Hi All,
Check out our new Decision Lens YouTube channel with a new video briefing on how Decision Lens helps you make better decisions by setting priorities and allocating resources to the highest value projects.
http://www.youtube.com/decisionlens
Decision making is one of the most important yet least understood activities that any organization has to accomplish. This introduction to decision making shows how the Analytic Hierarchy Process and Decision Lens can guide you so that the decisions you make are based on your objectives and priorities.
Good coverage of decision making today by Kerri Nelen who writes a blog for Applied Clinical Trials Online (pharma industry):
http://blog.appliedclinicaltrialsonline.com/2010/01/06/the-ipod-of-decision-makers
by: Kip Knight, President, Knight Vision Marketing
Note: Kip is formerly the VP of Marketing at eBay. Additionally, he spent 10 years in Brand Management at Procter & Gamble, and 12 years with PepsiCo, including serving as CMO at Taco Bell. Currently, Kip is affiliated with Decision Lens, helping companies make better decisions and optimize resource allocations. In this article he shares thoughts developed from his experiences at these great marketing companies.
It's fair to assume strategic planning for most business leaders is similar to planning to go to the dentist (i.e. they know it's important to do it but they are worried how much it's going to hurt). The term "strategic" is a power word often used to intimidate others - that's a real shame. Making sound strategic plans and executing them is something we're all capable of doing if we put the appropriate amount of time and focus towards doing it right.
To begin with, strategy is fundamentally about what you're going to do (and more importantly, what you're not going to do) to build your business. It's all about the choices you and your team are willing to make (and stick with) over time.
A strategic planning process often starts with a Mission Statement. Despite being the recurring topic of Dilbert cartoons, a great Mission Statement can actually help focus your team by answering a fundamental question too many businesses lose sight of: What business are we in and why?
Once you're agreed on your Mission Statement, your strategy work should focus on your business's overall Objective (i.e. how are you going to define success over the next 3 years).
Goals are the means to translate your overall business objective into accountability for everyone on your team. These are the key metrics used to measure success in achieving your overall business objective.
Strategies are the collection of choices your team makes to create a sustainable advantage versus your competition. There are an infinite number of choices you can make...the key to success is that there are very few choices you and your team should be committed to making for the long term. Those choices will determine the success or failure of your business.
Plans are directly linked to your strategies. They spell out what you're going to do over the next 12 months to make your strategies come to life. Too many executives spend a disproportionate amount of time developing strategies and not nearly enough on how they're going to be executed. Give me a brilliant execution of an average strategy any day versus a lousy execution of a brilliant strategy! The rewards of a well crafted strategy brilliantly executed are reflected in outstanding financial results.
A great strategy should be well known by everyone on your team (without having to refer to a thick PowerPoint) as well as your customers (who will see the execution of your strategy on a daily basis).
Another issue you don't need to worry about is changing your strategy very often. I've often compared changing a business strategy with amending the Constitution of the United States - it should only be done after careful thought and deliberation.
The Tide brand at P&G has been using the same advertising strategy for the past 50 years and has maintained category leadership the entire time. Brands that change their strategies frequently aren't going to last very long or be very effective since they end up confusing everyone associated with the business.
When I think of some of the brands I admire, such as Apple, Nike, Prius, Southwest and Whole Foods, a common theme that's apparent is they've made and stuck with key strategic choices over time that's given them a distinct advantage over their competition.
Consider businesses and brands that have failed (such as Pontiac and Buick). How much of their failure was due to the inability to answer such fundamental questions such as:
• How did they define success over a 3-year time frame?
• What were the key metrics used to measure success?
• What strategic choices did they make to create a sustainable advantage over their competition?
• What did they do over a 12-month period to make their plans a reality?
If you and your team can answer these questions clearly and confidently, congratulations: your odds of success for your brand just went way up. If not, I hope these questions will spur you and your team to develop your own answers with your team to build your business.
True transformation is rarely accomplished through incrementalism alone. It requires specific resources to be allocated to transformative initiatives and the real trade-off is often between how to balance between supporting the base business and investing in change.
Transformation requires more than expending 5% of current employees time on thinking about projects and initiatives to transform an organization. It requires specific people who can fully focus on understanding the benefits, costs, risks and opportunities that transformation can bring, then developing and proposing initiatives into the capital planning process or other budget processes. Then the real tradeoff that executives need to make regards determining which activities are not high priority in the base business so that the resources can be re-allocated to truly game changing initiatives.
