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Decision Tree

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Decision Tree

A decision tree is a decision support tool involving a tree-like model and the possible

outcomes such as utility, resources costs, and outcomes of events. It is one of the ways applied in

operations research to facilitate decision analyses through algorithms. This way, it helps the

management identify the most suitable strategy to attain the goals of production (Lee et al.,

2022). A decision tree can also be a flowchart-like structure with internal nodes representing a

test on an attribute. Each branch represents a test outcome, and each leaf node represents a class

label, a decision made after calculating all the attributes. The decision tree and influence diagram

in decision analysis act as the analytical tool and visual support system; it allows for the

calculation of all expected values and utility (Lee et al., 2022). Decision trees range from simple

diagrams to complex probability representations involving high-level decisions. This paper

presents a decision tree analysis for Dream Games involving a decision between producing new

Consoles and investing in the old ones.

In the presented case, the management of Dream Games, a company dedicated to

innovation and creativity in producing consoles and video games, is trying to determine whether

to invest in new consoles or continue producing and selling the product it has been selling for the

past five years. The proposed new console is faster, more energy efficient, and has graphics of

higher quality. With a budget of 70,000,000, one must determine whether it would be wise to

continue producing the consoles at the cost of 66,660,000 and generates 875,000 in sales or to

invest in a new one at 99, 990,000 and generate 1,100,000 in sales. The decision here is difficult

because many factors must be considered to determine the most viable option. The decision tree

in the appendix represents both sides of the decision analysis and the chances represented by

each potential choice.

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Process

Developing a decision tree entails identifying the root of the problem, identifying the

existing scenario, and evaluating the possible outcomes of the change needed. This problem

usually comes in the form of a make-or-buy decision or incremental analysis that seeks to

capitalize on one decision at the expense of another (Patel & Prajapati, 2018). The next step

entails picking a common scenario and creating a map of the mind; this involves speculating on

the decision one wishes to make. For example, when buying a car, one can start by thinking of a

potential one would want to pick. One can come up with many other decisions in the process and

branch out on the tree depending on the potential outcomes (Patel & Prajapati, 2018). Markers

denote every point to show whether the decision is ongoing or the decision-maker has made up

their mind.

In developing the decision tree, the product was considered against the means of getting

to the decision. Placing the product at the top of the pyramid allows one to work backward by

considering all the possibilities of getting there. In the decision process, the new and old products

have a 50-50 chance of being selected, but each presents different potential outcomes. I placed

the new and old products below the product box as a form of probability tree. The new product

was considered based on the cost and possible outcomes. The data presented the cost of investing

in the product, the potential production price per unit, the selling price to consumers per unit, and

the potential sales. At the end of the arrow representing the new product, I used a square box to

show that the decision tree is continuing and no decision has been made yet. The following

section shows the cost and sales that helped me arrive at a decision. At the end of this tree, I used

triangles to show that it had reached the end, meaning a decision had been reached.
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The other side showed what would happen if the company decided to continue investing

in the current console. This side is similar to the side representing the new investment, meaning

they end at the same level. Consequently, the shapes used for the side of the old console were the

same as the other side. The initials PP were used to represent production price, while I stood for

investment. On the other hand, CP stood for consumer price, and PS was for projected sales.

From the diagram, the last point shows the projected sales.

Given that it does not depend on possibilities, the rest can be calculated manually to

arrive at the most suitable decision. The only part that depends on a probability chance is the first

point that involves splitting the tree into two possibilities. However, selecting one possibility

means foregoing the other; at the end of the tree, one must select only one alternative, meaning

the other one will not matter.

