1. Decision Making: Fundamentals and Systems Michael A. Mazzocco AAPEX February, 2011 Mazzocco - DRAFT

2. Overview Two - 1:15 minute sessions Part 1. Analyzing and Making Decisions – Some Fundamentals Part Deux. Organizing for Effective Decisions

3. My Observations Seeds of motivation Can’t possibly cover all aspects in part of an afternoon What drove me to call Danny about decisions

4. My Observations 1.Decisions often made prior to analysis [ fire, aim, ready ? ] Very popular in simplistic LEEDERship culture. “vision” “purpose” What drove me to call Danny about decisions

5. My Observations 1.Decisions often made prior to analysis – Analyze this so I don’t look stupid … – This is what I want to do, What are the holes in my argument and how do I fix them? – This is what I want to do, How bad can certain parts get (price, yield, expenses) AND I‘m still OK? What drove me to call Danny about decisions

6. My Observations 2.Analysis of decisions frequently uses wrong information – Incorporating extraneous considerations – Overlooking critical factors 3.Decision criteria not specified 4.Inaccurate data – That California plant – cost per lb. – Complete cost? – Raw or finished? What drove me to call Danny about decisions

7. Make A Decision Description What is the purpose of the analysis ? What is the desired outcome of the analysis ? – Comfort? – Value? Magnitude? – Support? – Understanding? – A choice among alternatives? What are you trying to decide?

8. Make A Decision Description What are you trying to accomplish? – Change? Size? Revenue Throughput Costs (Inventory? Operating Expenses?) – Sustained Operations? Employee retention? peas:carrots land allocation? – Asset Service? Rent, lease; size; new, used? – Risk reduction? – Say it out loud … What are you trying to decide?

9. Decision Focus and Criteria Strategic Direction? Dispense and move on? Color of carpet in the board room … ? Short to Mid range operating profit plan? – Inputs/production methods (twin row? Early wean?) – Output choice (corn:beans:cotton) – Input/output (fertilize the pastures?) What are you trying to decide?

10. Criteria dictates appropriate tool When in doubt, look it up or ask ! Example: Partial budget – “Make A Business Case for your idea.” – Include only CHANGES – items that will change by implementing change

11. Partial Budget Layout Annual Revenues and Expenses Positive ImpactsNegative Impacts Increased RevenuesDecreased Revenues -- $$ Decreased CostsIncreased Costs -- $$ Total Positive ImpactsTotal Negative Impacts Net Impact Could be lots of detail and many rows

12. Cognitive Interference Escalating Commitment (M&A examples) Measuring Others’ Pain (M&A examples) Cognitive Bias and Framing In-session example Many Categories. Here are a few.

13. Decision Making Incorporating Risk How many cattle to feed? Weather affects cost and availability of feed. Make a payoff matrix Feed Production Probability LowFairGoodHighExpected 0.100.250.350.30Value AlternativeOutcome 8,000$150,000$170,000$180,000$200,000$180,500 10,000$0$120,000$220,000$270,000$188,000 12,000($100,000)$0$250,000$350,000$182,500 TWELVE budgets [forecasts] [scenarios] [ ] Four possible [weather] outcomes WHICH ROW OF OUTCOMES WILL YOU SELECT ? What is decision criteria ?

14. Decision Making Incorporating risk How many cattle to feed? Weather affects cost and availability of feed. Make a payoff matrix WHICH ROW OF OUTCOMES WILL YOU SELECT ? What is decision criteria ? Highest Expected Value? What is expected value of a coin flip? How many “pulls of the lever” do you get? Feed Production Probability LowFairGoodHighExpected 0.100.250.350.30Value AlternativeOutcome 8,000$150,000$170,000$180,000$200,000$180,500 10,000$0$120,000$220,000$270,000$188,000 12,000($100,000)$0$250,000$350,000$182,500

15. Decision Making Incorporating risk How many cattle to feed? Weather affects cost and availability of feed. Make a payoff matrix WHICH ROW OF OUTCOMES WILL YOU SELECT ? What is decision criteria ? Can you afford no income? Negative income? Feed Production Probability LowFairGoodHighExpected 0.100.250.350.30Value AlternativeOutcome 8,000$150,000$170,000$180,000$200,000$180,500 10,000$0$120,000$220,000$270,000$188,000 12,000($100,000)$0$250,000$350,000$182,500

