Wednesday, February 12,

2020
BUSINESS
1 DECISION ANAYSIS
SESSION - 1
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2020
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 Wednesday, February 12,
INTRODUCTION
 With today’s technology, companies are able to
collect tremendous amounts of data with relative
ease. Indeed, many companies now have more

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data than they can handle.
 However, the data are usually meaningless until
they are analyzed for trends, patterns,
relationships, and other useful information.
 This course illustrates in a practical way a
variety of methods, from simple to complex, to
help you analyze data sets and uncover
important information.
 In many business contexts, data analysis is only
the first step in the solution of a problem. Acting
on the solution and the information it provides to
make good decisions is a critical next step. 4
 Wednesday, February 12,
INTRODUCTION
We are living in the age of technology. This has two
important implications for everyone entering the

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business world.

 First, technology has made it possible to collect

huge amounts of data.

 Retailers collect point-of-sale data on products

and customers every time a transaction occurs;

 Credit agencies have all sorts of data on people

who have or would like to obtain credit; 5
 Wednesday, February 12,
INTRODUCTION
 Government agencies have data on economic
trends, the environment, social welfare,

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consumer product, and virtually everything else
imaginable. It has become relatively easy to
collect the data.

 As a result, data are plentiful. However, as for

many organizations easy to collect the data, it is
quite a challenge to make sense of all the data
they have collected.

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INTRODUCTION

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 A second important implication of technology is
that it has given many more people the power
and responsibility to analyze data and make

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decisions on the basis of quantitative analysis.

 The vast majority of employees now have a

 desktop or laptop computer at their disposal,
 access to relevant data,
 training in easy-to-use software, particularly
spreadsheet and database software.
 For these employees, statistics and other
quantitative methods are no longer forgotten
topics, they once learned in college. 7
 Wednesday, February 12,
INTRODUCTION
 Quantitative analysis is now an integral part of their
daily jobs. A large amount of data already exists, and
it will only increase in the future.

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 In fact, one of the hottest topics in today’s business
world is business analytics, also called data analytics.
 The new aspect of business analytics is that it
typically implies the analysis of very large data sets,
the kind that companies currently encounter
 By using quantitative methods to uncover the
information in these data sets and then acting on this
information— again guided by quantitative
analysis—companies are able to gain advantages that
their less enlightened competitors are not able to
gain.
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 Wednesday, February 12,
FEW PERTINENT EXAMPLES;
 Direct marketers analyze enormous customer databases to
see which customers are likely to respond to various products
and types of promotions. Marketers can then target different
classes of customers in different ways to maximize profits—

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and give their customers what they want.
 Hotels and airlines also analyze enormous customer
databases to see what their customers want and are willing to
pay for. By doing this, they have been able to devise very
clever pricing strategies, where different customers pay
different prices for the same accommodations.
 For example, a business traveler typically makes a plane
reservation closer to the time of travel than a vacationer. The
airlines know this. Therefore, they reserve seats for these
business travelers and charge them a higher price for the
same seats. The airlines profit from clever pricing strategies,
and the customers are happy.
.
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FEW PERTINENT EXAMPLES;

Wednesday, February 12,

 Financial planning services have a virtually
unlimited supply of data about security prices,
and they have customers with widely differing

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preferences for various types of investments.
Trying to find a match of investments to
customers is a very challenging problem.
 However, customers can easily take their
business elsewhere if good decisions are not made
on their behalf. Therefore, financial planners are
under extreme competitive pressure to analyze
masses of data so that they can make informed
decisions for their customers

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 Wednesday, February 12,
FEW PERTINENT EXAMPLES;

 We all know about the pressures U.S.

manufacturing companies have faced from
foreign competition in the past couple of decades.

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The automobile companies, for example, have
had to change the way they produce and market
automobiles to stay in business. They have had to
improve quality and cut costs by orders of
magnitude.
 Although the struggle continues, much of the
success they have had can be attributed to data
analysis and wise decision making.
 Starting on the shop floor and moving up through
the organization, these companies now measure
almost everything, analyze these measurements,
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and then act on the results of their analysis.
 Wednesday, February 12,
FEW PERTINENT EXAMPLES;
 We talk about companies analyzing data and
making decisions. The companies will be required
to;

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 describe large complex data sets,
 run analyses,
 required make quantitative forecasts,
 create optimization models, and run simulations.

