EBSC 7380 Strategy and Decision

Making
Week 4 Lecture
 •Following today’s lecture, you should be
able to:

• Understand the principles of the

SMART decision-making framework
Today’s
Learning • Apply the SMART analysis to a problem
using attributes, values and weights
Outcomes
• Use SMART to undertake a Cost-
Benefit Analysis
 Recap of Lecture Six

 Principles of SMART – Buying a Car

 Applying SMART – office relocation

 Cost-Benefit Analysis

Today’s Agenda
So far, the module has discussed
how decisions are made by
examining the significance of:

• Individuals
• Groups

The remainder of the module will

focus on using tools and frameworks
that support good decision making.

Introduction
Simple  Allows multiple objectives to be
considered by decision-makers

Multi  Trade offs between alternatives can be

evaluated
Attribute  Simple and transparent – but some

Rating numbers!

Technique

SMART
One – identify objective/s

Two – identify alternative outcomes

Three - identify the attributes that are relevant to

the decision

Four – assign values that measure the

performance of the attributes in relation to the
objective

Stages in the SMART analysis (1)

Five – determine a weight for each attribute – how
important an attribute is to the decision-maker

Six – apply weighted average of the attributes to each

alternative

Seven – make a provisional decision

Eight – perform sensitivity analysis to see how robust

the decision is based on the numbers used

Adapted from Goodwin and Wright (2014:34-36)

Stages in the SMART analysis (2)

 Identify the Attributes
• Performance
• External Design
• Handling
• Interior Design
• Fuel economy
• Practicality

Example: Buying a Car (1)

 Assign Values to Attributes
Dacia Sandero – excellent in practicality (80 out of 100), average
external design (40), poor performance (20)

Skoda Fabia – good handling (70), average performance (50), poor

internal design (20)

Seat Ibiza – good performance (70), average handling (50), poor

external design (30)

Fiesta ST – excellent performance (90), good external design (70),

poor in practicality (20)

Example: Buying a Car (2)

 Assign Weights (out of 100) to
the Attributes
• Performance (40%)
• External Design (25%)
• Handling (15%)
• Interior Design (10%)
• Fuel economy (6%)
• Practicality (4%)

Example: Buying a Car (3)

 Calculate Score for each option:

W1*V1 + W2*V2 + W3*V3 +

W4*V4 + W5*V5 + W6*V6 =
Total

Example: Buying a Car (5)

Skoda Fabia Fiesta ST

Attribute W V Total Attribute W V Total

Performance 40 50 2000 Performance 40 90 3600
Ext Design 25 40 1000 Ext Design 25 70 1680
Handling 15 70 1050 Handling 15 80 1200
Interior Design 10 20 200 Interior Design 10 50 500
Fuel Economy 6 60 360 Fuel Economy 6 30 180
Practicality 4 80 320 Practicality 4 20 80

4930 7240

Example: Buying a Car (6)

A small printing and photocopying business has to re-locate from
its existing office because the site has been acquired for
redevelopment.

The owner has identified seven options:

Location of office Annual rent (£)

Addison Square (A) 30000

Bilton Village (B) 15000
Carlisle Walk (C) 5000
Denver Street (D) 12000
Elton Street (E) 30000
Filton Village (F) 15000
Gorton Square (G) 10000

Solving an office location

problem - application of SMART
Addison Square (A) – a prestigious
office which is situated close to
customers. But the office is expensive
and an old, dark building.

Bilton Village (B) – a new building

offering comfortable working conditions
for staff but it is several miles from the
centre of town.

The other options lie somewhere

between these two extremes.

Location details
One – identify the objective

New office location for the business

Two – identify the outcome

Rent one of the seven offices identified; maximise

benefits, minimise costs

SMART Analysis Steps One

and Two
Three - Determine the attributes

Costs
• Rent
• Electricity
• Cleaning

Benefits
• Turnover
• Working Conditions

SMART Analysis Step Three

Value Tree
Key Aspects of a Value Tree
(1)

Keeney and Raiffa (1976) pinpoint five key aspects of a value tree:

Completeness – all attributes need to be included. Research shows that

assistance is need to do this. One study showed 10% of people failed to include
their most important objective and 71% had left out one of their top five (Bond,
Carlson and Keeney 2008).

Operationality – all attributes measurable in some way. If not, they need to be

broken down further or proxies used.

