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Chapter 2 – Influence Diagrams
Learn by exampleLearn vocabulary and grammar
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Two key elements of decision framing-often not considered
Multiple Objectives Tradeoffs◦If NOT upfront then when?◦Multiple stretch goals tradeoffs too
lateUncertainty Risk
◦If you do NOT ADMIT the existence of uncertainty, you cannot manage it
◦If you do not QUANTIFY uncertainty, you cannot decide how much to invest to address its impact
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Elements of a Decision Frame
Decision(s): Single, Multiple (Simultaneous or Sequential)
Alternatives within each decision Uncertainty Criteria--Goals--Values--Objectives = Context
Specific Scope – Time horizon and organizational breadth Decision Makers & Stakeholders Constraints
◦ Implicit - restrict range of alternatives◦ Explicit – mathematical representation (not included
here)
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Influence Diagram - CommunicationExplicitly note the existence of
randomness and uncertaintyClarify the “main” values or
objectives of decisionEmphasize the influence of
uncertainty on valuesSpecify the sequence of
decisions
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Categories of common objectives. Table 2.1
Min-Costs (variable and investment) Min-Time to complete Max-Profit—NPV, TARR, ROI Min- Risk of not meeting targets Min- Human resources required Min (Max) -Management issues Max-Long-term value Min-Operational issues Max-Performance Sales and/or market
share Min-Training requirements
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Common uncertainties. Table 2.2
Time needed to complete task or reach goal Performance to specifications Warranty claims and quality control Resources required Competitive actions Cost Is task doable? Market demand Revenue Throughput–productivity Will some specific event occur
who will be elected president pandemic occurs
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Framing decision with randomness influence diagrams: Vocabulary
= Rectangles/Boxes
= Circles/Ovals
= Rounded rectangle
= Diamond
= Text box with list
= Arrow
Random Events
Decisions
Values/Goals Calculation
Ultimate goal
Influence
Input/Data
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Automation Investment Boss Controls Manufacture an option to be made
Available to one million purchasers of cars
Uncertain take-rate (percent who buy option)
Deliver the option to (OEMs) at a price of $60.
Two alternatives: differ significantly in investment level automation and variable cost of production
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Automation Investment
Take rate
Automation Investment Profits
VolumeVariable CostInvestment
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Automation Investment: Expanded
Take rate
Automation Investment
Profits
Investment
Volumes
Variable Cost
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Figure 2.5: Theater Party Invitations
% Yes Responses
Percent No Shows
Attendees
Number SentInvitations
Maximize Goodwill
InviteesNot Attending
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Figure 2.6: Divide and delay decision - Theater party invitations
% Round 1 Yes
Percent of No Shows
Attendees
Round 1Invitations
Maximize Goodwill
InviteesNot Attending
% Round 2 Yes
Round 2Invitations
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Influence Diagram Symbols
Microsoft PowerPoint Pick appropriate shape: rectangle, oval,
rounded rectangle, and diamond. You may want to have specific fill color for each
type of box
Right click on shape: “Add text” Can specify size of text and place on more than one line.
Move shapes to appropriate location. Connect shapes with arrows
Be sure to link to a red dot on each shape enables redesign
Shapes can be copied and text modified.9/19/2011
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Influence Diagram Construction
Specify primary decision Define values and ultimate goal Identify relevant random variables or
events Specify downstream decisions that
need to be analyzed to make primary decision
Add arrows to define relationships Review layout List data inputs
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Example : Late to Market with New
Product Case: A company is considering developing a product that will be ready 3 months after its competitor introduces a similar product.
Random Event to Random Event – Conditional probability
Random Event to Value – Random event directly influences the VALUE. The value will be uncertain.
Competitive Action Sales Volumes
Sales Volumes Total Revenue
Influence DiagramArrows from Random Events: Connectors in PowerPoint
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Influence DiagramArrows from Random Events
Example : Late to Market with New ProductRandom event to decision: Random event’s
outcome is KNOWN before decision is to be made.
NEVER use an arrow from a circle to a decision to represent the fact that the decision is affected by the random event. This is the most common ERROR. ◦ The arrow shows that the outcome of the chance node is
known before the decision is made ◦ Absence of an arrow from the chance node to the decision
node does NOT mean that the uncertainty does not influence the decision.
◦ Everything in the diagram affects the decision
Competitor’s Price Launch Price
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Decision to Decision - decision sequence (possibly influence)
Decision to Random Event Price influences sales volume
PriceProduct Features
Price Sales Volume
Influence DiagramArrows from decisions
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Decision to Value – Decision directly influences value Pricing decision influences total revenue Indirectly: by affecting sales volume and Directly: since price sales = Total Revenue
Influence DiagramArrows from Random Events
Price Sales Volume
Total Revenue
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If Total Revenue and/or Total Cost are influenced by random events then the Net Profit will be an uncertain value. However, once the other two values are known, Net Profit is no longer uncertain.
Influence Diagram: value to value
Net profit
Total Revenue
Total Cost
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Competitor’s Price
Launch Price
ProductFeatures
Develop product
Total Revenue
Total Cost
Net Profit
Sales Volume
All elements influence the decisions: to develop the product, its features
& price
Late to market with new product:1st lay out elements without arrows
Engg. ratesLabor ratesThroughput
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Competitor’s Price
Launch Price
ProductFeatures
Develop product
Total Revenue
Total Cost
Net Profit
Sales Volume
All elements influence the decisions: to
develop the product, its features & price
Late to market with new product – Add arrows
Engg. ratesLabor ratesThroughput
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Competitor’s features
Modified Diagram?
Competitor’s Price
Launch Price
ProductFeatures
Develop product Total
Revenue
Total Cost
Net Profit
Sales Volume
Economy
Manufacturing Cost
PD Costs
ActualPrice
Competitor’s product performance
Engg. ratesLabor ratesThroughput
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What New Objectives Might be AddedMaximize Market ShareMaximize Utilization of plant
capacityMinimize adding to labor
workforce (Headcount)Change overall goal – No longer
just net profit – “value to corporation”
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Influence Diagram: Is not a Flow Diagram!All elements of an Influence
Diagram are analyzed and influence the decisions even if there are no nodes connected to the decisions
Forecasts of downstream uncertainties affect upstream decisions even without arrows linking the nodes.
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Limited Influence Diagram
Mainly uncertainties and only one or two objectives◦Project management complete
project as planned (within time and budget)
Mainly multiple objectives and limited uncertainty◦New car
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Figure 2.15: Buying a used car – value focused
Value
Miles per Gallon
Aesthetics
Total Cost
Longevity
Choose the Best Car
Reliability
Accessories
Purchase Price
Sound System
Seating Capacity
Exterior Condition
A/C and Heater
Maintenance Needed
Color
Odometer Mileage
Price of Gasoline
Consumer Reports
InteriorCondition
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Figure 2.16: Used car revised – new information
Value
Total Cost
Longevity
Choose the Best Car
Reliability
Maintenance Needed
Mechanic’s Report
Vehicle History Report
Choose the Best Two Cars
Other Objectives
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Figure 2.17: Oglethorpe diagram
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ALL Elements Represented in the Diagram Influence the Decisions
Probabilistic forecasts of sales and the competitor’s price will affect forecasts of revenue and profit.
These will influence the decisions: Whether or not to introduce the
product?
With what features?
And at what price?