Experts will be analyzing data and making

important decisions to help companies gain a
competitive advantage.
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 Wednesday, February 12,
MODELING AND MODELS
 Models and the modeling A model is an
abstraction of a real problem. A model tries to
capture the essence and key features of the

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problem without getting bogged down in
relatively unimportant details.

 There are different types of models, and

depending on an analyst’s preferences and skills,
each can be a valuable aid in solving a real
problem.

 graphical models,

 spreadsheet models. 13
 Wednesday, February 12,
GRAPHICAL MODELS;
Graphical models attempt to portray graphically
how different elements of a problem are related—
what affects

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 This diagram indicates fairly what affects what.
It does not provide enough quantitative details to
“solve” the company’s problem, but this is usually
not the purpose of a graphical model.

 Instead, its purpose is usually to show the

important elements of a problem and how they
are related. For complex problems, this can be
very enlightening information for management.
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A SEVEN-STEP MODELING PROCESS

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 Most of the modeling you will do in this course is
only part of an overall modeling process typically
done in the business world.

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 We portray it as a seven-step process, as
discussed here.

 Admittedly, not all problems require all seven

steps.

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 Wednesday, February 12,
THE MODELING PROCESS
1- Define the problem.

Typically, a company does not develop a model

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
unless it believes it has a problem. Therefore, the
modeling process really begins by identifying an
underlying problem.

 Perhaps the company is losing money,

 perhaps its market share is declining,
 or perhaps its customers are waiting too long for
service.

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 Wednesday, February 12,
THE MODELING PROCESS
 The company must be sure that it has identified the
correct problem before it spends time, effort, and money

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trying to solve it.
 For example, Miser cites the experience of an analyst
who was hired by the military to investigate overly long
turnaround times between fighter planes landing and
taking off again to rejoin the battle.
 The military was convinced that the problem was
caused by inefficient ground crews; if they were faster,
turnaround times would decrease.
 The analyst nearly accepted this statement of the
problem and was about to do classical time-and-motion
studies on the ground crew to pinpoint the sources of
their inefficiency. 17
THE MODELING PROCESS

Wednesday, February 12,

 However, by interfering around, he found that
the problem obviously lay elsewhere. The trucks
that refueled the planes were frequently late,

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which in turn was due to the inefficient way they
were refilled from storage tanks at another
location.
 Once this latter problem was solved—and its
solution was embarrassingly simple—the
turnaround times decreased to an acceptable
level without any changes on the part of the
ground crews.
 If the analyst had accepted the military’s
statement of the problem, the real problem might
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never have been located or solved.
 Wednesday, February 12,
THE MODELING PROCESS
2. Collect and summarize data.
 This crucial step in the process is often the most

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tedious. All organizations keep track of various
data on their operations, but these data are often
not in the form an analyst requires.

 They are also typically scattered in different

places throughout the organization, in all kinds
of different formats.

 Therefore, one of the first jobs of an analyst is to

gather exactly the right data and summarize the
data appropriately—for use in the model. 19
THE MODELING PROCESS

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 Collecting the data typically requires asking;

 questions of key people throughout the organization,

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 studying existing databases,
 performing time-consuming observational studies of
the organization’s processes.

 In short, it entails a lot of groundwork. Fortunately,

many companies have understood the need for good
clean data and have spent large amounts of time and
money to build data warehouses for quantitative
analysis
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THE MODELING PROCESS

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3. Develop a model.

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 The form of the model varies from one situation
to another.
 It could be a graphical model,

 or a spreadsheet model.

 The key is that the model must capture the

important elements of the business problem in
such a way that it is understandable by all
parties involved.
 As per latter requirement, we favor spreadsheet
models, especially when they are well designed
and well documented 21
 Wednesday, February 12,
THE MODELING PROCESS
4. Verify the model.