Decision

Using the decision tree, the possible values from each investment can be calculated by

comparing the returns from each. The investment for the old console product is 66,660,000, but

the profitability can be determined as follows. The product would attract 875,000 in sales,

meaning the revenue would be that amount multiplied by 875,000. Thus

875,000x399.96= 349,965,000

The net profits from this would be 349,965,000-66,660,000= 283,305,000

The new console would require an investment of 99,990,000 and generate 1,100,000 in

sales. The net profits for the new product would be given as

659,945,000-99,990,000=559,955,000
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If one were to get the difference between the customer prices and production price per

unit, the potential outcomes would be as follows:

New console:

599.94-199.98=363.08

383.08x1,100,000=399,388,000

Old console:

399.96-133.32=266.64

266.64x875000=233,310,000

Based on this decision process alone, Dream Games would be better off focusing on

producing the new product. The innovation would entail creating innovative video games, which

would provide a clear path to business profitability and progress. The new product offers Dream

Game an excellent chance to increase its market and profits while keeping up with emerging

market trends. One caveat to this move would be the new investment amount required; the

company would have to invest 99,990,000, an additional 33,330,000. However, the CEO would

have to approve this new investment, given that the potential revenues would be higher.

Justification

The old console has been in the market for the past five years, but no company records

indicate it has been upgraded or updated. The market is always hungry for new products as old

ones become obsolete. While the old console can still attract a significant market share, a new

one would raise the company’s earnings. Considering all prevailing market conditions and the

organization’s resources, the most suitable game the shareholders can play is to craft the new
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console to attract the younger, dynamic market segment to gain a competitive advantage over the

competition and increase its market share. The younger generations have shown that they are

open to new opportunities and are risk-takers, which explains why the organization must take a

risk and get out of the comfort zone it has been in for five years. Many things have changed,

including production processes and market demands.

The new investment almost stands at 50 percent above the old one, showing the high

amount needed to venture into this new opportunity. The production price is almost increasing at

50 percent, but the projected sales from the change would be standing at almost 25 percent. The

company needs this new investment in the next year to maintain its market share and attract more

significant market segments.

The technology used five years ago has changed over time, and the customers using the

product when Dream Games started production have grown with it. The company has the chance

to attract a new breed of customers to become an established market leader. This customer breed

prefers console games with better graphics and those with faster speeds. It is also critical to

consider that some older customers would be willing to upgrade to the new console. This aspect

justifies the move toward a futuristic scaled leadership and makes the risk-reward from

management decisions profitable. Futuristic gaming leadership is highly influential and shows

progression to the right management outcomes through strategy and thoughtfulness. The

management must scale up innovation and artificial intelligence mandatory as part of its

propriety franchise. This proposed change will not only upgrade its game in the console market

but also generate more significant revenue. Dream Games will enhance its market leadership,

and the risk-reward will work in its favor. Moreover, it is critical to consider that the new

product will be energy efficient and facilitate cost reduction and fewer customer complaints.
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Conclusion

A decision tree is a decision support tool applied in operations research to facilitate

decision analyses through algorithms to help the management identify the most suitable strategy

to attain production goals. This paper presented a decision tree analysis for Dream Games

involving a decision between producing new Consoles and investing in the old ones. The process

of developing a decision tree entails identifying the root of the problem, which entails identifying

the existing scenario and evaluating the possible outcomes of the change needed. The product

was considered against the means of getting to the decision. Placing the product at the top of the

pyramid allows one to work backward by considering all the possibilities of getting there. From

the analysis, Dream Games would be better off focusing on producing the new product. The

innovation would entail creating innovative video games, which would provide a clear path to

business profitability and progress. The new product offers Dream Game an excellent chance to

increase its market and profits while keeping up with emerging market trends.
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References

Lee, C. S., Cheang, P. Y. S., & Moslehpour, M. (2022). Predictive analytics in business

analytics: decision tree. Advances in Decision Sciences, 26(1), 1-29.

Patel, H. H., & Prajapati, P. (2018). Study and analysis of decision tree-based classification

algorithms. International Journal of Computer Sciences and Engineering, 6(10), 74-78.

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Appendix

PRODUCT

Old New

66,660,000 399.96 875,000 99,990,000

1,100,000
P
133.32 S 199.98 599.94
P
S
I

P C I
p P C
P
P
P