an ahp- multicriteria selection of …...2 an ahp multicriteria selection of products in industrial...

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AN AHP MULTICRITERIA SELECTION OF PRODUCTS IN INDUSTRIAL AND TECHNOLOGICAL DIVERSIFICATION STRATEGIES

EWG-DSS, Liverpool, 12-13 April 2012

José Mª Moreno

AN AHP- MULTICRITERIA SELECTION OF PRODUCTS IN INDUSTRIAL AND

TECHNOLOGICAL DIVERSIFICATION STRATEGIES

José María MORENO-JIMÉNEZ1

([email protected])Daniel de ARCOCHA1

Emilio LARRODÉ2

Victoria MUERZA2

1Zaragoza Multicriteria Decision Making Group (GDMZ)(http://gdmz.unizar.es)

2Sustainable Systems and Means of Transport Group (SMITS)(http://gitel.unizar.es)

Universidad de Zaragoza. SPAIN

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ABSTRACTThe economic recession that has recently immersed the western world, the dynamism and complexity of the markets and the generalisedglobalisation of the world economy have forced many companies to rethink and reorganise their industrial strategies.

Through identifying and taking advantage of the key technologies of a company, this work presents a multicriteria methodology and its corresponding decisional tool (DSS) for the selection of the best product in a process of related technological diversification that, along with the key technologies, identifies the sub-levels consonant to the sub-technologies, applications and products.

The proposed methodology, based on the AHP, allows the integration of multiple scenarios, actors and factors or criteria, both tangible and intangible. The methodology has been applied to a case study in the Spanish automotive auxiliary sector.

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AGENDA

1. INTRODUCTION

2. BACKGROUND

1. Diversification Strategies

2. The Analytic Hierarchy Process (AHP)

3. TECHNOLOGICAL DIVERSIFICATION PROCESS

4. AN AHP MULTICRITERIA SELECTION OF PRODUCTS

5. CASE STUDY AND RESULTS

6. CONCLUSIONS

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INTRODUCTION

The global and interconnected context of economy

The economics crisis (fall in sales, delocalization of multinational companies, unemployment…)

The dynamism and competitiveness of the markets, particularly those related with manufactures companies(object of our study).

The financial problems of Spanish firms⇒

“To find new development strategies that will guarantee the survival of firms (Spanish components manufactures) and the preservation of jobs”

1. Introduction2. Background

3. TechnologicalDiversificationProcess

4. Product Selection5. Case Study and

Results6. Conclussions

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INTRODUCTIONOne of the possible strategies in the search for new production options is diversification; understood as the increase of sales of a company in terms of new products in new markets (Ansoff 1965).

The High Council of the Chamber of Commerce, Industry and Shipping in Spain (HCCCISS), by means of public tender, contracts (2010) our University research group to the development of a simple and user-friendly software for the “quick” evaluation of the suitability of a potential technological diversification process.

Our research team, in collaboration with the HCCCISS, decided to develop a DSS to respond the initial requirement (a quick suitability evaluation of technological diversification in the automotive industry) and to design a global methodological framework for the technological diversification process.





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INTRODUCTIONThe methodology we propose for the technological diversification process (TDP) consists of two stages:

(i) the evaluation of suitability, a stage that includes:• the formulation of the problem • the selection, through multicriteria techniques, of

companies that have the potential to undertake a diversification process

(ii) the diversification process, in which:• the diversification suitability of the company is

confirmed• the most appropriated technological

diversification strategy is chosen• a business strategy is designed• its implementation process is established.





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INTRODUCTIONIn a previous study (Larrodé, Moreno-Jiménez, Muerza, 2012), a multicriteria evaluation of suitability procedure based on AHP and its corresponding DSS tool(AHP-MSE-AIN) have been applied to a set of companies belonging to the Spanish automotive industry.Q1: Why the Spanish automotive industry?

Characteristics of the manufactures companies:there is a high dependence on the evolution of the main industryit has a significant technological, innovation and competitive capacityit is capable of providing custom-made solutionsthere is the possibility of transferring innovations to other industrial sectors.The “risk” of this industrial sector





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INTRODUCTIONQ2: Why AHP?

Saaty`s Analytic Hierarchy Process (AHP) is one of the most extended multicriteria decision making approach. It allows the consideration of multiple scenarios, factors or criteria (tangible and intangible) and actors.

AHP has previously been used in the automotive industryand the new product development environment. It presents very good behaviour in multi-actor decision making.

