ENGINEERING ECONOMICS

LECTURE 2

Syeda Laraib Tariq

Lecturer, MED, NUtech

1
Engineering Economics Systematic evaluation of
the economic merits of proposed solutions to engineering
problems

■ Rational Decision- making

Process
■ The Engineer’s Role in
Business
■ Types of Strategic
Engineering Economic
Decisions
■ Fundamental Principles in
Engineering Economics
Bose Corporation

2
 Rational Decision-Making Process 3

1. Recognize a decision problem

2. Define the goals or objectives
3. Collect all the relevant
information
4. Identify a set of feasible
decision alternatives
5. Select the decision criterion to
use
6. Select the best alternative
 What is Decision Making?

• We all make decisions of varying importance every day,

so the idea that decision making can be a rather
sophisticated art is not valid
• Studies have shown that most people are much poorer
at decision making than they think!.
• An understanding of what decision making involves,
together with a few effective techniques, will help
produce better decisions

4
 Decision Making
1. What is
Decision Making? 2. Barriers to Good
Decision Making

3. Decision
Making Process

4. Decision Making
Tools
 What is Decision Making?

• Decision making is the cognitive process leading to

the selection of a course of action among alternatives.
• Every decision making process produces a final
choice. It can be an action or an opinion.
• It begins when we need to do something but we do
not know what. Therefore, decision making is a
reasoning process which can be rational or irrational,
and can be based on explicit assumptions or tacit
assumptions.
 Barriers to Good Decision Making

• Hasty - Making quick decisions without having

much thought.
• Narrow - Decision making is based on very limited
information.
• Scattered - Our thoughts in making decisions are disconnected
or disorganized.
• Fuzzy - Sometimes, the lack of clarity on important aspects of
a decision causes us to overlook certain important
considerations.
 Decision Making Process
Steps Tips
1. Identify a problem or ❑ A lot of decision making goes wrong at the starting point.
opportunity. ❑ The more specific your definition of the decision is to made, the
clearer will be your analysis and the likelihood of success.

2. Gather Information ❑ Successful decision makers explore all of the possible choices of
the situation.
3. Analyze Situation ❑ In fact many of the less obvious choices turn out to be the most
4. Develop Options effective ones.
❑In many cases, we may lack sufficient information to make an
informed decision.
5. Evaluate Alternatives ❑ Analyze the advantages and disadvantages of each choice

6. Select the preferred ❑ Synthesize all what you learned in previous steps and make a
conclusion that you believe to be your “best” choice.
alternatives
7. Act on decision and ❑ Once you have selected your best choice, you need to develop and
implement a specific and concrete plan of action.
monitor the results,
❑ As you begin taking the steps in your plan, you will discover that
making necessary adjustments need to be made.
adjustments.
 Decision Making Tools

Tools to facilitate better decisions:

• SWOT ANALYSIS
• SIX THINKING HATS
• DECISION MATRIX
• FORCE FIELD ANALYSIS
• ISHIKAWA DIAGRAM
• MIND MAPPING
• SOCRATIC QUESTIONING
 SWOT Analysis

• SWOT analysis is a great technique for identifying your

Strengths and Weaknesses and study any Opportunities
and Threats you face.
• It is also a powerful strategic planning tool used to
evaluate a project or in a business venture or in any other
situation of an organization or individual requiring a
decision in pursuit of an objective.
• It involves monitoring the Management environment
internal and external to the organization or individual.
 SWOT Analysis – Strategic Use

• Orienting SWOTs to An Objective - If SWOT analysis does not start with defining a
desired end state or objective, it runs the risk of being useless.
• If a clear objective has been identified, SWOT analysis can be used to help in the
pursuit of that objective. In this case, SWOTs are:

Strengths Weaknesses
Attributes of the organization Attributes of the organization
that are helpful to achieving the that are harmful to achieving
objective. the objective.
Opportunities Threats
External conditions that are External conditions that are
helpful to achieving the harmful to achieving the
objective. objective.
 SWOT Analysis – Creative Use

• Creative Use of SWOTs – If the objective seems

attainable, the SWOTs are used as inputs to the creative
generation of possible strategies, by asking (usually in
groups) and answering each of the following four
questions, many times:
Strengths Weaknesses
How can we Use each How can we Stop each
Strength? Weakness?

