OCR A Level Business: Decision making and Decision trees (H431) – Revision Notes

Quick recall for OCR A Level Business (H431) sections 1.13 Decision making and 1.14 Decision trees, from the Version 2.1 specification. For full explanations and two worked trees, use the study guide. Test yourself with the practice questions, see the wider area in the strategy revision notes, and tick off topics on the checklist. The course page is the OCR A Level Business hub, and the free diagnostics show what to revise first.

1.13 Decision making at a glance

Idea	Recall
Nature	A choice between alternative courses of action, made by identifying the issue, gathering information, comparing options and choosing
Purpose	Move the business towards its aims and objectives with limited resources and less guesswork
Importance	Effective decisions protect cash, use resources well and keep the business on course; the effects differ for owners, staff, customers, suppliers, lenders and the community
Aims and objectives	Aims are broad purposes; objectives are measurable targets. Objectives supply the criteria for judging options, and results show if the objective is met

Types of decision

Distinction	Categories	Memory hook
Time	Short-term, medium-term, long-term	How far ahead the effects run. The specification sets no fixed years, so state your own horizon
Level	Strategic, tactical, operational	Direction, delivery, daily running
Tools	Quantitative, qualitative	Numbers versus judgement

• Strategic: senior managers, whole business, costly, hard to reverse.
• Tactical: middle managers, one function or period, serves the strategy.
• Operational: supervisors and teams, routine, short-term.

Time and level often line up, but they are separate ideas. A decision can be short-term and still strategic.

Factors to weigh before deciding

1. Level of risk: size of possible loss against possible gain, set against reserves.
2. Nature of risk: quantifiable (can have probabilities) or unquantifiable.
3. Accuracy of forecasts: weak inputs give a misleading answer.
4. Volatility: unstable markets shorten the life of assumptions and favour flexible options.
5. Potential for bias: pet projects, over-confidence, ignoring contrary evidence.

Quantitative and qualitative tools

	Quantitative	Qualitative
Based on	Figures, forecasts, calculations	Opinion, judgement, context
Strength	Objective, comparable	Captures reputation, morale, ethics
Weakness	Ignores what cannot be measured; depends on estimates	Subjective; harder to compare
Example	Expected value from a decision tree	Staff views on a relocation

Performance measures

• Financial: profit, margins, cash flow, return on capital. Backward-looking and tied to the accounts.
• Non-financial: market share, customer satisfaction, quality, staff turnover, environmental impact. Can warn earlier and show what the accounts hide.
• Test a measure by asking whether it fits the objective, is reliable, is timely and has a benchmark.
• Use both. Neither gives the whole picture.

Method: choosing a course of action

1. State the objective and the criteria for success.
2. List the options, including doing nothing.
3. Compare quantitative evidence (profit, cost, EV, cash flow).
4. Add qualitative evidence (reputation, staff, ethics, stakeholders).
5. Weigh risk, forecast reliability and volatility.
6. Recommend one option and state the condition under which you would change your mind.

Method: extent of success

Compare results with objectives, with previous years, with competitors and from each stakeholder’s view. Reach a judgement of degree: successful in some respects, not in others, and say which matter most. A business that meets its growth target but misses its profit target is partly successful, and the weight you give each depends on the objective and on the stakeholder.

1.14 Decision trees at a glance

Symbols and rules

Feature (standard conventions, not specification wording)	Rule
Decision node	Square. The business chooses.
Chance node	Circle. Probability decides.
Probabilities	Decimals or percentages; total 1.0 (100%) at each chance node
Costs	On the branch where they are spent
Direction	Build left to right, calculate right to left

Formulas (standard form, not specification wording)

EV = sum of (probability x payoff)
economic outcome of a branch = payoff - costs on that path
net gain of an option = EV - cost of the option

Method in steps

1. Check the probabilities at each chance node total 1.0. Find a missing one by subtraction.
2. Start at the right. Work out the EV of each chance node.
3. At a decision node, pick the branch with the best figure, taking account of its cost.
4. Move left, using that figure as the payoff for the earlier branch.
5. Deduct the cost of the option to find its net gain.
6. Compare options, including doing nothing (net gain nil).
7. Interpret: say what the figure means, then evaluate.

Reminder example: sensitivity to a probability

Stoneyfold Bakery can open a second shop for £45,000. If it succeeds (probability p) the payoff is £120,000. If not, £15,000.

• EV = 120,000p + 15,000(1 - p) = 15,000 + 105,000p.
• Net gain = 15,000 + 105,000p - 45,000 = 105,000p - 30,000.
• Net gain is zero when p = 30,000 / 105,000 = 0.286 (28.6%).