What I have personally witnessed in many commercial organizations is that the two most difficult things they deal with in the evolution of their businesses is first to have people coming up with good ideas regarding new products and initiatives then making judicious investment decisions to ensure that they continue to innovate. The most destructive thing to many companies is overinvesting in their cash cow and not sufficiently investing in innovation causing them to grow in spurts, fall off cliffs, change personnel and start the process over again. Capital planning in infrastructure, IT, or other key parts of the business is key to maintaining this balance.
So I went onto Nutrisystem 2 weeks ago. That's the diet plan that you set up where you get your food shipped to you -- breakfast, lunch, dinner. Dan Marino says it works, so I thought I'd give it a try.
A decision that doesn't provide the desired outcome. What can lead to this?
[By Thomas Saaty]
In sports team A beats team B, team B beats team C but team C beats team A. Does team A beat team C or C beat A? An individual prefers apples to oranges and oranges to bananas, but at the store he buys more bananas than apples, does he really prefer apples absolutely to bananas or with some hesitation, and why does he buy so many bananas then? Our logic requires categorical answers of yes or no to these questions.
These examples show that things happen or are preferred with variable intensity and do not have categorical yes or no answers. What must we do to allow for such apparent contradictions to our logical cannons that would allow for circulatory reasoning as in the sports example rather than ban it from our logic? Because such events and preferences occur with varied intensities, we must use numbers to indicate how strong they are and those numbers must provide a faithful representation of what happens in the real world and not simply be examples of garbage in garbage out processing of information.
With numbers we can accumulate intensities and then it would make sense to determine how strongly one thing dominates another with respect to a certain occurrence or property. If it turns out that we can understand the world better with such a representation because it allows for circularity then we need to explore how it can be done and how much of an improvement we get from its outcome in the form of numbers as priorities than we currently get by using our linear yes-no logic to trace the outcome of influences. Meaning implies significance and significance implies priority and our outcomes would be on target to give us meaning for outcomes which may be circular. How can we do it and does it work?
To deal with the complexity of the real world and of the thinking mind, we must know the structure(s) of that complexity. We also need to know how to use judgments that express our understanding and even more, use them to measure the many intangibles side by side with the measurements of tangibles, to determine the importance of the influences that play a significant role in shaping complexity. Many people need to be involved in providing the judgments because often one person does not have the experience and adequate understanding to provide the judgments about all the factors that go into the process.
To develop a structure of the influences that shape complexity we identify the important sources and sinks of influences, whether they are from nature or from people with all the criteria that affect their intensity of occurrence. These structures take the form of a hierarchy with a goal at the top and alternative outcomes at the bottom, or a network with dependence and feedback. The object is to use experienced judgments to determine the priorities of the importance of the influences from which a best outcome or mix of outcomes is derived. It is done by synthesizing the priorities of the influences into a best final outcome, a process that would be extremely difficult to do by using words, language and deductive logic which is linear as relates one idea to one other idea sequentially and has no way to create priorities without operating on numerical judgments.
We have shown through many examples that for a complex problem, like the war in Iraq, logic does not lead to a single unique plausible outcome, nor do measurements of the number of months or years, people, soldiers, dollars, deaths and all other numbers that can be assembled, and finally nor do the opinions of a myriad people working individually or as a group tell us what the best way to solve this difficult problem is. But there is a tried and proven practical way to do it even if we have to involve the opinions of all the 6.8 billion inhabitants of this world and they may or may not use logic or all the known measurements. How?
The Analytic Hierarchy Process (AHP) and its generalization to dependence and feedback, the Analytic Network Process (ANP) provide comprehensive methods and structures for systematically improving our understanding of the gradual and finely organized influences that drive how we evaluate alternatives and make decisions. It overcomes the so called bounded rationality based on the assumption of transitivity by including in its structures and calculations, the sensitivity and depth of feelings associated with understanding and the imagination and awareness needed to address all the concerns. These processes acknowledge the inherent subjectivity in all decision making and make it explicit to the stakeholders through relative quantitative priorities.
The AHP/ANP requires that one not only follow an algorithm to put things together correctly, but even more importantly, a way to creatively construct a structure to base the algorithm on. In addition, unlike any other model in applied mathematics today, the AHP/ANP deals with intangible factors and derives measurements for them by using judgments with the participation of many people who provide the judgments individually. The AHP/ANP can combine these judgments into a single representative judgment for the group and also including the importance of the individuals themselves.
