Management Science: Chapter 2 Powerpoint

STEPHEN G.
POWELL
KENNETH R. BAKER
MANAGEMENT CHAPTER 2 POWERPOINT

SCIENCE MODELING IN A PROBLEM-SOLVING FRAMEWORK
The Art of Modeling with Spreadsheets
Compatible with Analytic Solver Platform

FOURTH EDITION
MODELERS’ ROLES IN THE PROBLEM-SOLVING PROCESS
• End user
– Identifies problems, develops model, uses model, and
implements results
– Often the modeler
• Team member
– Communication skills critical
– Whole team must understand model and assumptions
• Independent consultant
– Model is for a client
– Model must be consistent with client’s goals
Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 2

KEY TERMS: “PROBLEM” VERSUS A “MESS”
• A problem is a well-defined situation that is capable of

resolution.
• A mess is a morass of unsettling symptoms, causes, data,
pressures, shortfalls, opportunities, etc.
• Identifying a problem in the mess is the first step in the
creative problem solving process.

PROBLEM STATEMENTS
• A statement in the form “In what ways might…?”

– Focuses on defining the problem to be solved
– Example: “In what ways might we increase revenues to
keep pace with costs?”
• Solutions will differ based on the problem statement, so:
– Pay close attention to the problem definition.
– Take any problem definition as tentative.
– Prepare to alter the definition if evidence suggests a
different statement would be more effective.

CHARACTERISTICS OF WELL-STRUCTURED PROBLEMS
• The objectives of the analysis are clear.

• The assumptions that must be made are obvious.
• All the necessary data are readily available.
• The logical structure behind the analysis is well
understood.
• Example: Algebra problems are typically well- structured
problems.

ILL-STRUCTURED PROBLEMS
• Objectives, assumptions, data, and structure of the

problem are all unclear.
• Examples:
– Should the Red Cross institute a policy of paying for blood
donations?
– Should Boeing’s next major commercial airliner be a small
supersonic jet or a slower jumbo jet?
– Should an advertiser spend more money on the creative
aspects of an ad campaign or on the delivery of the ad?
– How much should a mid-career executive save out of
current income toward retirement?
• Require exploration more than solutions.

EXPLORATION
• With an inquiring mind and a spirit of discovery,

exploration involves:
– formulating hypotheses
– making assumptions
– building simple models
– deriving tentative conclusions
• It often reveals aspects of the problem that are not
obvious at first glance.

DIVERGENT AND CONVERGENT THINKING
• Divergent thinking
– Thinking in different directions
– Searching for a variety of answers to questions that may
have many right answers
– Brainstorming
• Convergent thinking
– Directed toward achieving a goal or single solution
– Involves trying to find the one best answer
– Emphasis shifts from idea generation to evaluation
• Decision makers need to be clear as to which they use at
a given time, and balance the two.

THE SIX-STAGE PROBLEM-SOLVING PROCESS
1. Exploring the mess

Divergent phase
Search the mess for problems and opportunities.
Convergent phase
Accept a challenge and undertake systematic efforts to respond to it.
2. Searching for information
Divergent phase
Gather data, impressions, feelings, observations; examine the situation from many
different viewpoints.
Convergent phase
Identify the most important information.
3. Identifying a problem
Divergent phase
Generate many different potential problem statements.
Convergent phase
Choose a working problem statement.

THE SIX-STAGE PROBLEM-SOLVING PROCESS (CONT’D)
4. Searching for solutions

Divergent phase
Develop many different alternatives and possibilities for solutions.
Convergent phase
Select one or a few ideas that seem most promising.
5. Evaluating solutions
Divergent phase
Formulate criteria for reviewing and evaluating ideas.
Convergent phase
Select the most important criteria; use them to evaluate, strengthen, and refine ideas.
6. Implementing a solution
Divergent phase
Consider possible sources of assistance and resistance to proposed solution. Identify
implementation steps and required resources.
Convergent phase
Prepare the most promising solution for implementation.

EXAMPLE: INVIVO DIAGNOSTICS
• A $300M pharmaceutical company built on the strength

of a single product that accounts for over 75% of
revenues.
• In 18 months, the patent for this product will expire.
• The CEO wants to explore ways to plug the expected
$100-$200M revenue gap as revenues from this product
decline.

1. EXPLORING THE MESS
• What problems or opportunities do we face?

• Where is there a gap between the current situation and
the desired one?
• What are the stated and unstated goals?
• This stage is complete when we have:
– A description of the situation
– Identified (not gathered) key facts and data

2. SEARCHING FOR INFORMATION
• What are the symptoms and causes?

• What measures of effectiveness seem appropriate?
• What actions are available?
• This stage is complete when we have:
– Found and organized relevant data
– Made initial hypotheses about problem causes and
solutions

3. IDENTIFYING A PROBLEM
• Which is the most important problem?

• Is this problem like others we have dealt with?
• What are the consequences of a broad versus narrow
problem statement?
• This stage is complete when we have produced a
working problem statement.