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 Here the analyst tries to determine whether the
model developed in the previous step is an
accurate representation of reality.

 A first step in determining how well the model

fits reality is to check whether the model is valid
for the current situation.

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 Wednesday, February 12,
THE MODELING PROCESS
5. Select one or more suitable decisions

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Many models are decision models. For any specific
decisions, the model indicates;

 the amount of profit obtained,

 the amount of cost incurred,
 the level of risk, and so on.

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THE MODELING PROCESS

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6. Present the results to the organization.

 In a classroom setting you are typically finished

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when you have developed a model that correctly
solves a particular problem.
 In the business world a correct model, even a
useful one, does not always suffice. An analyst
typically has to “sell” the model to management.

 Unfortunately, the people in management are

sometimes not as well trained in quantitative
methods as the analyst, so they are not always
inclined to trust complex models
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THE MODELING PROCESS

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 There are two ways to mitigate this problem.
First, it is helpful to include relevant people
throughout the company in the modeling

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process—from beginning to end—so that
everyone has an understanding of the model and
feels an ownership of it.

 Second, it helps to use a spreadsheet model

whenever possible, especially spreadsheet if it is
designed and documented properly.

 Almost everyone in today’s business world is

comfortable with spreadsheets, so spreadsheet
models are more likely to be accepted.
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 Wednesday, February 12,
THE MODELING PROCESS
7. Implement the model and update it over time.
 Again, there is a big difference between a
classroom situation and a business situation.

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When you turn in a classroom assignment, you
are typically finished with that assignment and
can await the next one.
 In contrast, an analyst who develops a model for
a company usually cannot pack up his bags and
leave. If the model is accepted by management,
the company will then need to implement it
company-wide.
 This can be very time consuming and politically
difficult, especially if the model’s suggestions
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represent a significant change from the past.
 Wednesday, February 12,
THE MODELING PROCESS

 At the very least, employees must be trained

how to use the model on a day-to-day basis.

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 In addition, the model will probably have to be
updated over time, either because of changing
conditions or because the company sees more
potential uses for the model as it gains
experience using it.

 This presents one of the greatest challenges for a

model developer, namely, the ability to develop a
model that can be modified as the need arises. 27
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Basic aspects of Pre-Investment
Decisions

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BASIC CONCEPT
 A feasibility study is an analysis of the viability of an idea.
 The feasibility study focuses on helping answer the
essential question of “should we proceed with the proposed
project idea?”
 All activities of the study are directed toward helping
answer this question.

 Feasibility studies can be used in many ways but primarily

focus on proposed business projects. Organizations with a
business idea should conduct a feasibility study to
determine the viability of their idea before proceeding with
the development of a business.
 Determining early that a business idea will not work saves
time, finance and misery later.
BASIC CONCEPT
 A feasible business project is one where the business
will generate adequate;
 cash-flow and profits

 withstand the risks it will encounter

 remain viable in the long-term and meet the goals of

the founders.
 The project can be either;

 a start-up business

 the purchase of an existing business

 an expansion of current business operations

 or a new enterprise for an existing business

EVALUATE ALTERNATIVES

A feasibility study is usually conducted after producers have

discussed a series of business ideas or scenarios.
The feasibility study helps to “frame” specific business
scenarios so they can be studied in-depth. During this
process the number of business alternatives under
consideration is usually quickly reduced.

 During the feasibility process you may investigate a variety

of ways of organizing the business and positioning your
product in the marketplace.
 It is like an exploratory journey and you may take several
paths before you reach your destination.
 Just because the initial analysis is negative does not mean
that the proposal does not have merit. Sometimes
limitations or flaws in the proposal can be corrected.
PRE-FEASIBILITY STUDY
 A pre-feasibility study may be conducted first to help sort
out relevant scenarios;

 Before proceeding with a full-blown feasibility study, you

may want to do some pre-feasibility analysis of your own.

 If you find out early-on that the proposed business idea is

not feasible, it will save you time and finance.

