Choose the Right Decision Criteria for Business Analysis

During a recent Facilitating a Requirements Workshop class, my students and I

had great discussion regarding decision criteria for business analysis. In follow
up, my students asked me for a quick write up and I wanted to share.
How do we decide which alternative is the best when trying to help a group
make a decision? We should always employ decision criteria in making any
decision. Lets explore this by using an example of trying to decide which car to
buy. What is important to us that will help us determine which car will best fit
our situation? Is it style, comfort, noise, gas mileage, speed,
manual/transmission, accessibility, price, payment terms available,
reliability?
You can think of this criteria as part of the user story around the decision
being made. For example, this user story might apply to some: I need the car
to look cool so that I can impress women. One that is much more realistic for
me would be I need the car to be reliable so that I dont have to worry about
breakdowns in traffic. The criteria are going to help you determine that a
successful decision has been made. In this example, success would be that we
purchased the right car for our situation.
The decision criteria in a business setting are those variables or characteristics
that are important to the organization making the decision. They should help
evaluate the alternatives from which you are choosing. I use the word
variables because you can disregard any characteristics that are constant
among the alternatives. For example, if all of the cars I am evaluating get the
same gas mileage, then disregard that characteristic as it will not help you
choose between the alternatives.
The decision criteria should be measurable and should be within scope of the
problem you are trying to solve. On criteria that seem immeasurable, you
should at least be able to compare one to another. For example, the typical
software characteristic user friendly is not measurable as stated. You could
either list out what makes the application user friendly for your organization or
you can try out the applications and have a rankings for the alternatives on
relative user friendliness between them.
These are some typical decision criteria used:

1.

Ease of implementation

2.

Cost

3.

Ease of modification/scalability/flexibility

4.

Employee morale

5.

Risk levels

6.

Cost savings

7.

Increase in sales or market share

8.

Return on investment

9.

Similarity to existing organization products

10.

Increase in customer satisfaction

When in a group decision-making situation, it is often helpful to have the group

brainstorm the decision criteria. This helps ensure buy in of the decision itself
because the criteria is measurable and not just a well I feel like we should buy
this product because I like it. You might also weigh the criteria. For example,
cost savings might have a higher weight than ease of use.
Following a structured decision making process will not only enable faster
decision-making, it also improves the probability that you will get a consensus
on the decision. Consensus is determined to exist when the entire group agrees
to support the decision, even if they do not totally agree with it. When getting a
group to make a decision, an open discussion with logical presentation of the
decision criteria will drive the group toward consensus.

MULTIPLE-CRITERIA DECISION MAKING

Real-world decision-making problems are usually too complex and illstructured to be considered through the examination of a single criterion,
attribute, or point of view that will lead to the optimum decision. In fact, such a
unidimensional approach is merely an oversimplification of the actual nature of
the problem at hand, and it can lead to unrealistic decisions. A more appealing
approach would be the simultaneous consideration of all pertinent factors that
are related to the problem. However, through this approach some very essential
issues/questions emerge: how can several and often conflicting factors be
aggregated into a single evaluation model? Is this evaluation model a unique
and optimal one? Researchers from a variety of disciplines have tried to address
the former question using statistical approaches, artificial intelligence
techniques, and operations research methodologies. The success and
usefulness of these attempts should be examined with regard to the second
question. Obviously, a decision problem is not addressed in the same way by all
decision makers. Each decision maker has his or her own preferences,
experiences, and decision-making policy; thus one person's judgment is
expected to differ from another's. This is a significant issue that should be
considered during the development of decision-making models.
Addressing such issues constitutes the focal point of interest in multiplecriteria decision making (MCDM). MCDM constitutes an advanced field of
operations research that is devoted to the development and implementation of
decision support tools and methodologies to confront complex decision
problems involving multiple criteria, goals, or objectives of conflicting nature.
The tools and methodologies provided by MCDM are not just
some mathematical models aggregating criteria, points of view, or attributes,
but furthermore they are decision-support oriented. Actually, support is a key
concept in MCDM, implying that the models are not developed through a
straightforward sequential process where the decision maker's role is passive.
Instead, an iterative process is employed to analyze the preferences of the
decision maker and represent them as consistently as possible in an
appropriate decision model. This iterative and interactive preference modeling
procedure constitutes the underlying basis of the decision-support orientation