Opportunities Threats
How can we Exploit each How can we Defend against
Opportunity? each Threat?
Source: http://en.wikipedia.org/wiki/SWOT_Analysis
 SWOT Analysis – Internal and External
Factors
• The aim of any SWOT analysis is to identify the key
internal and external factors that are important to
achieving the objective. SWOT analysis groups key pieces
of information into two main categories:
Strengths
Internal Factors
Organization

Weaknesses
Opportunities

External Factors
External Environment

Threats
 SWOT Analysis – Errors to Be Avoided

• Conducting a SWOT analysis before defining and

agreeing upon an objective (a desired end state).
SWOTs should not exist in the abstract. They can exist
only with reference to an objective.
• Opportunities external to the company are often
confused with strengths internal to the company.
They should be kept separate.
• SWOTs are sometimes confused with possible
strategies. SWOTs are descriptions of conditions,
while possible strategies define actions.
Decision matrix
 Force field analysis

• Force Field Analysis is best carried out in small group of about six to eight people
using flip chart paper or overhead transparencies so that everyone can see what is
going on.
• The first step is to agree the area of change to be discussed. This might be written
as a desired policy goal or objective.
• All the forces in support of the change are then listed in a column to the left
(driving the change forward) while all forces working against the change are listed
in a column to the right (holding it back).
• The driving and restraining forces should be sorted around common themes and
should then be scored according to their 'magnitude', ranging from one (weak) to
five (strong).
• The score may well not balance on either side.
Force field analysis
Ishikawa Diagram (fishbone)
 Six Thinking Hats

Argument vs. Parallel Thinking

 Six Thinking Hats
Framework

• Confusion is the biggest enemy of good

thinking
– We try to do too many things at a time
• Juggling with six balls at a time is rather difficult
• Tossing up one ball at a time is much easier

– Six Hat Thinking does one thing at a time and

in the end the full picture emerges
 Six Thinking Hats
Western Thinking = Argument

• Western thinking was designed about 2300

years ago by the Greek “Gang of Three”:
– Socrates – simply point out what is “wrong”
– Plato – we see only shadow “truths”
– Aristotle – things fit into “boxes”
(categories)

• Western thinking is concerned with “what is”

determined by analysis, judgment and
argument.
Six Thinking Hats
Adversarial vs. Parallel Thinking

Adversarial Thinking
A B

Parallel Thinking
A

B
 Six Thinking Hats
Parallel Thinking

It was six men much

inclinedTo learning,
Who went to see the
Elephant
(Though all of them
were blind),
That each by
observation
Might satisfy his mind. John Godfrey Saxe's ( 1816-1887) version of

the famous Indian legend

 Six Thinking Hats
Parallel Thinking
Wall
Fan

Spear

Snake

Rope And so these men of Indostan

Disputed loud and long,
Tree Each in his own opinion
Exceeding stiff and strong,
Though each was partly in the
right,
And all were in the wrong!
 Six Thinking Hats
Parallel Thinking

A wise man was passing by and he saw this. He stopped and asked
them, "What is the matter?" They said, "We cannot agree to what
the elephant is like.“

The wise man calmly explained to them, "All of you are right. The
reason every one of you is telling it differently is because each one
of you touched a different part of the elephant. So, actually the
elephant has all those features.“

"Oh!" everyone said. There was no more fight. They felt happy
that they were all right.
 Six Thinking Hats
Parallel Thinking

• Using parallel thinking they could all walk around

and “look” at each part of the elephant together.
So at each moment each person is looking in
parallel from the same point of view and in the
same direction.
• This is almost the exact opposite of argument,
adversarial, confrontational thinking
– Each party deliberately takes an opposite view
– Each tries to prove the other wrong
 Six Thinking Hats
Directions and Hats

• By using standard labels (like; front, back, left side, right

side, north, south, east, west) we can choose which
direction we want to look.
• What are the different directions thinkers can be invited
to look?
• This is where the hats come in:
– There are six colored hats corresponding to the six
directions of thinking: white, red, black, yellow, green,
blue.
• Why hats?
– A hat indicates a role (i.e. I see you have your thinking
cap on…)
– A hat can be put on or taken off with ease
– A hat is visible to everyone around
 Six Thinking Hats
The Six Hats

White Hat

Blue Hat
Red Hat

Green Hat Black Hat

Yellow Hat
 Six Thinking Hats
The WHITE Hat = Facts and Data

• The White Hat calls for information known or

needed.
– Think of white paper, which is neutral and carries
information:
• …What information do we have?
• …What information is missing?
• …What information would we like to have?
• …How are we going to get missing information?
When you are asked for White Hat thinking, you are being
asked to put aside proposals and arguments - and to focus
directly on the information.
 Six Thinking Hats
The RED Hat = Feelings / Intuition

