There are many models for decision-making processes. They vary in complexity, in degree of formality, and in application. Some decision-making processes are quite simple and may entail little more than satisfying some capricious condition. An example would be one deciding to make an impulse buy on some designer jeans because one might want to look like a rock star and the jeans satisfy that condition. Unfortunately, such rudimentary models are not adequate for practical applications in the more critical conditions that one might find in the business world. Under such critical conditions it is necessary to employ more elaborate models that take into account the risks, the consequences and benefits, and the cost of making a decision. It may also be necessary for the models to serve as learning tools that allow for the development of the overall decision-making process through time.
In this paper we will briefly discuss five formalized decision-making models: Cost / Benefit Analysis, Decision Trees, "Triage", Paired Comparison Analysis, and Grid Analysis. We will present a real-world business scenario where the decision making process is critical for success. Through the course of the scenario we will introduce each of the models and demonstrate their application. We will close with a brief discussion on how the applications serve as learning tools for subsequent decision-making efforts and with a listing of complementary or alternative models.
Most, if not all, modern business environments have an information technology (IT) component that is critical to its ongoing success. Businesses use information systems to drive key strategic business decisions, to manage the supply chain and optimize production, to develop business intelligence, and to streamline operational business processes among many other things. Information technologies are also quite expensive in terms of human resources, time, and ultimately dollars. As a result IT decisions are evaluated carefully and with great scrutiny. It is therefore essential to employ intelligent and effective decision-making processes to ensure success in these areas and in the business in general.
The author’s employer (company) recently completed the process of making a very critical IT decision: to upgrade, replace, or customize its Enterprise Resource Planning (ERP) system. The outcome of this decision will have far reaching implications that will affect operations on a global scale and it will have a significant cost impact. The first phase in this decision-making process was to determine whether or not the possible benefits would outweigh the possible costs. A Cost / Benefit Analysis was used for this. Cost / Benefit Analysis is used determine a ratio of cost to benefit for the outcome of a particular decision (Mind Tools, 2004). The company, in this case, had some estimates from its own past efforts as well as from other companies of similar size and industry. The ratio in all cases indicated that the benefits would far outweigh the costs. Having a good body of nascent information also helped to bolster the confidence in the decision to move forward with the project.
The second phase of the process was to determine which direction to take the project. Should the system be replaced completely, upgraded to the latest version, or customized to meet current needs. A Decision Tree was used to steer this decision. Decision trees are good for laying out options and outcomes in a structured format. They provide a "balanced picture of the risks and rewards associated with each possible course of action" (Mind Tools, 2004). In this particular situation, the decision to replace or upgrade was easy because the current version of the system was going to no longer be supported by the vendor. That outcome was simply unacceptable and therefore left only two possible paths: replace or upgrade.
To determine whether to upgrade or replace the ERP system with another product a number of other models were used. The "Triage" approach presented by McGuff and Kador (1999, p. 235) was used to decide what the requirements of the next ERP system would be. The Triage approach involves taking an inventory of all the conditions or constraints that are required to reach some level of success in the outcome. Elements that absolutely must be in place to consider the outcome a success are categorized as "Critical." Those elements that ought to be in place to achieve a higher degree of success are categorized as "Conditional." The elements that are considered "nice to have" are categorized as "Casual." The technique of Paired Comparison Analysis was then used to rank the elements within their respective categories. Paired Comparison Analysis involves matching each element side by side and then determining which one takes priority and by what margin (Mind Tools, 2004). Through exhaustive pairing, a definitive rank ordering can be determined. The elements and their rankings were then used in a Grid Analysis to determine which product would be the most suitable. Grid Analysis is used to evaluate a number of alternative solutions when there are many factors involved (Mind Tools, 2004). A grid is used to represent the factors involved, the weight of those factors, and the solutions. The solutions are scored with respect to how well they accommodate the factors and the weights are applied to those scores. The weighted scores are summed up and compared with the highest score winning. In this case, the upgrade option won on the Grid Analysis. The company is now well under way down the upgrade path with due confidence in its decision.
This particular decision was quite significant, but the methods used to reach it were based on similar decisions that had been made in the past using a relatively simple set of decision making models or tools. The Cost / Benefit Analyses from the previous ERP implementation and those provided through consultation were instrumental in moving the process forward. Other smaller projects that were successful presented other decision-making artifacts that were useful as well. The Grid Analysis model has been used formally on many of these projects and has proved to be effective as well as easy to use in subsequent efforts. Its effectiveness and ease of use has been instrumental in helping other groups to formalize and improve their decision making processes as well.
There are countless models of decision-making. Plus / Minus / Implications (PMI), Pareto Analysis, Force Field Analysis, and Edward de Bono’s "6 Thinking Hats" are few other popular models that were not mentioned in this discussion, but may be worth investigating (Mind Tools, 2004). None of these models or the ones discussed would be necessary when figuring out whether to wear pinstripes or solids or whether to buy a soft taco instead of a hard taco. They are, however, well suited for making big decisions that involve significant implications. Exercising their use helps to quicken decision-making reflexes and bolsters confidence in the decisions that are made. The artifacts that result from applying the various models can also be used to drive more informed decisions in the future or to measure the effectiveness of the decision making process itself. The end result is increased success through improved decision making.
References
McGuff, Francis., & Kador, John. (1999) Developing Analytical Database Applications. New Jersey: Prentice Hall PTR.
Mind Tools. (2004). Techniques for Effective Decision Making. Retrieved May 04, 2004, from http://www.mindtools.com/pages/main/newMN_TED.htm