 If the findings lead you to proceed with the feasibility

study, your work may have resolved some basic issues.

 A consultant may help you with the pre-feasibility study,

but you should be involved. This is an opportunity for you
to understand the issues of business development.
MARKET ASSESSMENT
 A market assessment may be conducted that will help
determine the viability of a proposed product in the
marketplace.
 The market assessment will help to identify opportunities
in a market or market segment.

 If no opportunities are found, there may be no reason to

proceed with a feasibility study.

 If opportunities are found, the market assessment can give

focus and direction to the construction of business scenarios
to investigate in the feasibility study.

 A market assessment will provide much of the information

for the marketing feasibility section of the feasibility study.
RESULTS AND CONCLUSIONS

 The conclusions of the feasibility study should outline

in depth the various scenarios examined and the
effects, strengths and weaknesses of each.

 The project leaders need to study the feasibility study

and challenge its underlying assumptions.
RESULTS AND CONCLUSIONS
 Don’t expect one alternative to “jump off the page” as being the
best scenario.

 Feasibility studies do not suddenly become positive or negative.

As you accumulate information and investigate alternatives,
neither a positive nor negative outcome may emerge.

 The decision of whether to proceed is often not clear cut. Major

stumbling blocks may emerge that negate the project. Sometimes
these weaknesses can be overcome.

 Rarely does the analysis come out overwhelmingly positive.

 The study will help you assess the tradeoff between the risks and
rewards of moving forward with the business project.
RESULTS AND CONCLUSIONS
 Remember, it is not the purpose of the feasibility study
or the role of the consultant to decide whether or not to
proceed with a business idea.

 It is the role of the project leaders to make this

decision, using information from the feasibility study
and input from consultants
GO/NO-GO DECISION
 The go/no-go decision is one of the most critical in
business development.

 It is the point of no return. Once you have definitely

decided to pursue a business scenario, there is usually
no turning back.

 The feasibility study will be a major information

source in making this decision.

 This indicates the importance of a properly developed

feasibility study.
GO/NO-GO
 The feasibility study outlines and analyzes several alternatives or
methods of achieving business success.

 The feasibility study helps to narrow the scope of the project to

identify the best business scenario(s).

 The business plan deals with only one alternative or scenario.

 The feasibility study helps to narrow the scope of the project to

identify and define two or three scenarios or alternatives.

 The person or business conducting the feasibility study may work

with the group to identify the “best” alternative for their
situation. This becomes the basis for the business plan.
GO/NO-GO
 The feasibility study is conducted before the business plan.

 A business plan is prepared only after the business project has

been deemed to be feasible.

 If a proposed business project is considered to be feasible, a

business plan is usually constructed next that provides a
“roadmap” of how the business will be created and developed.

 The business plan provides the “blueprint” for project

implementation.

 If the project is deemed not to be feasible, efforts may be made to

correct its deficiencies, other alternatives may be explored, or the
idea is dropped.
FEASIBILITY STUDY VS. BUSINESS PLAN

Feasibility Study vs. Business Plan

 A feasibility study is not a business plan. The separate
roles of the feasibility study and the business plan are
frequently misunderstood.
 The feasibility study provides an investigating
function. It addresses the question of “Is this a viable
business venture?”
 The business plan provides a planning function. The
business plan outlines the actions needed to take the
proposal from “idea” to “reality.”
BUSINESS PLAN
A business plan is a written description of your
business's future. That's all there is to it--a document
that describes what you plan to do and how you plan to
do it.
what's included in a business plan, and how do you put
one together? Simply stated, a business plan conveys;
 Your business goals
 The strategies you'll use to meet them
 Potential problems that may confront your business
and ways to solve them
 The organizational structure of your business
(including titles and responsibilities)
 Finally, the amount of capital required to finance your
project and keep it going .
BUSINESS PLAN
There are three primary parts to a business plan:
 The first is the business concept, where you discuss the
industry, your business structure, your particular product
or service, and how you plan to make your business a
success.