• The Red Hat signifies feelings, hunches, and

intuition.
– Think of red and fire and warm:
• …Putting on my red hat, this is what I feel about the
project
• …My gut feel is that it will not work
• …I don’t like the way this is being done

Because the Red Hat signals feelings, they can come into
the discussion without pretending to be anything else.
 Six Thinking Hats
The BLACK Hat = Issues / Concerns

• The Black Hat is judgment – the devil’s

advocate or why something may not work.
– Think of a stern judge wearing black robes
who comes down heavy on wrong-doers.
– The Black Hat is the caution hat.
• …The regulations do not permit us to do that
• …We do not have the capacity to meet the demand

The Black Hat is very valuable but overuse can be a

problem.
 Six Thinking Hats
The Yellow Hat = Benefits

• The Yellow Hat symbolizes brightness and

optimism.
– Think of sunshine.
– The Yellow Hat is for:
• The logical positive view of things
• Feasibility and how something can be done
• Benefits that are logically based:
– …This might work if we moved the plant nearer the
customers
– …The benefit would come from repeat customers
Yellow Hat thinking requires a deliberate effort. Benefits
are not always immediately obvious and we might have to
search for them.
 Six Thinking Hats
The GREEN Hat = New ideas / Possibilities

• The Green Hat focuses on creativity; the

possibilities, alternatives, and new ideas.
– Think of vegetation and rich growth.
– The Green Hat is for:
• New ideas and additional alternatives
• Putting forward possibilities and hypotheses
• Creative efforts
– …We need some new ideas here
– …Could we do this a different way?
The Green Hat makes time and space available for
creative thinking.
 Six Thinking Hats
The BLUE Hat = Managing the Thinking

• The Blue Hat is used to manage the thinking

process.
– Think of the sky and an overview.
– The Blue Hat:
• Is for process control
• Sets the agenda for thinking
• Suggests the next step in the thinking
• Can ask for other hats:
– …I suggest we try some green hat thinking
– …Could we have a summary of your views?
The Blue Hat is for thinking about thinking. It is used for
organizing and controlling the process so that it becomes
more productive.
 Six Thinking Hats
Framework

• Encourages parallel thinking

• Directs thinking in discrete segments
• Switches thinking from one mode to
another
• Explores a subject more thoroughly
• Makes specific time and space for
creative thinking
• Separates ego from performance
 Six Thinking Hats
• White Hat: Looks objectively at data and information. Is neutral and
concerned with facts and figures.

• Red Hat: Legitimizes feelings and gives an emotional view, hunches,

and intuition.

• Yellow Hat: Is positive and constructive. The yellow color symbolizes

sunshine, brightness and optimism.

• Black Hat: Is logical, negative, judgmental, and cautious. Is gloomy,

suggests why it cannot be done.

• Green Hat: Is about new ideas and creative thinking.

• Blue Hat: Controls the thinking process. The blue hat is concerned
with control and the organization of the thinking process.
 Six Thinking Hats
White Hat: Red Hat:
Information
• Information we know Feelings, Intuition,
• Information we Emotions
would like to know • Permission to express
• Information we need feelings
• Information that is • No need to justify
missing • Represents feelings right
• How are we going to now
get that information • Keep it short
• Includes hard facts • A key ingredient in decision
to doubtful making
information
 Six Thinking Hats

Black Hat: Yellow Hat:

Logical Negative Logical Positive
• The pessimistic view • The optimistic view
• Reasons must be given • Reasons must be
given
• Points out thinking that
does not fit the facts, • Needs more effort
experience, regulations, than the black hat
strategy, values • Looks for the
• Points out potential concept behind the
problems idea
 Six Thinking Hats

Green Hat: Blue Hat:

New Ideas, Managing the Thinking
Possibilities • “Control” hat
• Creative thinking • Organizes the thinking
• Seeking alternatives • Sets the focus and
and possibilities agenda
• Removing faults • Summarizes and
• Doesn’t have to be concludes
logical • Ensures that the rules
• Generates new are observed
concepts
 Mind Mapping Diagrams

• graphical representations of thought

processes for brainstorming, problem
solving, rational analysis, and decision
marking.
• It includes thousands of ready-made
graphics that you simply stamp to create
your drawing
Mind Mapping Diagrams