Decision making involves the following concerns:
1. Creating a structure to represent all the factors in a decision and their influences and interactions
2. Generating a set of alternatives and choosing the best one which involves:
3. Allocating resources to projects and alternatives. To do this we need to:
4. Planning. In planning we
5. Designing systems and ensuring their stability
6. Resolving conflict
7. Performing Benefits, Opportunities, Costs and Risks (BOCR) analysis
In science, measurements of factors with different ratio scales are combined by means of formulas. The formulas apply within structures and involve variables and their relations. Each scale has a zero as an origin and an arbitrary unit applied uniformly in all measurements on that scale but the meaning of the unit remains elusive and only becomes well understood through much practice. The meaning and use of the outcome of any measurement on a ratio scale must in the end be interpreted according to the judgment of an expert as to how well it meets understanding and experience for the situation in which it is being applied or how well it satisfies laws of nature that are always there. Science derives results using numbers objectively, that is, everyone gets the same numbers, but interprets their significance subjectively, that is, how well they serve individual or group goals and understanding.
In decision making, however, because of the diversity of influences with which it is concerned, and the many decisions that may arise, there are no set laws that characterize in fine detail commonly encountered structures as there are in science. Understanding and familiarity with the situation is needed to structure a problem and judgments are needed to capture importance, preference or likelihood. With the Analytic Hierarchy Process (AHP) these judgments are expressed quantitatively on an absolute scale that denotes dominance of one element over another so that a best outcome can be derived by combining and trading off different factors or attributes. In the end after applying the AHP rules of composition a multidimensional scaling problem is reduced to a one-dimensional scale of priorities that are relative sets of numbers which belong to an absolute scale. So in the AHP significance is interpreted subjectively at the beginning of the process through judgments and priority numbers are derived from them objectively, that is, everyone would derive the same results from those judgments.
Priority scales are similar to probabilities; they are not the same as the ratio scales used in science. Ratio scales are like yardsticks. They have a starting point (a zero) and a unit. Priority scales do not. By the term “relative” we mean a priority scale is specially derived for a situation with its factors and alternatives and it is applicable only to that situation. It is not good for all situations and all time; when the situation changes the priorities may change. The ratios of AHP priorities are meaningful: for example, a priority of .50 is twice a priority of .25. In decision making the priority scales are derived objectively after subjective judgments are made, and they reflect the importance of the influences we considered. The process is the opposite of what we do in science when the subjectivity of interpreting what the final number means comes at the end. Of course there has to be validation of the decision process through many examples that show it works to make it a science based on reason, quantity and mathematics.
Finally, in science measurement is applied uniformly using the arbitrary unit from the very small to the very large. This cannot be done for all elements using judgment in decision making. Judgment can only be applied meaningfully to homogeneous groups of elements and when they are not they must be put into different clusters with a common pivot element from one cluster to the next to make it possible to compare them in each cluster and then combine their measurement according to increasing order of magnitude. In science there is no way to compare the significance of very small numbers with very large numbers in a systematic and meaningful way except by speaking of orders of magnitude. The meaning of the unit does not change from one order of magnitude to another, thus leaving interpretation in science subjective and loose.
In another blog we look forward to bringing the two together: science and mathematics with their Cartesian axes and decision making with its priorities that occur in relative form.
[by Dr. Thomas Saaty]
The AHP (Analytic Hierarchy Process) and ANP (Analytic Network Process) methodologies take into consideration all of the factors that are difficult for other methodologies to take into consideration in a sufficiently refined way based on an accurate and valid representation of the intensities of judgments.
How can we learn to consciously deal with influence? We need to accept the following observations:
1) A person is a nervous system equipped with senses, muscle and bone to control the environment; the nervous system develops judgments;
2) The influences as described by judgments and synthesized in the mind are describable by a “hypermatrix” the interactions of whose submatrices are derivable from raising it to powers;
3) Theoretically, people interact by combining certain priorities in their hypermatrices raising the result to powers and then comparing to determine agreement and differences;
4) All things in nature are order seeking in some internally determined sense.
The most pervasive idea that all living things share is that of making choices for action in the face of different kinds of influence. This action is our way of controlling and responding to influences with the kind of influence that we prefer according to our purpose. Sometimes biology and chemistry have a unique choice built-in which may be unfavorable to the circumstances. At other times there is an opportunity to try different choices.
The most important case is when the choices are several and we have to choose one from them that is best according to some criteria. This freedom of choice shows that a human being is an advanced form of existence with an ability to consciously control its survival and destiny. But still we are limited in what we can sense and perceive and thus our choices are conditional by our body form and by our senses and environment in which we live. Next to chemistry, physics and electricity that create form and function, decision-making is the most important function that arises from them to further the future of life. The essence of our survival depends on the quality and kind of decisions we make and how much we factor into them influences that may not be here today, but could occur tomorrow to change their significance.
