Evaluate the usefulness of decision tree analysis to FE's Directors when making the strategic choice between options A and B.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2020). The mark or mark type is shown in brackets.

1. [K] Decision trees – consider payoffs and probabilities
2. [K] Investment appraisal - using forecast cash flows (ARR, Payback, NPV, Discounted payback)
3. [K] Ansoff - classifies strategies (Market penetration, Product development, Market development, Diversification)
4. [K] Relates to risk
5. [K] Force Field Analysis - driving forces and constraining forces
6. [APP] Difference in cost of investment of $400m. A is 50% more than B. Cost is constraining factor for A.
7. [APP] Expected value Option A: 2.32 – 1.2 = $1.12bn
8. [APP] Expected value Option B:1.44 – 0.8 = $0.64bn
9. [APP] ARR of A is above the current profit margin (PM = 9.5%)
10. [APP] ARR of B is below current profit margin
11. [APP] Option A - market penetration
12. [APP] Option B - diversification? Other interpretations possible
13. [AN] Decision trees help to quantify the decision and encourage consideration of all outcomes – important for a profit seeking PLC.
14. [AN] Encourage consideration of risk and attempts to quantify it thus FE will be able to minimise its exposure to risk
15. [AN] Ansoff identifies the nature of the expansion – and considers the risk element too so a risk averse business might opt for market penetration
16. [AN] Payback is important where cash is limited. FE has a gearing ratio approaching 50% so paying back loan capital as early as possible could be important.
17. [AN] Force field analysis. By identifying driving and constraining factors FE can seek to reduce the constraining factors and build on the driving factors thus increasing the chances of success. Helps identify key issues for the Board to consider in making the decision.
18. [EVAL] SC based only on DT will ignore other significant factors when making the decision
19. [EVAL] Attitude of Board of Directors to risk important
20. [EVAL] Overall judgement based on preceding analysis and a consideration of the other techniques and information that need to be considered before this type of major strategic decision is made.
21. [EVAL] Ansoff - problem with quantification of risk. How useful is this for making a decision? Too many other factors to take account of.
22. [EVAL] Decision tree – how were the probabilities and expected outcomes estimated?
23. [EVAL] Investment appraisal – only considers quantitative factors
24. [EVAL] Force field analysis – highly subjective. Weighting of factors can influence recommendation