4. SEARCHING FOR SOLUTIONS
• What decisions are open to us?

• What solutions have been tried in similar situations?
• How are the various candidate solutions linked to
outcomes of interest?
• This stage is complete when we have produced a list of
potential solutions.
– Perhaps also a list of advantages and disadvantages

5. EVALUATING SOLUTIONS
• How does this solution impact each of the criteria?

• What factors within our control could improve the
outcomes?
• What factors outside our control could alter the
outcomes?
• This stage is complete when we have produced a
recommended course of action along with justification.

6. IMPLEMENTING A SOLUTION
• What are the barriers to successful implementation?

• Where will there be support and motivation, or
resistance and conflict?
• Are the resources available for successful
implementation?
• This stage is complete when we have produced an
implementation plan and begun execution.

MENTAL MODELS (INFORMAL MODELING)
• Help us to relate cause and effect

– But often in a simplified, incomplete way
• Help us determine what is feasible
– But may be limited by personal experiences
• Are influenced by our preferences for certain outcomes
• Are useful but can be limiting
• Problem solvers construct quick, informal mental models
at many different points in the process.

FORMAL MODELS
• Provide the same kind of information as mental models

– Link causes to effects, aid in evaluating solutions
• Require a set of potential solutions and criteria to
compare solutions to be identified
• More costly and time consuming to build than mental
models
• Make assumptions, logic, and preferences explicit and
open to debate

INFLUENCE CHARTS
• A simple diagram to show outputs and how they are

calculated from inputs
• Tool of choice for complex, unstructured problems
• Identifies main elements of a model
• Delineates the boundaries of a model
• Recommended for early stages of any problem
formulation task
• Flexible, support frequent revision

BUILDING AN INFLUENCE CHART
• Built from right to left

• Conventions on types of variables
– Outputs – hexagons
– Decisions – boxes
– Inputs – triangles
– Other variables – circles
– Random variables – double circles
– See Figure 2.3
Figure 2.3

INFLUENCE CHART PRINCIPLES
• Start with outcome measure

• Decompose outcome measure into independent
variables that directly determine it
• Repeat decomposition for each variable in turn
• Identify input data and decisions as they arise
• Ensure each variable appears only once
• Highlight special types of elements with consistent
symbols

EXAMPLE 1: A PRICING DECISION
• “Determine the price we should set for our product so as

to generate the highest possible profit this coming year.”
• See Figures 2.2a – 2.2f




EXAMPLE 2: THE SS KUNIANG1
• In the early 1980s, New England Electric System (NEES)

was deciding how much to bid for the salvage rights to a
grounded ship, the SS Kuniang. If the bid were
successful, the ship could be repaired and outfitted to
haul coal for the company’s power-generation stations.
But the value of doing so depended on the outcome of a
U.S. Coast Guard judgment about the salvage value of
the ship.
• See Figure 2.6
1
D. E. Bell, “Bidding for the S.S. Kuniang,” Interfaces 14 (1984): 17–23.

EXAMPLE 3: AUTOMOBILE LEASING
• The primary challenge for companies offering a closed-

end lease is to select the residual value of the vehicle.
• See Figure 2.7

INFLUENCE CHARTS WRAP-UP
• The goal is to develop a problem structure—not to solve

the problem.
• There is no one correct chart.
• Charts ignore all available numerical data.
• Charts rely on modeling assumptions that should be
recorded as made.

CRAFT SKILLS FOR MODELING
• Successful modelers draw on both technical and craft

skills
• Technical skills
– Lead to a single correct answer
– Require no creativity, learned quickly
– Example: Calculating present values
• Craft skills
– Do not lead to a single answer
– Example: Designing a prototype

CHARACTERISTICS OF CRAFT SKILLS
• Do not lead to a single answer

• Require creativity
• Harder to define and teach
• Develop slowly over time
• Involve modeling heuristics

MODELING HEURISTICS
• Simplify the problem

• Break the problem into modules
• Build a prototype and refine it
• Sketch graphs of key relationships
• Identify parameters and perform sensitivity analysis
• Separate the creation of ideas from their evaluation
• Work backward from the desired answer
• Focus on model structure, not data collection

SIMPLIFY THE PROBLEM
• “Model simple, think complicated”

• Simplification
– The essence of modeling
– Increases transparency - aids with buy-in
– Requires a focus on key connections and central trade-offs
– Involves making assumptions

BREAK THE PROBLEM INTO MODULES
• Keep components as independent as possible.

• Each component is simpler to deal with than the whole.
• Development of components provides structure to the
modeling process.

BUILD A PROTOTYPE AND REFINE IT
• A prototype is a working model.

• It should:
– Take data and inputs from the user
– Produce key outputs in response
• A prototype:
– Will be refined later
– Is, by definition, simple

CHARACTERISTICS OF A COMPLETED PROTOTYPE
• The problem is decomposed into modules.

• We have built a simple model for each module.
• The modules work together to produce results.
• We have provided a tentative answer to the client’s
major questions.

PROTOTYPES
• Keep the entire problem in the mind of the modeler

• Provide a roadmap for future work
• Support sensitivity analysis
– Where would my model benefit most from additional
work?

