Let’s make this qualitative

Let’s Make This Qualitative

Quantitative Business Decision Making for the Qualitative Minded

Mike Desilets, MBA

If you had to choose, which one would you pick?

Qualitative Quantitative

Average Σn=1

N

Xn

N

PSST! They are the same!

Should you continue?

Average Σn=1

N

Xn

N

YES!!! You are free to go…

We all make decisions everyday.

TUNA-OR-

HAM?

Pick which one you want more.

TUNA: A LOTHAM: NOT REALLY

Can we quantify this?

THINK OF A SURVEY1 2 3 4 5

Not really A Lot

On a scale of 1 to 5, how much do you want tuna?

1 2 3 4 5

Not really A Lot

On a scale of 1 to 5, how much do you want ham?

How did we come to a conclusion?

5 > 1

Ham

Tuna

How do we extend this to multiple criteria?

ONLY CRITERIA BEFORE WAS:

“HOW MUCH DO IWANT THIS?”

You’ve been made 3 job offers in each of the following cities:◦ Denver◦ San Francisco◦ Boston

You decide that the most important factors to consider where to move are (in order)◦ Weather (given the fact you aren’t a skier)◦ Salary◦ City’s cultural and historical value◦ Proximity to your family (who are in Denver)

Task: Use a quantitative decision matrix to help

Example

Step 1) Define the criteria

1) WEATHER2) SALARY3) CITY CULTURE4) PROXIMITY TO FAMILY

You’ve already done that!

Decide importance of each criteria

FAMILY : NEUTRALWEATHER : VERY

IMPORTANTSALARY : IMPORTANTCITY CULTURE :

IMPORTANT

You’ve already done that, too!But, let’s rate them like a survey.

1 2 3 4 5

Not Important

VeryImportant

Neutral

Options Family Weather Salary City

Denver Very Good Neutral Good Neutral

San Fran Good Very Good Neutral Very Good

Boston Bad Bad Very Good Very Good

Rank the options

Rate each city (option)

against each criteria

1 2 3 4 5

Very Bad Very GoodNeutral GoodBad

Quantify – Part 1

UPDATE THE TABLE WITH NUMBERS

Family: 3 Weather: 5 Salary: 4 City: 4

Denver Very Good: 5

Neutral: 3 Good: 4 Neutral: 3

San Fran Good: 4 Very Good: 5

Neutral: 3 Very Good: 5

Boston Bad: 2 Bad: 2 Very Good: 5

Very Good: 5

Add numbers

Quantify – Part 2MULTIPLY CRITERIA

AND OPTION RANKINGSFamily: 3 Weather: 5 Salary: 4 City: 4

Denver Very Good: 5 (15)

Neutral: 3(15)

Good: 4(16)

Neutral: 3(12)

San Fran Good: 4(12)

Very Good: 5(25)

Neutral: 3(12)

Very Good: 5(20)

Boston Bad: 2(6)

Bad: 2(10)

Very Good: 5(20)

Very Good: 5(20)

“Salary” @ 4

Times“Very Good” @ 5

Equals 20

Quantify – Part 3ADD VALUES TO DETERMINE

RAW SCORESFamily: 3 Weather:

5Salary: 4 City: 4 3+5+4+4=16

Denver Very Good: 5 (15)

Neutral: 3(15)

Good: 4(16)

Neutral: 3(12)

15+15+16+12 =58

San Fran Good: 4(12)

Very Good: 5(25)

Neutral: 3(12)

Very Good: 5(20)

12+25+12+20=69

Boston Bad: 2(6)

Bad: 2(10)

Very Good: 5(20)

Very Good: 5(20)

6+10+20+20=56

Family 12 + Weather 25 + Salary 12 + City 20 = 69

Evaluate – but what does it mean?

LARGEST ONE IS CHOICE

RIGHT?