 The second is the marketplace section, in which you

describe and analyze potential customers: who and where
they are, what makes them buy and so on. Here, you also
describe the competition and how you'll position yourself to
beat it.

 Finally, the financial section contains your income and

cash flow statement, balance etc. This part may require
help from your accountant.
REASONS GIVEN NOT TO DO A FEASIBILITY
STUDY
Project leaders may find themselves under pressure to
skip the “feasibility analysis” step and go directly to
building a business.
Individuals from within and outside of the project may
push to skip this step. Reasons given for not doing a
feasibility analysis include:
 We know it’s feasible. An existing business is already
doing it.
 Why do another feasibility study when one was done
just a few years ago?
 Feasibility studies are just a way for consultants to
make money.
REASONS GIVEN NOT TO DO A
FEASIBILITY STUDY
 The market analysis has already been done by the
business that is going to sell us the equipment.
 Why not just hire a general manager who can do the
study?
 Feasibility studies are a waste of time. We need to buy
the building, tie up the site and bid on the equipment.

The reasons given above should not discourage you from

conducting a meaningful and accurate feasibility study.
Once decisions have been made about proceeding with a
proposed business, they are often very difficult to
change. You may need to live with these decisions for a
long time.
REASONS TO DO A FEASIBILITY STUDY
 Identifies reasons not to proceed.
 Enhances the probability of success by addressing and
mitigating factors early on that could affect the
project.
 Provides quality information for decision making.
 Provides documentation that the business venture was
thoroughly investigated.
 Helps in securing funding from lending institutions
and other monetary sources.
 Helps to attract equity investment.
 The feasibility study is a critical step in the business
assessment process. If properly conducted, it may be
the best investment you ever made.
FIVE AREAS OF PROJECT FEASIBILITY

 Five Areas of Project Feasibility

A feasibility study evaluates the project’s potential for
success; therefore, perceived objectivity is an important
factor in the credibility of the study for potential
investors and lending institutions.
There are five types of feasibility study —separate areas
that a feasibility study examines;
FIVE AREAS OF PROJECT FEASIBILITY
1. Technical Feasibility - this assessment
focuses on the technical resources available to
the organization;
 It helps organizations determine whether the
technical resources meet capacity and whether
the technical team is capable of converting the
ideas into working systems.
 Technical feasibility involves evaluation of the
technology requirements of the proposed project.
FIVE AREAS OF PROJECT FEASIBILITY
2. Economic Feasibility - this assessment
typically involves;
 a cost/ benefits analysis of the project, helping
organizations determine the viability, cost, and
benefits associated with a project before financial
resources are allocated.
 It also serves as an independent project
assessment and enhances project credibility—
helping decision makers determine the positive
economic benefits to the organization that the
proposed project will provide.
FIVE AREAS OF PROJECT FEASIBILITY
3. Legal Feasibility - this assessment
investigates whether any aspect of the proposed
project conflicts with legal requirements like
zoning laws etc.
 Let’s say an organization wants to construct a
new office building in a specific location. A
feasibility study might reveal the organization’s
ideal location isn’t zoned for that type of
business.
 That organization has just saved considerable
time and effort by learning that their project was
not feasible right from the beginning
FIVE AREAS OF PROJECT FEASIBILITY
4. Operational Feasibility - this assessment involves;
 undertaking a study to analyze and determine
whether—and how well—the organization’s needs can
be met by completing the project.

 Operational feasibility studies also analyze how a

project plan satisfies the requirements identified in the
requirements analysis phase of system development
FIVE AREAS OF PROJECT FEASIBILITY

5. Scheduling Feasibility - this assessment is the most

important for project success; after all, a project will fail if not
completed on time. In scheduling feasibility, an organization
estimates how much time the project will take to complete.

When these areas have all been examined, the feasibility

study helps identify any constraints the proposed project may
face, including:
 Internal Project Constraints: Technical, Technology,
Budget, Resource, etc.
 Internal Corporate Constraints: Financial, Marketing,
Export, etc.
 External Constraints: Logistics, Environment, Laws and
Regulations, etc.
THANK YOU