Topics covered: Decision Tree Diagram
Meaning.
Advantages and disadvantages.
Decision tree diagram.
Good Life Plc (GLP) is a mass market consumer goods manufacturer. Due to globalisation and growing ecommerce business platforms, the management is concerned about falling market share, sales revenue and profit. The senior management team of GLC is considering the following strategic options.
Option 1: Market penetration.
Option 2: Market development.
Option 3: Product development.
Option 4: Diversification.
Costs and revenues of each option are given below:
| Options and Cost | Probability of success and estimated revenue ( $) | Probability of failure and estimated revenue ( $) |
| Option 1: Market penetration ($10,000) | 0.5 and $ 38,000 | 0.5 and $ 32,000 |
| Option 2: Market development ($12,000) | 0.6 and $ 32,000 | O. 4 and $30,000 |
| Option 3: Product development ($ 15,000) | 0.4 and $ 24,000 | 0. 6 and $ 20,000 |
| Option 4: Diversification ($ 18,000) | 0.4 and $ 26,000 | 0.6 and $ 22,000 |
Questions:
- Using the information given in the table 1, construct a fully labelled decision tree diagram, calculate expected outcome for each option, and recommend GLP the best option based on your calculation. Show all your working. [8 marks]
- Identify and explain two benefits of using decision tree diagram as a planning tool for GLP. [4 marks]
- Identify and explain two limitations of using decision tree diagram as a planning tool for GLP. [4 marks]