of MCDM, and it is one of the basic distinguishing features of the MCDM as

opposed to statistical and optimization decision-making approaches.
HISTORICAL OVERVIEW
From the very beginning of mankind, decision making always involved multiple
criteria that have been treated either implicitly or explicitly, although no
specific mathematical framework existed for this purpose. Pareto was the first
to study, in an axiomatic way, the aggregation of conflicting criteria into a
single evaluation index. He was also the first to introduce the concept of
efficiency, one of the key aspects of the modern MCDM theory. Several decades
later, Koopmans extended Pareto's work introducing the notion of efficient
vector, i.e., the non-dominated set of alternatives. During the same period
(1940s to 1950s) von Neumann and Morgenstern introduced the expected
utility theory, thus setting the foundations of another MCDM approach. In the
1960s the concepts and procedures described in these early works were
extended by Charnes and Cooper and Fishburn. By the end of the 1960s
significant research started to be undertaken in this field by the European
operational research community. Roy, the founder of the European stream of
MCDM, developed a new theoretical approach based on the concept of
outranking relations. From the 1970s to the 1990s, MCDM evolved rapidly,
scientific MCDM associations were formed, and numerous advances were
published in the international literature, both on the theoretical aspects of
MCDM as well as on its practical implementation. The field has benefited
significantly from the wide-spread use of personal computers, which enabled
the development of software packages employing MCDM methods. These
software packages, known as multicriteria decision support systems, provide
the means to implement the theoretical advances in MCDM in userfriendly systems that enable real-time decision making through interactive and
iterative procedures that enhance the decision maker's perception of the
problem and his or her judgment and decision-making policy.
THEORETICAL APPROACHES TO MCDM
Among the MCDM methods and tools, several approaches and theoretical
disciplines can be defined, although their distinctions and boundaries are often
difficult to determine. This discussion adopts the classification of MCDM
approaches proposed by Pardalos et al. It distinguishes four categories: (1)

multi-objective mathematical programming, (2) multi-attribute utility theory,

(3) outranking relations approach, and (4) preference disaggregation approach.
The multi-objective mathematical programming (MMP) is an extension of the
well-known single-objective mathematical programming framework. It involves
the optimization of a set of objectives that are expressed in the form of linear or
nonlinear functions of some decision variables. The optimization of these
objectives is performed subject to constraints imposed either by the decision
environment or by the decision maker. The conflicting nature of the objectives
in real-world decision problems makes impossible their simultaneous
optimization. Thus, the decision maker cannot obtain an optimum solution,
but has to consider finding a satisfying one. The determination of this
satisfying solution depends on the decision maker's preferences, judgment, and
decision policy. The MMP techniques that have been developed aim to
determine initially the set of efficient solutions (solutions that are not
dominated by any other solution with respect to the specified objectives) and
then to identify a specific solution that meets the decision maker's preferences,
through an interactive and iterative procedure. More details on this category of
methods can be found in the books of Zeleny and Steuer.
The multi-attribute utility theory (MAUT) is an extension of the classical utility
theory. Its aim is to represent/model the decision maker's preferences through
a utility function u ( g ) aggregating all the evaluation criteria: u ( g )
= u ( g 1 , g 2 , , g n ), where g is the vector of the evaluation criteria g 1 , g 2 ,
, g n . In general, it is possible to decompose a multicriteria utility function in
real functions u 1 , u 2 , , u n concerning the independence of criteria. Thus,
different utility function models are obtained. The most studied form of utility
function, from a theoretical point of view, is the additive form: u ( g 1 , g 2 ,
, g n ) = u 1 ( g 1 ) + u 2 ( g 2 ) + + u n ( g n ), where u 1 , u 2 , , u n are the
marginal utilities defined on the scales of criteria. On the basis of the utilities
of the alternatives that are determined through the developed utility function,
the decision maker can rank them from the best alternatives (alternatives with
the higher utility) to the worst ones (alternatives with the lower utility), classify
them into appropriate classes through the definition of appropriate utility
thresholds, or select the alternative with the higher utility as the best one. The
books of Zeleny and Keeney and Raiffa provide a comprehensive discussion of
MAUT, its axiomatic foundations, and the forms of utility functions that are

