Decision Making:
Fundamentals and Systems
Michael A. Mazzocco
AAPEX
February, 2011
Mazzocco - DRAFT
Overview
• Two - 1:15 minute sessions
• Part 1. Analyzing and Making
Decisions – Some Fundamentals
• Part Deux. Organizing for
Effective Decisions
My Observations
What drove me to call Danny about decisions
Seeds of motivation
Can’t possibly cover all aspects in part of an afternoon
My Observations
What drove me to call Danny about decisions
1. Decisions often made prior to analysis
[ fire, aim, ready ? ]
Very popular in simplistic LEEDERship culture.
“vision”
“purpose”
My Observations
What drove me to call Danny about decisions
1. Decisions often made prior to analysis
– Analyze this so I don’t look stupid …
– This is what I want to do,
•
What are the holes in my argument and how do I fix
them?
– This is what I want to do,
•
How bad can certain parts get (price, yield, expenses)
AND I‘m still OK?
My Observations
What drove me to call Danny about decisions
2. Analysis of decisions frequently uses wrong information
– Incorporating extraneous considerations
– Overlooking critical factors
3. Decision criteria not specified
4. Inaccurate data
– That California plant – cost per lb.
– Complete cost?
– Raw or finished?
Make A Decision Description
What are you trying to decide?
• What is the purpose of the analysis
?
• What is the desired outcome of the
analysis ?
– Comfort?
– Value? Magnitude?
– Support?
– Understanding?
– A choice among alternatives?
Make A Decision Description
What are you trying to decide?
• What are you trying to accomplish?
– Change?
Size?
Revenue
Throughput
Costs (Inventory? Operating Expenses?)
– Sustained Operations?
• Employee retention?
• peas:carrots land allocation?
– Asset Service?
• Rent, lease; size; new, used?
– Risk reduction?
– Say it out loud …
Decision Focus and Criteria
What are you trying to decide?
• Strategic Direction?
• Dispense and move on?
• Color of carpet in the board room … ?
• Short to Mid range operating
profit plan?
– Inputs/production methods
• (twin row? Early wean?)
– Output choice
• (corn:beans:cotton)
– Input/output
• (fertilize the pastures?)
Criteria dictates appropriate tool
• When in doubt, look it up or ask !
• Example: Partial budget
– “Make A Business Case for your idea.”
– Include only CHANGES
– items that will change by implementing change
Partial Budget Layout
Annual Revenues and Expenses
Could be
lots of
detail
and
many
rows
Positive Impacts
Negative Impacts
Increased Revenues
Decreased Revenues
-- $$
-- $$
-- $$
-- $$
Decreased Costs
Increased Costs
-- $$
-- $$
-- $$
-- $$
Total Positive Impacts
Total Negative Impacts
Net Impact
Cognitive Interference
Many Categories. Here are a few.
• Escalating Commitment
• (M&A examples)
• Measuring Others’ Pain
• (M&A examples)
• Cognitive Bias and Framing
• In-session example
Decision Making Incorporating Risk
Make a payoff matrix
• How many cattle to feed? Weather affects cost and availability of feed.
Low
0.10
Alternative
8,000
10,000
12,000
$150,000
$0
($100,000)
Feed Production Probability
Fair
Good
0.25
0.35
Outcome
$170,000
$120,000
$0
$180,000
$220,000
$250,000
High
0.30
Expected
Value
$200,000
$270,000
$350,000
$180,500
$188,000
$182,500
• TWELVE budgets [forecasts] [scenarios] [ ]
• Four possible [weather] outcomes
• WHICH ROW OF OUTCOMES WILL YOU SELECT ? What is decision criteria ?
Decision Making Incorporating risk
Make a payoff matrix
• How many cattle to feed? Weather affects cost and availability of feed.
Alternative
8,000
10,000
12,000
•
•
•
•
Feed Production Probability
Low
Fair
Good
0.10
0.25
0.35
Outcome
$150,000
$170,000
$180,000
$0
$120,000
$220,000
($100,000)
$0
$250,000
High
0.30
Expected
Value
$200,000
$270,000
$350,000
$180,500
$188,000
$182,500
WHICH ROW OF OUTCOMES WILL YOU SELECT ? What is decision criteria ?
Highest Expected Value?
What is expected value of a coin flip?
How many “pulls of the lever” do you get?
Decision Making Incorporating risk
Make a payoff matrix
• How many cattle to feed? Weather affects cost and availability of feed.
Alternative
8,000
10,000
12,000
Feed Production Probability
Low
Fair
Good
0.10
0.25
0.35
Outcome
$150,000
$170,000
$180,000
$0
$120,000
$220,000
($100,000)
$0
$250,000
High
0.30
Expected
Value
$200,000
$270,000
$350,000
$180,500
$188,000
$182,500
• WHICH ROW OF OUTCOMES WILL YOU SELECT ? What is decision criteria ?
