1. CHAPTER 7, DECISION CRITERIA
and SCOPING THE OPTIONS
From the problem solving model, figure 7.1,
we have moved the highlight to “criteria
and alternatives”.
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2. Figure 7.1, the problem solving
model.
PROBLEM STATEMENT
PROBLEM STATEMENT
CRITERIA
CRITERIA
ALTERNATIVES
ALTERNATIVES
NON-FINANCIAL ANALYSIS
NON-FINANCIAL ANALYSIS FINANCIAL ANALYSIS
FINANCIAL ANALYSIS
MAKE A CHOICE
MAKE A CHOICE
IMPLEMENTATION PLAN &
IMPLEMENTATION PLAN &
FOLLOW UP
FOLLOW UP
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3. ESTABLISHING DECISION
CRITERIA
• A decision criterion is a “driver” for choosing between
alternative courses of action to solve a problem or take
advantage of an opportunity.
• The five Total Impact accounts represent the broad
framework for a set of decision criteria
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4. Financial Efficiency and
Effectiveness
• This criteria documents the "cash-flow"
impacts on the organization and
stakeholder groups resulting from project
alternatives
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5. Figure 7.2, the Financial Criteria
• Sub Criteria • Measurement Concept
Financial returns to • Return on Equity, Return on Assets, Profit margin etc. These
stockholders are aggregate, or high level measures of financial success.
• Productivity improvements such as reduced processing costs,
Operating cost savings (materials and labour) sickness injury and absence,
maintenance costs and support/overhead costs.
• The sale of existing assets. (buildings, land). These benefits
Salvage value of equipment flow at the end of the life cycle of the project.
Reduced acquisition costs • Lower costs of acquiring capacity through asset purchases.
These benefit refer to being able to improve capacity through
of assets, goods or the purchase of more efficient capital assets that cost less to
services buy relative to the capacity achieved.
• Workspace savings, (reduced office space) increased
equipment utilization, (more capacity from existing
Asset value savings machines) and asset life extensions, (prolonging the service
life of producing assets.
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6. Social and Stakeholder Criteria.
• The remaining criteria have financial impacts that are not
internal to the organization. The financial impacts are felt
by stakeholder groups
– If two alternatives are identical in terms of financial costs and
benefits, then the alternative that best suits the social system
should be chosen out of a sense of social responsibility.
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7. Sustainability of the Economic
Environment
– Organizations are recognizing that the economic
system is a network of partnerships, … it is necessary
for all organizations to prosper in order for the
economic system to flourish.
– Organizations create jobs that stimulate the economy,
and they create spin off businesses that support the
organization. These benefits can be measured as
follows:
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8. Figure 7.3, the Sustainability Criteria
Sub Criteria Measurement Concept
• The primary quantified measure for economic
development is the number of person-years of
employment that is created and its duration.
• Provide estimates of the number or percentage of
NEW EMPLOYMENT
currently unemployed persons who will find
BENEFITS employment as a result of the project, particularly
regionally.
• Indicate what types of employment will be created,
for example high versus low skill.
• Identify the new business created by your initiative,
specifically business that did not exist in the region
ECONOMIC ACTIVITY
before our project was in place. The primary
BENEFITS benefit of stimulated business is the increase in in
the flow of funds in the economic system.
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9. Stewardship of the Natural
Environment
– The environmental criteria documents a wide
range of potential impacts that project
alternatives could have on the natural
environment.
– The end result of effective environmental
management is to cause an improvement in:
• Wildlife health
• Aquatic health
• Vegetation health
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10. Figure 7.4 The environmental Criteria
Sub Criteria Measurement Concept
Air emissions • Parts per million of airborne contaminants
Water emissions • Parts per million of waterborne contaminants
Contaminated soil • Parts per million of solid contaminants
• Quantity and proportion of recycled
Recycled materials materials to other forms of waste
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11. Safety of Employees and the
Public (Social Impacts)
• The “Safe Keeping” of the quality of our
lives therefore means that projects must be
analyzed in terms of their impact on a
broad range of social safety issues.
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12. Figure 7.5, The Social Impact Criteria
Sub Criteria Measurement Concept
• Usually measured with a public opinion survey that captures
• Aesthetics
the perception of stakeholders regarding the value they place
• Areas of cultural, on having the issues present in their social environment.
historical or • Most frequently the measures centre around crime reduction,
archaeological access to community services like schools and hospitals, the
significance quality of the transportation system, access to day care and
• Quality of life seniors homes.
• While it is the job of government to manage these things, it is
• Equitable treatment of the the job of organizations in the system to support and finance
public these things.
• Count the change in the number of users of recreation
facilities and other services. The assumption is that increased
• Recreation recreation improves health which reduces health care costs.
Among youth, increased recreation reduces youth crime and
the related victim costs.
• Public and worker safety • Accident rates both on the job and in the community at large
• The organization being a • Employee turnover, absenteeism, and other morale and
progressive employer employment equity measures.
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13. Customer Service Impacts
• The ultimate measure of customer
satisfaction can be found on the income
statement. If they are not satisfied, they
will not buy from you!
• Who is the customer? The customer is the
one who transfers cash from their account
to yours.