16. Decision Making Incorporating risk How many cattle to feed? Weather affects cost and availability of feed. Make a payoff matrix WHICH ROW OF OUTCOMES WILL YOU SELECT ? What is decision criteria ? Can you afford to chance high income? Feed Production Probability LowFairGoodHighExpected 0.100.250.350.30Value AlternativeOutcome 8,000$150,000$170,000$180,000$200,000$180,500 10,000$0$120,000$220,000$270,000$188,000 12,000($100,000)$0$250,000$350,000$182,500

17. Decision Making Incorporating risk How many cattle to feed? Weather affects cost and availability of feed. Make a payoff matrix WHICH ROW OF OUTCOMES WILL YOU SELECT ? What is decision criteria ? Or do you need a minimum income level? Feed Production Probability LowFairGoodHighExpected 0.100.250.350.30Value AlternativeOutcome 8,000$150,000$170,000$180,000$200,000$180,500 10,000$0$120,000$220,000$270,000$188,000 12,000($100,000)$0$250,000$350,000$182,500

18. Decision Making Incorporating risk How many cattle to feed? Weather affects cost and availability of feed. Make a payoff matrix Feed Production Probability LowFairGoodHighExpected 0.100.250.350.30Value AlternativeOutcome 8,000$150,000$170,000$180,000$200,000$180,500 10,000$0$120,000$220,000$270,000$188,000 12,000($100,000)$0$250,000$350,000$182,500 All three choices are correct, depending upon your decision criteria !

19. Part II. Effective Decision Organizations Experience of many pathologies “Don’t do anything until I tell you what to do next.” Bottleneck of all decisions going through one point. Failure to have a timeline – “Let’s schedule a follow up.” Criteria uncertain Critical decisions at wrong place Bad execution Improve Performance (Bain)

20. Symptoms of Bad Decision Structure Take too long Made by wrong people, wrong part of organization with wrong information Turn out badly / Not made well. Re-debated, Re-examined. Bad execution Pain of inconsistency Improve Performance (Bain)

21. Decision Effectiveness 1.Quality – Right decisions. Right approach. 2.Speed – Relative, not absolute. 3.Yield – Turning decisions into action. 4.Effort – The appropriate amount. – Drag on 3 above if too much or too little. Measures of organizational decision making (Bain)

22. Decision Effectiveness 1.What? – decisions need to be made and executed? 2.Who? – will play key roles? Maker Recommender Information gatherer 3.How? – will the decision be made and executed? Criteria Analytical technique 4.When? – will the decision be made and executed? Timeline Structuring decisions for impact (Bain)

23. What? 1.Critical decisions Large value at stake Made / re-made frequently, adding up to large value 2.Clarity Frame Unbundling Structuring decisions for impact (Bain)

24. Who? 1.RAPID Recommend – the analyst Agree – Who is “signing off” on recommendation? » Agreeers are not necessarily the decision maker. Perform – Who will implement and execute? Input – Judgment and information providers Decide – One person 2.Actually, order is: R – I – A – D - P Structuring decisions for impact (Bain)

25. How? Structured Decision Approach Agreement on criteria and technique – Impacts Effort, Quality, and Speed All the relevant facts More than one REAL alternative – Kissinger example: Three concocted alternatives. 1.Outcome is Surrender to Soviets 2.Outcome is Thermonuclear War 3.Outcome is … What the team wanted to do all along Establish steps and sequence Decision is NOT the same as discussion of choices Structuring decisions for impact (Bain)

26. When? Be Explicit Clear, specific timetable Impacts yield, speed Structuring decisions for impact (Bain)

27. Organizational Plumbing and Wiring Common vocabulary – What is “margin?” Location of decisions: – Not all the same – Wayne Beck: “empowered.” Understanding roles; Using appropriate resources Capturing input and analyses Structuring decisions for impact (Bain)

28. What Else? Questions? Comments?

29. Contact Information Mike Mazzocco mmazzocco@verdantpartners.com http://www.verdantpartners.com/consult.php Phone: +1 (217) 359-8470 x8817 Fax: +1 (217) 359-8870 2504 Galen Drive, Suite 103 Champaign, IL 61821-7048 USA References