In marketing decisions, people sometimes ask what the differences are between the Analytic Hierarchy Process and Conjoint Analysis. Most of the confusion seems to come from the fact that in each process there are pairwise comparisons. But that's really where the similarity ends. (this content courtesy of Dr. Jerry Wind at Wharton).
Conjoint is the best approach (short of real market experiments) to get consumers to make tradeoffs among the features or benefits of a set of alternative choices, i.e. products. Its major advantages are that it allows in a relatively short interview (typically about 20 -30 minutes) to get enough information on consumers trade offs and, using hybrid conjoint analysis, one can analyze the data and develop three outputs:
a. the relative importance of each feature/benefit
b. the optimal offering
c. through simulators, an answer to what will happen if we change any of the features
Conjoint is especially valuable when presenting the consumer with real products (developed based on a master experimental design). Conjoint is often used to establish price elasticity., segment markets, decide on positioning and design optimal product and service offerings. It has also been used to evaluate different advertising and promotion offerings and distribution channels.
In short it is one of the best consumer research techniques with thousands of application and articles.
The results of conjoint analysis can be very helpful INPUT to managers who use the AHP taking the consumer input and other considerations in determining their optimal strategy.
For example even if I have info on price elasticity from a conjoint analysis study I can use this as a guide to a pricing decision and will be better off including the consumer input as one of the inputs to management deliberations.
Another major difference is that the strength of the AHP is in group decision making (conjoint can not do it)
The major benefits for AHP is the process that allows management to articulate assumptions, structure their decision process, focus on both the short and long term via key scenarios, bring all relevant information (including results of conjoint studies) into the discussion, conduct sensitivity analysis, and get a buy in by all the managers involved.
Conjoint can not do any of these nor is it designed to do it (this is where Jerry's portion of this blog ends).
For example, if you are trying to decide on the best marketing program mix to achieve a specific marketing strategy, you might be considering programs in video, events, Internet, and print. Conjoint has no criteria – just alternatives that you are comparing. You could use it to ask consumers which among a specific set of print campaigns they might prefer (although you won’t have the degree of preference and you won’t have any measure of consistency about that preference), but it doesn’t allow you to compare those alternatives to a set of strategic objectives or tell you how well would very different types of alternatives in different areas would compare, i.e. how a video campaign would deliver to the strategy vs how an event delivers to that strategy vs an Internet program vs. a print campaign, because the features of each of these alternatives are so dramatically different. Aligning the marketing or product mix with the strategy, developing the relative priorities, and allocating resources are not possible in conjoint.
The AHP is a prioritization and resource allocation approach much more fitting to marketing executives who need to align a host of often very different marketing program alternatives to a business strategy. It enables you to generate innovative marketing mix strategies, evaluate the various strategies, and reach consensus among conflicting interests (group enabled). Specific uses include:
- determining the desired target product portfolio and allocation of resources among the components of the portfolio
- determining the desired directions for new product development or introductions (McNeil case)
- generating and evaluating marketing mix strategies
Because AHP uses “ratio scales”, comparing the importance of one criterion against each other criterion, it enables executives to compare and assess the relative importance of very tangible objectives such as “sales growth” with more intangible objectives such as “building brand loyalty”. This is literally a comparison of apples and oranges that everyone thinks cannot be done. AHP is the only approach that can do this because of the ratio-scale pairwise comparison process.
Finally, when you get to the evaluation of the marketing alternatives against those strategic objectives, AHP enables the marketing execs to then compare very different types of alternatives and assess how much each alternative will deliver towards the strategic objectives. Specifically, you can evaluate how a given “Internet marketing” program delivers to a strategic objective vs a print campaign or an event. The Internet marketing program might contribute to the “sales growth” objective very well, but not do much at all towards “building brand loyalty”, whereas an event might deliver much more effectively to “building brand loyalty” but fall short on measureable “sales growth”. The outcome of the AHP process is the prioritized list of all of the alternatives and how much they contribute to the strategy in an exact, structured and quantified way. i.e. the best marketing program has a priority of .96 while the worst is a .07. This tells you that you should be willing to invest 14X as much in the top program compared to the bottom, and enables you to focus on a very innovative marketing mix. The priority of the alternatives then provides a platform to allocate $$ for budgeting to the campaigns that will deliver the most value for the business. You are maximizing the investment towards your strategy, and thus the value delivered from that investment. Very different than conjoint, you know with AHP and Decision Lens exactly how much bang for the buck each marketing program is delivering for you against the strategy.
