic outcomes	Shows alternatives and possible consequences clearly	Can become complex and depend on unrealistic expectations
Cost-benefit analysis	Compare projected costs and benefits	Evidence-based and exposes hidden factors	Forecasts and data may be inaccurate
Critical path analysis	Plan project timing and dependencies	Identifies time-critical activities and required resources	Depends on accurate estimates and stable conditions