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Robust Decision Making
Table of Contents
Robust Decision Making 1
Decision Making Process: 2
Decision making tools and their justifications: 2
Critical Evaluation: 5
Waveriders is a private owned company and manufactures leisure and army boats. Waveriders is considering an opportunity of designing a new boat "Sea Catch" to attract more customers and to better cater the needs of its customers. Company has already spent £2.5 million on the market research for design and development. The company is facing a problem in deciding either to buy a new factory or not to buy one. Another problem faced by waveriders is to find a suitable location for its new factory to expand its business and the two options screened out are "Lymington" and "Exmouth". Both the locations have some pros and cons. The company has also some difficulties in choosing the right marketing strategies and allocation of cost to different marketing mediums.
Using different decision making tools like Decision tree Analysis, Financial Analysis (including Return on Investment, Calculation of Net present Value, Payback time period), SWOT Analysis and Grid Analysis, the group proposed the company to continue the development of new product "Sea Catch" and choose "Lymington" as the production location. Cost allocation for different marketing mediums was also identified and Newspaper, Radio and Television seemed most appropriate mediums. After working on "What" and "How" part, now this task needs an answer to "Why" part of justifying the choice of these tools and processes. The objectives of this assignment are:
To justify the methodology used in decision making process.
To critically evaluate the choices.
Decision Making Process:
Decision making process involves the following five steps (Anderson, Sweeney and Williams 2000):
Identify the problem.
Investigate the problem.
Determine different criteria to assess problem.
Evaluation of different alternatives.
Choose one alternative.
Using this process, problem was first identified and then investigated into detail and determination and evaluation of different criterion was done using different decision making tools. The nature of the problem is to identify the most profitable options to sustain business and its products. Decision requirements include an economical and feasible path to meet the customer requirements and attract new customers. The data available is the sales of different products for the last four years and cost associated with different alternatives.
Decision making tools and their justifications:
The above analysis gave an idea about the nature of the problem and with the given data, relevant decision techniques were used. Based on more numerical figures given in data, financial analysis was done in more detail and to get the picture clearer, decision tree and SWOT Analysis was made. The group decided to choose most relevant and sound evaluation process to make the robust decision (Guerra-López, 2007; cited in Lopez and Thomas 2011).
Decision Tree Analysis:
The main reason behind using decision tree analysis was its easy interpretation and the starting point to get the picture clear and visible (Berger et al 2004) and (Tirenni et al 2007). Another reason of choosing decision tree analysis as a starting point to the decision making process was that this tool is used where problems are sequential and the later problem depends on the earlier one (Berger et al 2004). Same was the case in waveriders where choosing an option would have an impact on the other ones. Decision trees are used to predict the future and assume the outcomes (Tirenni et al 2007) and the group predicted the future of choosing different locations based on their outcomes.
The interpretation of decision tree is quiet easy (Podgorelec, Kokol, Stiglic and Rozman 2002). Using decision trees was useful and appropriate in this decision making process of waveriders because here variables were dependent on one another and there was a clear relationship between variables hence using decision tree made it convenient to address the interactions between variables and it also considers dependency (Tirenni et al 2007) and this argument was also supported by (Gepp et al 2010).
Effectiveness of this tool was supported by D'souza et al (2007) stating that it helps in identifying the best option to be chosen and decision tree addresses all the risks associated with each path (D'souza et al 2007). In support to this risk assessment approach of this tool, Beger et al (2004) said that "Decision tree is a tool which is used to make decisions when risk factor is there".
Confirmation bias did develop here and to minimize that bias, alternative methods were used like financial analysis and SWOT Analysis, listed below to get the results from different perspectives and no judgments were made in the beginning.
The main reason behind using financial analysis was to check the validity of the process and to make robust decision (Calandro and Flynn 2007). Financial analysis was conducted by the group to check the feasibility of the given options and based on different scenarios, the net present value, discounted payback time period and return on investment was calculated, because of the available data and decision requirement to get the most feasible option. The reason of using return on investment is to get the cost benefit analysis and decide amongst alternatives that which one is more profitable (Erdogmus et al 2004). Net Present value was used to compare two options having same pattern of cash flows and same characteristics (Grinyer and Green 2003). This financial planning aspect was considered because it helps in making good decisions based on objective measurements (Gehring, 2013). Even in financial planning, the financial analysis is given the most importance (Gehring, 2013). These quantitative methods were used to get evidence based and rational results (Cooper et al., 2001b; Dickinson, Thornton, and Graves, 2001; cited in Kester, Griffin, Hultink and Lauche 2011).
For the purpose of financial analysis, different scenarios were considered including the selection of lymington and Exmouth in both cases of successful and unsuccessful prototype. Multiple criteria were used in the financial analysis procedure to simplify the decision making process (Suplee and Dzubow 2008).
The above mentioned three indicators were used and to make right decision, weighted average of all these indicators were calculated as they all play equally important role and decision was made on the accumulative average of all these three indicators identified. The NPV for Lymington calculated was low but the accumulative average of discounted payback time period and ROI was good for Lymington as compared to Exmouth. The group decided to go for Lymington on the basis of these numerical figures as decision requirements needed a less risky path to generate profits, so less payback period and more return on investment seemed more feasible to be given more importance.