Decomposability – attribute can be judged separately from others; if not, then

redefine or re-group attributes
 Key Aspects of a Value Tree
(2)

Minimum Size – the tree should

Absence of Redundancy – in
not be too large otherwise
essence, no attribute should
analysis can be difficult. Remove
duplicate another. Otherwise,
any identical attributes from the
this will give undue weight in the
analysis and do not decompose
decision-making process
attributes more than necessary.
Four – Assign values to the attributes

• Initial focus is on benefits

• For each attribute, assign a value: 0 is the least favourable, 100 is

the most favourable

• It is the interval (or improvement) between the points that is

compared

SMART Analysis (3)

Values assigned to ‘office image’

1. Addison Square =100

2. Elton Street= 90
3. Filton Village= 70
4. Denver Street= 30
5. Gorton Square= 20
6. Bilton Village= 10
7. Carlisle Walk= 0
 Attribute Office

A B C D E F G

Closeness 100 20 80 70 40 0 60

Visibility 60 80 70 50 60 0 100

Image 100 10 0 30 90 70 20

Size 75 30 0 55 100 0 50

Comfort 0 100 10 30 60 80 50

Car parking 90 30 100 90 70 0 80

Values assigned to benefit

attributes for office relocation
SMART Analysis Step Five

Five – Determine the Weights

Process:

1- Rank the attributes

2- Assign 100 to the weight for the highest-ranked attribute
3- Give weights to the other attributes accordingly
4- Normalise the weights! A normalised weight means that all weights will add
to up to 100
 Normalised weights
Attribute Original weights (rounded)
Closeness to customers 100 32
Visibility 80 26
Image 70 23
Size 30 10
Comfort 20 6
Car-parking facilities 10 3
310 100

Therefore, the normalised weight for ‘Image’ is:

(70/310)*100= 22.58

Normalising Weights
Six – Apply weighted average of the attributes to each
alternative
Addison Square
Attribute Values Weight Value x weight
Closeness to customers 100 32 3200
Visibility 60 26 1560
Image 100 23 2300
Size 75 10 750
Comfort 0 6 0
Car-parking facilities 90 3 270
8080
so aggregate benefits = 8080/100 = 80.8

SMART Analysis Step Six

Values and weights for office
relocation
Value Tree Revisited
Cost-Benefit Analysis (1)

• To this point, costs ignored

• Now we can evaluate the trade off between costs (money) and benefits
(qualitative attributes)

• Question: can we have cost as an attribute?

Possible – although is likely to make the analysis of the cost-benefit trade

off difficult

• Therefore, we will develop a diagram to see how each option performs in

relation to costs
Cost-Benefit Analysis (2)

Costs associated with the seven offices

Annual Annual
Office Annual cleaning electricity Total
rent (£) costs (£) costs (£) costs (£)

Addison Square 30000 3000 2000 35000

Bilton Village 15000 2000 800 17800
Carlisle Walk 5000 1000 700 6700
Denver Street 12000 1000 1100 14100
Elton Street 30000 2500 2300 34800
Filton Village 15000 1000 2600 18600
Gorton Square 10000 1100 900 12000
Trading Benefits against Costs for each location

Annual Cost (£)

Cost-Benefit Analysis (3)

 Seven - Making a decision

• If benefits are the priority, choose Addison

SMART Square (A)

Analysis
• If the decision maker is more concerned
Step with costs, choose Carlisle Walk (B)
Seven (1)
• Gorton Square (G) offers an intermediate
choice
 Making a decision continued

However, the analysis also allows us to consider

alternatives …

SMART • Choosing Gorton Square (G) rather than Carlisle Walk

would lead to an increase in benefits from 47.2 to 60.2 but
Analysis increased costs of £5,300 - or £414 per value point

Step • In the same way, choosing Addison Square rather than

Gorton Square would lead to an increase in the value of
Seven (2) benefits by 20.6 points at a cost of £23,000 – or £1,117
per value point.

• Therefore, if the value point is worth less than <£414,

choose Carlisle Walk. If the value point is worth £414 to
£1117 choose Gorton Square. If it is worth >£1117 choose
Addison Square.
 Making a decision continued

But how do we determine how much each value

point is to the decision-maker?

1.Examine the value tree

SMART 2.Choose a lower level attribute which the decision-
maker can put a monetary value on
Analysis 3.Decision maker indicates they would pay £15,000
Step per year to improve image from the worst to the
best – so, £15,000 to move from 0 (the worst
Seven (3) image) to 100 (the best)
4. Normalised weight of ‘Image’ is 23%. Therefore
the decision-maker is prepared to pay £15,000 to
increase the overall benefits by 23 points.
5.This works out at £652 per point.

The choice should therefore be Gorton Street

Recap of today’s lecture

The SMART framework offers a simple and transparent framework for

making decisions

It follows a staged process which focuses objectives, attributes, values

and weights

It allows for options to compared and trade offs between costs and
benefits to be evaluated

Next week’s lecture will cover the final stage of SMART – sensitivity
analysis
Bond, S.D., Carlson, K.A. and Keeney, R.L. (2008) Generating Objectives: Can Decision-
Makers Articulate What They Want? Management Science 54 pp 56-70

Goodwin, P. and Wright, G. (2014) Decision Analysis for Management Judgement. Fifth
Edition. Chichester. Wiley.

Keeney, R.L. (1982) Decision Analysis: An Overview. Operations Research 30 (5) pp

803-837

Keeney, R.L. and Raiffa, H. (1976) Decisions with Multiple Objectives: Preferences and
Value Tradeoffs. New York. Wiley.

Further Reading