SKETCH GRAPHS OF KEY RELATIONSHIPS
• Graphs express relationships visually

– Not mathematically or verbally
• Allows for looking at a problem from different
viewpoints
• Externalizes the analysis
– Moves it from the mind to an external artifact (the graph)

Decisions
Outcomes
MODEL
VISUALIZATION OF THE MODELING PROCESS

USEFUL FUNCTIONS FOR MODELING

IDENTIFY PARAMETERS AND PERFORM SENSITIVITY
ANALYSIS
Price1 and Price2 below represent a family of relations.

o Price1 = a – b*(Quantity)
o Price2 = a*(Quantity)b (b<1)
a and b are the parameters of these models.
Sensitivity analysis
o Determines plausible ranges for the parameters
o Tests the impact of parameter values on model outputs
Parameterization builds links between our rational
knowledge and our intuition.

SEPARATE THE CREATION OF IDEAS FROM THEIR
EVALUATION
• Many modelers prefer judging ideas over generating

them.
• To “quiet the critical voice”:
– Separate periods of divergent and convergent thinking.
– Initiate a brainstorming session; remind participants not to
criticize ideas of others.
– Realize that mistakes and blind alleys are part of the
modeling process.

WORK BACKWARD FROM THE DESIRED ANSWER
• Start with the form the answer will take.

• Work backward to select model and analysis to generate
the chosen result.
• The “PowerPoint heuristic”
– What should be on one summary slide that contains the
essential message (e.g., a number, a table, a chart)?

FOCUS ON MODEL STRUCTURE, NOT ON DATA COLLECTION
• Novice modelers spend a high proportion of time on

data.
• Expert modelers spend most of their time on model
structure.

MISTAKEN BELIEFS OF NOVICE MODELERS
• The available data is the information needed in the

modeling process.
• Obtaining data moves the process forward.
• More data improves the quality of the final
recommendations.

COMMON SOURCES OF BIASES AND ERRORS IN EMPIRICAL
DATA
• Sampling error
• Differences in purpose
• Masking
• Inappropriateness
• Definitional differences

EXPERT MODELERS’ ATTITUDES TOWARDS DATA
• Treat data skeptically

• Realize that even good data may not be relevant for the
model
• Realize that data collection can be distracting and
limiting
• Build the model structure first and then use data to
refine it

SUMMARY
• Effective modeling takes place within a larger problem

solving process.
• Problem-solving process:
– Exploring the mess
– Searching for information
– Defining the problem
– Searching for solutions
– Evaluating solutions
– Implementing the solution

SUMMARY (CONT’D)
• Mental modeling is an essential tool in problem solving.

• Formal models provide the same kind of benefits as
mental models.
• Influence charts offer the modeler a bridge between an
ill-structured problem and a formal model.

SUMMARY (CONT’D)
• Modeling heuristics are rules of thumb that help in the

design and use of models.
– Simplify the problem.
– Break the problem into modules.
– Build a prototype and refine it.
– Sketch graphs of key relationships.
– Identify parameters and perform sensitivity analysis.
– Separate the creation of ideas from their evaluation.
– Work backward from the desired answer.
– Focus on model structure, not on data collection.

COPYRIGHT © 2013 JOHN WILEY & SONS, INC.
All rights reserved. Reproduction or translation of

this work beyond that permitted in section 117 of the 1976
United States Copyright Act without express permission of
the copyright owner is unlawful. Request for further
information should be addressed to the Permissions
Department, John Wiley & Sons, Inc. The purchaser may
make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages caused by
the use of these programs or from the use of the information
herein.

Management Science: Chapter 2 Powerpoint

Uploaded by

Copyright:

Available Formats

Management Science: Chapter 2 Powerpoint

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Management Science: Chapter 2 Powerpoint

Uploaded by

Copyright:

Available Formats

STEPHEN G.

MANAGEMENT CHAPTER 2 POWERPOINT

Compatible with Analytic Solver Platform

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 2

• A problem is a well-defined situation that is capable of

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 3

• A statement in the form “In what ways might…?”

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 4

• The objectives of the analysis are clear.

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 5

• Objectives, assumptions, data, and structure of the

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 6

• With an inquiring mind and a spirit of discovery,

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 7

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 8

1. Exploring the mess

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 9

4. Searching for solutions

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 10

• A $300M pharmaceutical company built on the strength

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 11

• What problems or opportunities do we face?

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 12

• What are the symptoms and causes?

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 13

• Which is the most important problem?

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 14

• What decisions are open to us?

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 15

• How does this solution impact each of the criteria?

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 16

• What are the barriers to successful implementation?

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 17

• Help us to relate cause and effect

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 18

• Provide the same kind of information as mental models

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 19

• A simple diagram to show outputs and how they are

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 20

• Built from right to left

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 21

• Start with outcome measure

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 22

• “Determine the price we should set for our product so as

• See Figures 2.2a – 2.2f

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 23

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 24

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 25

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 26

• In the early 1980s, New England Electric System (NEES)

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 27

• The primary challenge for companies offering a closed-

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 28

• The goal is to develop a problem structure—not to solve

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 29

• Successful modelers draw on both technical and craft

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 30

• Do not lead to a single answer

Chapter 2 Copyright © 2013 John Wiley & Sons, Inc. 31