This tool is used to identify the possible direction for an organization and their current situation can be described in a matrix which is divided into four quadrants i.e. Strengths, weaknesses, opportunities and threats (Ommani, 2011). This tool was used by our group in identifying the direction for the waveriders to make a decision in choosing the best location for production depending upon their SWOT Analysis. An advantage of SWOT Analysis is that it helps in getting insight about the problem and gives solutions to those problems (USDA, 2008; Nouri et al, 2008; cited in Ommani, 2011). This technique was used because it is easier to understand and gives a clear structure to figure out the ideas and make strategies accordingly (Piercy and Giles 1989) and (Hill and westbrook 1997).
An effective use of this SWOT Analysis was done by our team by not only categorizing the information in that matrix but also evaluating those factors and assigning weight and score to those factors to interpret their relative importance (Course material 2013).
The Evaluation matrices were used and they were divided in external and internal evaluation matrix where external evaluation matrix comprised of threats and opportunities and this evaluation helped in creating more awareness about the environmental changes and helped in identifying and managing risk for different situations. This aspect of SWOT Analysis of creating awareness and risk management was supported by Ommani (2011). The combination of both these internal and external evaluation matrices acted as a tool in formulating strategy (Ommani, 2011) and enabled our group in developing a strategy to make right decision.
Waveriders was facing a problem in adopting the right marketing strategy for the new product and had to make decisions regarding the cost allocation on different marketing mediums to be used and to calculate their effectiveness. So there were many alternatives and no single objective. The problem demanded the use of GRID Analysis as it can be used for choosing between many alternatives having no single objective (Course material 2013).
Using the GRID Analysis and placing the alternatives on left edge of the matrix and factors on the top, weights were assigned to different alternatives for different factors hence a clear picture of most attractive mediums were identified and according to the Analysis, Newspapers ranked at the top.
Biases can actually sway the reasoning behind many decisions and different types of biases can occur like confirmation bias results in the ignorance of all those facts that are opposite to or different to a person's own perceptions and another bias is the anchoring bias in which more reliance on one type of information results in biased decision (Kahneman, Lovallo and Sibony 2011). Our group analysis was both confirmation and anchor biased as it was solely based on financial analysis and figures. To minimize the confirmation bias caused by decision tree, a more depth financial analysis was done to support the decision. The SWOT Analysis was conducted but it was just done to support the financial analysis result hence an approach to determine the importance of other notions was not used. Even these biases can result in deviation from strategic decision making (Kahneman et al. 1982; Schwenk 1988; Stevenson et al. 1990 cited in Busenitz and Barney 1997).
Problems with implementation of the tools:
Most of the decision making techniques used by our group were quantitative in nature and based on numbers and objective measurement. A sole independence on financial methods is criticized by Cooper et al (2004a, 2004b, 2004c) stating that companies who rely only on financial methods perform worse than others (Kester et al 2011). Analysis was not conducted accurately as some figures were not given and without them, the interpretation of result was not accurate (Blau et al., 2004; Linton, Walsh, and Morabito, 2002; Poh, Ang, and Bai, 2001; cited in Kester et al 2011). Specifically in the decision tree analysis where some values were missing and it does not give accurate results if some important values are missing (Podgorelec et al, 2002) and (Blau et al., 2004; Linton, Walsh, and Morabito, 2002; Poh, Ang, and Bai, 2001; cited in Kester et al 2011).
Other tools that could have been used:
Tools like Cost Benefit Analysis could have been used to compare the choices and to calculate the margin between given costs of both the options and their respected benefits. The option with the higher margin could have been analyzed as cost benefit analysis is suitable when it is about comparison between choices and making evaluation decisions (Jonassen 2012). AHP is a very effective decision making tool and could have minimized the deficiencies of decision tree analysis as it can produce accurate results if some values are missing (Saaty and Katz, 1990). Using AHP could have resulted in reducing the biases as it observes the alternatives from different decisions and there are less chances of making a biased decision (Course material 2013). As the decisions were mostly based on quantitative analysis, another problem could have been diagnosed by using AHP as it gives a methodology to measure both the qualitative as well as quantitative performances (Vaidya and Kumar, 2006).
In making a robust decision, there are different decision making tools associated and maximum uses of these tools give better results but their relevance to the problem is compulsory. The blend of qualitative and quantitative analysis is required to make good decisions. An appropriate use of different decision making techniques was made to make the robust decision for Waveriders. Though, there were some biases involved in the decision making process but the aspect of relevance was there. These biases and problems with proper implementation of some tools could have been ignored by using more relevant and different nature of methodologies. A better understanding of different decision making methodologies is also required to make better implementation. The methodology used by the group was appropriate to the current problems faced by waveriders and identified results were supported by all methodologies that were used. Their use could have been improved by implicating other relevant methodologies or by eliminating some biases involved.