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Decision Analysis Process and Strategic Decision-Making

Understand the components of strategic decision-making - values, future outcomes, information, and alternatives. Learn how to analyze risks, measure outcomes, and engage with decision-makers effectively.

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Decision Analysis Process and Strategic Decision-Making

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  1. Objectives: It is a specific thing that you want to achieve Decision making can be guided by one or multiple objectives Values: An individual’s objectives taken together make up his or her values Outcomes: The possible things that can happen while trying to resolve an uncertain event through a decision analysis process More Definitions Ref: slides from Dr. Loerch

  2. More Definitions (contd.) • Information: • Information relates to a specific decision—it is what the decision is based on. Information can be measured as the probability that the preferredchoicein a specific decision with specific alternatives will lead to the outcome most desired from among the outcomes actually achievable from the available alternatives

  3. Strategic decisions involve four critical components Values What do we want? Future What could happen? Information What do we know? Alternatives What can we do? • Understanding of the future is critical to all three elements. • Use strategicvaluesto identify future decision opportunities.

  4. Identify Problem Identify Objectives (values) Identify Alternatives Choose Best Alternative Sensitivity Analysis More Analysis Needed Make Recommendation Decision Analysis Process Decompose and Model Problem – Structure – Uncertainty – Preference Yes No

  5. Private Automotive General Motors Ford Oil & Gas Chevron Phillips Petroleum Pharmaceutical Johnson & Johnson Eli Lilly Bristol Myers Squibb Aerospace Medical IT Kodak R&D Portfolios etc. Public DoD Joint Staff Air Force Army Navy/Marines DOE Nuclear Waste Hazardous Chemicals S&T Intelligence Community CIA NRO NSA CIFA NASA etc. Decision Analysis has many successful applications.

  6. Types of decisions Static Decision • One time decisions • Analysis performed only once • Sequential decisions but Analysis performed only once Dynamic Decisions • Analysis performed more than once • Time is a factor

  7. Decision Analysis For System Design • The purpose of a design is: • To solve a problem • To overcome a shortcoming • To improve a situation • Design involves decision making • The same procedures that provide a framework for other decision processes work for design decisions as well

  8. Measurement • Most important step in analysis - What should be measured? • Goes by many names: • Measure of Effectiveness (MOE) • Measure of Performance • Measure of Merit • Objective • Measure of Benefit (vice Cost) • Metric • Must reflect outcome of decision

  9. Risk • Definition: (Oxford English Dictionary) “Exposure to the possibility of loss, injury, or other adverse circumstance” Risk is the variability in our estimation of the outcome of a choice, including both better and worse-than-hoped-for events. • Three Issues • How bad could it get? Must measure bad outcome in some sense • How possible is the bad outcome? Need probability distribution on possible outcomes. • How much do I care? Risk attitude of decision maker

  10. Decision Analyst vs Decision Maker

  11. Purpose of Decision Analysis • To provide insight to the Decision Maker • Not make the decision for him/her • Difference between Decision Maker and Analyst • 3 things that a decision maker can do with your analysis • Use it • Modify it • Throw it away • Do a good job and don’t worry about it!

  12. Analysts need to better understand decision-making process Political Rational Emotional

  13. Interacting with Decision Makers • We as systems engineers and analysts are seldom the decision maker! • Understanding • Senior level decision-making • Senior decision-makers • Decision analysts • Presentations to senior decision-makers • Discussing potential new analyses • Obtaining approval for analysis plan • Providing a decision briefing

  14. Who are Decision Makers ?

  15. Characteristics of Decision Makers • Busy • Difficult to see • Gatekeepers control access • Establish vision and strategic objectives • Interested in how your idea fits with their agenda • Knowing their objectives is valuable • Control resources • Analysis champion requires their approval • Their support is usually critical Get access to senior leaders early in the analysis and at key decision points.

  16. Senior decision-makers need to better communicate with analysts • Define the problem • Describe the desired product • State the need date • Identify the constraints • Provide resources

  17. Three proven guidelines to successful presentations to senior leaders • Allow time for the senior decision-maker to talk • Once you are in let them determine how long you stay • Use fewer and better slides • Use 10-15 slides for 30 minutes • Always state (restate) the problem/issue/challenge • Put a summary of the key message on every chart • Brief the message • “Seek first to understand then to be understood” • Listen to the question • Answer questions briefly and clearly • Make sure you are working the right problem.

  18. Decision analysts need to provide executive summary presentations to senior decision-makers • When the analysis is finished you are 50% done • Pre-brief key advisors • Incorporate their comments and suggestions • Used more detailed briefings • Do not use your own perceptions • Summarize the results of your systematic analysis • Tell what is means to the decision-maker • Keep the charts clear and concise • Tell a story • Avoid extraneous information • Extensively use graphs, colors, and pictures

  19. Summary • Communicating with senior managers • Get access early and often • Make sure you are working the right problem • Respect their time • Need to remind them of your project • Provide executive summary briefings • One chart summary • Three communication opportunities • Get started – understand the decision-maker’s problem • Obtain approval for work plan - systematic approach • Provide a decision briefing - tell a story

  20. Definition • Consequence: • It’s the final fate of the Decision Maker

  21. Time value of Money • If an investment of $100 at 10% annual interest yields $110 after 1 year its present value (PV) is PV = X (1+r)n X = amount received after n years R= rate of interest per year The net present value is NPV = PV of returns on investment – investment The PV is =110/(1+0.1)=$100. NPV= $100-$100 = 0.

  22. Time value of Money • The return on $ 425 investment is • Year 1 2 3 4 • Return $ 110 121 133.1 146.41 Assume savings bank interest rate = 10% compounded annually. Total money earned = $ 622.24 (use compound interest formula) Is this a good investment in comparison to the savings bank? Total return = 110+121+133.1+146.41 = $510.51

  23. Time value of Money • Calculate PV • PV = 110/(1+0.1) + 121 /(1+0.1)2 + 133.1 /(1+0.1)3 + 146.41/(1+0.1)4 PV = 100+100+100+100=400 NPV = PV – investment = 400-425 = -$25 Savings bank NPV = 425-425=0 It is not worth investing. Put the money in savings!! What if the investment gives back in $ 130 140 150 160 (Total = 580) for each of the 4 years? PV = 455.86 NPV= 455.86-425= 30.86 (better than a savings bank)

  24. Reading Assignment • Read Chapter 1 and 2 of the textbook • Next topic • Refresher on Probability Chapter 7, 8, 9

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