commonly employed in decision-making problems, both under certainty and

uncertainty.
The outranking relations approach was developed in Europe with the
presentation of the ELECTRE methods (ELimination Et Choix Traduisant la
REalit) by Roy. An outranking relation allows one to conclude that an
alternative a outranks an alternative b if there are enough arguments to
confirm that a is at least as good as b, while there is no essential reason to
refuse this statement. To develop the outranking relation, the decision maker,
in collaboration with the decision analyst, must specify the weights of the
evaluation criteria, as well as some technical parameters (preference,
indifference, and veto thresholds). The definition of these parameters enables
the examination of whether there is a sufficient majority of criteria for
which a is better than b (concordance) and if the unfavorable deviations for the
rest of the criteria (discordance) are not too high. In this case it is possible to
conclude that alternative a outranks alternative b. Furthermore, through this
modeling procedure it is possible to identify the cases where the performances
of two alternatives on the evaluation criteria differ significantly, thus making
impossible their comparison (incomparability). A detailed presentation of all
out-ranking methods can be found in the works of Vincke and Roy and
Bouyssou.
The preference disaggregation approach refers to the analysis (disaggregation)
of the global preferences (judgment policy) of the decision maker in order to
identify the criteria aggregation model that underlies the preference result
(ranking or classification/sorting). Similar to MAUT, preference disaggregation
analysis uses common utility decomposition forms to model the decision
maker's preferences. Nevertheless, instead of employing a direct procedure for
estimating the global utility model (MAUT), preference disaggregation analysis
uses regression-based techniques (indirect estimation procedure). More
specifically, in preference disaggregation analysis the parameters of the utility
decomposition model are estimated through the analysis of the decision
maker's overall preference on some reference alternatives, which may involve
either examples of past decisions or a small subset of the alternatives under
consideration. The decision-maker is asked to provide a ranking or a
classification of the reference alternatives according to his or her decision
policy (global preferences). Then, using regression-based techniques the global
preference model is estimated so that the ranking or classification specified by

the decision maker can be reproduced as consistently as possible through the

developed decision model. A rather exhaustive bibliography of the methods of
the disaggregation of preferences can be found in the works of Jacquet-Lagrze
and Siskos and Pardalos, Siskos and Zopounidis.
Except for the functional and methodological differences among the four
aforementioned MCDM approaches, their differences with regard to the types of
decision problems that they address should also be pointed out. Real-world
decision problems can be categorized into two groups:
1. Problems where the decision maker must evaluate a finite set of
alternatives in order to select the most appropriate one, to rank them
from the best to the worst, to classify them into predefined homogeneous
classes, or to describe them. Typical examples involve the selection
among different investment projects, personnel evaluation (ranking
problem), and financial distress prediction (classification problem;
i.e., discrimination between healthy and financially distressed firms).
These type of problems are referred to as discrete MCDM problems.
2. Problems where there is an infinite set of alternatives. Thus the decision
maker must construct the most appropriate one according to his or her
goals or objectives. Recourse allocation problems are typical example of
this kind. For instance, a portfolio manager faces the problem of
constructing a portfolio of securitiesaccording to his specific investment
policy and objectives. Different combinations of securities can result to
numerous portfolios. Thus, it is impossible to define an exhaustive set of
portfolios for evaluation and selection of the most appropriate one.
Instead, the portfolio manager must construct the most appropriate
portfolio through the determination of the amount of capital that should
be invested in each security. These type of problems are referred to as
continuous MCDM problems.
Discrete MCDM problems are addressed through the multiattribute utility
theory (MAUT), the outranking relations approach, and preference
disaggregation, while continuous MCDM problems are addressed through
MMP.

