Using the Analytic Hierarchy Process for Small Business Decision Making

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Using The Analytic Hierarchy Process For Small Business Decision Making

Small businesses face many of the same decisions as the largest corporations do, but they may not have the resources necessary to develop the information required to make the same quality decisions. Recently, managers of small businesses have identified a need to use various market research/decision analysis tools in order to assess their internal and external environments[9]. For example, managers may attempt to evaluate consumer perceptions of the firm's products in relation to those of its competitors in order to determine an appropriate marketing strategy. As another example, the senior management may be asked to evaluate several alternative business strategies where some of the factors to be considered are not directly measurable, such as "reputation." In a large corporation, these problems are usually handled either with the help of a large internal staff or by spending a large sum on hiring an outside consultant. Most small businesses neither have a large support staff nor the financial flexibility to afford a consultant.

In the above examples, multiple criteria would be used to evaluate several alternatives (e.g., products, strategies). Measuring and interpreting these judgments are difficult, and the analytical methods are often quite complex. Saaty[11] developed an approach to evaluate judgments called the Analytic Hierarchy Process (AHP) that has been used successfully in many decision situations. This approach is well suited for problems where the criteria are qualitative and have a large subjective component, thus requiring judgments. It provides the capability to accommodate some of the behavioral and political factors that influence the decision process. In a small business environment where there may be less opportunity for extensive analysis, these subjective factors may play a more important role in decision making than they do in a much larger organization.

AHP can be used by management to evaluate alternative actions directly or to estimate user preferences for various products, which would then lead to some management action. Preferences are obtained from individuals separately or from a group of individuals. All possible combinations of these situations can arise in the context of small business decision making. Most of the applications of AHP have involved an individual decision maker directly evaluating alternatives. The purpose of this paper is to describe the nature of AHP, illustrate one application involving the evaluation of alternative products by consumers and the subsequent managerial implications, suggest how AHP may be used in many small business applications, and provide some implementation guidance for AHP.

THE ANALYTIC HIERARCHY PROCESS

The Analytic Hierarchy Process is a method used to assist decision makers in evaluating multiple attribute alternatives. There are three basic elements in using AHP: (1) describe a complex decision problem as a hierarchy, (2) use pairwise comparisons to estimate the relative importance of the various criteria on each level of the hierarchy, and (3) integrate the pairwise comparisons to develop an overall evaluation of the decision alternatives.

Hierarchies are basic to the human way of breaking reality into levels. Conceptually, a decision problem consists of various levels representing the focus (objective), the criteria and/or subcriteria, and the decision alternatives. A graphical representation of a simple hierarchy is presented in Figure I.

Identification of the decision hierarchy is the real key to success in using AHP. A decision maker, including the small business decision maker, must know what kinds of criteria are important for evaluating a set of decision alternatives. Developing a decision hierarchy forces the decision maker to be explicit about what those criteria are. A particular advantage of AHP is that it permits the inclusion of subjective criteria in arriving at a recommended decision. …