decision making: fundamentals and systems michael a. mazzocco aapex february, 2011 mazzocco - draft

Mazzocco - DRAFT

Decision Making:Fundamentals and Systems

Michael A. Mazzocco

AAPEXFebruary, 2011

Overview

• Two - 1:15 minute sessions

• Part 1. Analyzing and Making Decisions – Some Fundamentals

• Part Deux. Organizing for Effective Decisions

My Observations

Seeds of motivation

Can’t possibly cover all aspects in part of an afternoon

What drove me to call Danny about decisions

My Observations

1. Decisions often made prior to analysis[ fire, aim, ready ? ]

Very popular in simplistic LEEDERship culture.

“vision” “purpose”


My Observations

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

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 is the purpose of the analysis ?

• What is the desired outcome of the analysis ?– Comfort?

– Value? Magnitude?

– Support?

– Understanding?

– A choice among alternatives?

What are you trying to decide?

Make A Decision Description

• 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

• 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 LayoutAnnual Revenues and Expenses

Positive Impacts Negative Impacts

Increased Revenues Decreased Revenues

-- $$ -- $$

-- $$ -- $$

Decreased Costs Increased Costs

-- $$ -- $$

-- $$ -- $$

Total Positive Impacts Total Negative Impacts

Net Impact

Could be lots of detail and many rows

Cognitive Interference

• Escalating Commitment• (M&A examples)

• Measuring Others’ Pain• (M&A examples)

• Cognitive Bias and Framing• In-session example

Many Categories. Here are a few.

Decision Making Incorporating Risk

• How many cattle to feed? Weather affects cost and availability of feed.

Make a payoff matrix

Feed Production Probability Low Fair Good High Expected 0.10 0.25 0.35 0.30 ValueAlternative Outcome

8,000 $150,000 $170,000 $180,000 $200,000 $180,500 10,000 $0 $120,000 $220,000 $270,000 $188,000 12,000 ($100,000) $0 $250,000 $350,000 $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



• 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?


8,000 $150,000 $170,000 $180,000 $200,000 $180,500 10,000 $0 $120,000 $220,000 $270,000 $188,000 12,000 ($100,000) $0 $250,000 $350,000 $182,500




• WHICH ROW OF OUTCOMES WILL YOU SELECT ? What is decision criteria ?

• Can you afford no income? Negative income?


8,000 $150,000 $170,000 $180,000 $200,000 $180,500 10,000 $0 $120,000 $220,000 $270,000 $188,000 12,000 ($100,000) $0 $250,000 $350,000 $182,500





• Can you afford to chance high income?


8,000 $150,000 $170,000 $180,000 $200,000 $180,500 10,000 $0 $120,000 $220,000 $270,000 $188,000 12,000 ($100,000) $0 $250,000 $350,000 $182,500





• Or do you need a minimum income level?


8,000 $150,000 $170,000 $180,000 $200,000 $180,500 10,000 $0 $120,000 $220,000 $270,000 $188,000 12,000 ($100,000) $0 $250,000 $350,000 $182,500





8,000 $150,000 $170,000 $180,000 $200,000 $180,500 10,000 $0 $120,000 $220,000 $270,000 $188,000 12,000 ($100,000) $0 $250,000 $350,000 $182,500

• All three choices are correct, depending upon your decision criteria !

Part II. Effective Decision Organizations

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

Improve Performance (Bain)

Symptoms of Bad Decision Structure

• 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

Improve Performance (Bain)

Decision Effectiveness

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.

Measures of organizational decision making (Bain)

Decision Effectiveness

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

Structuring decisions for impact (Bain)

What?

1. Critical decisions• Large value at stake• Made / re-made frequently,

adding up to large value

2. Clarity• Frame• Unbundling


Who?

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


How?

Structured Decision Approach• Agreement on criteria and technique

– Impacts Effort, Quality, and Speed• All the relevant facts• More than one REAL alternative

– Kissinger example: Three concocted alternatives.1. Outcome is Surrender to Soviets2. Outcome is Thermonuclear War3. Outcome is … What the team wanted to do all along

• Establish steps and sequence• Decision is NOT the same as discussion of choices


When?

Be Explicit

• Clear, specific timetable• Impacts yield, speed


Organizational Plumbing and Wiring

• Common vocabulary– What is “margin?”

• Location of decisions:– Not all the same– Wayne Beck: “empowered.”

• Understanding roles;• Using appropriate resources• Capturing input and analyses


What Else?

Questions? Comments?

Contact Information

Mike [email protected] http://www.verdantpartners.com/consult.phpPhone: +1 (217) 359-8470 x8817Fax: +1 (217) 359-8870 2504 Galen Drive, Suite 103Champaign, IL 61821-7048 USA

References

mailto:[email protected]

http://www.verdantpartners.com/consult.php

decision making: fundamentals and systems michael a. mazzocco aapex february, 2011 mazzocco - draft

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