MCDM APPLICATIONS
In the international literature on management science and operations research
there is an increasing number of real-world applications of MCDM. Of course,
in the limited space here it would be impossible to provide an extensive
bibliography regarding these applications. However, it is possible to outline
some of the most significant areas to which MCDM has contributed. The
following list reports some of these areas:
1. Finance and economics
o Business failure prediction
o Credit risk assessment
o Portfolio selection and management
o Company mergers and acquisitions
o Financial planning
o Country risk evaluation
o Regional economic policy specification
2. Environmental Management and Energy planning
o Forest management
o Waste management
o Power plant siting
o Water resources planning
o Nuclear power management
o Energy intensity evaluation
3. Marketing

o Customer satisfaction
o Design of market penetration strategies
o Retail evaluation
4. Transportation
o Highway planning
o Subway design
5. Human resources management
o Job evaluation
o Personnel selection
6. Education
7. Agriculture
Extensive information on these applications can be found in the books of
Vincke, Pardalos et al., and Roy.
The complexity of real-world decisions and the plethora of factors and criteria
that are often involved necessitate the implementation of a sound theoretical
framework to structure and model the decision-making process. MCDM
provides such a framework, as well as a wide variety of sophisticated
methodological tools that are oriented towards the support of the decision
makers in facing real-world decision problems. This decision-support
orientation of MCDM, in combination with the focus given by researchers in
this field to develop advanced and realistic preference modeling techniques, is
its main distinguishing feature as opposed to statistical analysis and
optimization theory. The advances in the field continue rapidly. According to
Fishburn and Lavalle, they involve foundation aspects of MCDM such as the
interface between behavioral decision theory and prescriptive practice and the
underlying assumptions of MCDM methods, methodological aspects involving
the development of more effective methods, and implementation aspects

through the development of multicriteria decision-support systems. Along with

these advances, researchers are also exploring the application of MCDM to
other fields, including artificial intelligence (neural networks, expert systems,
genetic algorithms) and fuzzy sets. The integration of the diverse nature of
these fields within the MCDM framework increases the potentials regarding the
development of advanced decision-support tools to confront the complexity of
real-world decisions
SEE ALSO: Decision Making ; Decision Rules and Decision Analysis ; Decision
Support Systems
Constantin Zopounidis and
Michael Doumpos
Revised by Hal P. Kirkwood , Jr.
FURTHER READING:
Brugha, C.M. "Structure of Multi-Criteria Decision-Making." The Journal of
Operational Research Society 55, no. 11 (2004): 11561169.
Figueira, J., S. Greco, and M. Ehrgott, eds. Multiple Criteria Decision Analysis:
State of the Art Surveys. New York: Springer, 2004.
Fishburn, P.C., and I.H. Lavalle. "MCDA: Theory, Practice and the
Future." Journal of Multi-criteria Decision Analysis 8, no. 1 (1999): 12.
Keeney, R.L., and H. Raiffa. Decisions with Multiple Objectives: Preferences and
Value Trade-Offs. Cambridge: Cambridge University Press, 1993.
Pardalos, P.M., Y. Siskos, and C. Zopounidis. Advances in Multicriteria
Analysis. Dordrecht: Kluwer Academic Publishers, 1995.
Roy, B. Multicriteria Methodology for Decision Aiding. Dordrecht: Kluwer
Academic Publishers, 1996.
Vincke, P. Multicriteria Decision Aid. New York: John Wiley and Sons, 1992.

Zopounidis, C., and M. Doumpos. Multicriteria Decision Aid Classification

Methods. New York: Springer, 2002.

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