Analytic Hierarchy Process AHP - Business Performance Management

Summary

The video script introduces the Analytic Hierarchy Process (AHP), a mathematical method for deriving weights for decision-making by comparing elements in pairs. It's applicable to various fields, such as product selection or strategic decision-making. The process involves defining objectives, structuring criteria and alternatives, performing pairwise comparisons, and calculating weights and consistency ratios. An example illustrates how AHP can be used to evaluate and rank smartphone models based on color, memory, and delivery time, ultimately guiding a purchase decision.

Takeaways

• 📊 The Analytic Hierarchy Process (AHP) is a mathematical method used to derive weights for decision-making by comparing elements in pairs.
• 🔢 AHP allows for both quantitative measurements (like price or weight) and qualitative judgments (like satisfaction or preference) to be used as inputs.
• 📋 The process starts by defining the objective and structuring the decision into criteria, sub-criteria, and alternatives.
• ⚖️ Pairwise comparisons are made between elements, using a scale that ranges from 1 (equal importance) to 9 (extreme importance).
• 📊 A matrix is created from these comparisons, and the normalized principal eigenvector is calculated to derive the weights.
• 📈 The weights are then used to evaluate alternatives and rank them based on their importance relative to the decision criteria.
• 🎨 An example given is selecting a gadget based on color, memory, and delivery time, where each criterion is compared and weighted accordingly.
• 📊 The method also allows for a cost-benefit analysis by separating the benefits derived from the analysis from the cost of the alternatives.
• 📈 A diagram can be drawn to visualize the benefits in relation to the relative costs, aiding in the final decision-making process.
• 🔧 AHP is versatile and can be applied in various fields, such as evaluating product features, strategic alternatives, or making decisions with multiple stakeholder inputs.

Q & A

What is the AHP method used for?

The AHP (Analytic Hierarchy Process) method is used to derive weights for criteria or factors by making pairwise comparisons, allowing for both subjective opinions and objective measurements to be considered in decision-making processes.

How does the AHP method handle inconsistencies in judgment?

AHP allows for some small inconsistency in judgment as an input, and it calculates a consistency index to evaluate the level of consistency in the pairwise comparisons made during the decision-making process.

What are the inputs for the AHP method?

Inputs for the AHP method can include actual measurements like price, weight, and other quantifiable factors, as well as subjective opinions such as satisfaction, feelings, or preferences.

What is the output of the AHP method?

The output of the AHP method includes ratio scales derived from eigenvectors and a consistency index derived from the eigenvalue. These are used to rank alternatives or options in a decision-making scenario.

What are the steps involved in the AHP process?

The AHP process involves defining the objective, structuring elements into criteria, sub-criteria, and alternatives, making pairwise comparisons, calculating weights and consistency ratios, evaluating alternatives, and obtaining a ranking.

How are pairwise comparisons made in the AHP method?

Pairwise comparisons in AHP are made using a scale from 1 to 9, where 1 indicates equal importance and 9 indicates one criterion is nine times more important than the other. This scale is used to compare the importance of criteria and sub-criteria.

How is the normalized principal eigenvector computed in AHP?

The normalized principal eigenvector is computed from the pairwise comparison matrix using mathematical methods, often facilitated by software or spreadsheet applications like Excel.

Why might price not be included as a criterion in the AHP analysis?

Price might not be included as a criterion in AHP analysis to allow for a separation of benefits from costs, which can then be used for a cost-benefit analysis, providing a clearer picture of value for money when making decisions.

What is the significance of the consistency index in AHP?

The consistency index in AHP is significant because it measures the level of consistency in the pairwise comparisons. A high consistency index indicates that the comparisons are logically consistent, while a low index suggests that the comparisons may need to be re-evaluated.

How can AHP be applied in different fields?

AHP can be applied in various fields to evaluate product features, make selections from strategic alternatives, select key performance indicators, or make consolidated decisions with multiple inputs from different stakeholders.

What is the purpose of structuring elements into groups of criteria, sub-criteria, and alternatives in AHP?

Structuring elements into groups of criteria, sub-criteria, and alternatives in AHP helps to organize the decision-making process by breaking down complex decisions into more manageable parts, allowing for a more systematic and comprehensive analysis.