• Can you afford no income? Negative income?
Decision Making Incorporating risk
Make a payoff matrix
• How many cattle to feed? Weather affects cost and availability of feed.
Alternative
8,000
10,000
12,000
Feed Production Probability
Low
Fair
Good
0.10
0.25
0.35
Outcome
$150,000
$170,000
$180,000
$0
$120,000
$220,000
($100,000)
$0
$250,000
High
0.30
Expected
Value
$200,000
$270,000
$350,000
$180,500
$188,000
$182,500
• WHICH ROW OF OUTCOMES WILL YOU SELECT ? What is decision criteria ?
• Can you afford to chance high income?
Decision Making Incorporating risk
Make a payoff matrix
• How many cattle to feed? Weather affects cost and availability of feed.
Alternative
8,000
10,000
12,000
Feed Production Probability
Low
Fair
Good
0.10
0.25
0.35
Outcome
$150,000
$170,000
$180,000
$0
$120,000
$220,000
($100,000)
$0
$250,000
High
0.30
Expected
Value
$200,000
$270,000
$350,000
$180,500
$188,000
$182,500
• WHICH ROW OF OUTCOMES WILL YOU SELECT ? What is decision criteria ?
• Or do you need a minimum income level?
Decision Making Incorporating risk
Make a payoff matrix
• How many cattle to feed? Weather affects cost and availability of feed.
Low
0.10
Alternative
8,000
10,000
12,000
$150,000
$0
($100,000)
Feed Production Probability
Fair
Good
0.25
0.35
Outcome
$170,000
$120,000
$0
$180,000
$220,000
$250,000
High
0.30
Expected
Value
$200,000
$270,000
$350,000
$180,500
$188,000
$182,500
• All three choices are correct, depending upon your decision criteria !
Part II. Effective Decision Organizations
Improve Performance
(Bain)
Experience of many pathologies
• “Don’t do anything until I tell you what to do next.”
• Bottleneck of all decisions going through one point.
• Failure to have a timeline
– “Let’s schedule a follow up.”
• Criteria uncertain
• Critical decisions at wrong place
• Bad execution
Symptoms of Bad Decision Structure
Improve Performance
• Take too long
• Made by wrong people, wrong part of
organization with wrong information
• Turn out badly / Not made well.
• Re-debated, Re-examined.
• Bad execution
• Pain of inconsistency
(Bain)
Decision Effectiveness
Measures of organizational decision making
1. Quality – Right decisions. Right approach.
2. Speed – Relative, not absolute.
3. Yield – Turning decisions into action.
4. Effort – The appropriate amount.
– Drag on 3 above if too much or too little.
(Bain)
Decision Effectiveness
Structuring decisions for impact
1. What? – decisions need to be made and executed?
2. Who? – will play key roles?
•
•
•
Maker
Recommender
Information gatherer
3. How? – will the decision be made and executed?
•
•
Criteria
Analytical technique
4. When? – will the decision be made and executed?
•
Timeline
(Bain)
What?
Structuring decisions for impact
1. Critical decisions
•
Large value at stake
•
Made / re-made frequently,
adding up to large value
2. Clarity
•
Frame
•
Unbundling
(Bain)
Who?
Structuring decisions for impact
1. RAPID
•
Recommend – the analyst
•
Agree – Who is “signing off” on recommendation?
»
Agreeers are not necessarily the decision maker.
•
Perform – Who will implement and execute?
•
Input – Judgment and information providers
•
Decide – One person
2. Actually, order is: R – I – A – D - P
(Bain)
How?
Structuring decisions for impact
(Bain)
Structured Decision Approach
•
Agreement on criteria and technique
–
•
•
All the relevant facts
More than one REAL alternative
–
•
•
Impacts Effort, Quality, and Speed
Kissinger example: Three concocted alternatives.
1. Outcome is Surrender to Soviets
2. Outcome is Thermonuclear War
3. Outcome is … What the team wanted to do all along
Establish steps and sequence
Decision is NOT the same as discussion of choices
When?
Structuring decisions for impact
Be Explicit
•
•
Clear, specific timetable
Impacts yield, speed
(Bain)
Organizational Plumbing and Wiring
Structuring decisions for impact
• Common vocabulary
– What is “margin?”
• Location of decisions:
– Not all the same
– Wayne Beck: “empowered.”
• Understanding roles;
• Using appropriate resources
• Capturing input and analyses
(Bain)
What Else?
Questions? Comments?
Contact Information
References
Mike Mazzocco
mmazzocco@verdantpartners.com
http://www.verdantpartners.com/consult.php
Phone: +1 (217) 359-8470 x8817
Fax: +1 (217) 359-8870
2504 Galen Drive, Suite 103
Champaign, IL 61821-7048 USA