Success probability	Net gain
20%	-£9,000
30%	£1,500
40%	£12,000
50%	£22,500

Interpretation: the shop pays off on average only if the owners believe success is more than about 29% likely. Because that probability is a judgement, they should ask how confident they are in it. This is a good way to evaluate how to respond to a tree.

Evaluating a tree

Question	Points to make
Outcomes	Compare EVs and the range between best and worst cases; EV may never actually occur
Response	Test the probabilities, check the worst case is survivable, add qualitative factors
Importance	Greatest for costly, hard-to-reverse choices; shows who bears the downside
Usefulness	Strengths: clear, shows assumptions, compares options, handles sequences. Limits: estimates, subjective, ignores qualitative factors and timing of cash flows, false precision

Must-know distinctions

Be ready to explain each of these pairs in a sentence and apply it to a case.

• Strategic versus tactical versus operational (level), not the same as long versus short term (time).
• Expected value versus net gain: the second deducts cost.
• Quantifiable versus unquantifiable risk: only the first can be put on a tree.
• Financial versus non-financial measures.
• Decision node versus chance node.

Quick self-test

1. Define decision making in one sentence.
2. Give two differences between strategic and operational decisions.
3. Name the five factors the specification lists as needing to be taken into account.
4. Why might a business with a growth objective reject the option with the highest profit?
5. A chance node has branches of 40%, 35% and one more. State the missing probability as a decimal.
6. A branch has a 35% chance of £80,000 and a 65% chance of £20,000, and costs £30,000. Calculate EV and net gain.
7. Why is a decision tree a poor tool if the risks are unquantifiable?
8. Give one financial and one non-financial measure of performance and say what each shows.
9. State two ways a decision tree helps a business and two limits.
10. How should a business respond if its tree favours Option A only when a probability is 0.3 or higher, and the manager is unsure whether it is 0.3?

Answers

1. Choosing between alternative courses of action to meet aims and objectives.
2. Strategic: long-term, whole business, senior managers, hard to reverse. Operational: day-to-day, one team, supervisors, easily changed.
3. Level of risk, nature of risk, accuracy of forecasts, volatility, potential for bias.
4. Because the option may not deliver the growth, for example market share, that the objective requires. Objectives set the criteria.
5. 1 - 0.40 - 0.35 = 0.25.
6. EV = 0.35 x 80,000 + 0.65 x 20,000 = 28,000 + 13,000 = £41,000. Net gain = 41,000 - 30,000 = £11,000.
7. Probabilities cannot be attached to them, so the EV has no sound basis and the numbers give false precision.
8. For example net profit margin shows profitability. Customer satisfaction shows how well customers are served, which the accounts may not reveal.
9. Helps: makes assumptions visible; allows options to be compared on one measure. Limits: probabilities are estimates; qualitative factors and cash-flow timing are ignored.
10. Treat the choice as sensitive. Gather more evidence on the probability, check the downside is affordable, weigh qualitative factors and consider a smaller or more flexible version of A.

Where marks are usually lost

• Calculating EV but not subtracting the option’s cost before comparing.
• Giving probabilities that do not sum to 1.0 or 100%.
• Defining strategic, tactical and operational only by time, ignoring level and scope.
• Listing limits of decision trees without applying them to the business in the case.
• Naming the factors (risk, forecasts, bias) with no link to the business described.
• Treating the highest EV as the answer without discussing risk, objectives and qualitative evidence.
• Judging success only on profit, ignoring non-financial measures and stakeholders.
• Conclusions that say “it depends” without saying on what.
• No units or no pound sign on money results.

Frequently asked questions

What do the squares and circles on a decision tree mean? A square is a decision node, where the business chooses a branch. A circle is a chance node, where chance decides the outcome; these drawing conventions are standard practice rather than specification wording.

How do you calculate expected value? EV = the sum of (probability × payoff) at a chance node, and net gain = EV − the cost of the option. These are standard forms, since the specification does not set a formula.

In which direction do you work through a two-stage decision tree? Work from right to left, calculating expected values at chance nodes and choosing the best option at each decision node. Rolling forward from left to right is a common error.

Should business success be judged on profit alone? No. Use non-financial measures as well, such as market share, customer satisfaction and staff turnover, and consider different stakeholders.

Official syllabus

OCR Level 3 Advanced GCE in Business (H431) specification, Version 2.1, sections 1.13 Decision making and 1.14 Decision trees, published by OCR (Oxford Cambridge and RSA).