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14. Figure 7.6, the Customer Service Criteria
• Sub Criteria • Measurement Concept
• Customer satisfaction survey
• Quality of products or
• Number of repeat customers
services • % Market share
• Either positive or negative cash-flow implications on
• Cash-flow implications customers in the form of prices and costs that are incurred
through their usage of your products or services
• Market or one-time
• Cost or benefit impacts on real estate values or other
impacts to customers' assets owned by the customer
land or property
• Changes to the quality of • Measures of attitude, friendliness, responsiveness, and
non-core service professionalism as collected in a customer opinion survey
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15. Risk, often the most powerful
criteria
• Risk is loosely defined as ‘the likelihood that a consequence that you don’t
want, will happen to you.’
• A comprehensive analysis of the risks in a project will improve the decision
process, and increase the likelihood that the optimal solution will be realized.
• First we will deal with the risks of assumptions made in analyzing
alternatives.
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16. Dealing with risks in the
analysis phase
• Some of the risks that should be considered are:
– timing of the project/cash flow sequence,
– project completion risk,
– assumption error,
– estimate error,
– obsolescence,
– risks related to operational efficiency, maintenance frequency and system
reliability.
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17. Dealing with risks in the
analysis phase
• Analyzing alternatives should address
issues such as these:
• What are the risks and where is the major uncertainty in the
project?
• How sensitive is the expected benefit/cost ratio or net present
value to a change in assumption for important variables such as
in‑ service date, projected benefits or costs?
• How much of the project cost would be lost if something major
went wrong?
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18. Dealing with risks from a total
project view
• The procedure for a risk analysis is to take
every single event and assumption in the
project and ask the following questions:
• What could go wrong?
• What could go more right than expected? (too much success is
risky)
• What is the likelihood of this event occurring?
• How will the effect be felt?
• What can be done to mitigate the effect?
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19. Dealing with risks from a total
project view
• What system will I use to tell me when the risk event has occurred?
• What is the earliest possible time I can notice that things are not going as
planned?
• What corrective action needs to be taken after the event has occurred?
• What risks are associated with staying with the status quo or the do
nothing alternative?
• Am I comfortable enough with the probability and cost of risk to allow
the project to proceed?
– There are two views of risk analysis, a micro view that deals with
project specific risk and a macro view that deals with risks coming
from the environment.
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20. The Micro View of Risks
• Project specific risks are those risks
associated with project events such as:
• technical fit with existing systems
• projected costs and benefits
• supplier delivery and quality control
• meeting the installation timeline
– Project specific risks are generally regarded as
predictable and controllable by managers.
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21. The Macro View of Risks
• The macro view deals with environmental
risks that are outside of the project scope.
• technical obsolescence
• economic forces, (recession and inflation)
• legislative changes in areas such as environmental compliance and
human rights
• population growth and preferences
– These risks might be predictable but are
largely uncontrollable by the manager.
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22. The Macro View of Risks
• While these events are largely uncontrollable, a manager can
still mitigate the effect of the risk by developing a system that
enables early recognition of the event and having an action
plan in place to deal with the consequences.
– Builders insurance, performance bonds etc
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23. Using Criteria to Rank
Alternatives
• At this point you should have several criteria to use
to assist in the selection of the best solution to a
problem. The criteria define the dimensions of the
analysis that alternatives will be subjected to.
• You will also find that criteria need to be weighted
as to their relative significance in the decision
process
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24. Using Criteria to Rank
Alternatives
• The same logic holds in business decisions. Before
you go shopping for alternative solutions to a
problem, rank your criteria in descending order of
importance, and put values on how the criteria will
be measured, either in financial or non-financial
terms.
– The “show stopper” is a single criteria that if
un-met, will cause all alternatives to fail.
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25. IDENTIFYING
ALTERNATIVES
• Identifying alternative courses of action
involves the following steps:
• Use the problem statement
• Use the decision criteria
• Search for a limited number of alternatives.
• Put a boundary on the scope
• Don’t be afraid to challenge or shift existing rules,
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26. IDENTIFYING
ALTERNATIVES
• All problem situations have a variety of
alternative approaches:
• (Abandonment) Eliminate the problem by
abandoning the process that is the cause.
• (Redevelop) Eliminate the problem by employing
a new process or changing an old process.
• (Rehabilitate) Eliminate the problem by replacing
the process with a similar process.
• (Do nothing) Stay with the status quo.
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27. IDENTIFYING
ALTERNATIVES
• In general, a well scoped list of options will
facilitate a logical and well balanced analysis of
the possible solutions to a problem.
• Once we are satisfied that the complete set of
logical solutions has been found it’s time to match
the alternatives to the criteria and put the
alternatives in order of attractiveness.
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28. Chapter summary
• This chapter was about building a framework for
making a decision.
• The foundation of the framework is the set of
decision criteria which will be applied to a set of
reasonable alternatives which might solve the
problem/opportunity.
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29. Chapter Summary
– There are two critical learning’s from this chapter.
• care must be taken to ensure that the set of criteria are
complete and that the criteria have measures so that
alternatives can be ranked.
• The scoping of alternatives must be broad enough to contain
the best possible solution.
– Problem solving can be easy if you do it wrong, but
you won’t be finding the best solution!
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30. Closing remarks
• We are almost ready to make a choice, except for
one major element. Financial evaluation.
• The financial evaluation is often the most complex
part of decision analysis. That’s why it is deserving
of a chapter of its own.
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