Raw Score

Denver 58

San Fran 69

Boston 56

Quantify – Part 4BRING RAW VALUES

ONTO THE RANKING SCALERaw Score 58 divided by criteria sum 16Equals 3.625

Raw Score

Ranking

Denver 58 58/16 = 3.265

San Fran 69 69/16 = 4.3125

Boston 56 56/16 = 3.5

Evaluate – and understand

Raw Score

Final Score

Denver 58 3.625

San Fran 69 4.3125

Boston 56 3.5

Boston (3.5)

Denver (3.625)

San Fran(4.3125)

1 2 3 4 5

Very Bad Very GoodNeutral GoodBad

Evaluating was “easy”

BOSTON < DENVER < SAN FRAN

What about when there is only one choice (yes/no, up/down, etc)?

DO I GO AHEAD WITHTHIS R&D PROJECT?

IF YES, WHAT IS MY STRATEGY?

Go/No-Go: Answer 1RANK THE OPTION LIKE BEFORE

AND CHOOSE A VALUE THATIS YOUR THRESHOLD BETWEEN

YES AND NO.

FOR EXAMPLE, A SCORE OVER 4.5MEANS “GO”

PROS: EASY, CONCRETECONS: WHAT DOES IT MEAN?

Go/No-Go: Answer 2USE NPV, IRR, OR SOME OTHER

QUANTITATIVE METHOD

PROS: EASY TO DO IN EXCEL

CONS: ARE YOUR EXPENSES RIGHT?ARE YOUR YEARLY REVENUES RIGHT?

IS YOUR DISCOUNT RATE RIGHT?DOESN’T EVALUATE ABILITY TO

EXECUTE.DOESN’T INCORPORATE RISK.

Best answer

VISUALIZE THE ANSWER AND MAKE A QUALITATIVE

DECISION BASED ON SIMPLE RATINGS OF CASH

FLOWS, RISK, MARKET, ABILITY TO EXECUTE, ETC?

Solution

GE/MCKINSEYNINEBOX

MATRIX

Evaluates Decisions on 2 Criteria

MARKET ATTRACTIVENESS&

BUSINESS STRENGTH

Rates each against multiple criteria

Market Attractiveness Business Strength

Overall Market Size Growth Rate Profit Margins Competitive Intensity Technology Requirements Inflationary Vulnerability Energy Requirements Environmental Impact Social/Political/Legal

Market Share Share Growth Product Quality Brand Reputation Distribution Network Promotional Effectiveness Productive Capacity Productive Efficiency Unit Costs Material Supplies R&D Performance Management

Decide importance of each criteria

Importance to Evaluation

Overall Ranking

Very High: 5 High: 4 Neutral : 3 Low : 2 Very Low : 1 Not at all : 0

Very Positive : 5 Positive : 4 Neutral : 3 Negative : 2 Very Negative : 1

We can easily eliminate some options from the evaluation by rating something as “not important at all”

Market

Attractiveness

Business Strength

Project #1

Determine each score and plot

Project #1

INVEST TO BUILD

BUSINESSSTRENGTH

IN THISATTRACTIVE

MARKET

What would you do?

MAYBE NOT!

HOW CAN WE DO BETTER?

CHOOSE A NEW MARKET?

ALWAYS TRY TO FIND A WAY TO MOVE UP AND

LEFT

Do you give up here?

Project #2

Project #1

Porter’s 5 Forces to the market attractiveness

PESTLE Analysis to market attractiveness

Porter’s Value Chain to business strength

Day’s Risk Matrix to business strength

VRIO Model assessment of competitive advantages to business strength

AND MORE!!!

Why stop there? We can add…

Bottom line (no – not profit)

MORE INFORMATION =

A MORE REALISTIC MODEL

Your model is only as good as the inputs

A canned model is never right. It…◦ Reminds you what to look for◦ Shows you which way you might want to go

The GE/McKinsey Matrix can be used to view multiple projects and compare them.◦ Use market size to add value (larger market

means larger plot marker)

Caveats

[email protected]