The methodology we propose for the technological diversification strategy considers that the actors (experts) work in a group decision making setting, where the judgments (associated with the preferences among the elements being compared) have been elicited by consensus.





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INTRODUCTION

First Phase: Multicriteria suitability evaluation model





The true value of this first phase in the technological diversification pro-cess is not, despite its importance, the final classification of the companies, but the learning procedure derived from the multicriteria analysis and evaluation of the diversification suitability. From this learning procedure, eachevaluated company was provided with a series of recommendationsrelated to diversification

(Larrodé, Moreno-Jiménez, Muerza, 2012)

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INTRODUCTION

Second Phase (2nd stage): Multicriteria selection of products. Once the diversification suitability of a firm is confirmed and the technological tree is designed, the most appropriate technological strategy is selected.

In this final step of the 2nd stage, the company must decide on the best product or portfolio of products for achieving the goals pursued by the company.

Two approaches for the multicriteria selection of productsbased on related technologies (concentric diversification):

Top-Down or Market orientation approach

Bottom-Up or Technological orientation approach





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BACKGROUND2.1. Technological Diversification

In the last 30 years, the concept of industrial diversificationhas been intensively studied from different perspectives(governmental, business, economic etc.) and perhaps this is why there is still no clear agreement on how to conceptualize, define and measure this business strategy.Reasons for diversification:

Internal incentives (inactive resources) • Stabilize profitability and increase sales (Wan 1998)• Improve product quality and reduce costs (Garcia,

2006) Environment incentives (business opportunities) • Increase of market power, risk reduction and the

exploitation of synergies between different businesses, markets and activities (Grant, 2002).





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DIVERSIFICATIONMarket developmentNew

Product developmentMarket penetrationTraditional

MARKETS

NewTraditional

PRODUCTS

DIVERSIFICATIONMarket developmentNew

Product developmentMarket penetrationTraditional

MARKETS

NewTraditional

PRODUCTS

Table 1. Ansoff’sProduct-Market Matrix

Related technology Unrelated technology

Same typeFirm its own

customer

Similar types

Concentric Diversification Marketing and

technology related

Concentric Diversification

Marketing related

New types

Concentric Diversification

Technology relatedCONGLOMERATE DIVERSIFICATION

NEW PRODUCTS

NE

W M

AR

KE

TS

Horizontal Diversification

Vertical Integration

Table 2. Relational and un-relational diversification





BACKGROUNDAnsoff (1965) defines diversification (Table 1) as the

growth option of a company (increasing sales) in terms of products and markets (new products for new markets). Table 2 includes the following strategies for diversification:

(i) Horizontal diversification strategy (ii) Vertical integration strategy (iii) Concentric diversification strategy (iv) Conglomerate diversification strategy

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BACKGROUND2.2. Analytic Hierarchy Process (AHP)

AHP is one of the most widely used multicriteria technique in decision making processes. It involves the consideration of multiple scenarios, actors and factors or criteria (tangible and intangible).It is one of the methods that best captures the changes in philosophy (from mechanistic reductionism to evolutionist holism), methodology (from the search for truth to the search for knowledge) and technology (communication networks) that took place in the latter years of the 20th C. This technique constructs an absolute scale associated with the priorities of the elements being compared following a four-step methodology consisting of: (i) modelling, (ii) evaluation, (iii) prioritization and (iv) synthesis.





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BACKGROUND2.2. Analytic Hierarchy Process (AHP)

(i) Modelling: construction of a hierarchy in which criteria, subcriteria, attributes and alternatives are incorporated(ii) Evaluating the hierarchy by means of reciprocal pairwise comparison matrices, where judgments form part of Saaty’s fundamental scale (Saaty, 1980) (iii) Prioritization of the elements of the hierarchy using any of the existing prioritization methods (local priorities) and the principle of hierarchical composition (global priorities)(iv) Synthesis of the global priorities to obtain the total or

final priorities for the alternatives using some aggregation procedure.





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According to the resources-based approach a company can be characterised as a set of technologies and a deposit of knowledge applied to the solution of problems.

Here, the concept of technology is not understood in the traditional sense but as a broader concept related to the know-how of the firm - the knowledge, skills and capabilities that a company has available at any given moment.

The exploitation of technological potential (TDP) consists in systematically analyzing new applications in other areas that have the possibility of obtaining a profit.

Similarly, some authors assert that companies must consider how and where to use their superior technological skills in order to extend their activities to other product lines or business areas (Amit and Shoemaker 1993).

TECHNOLOG.. DIVERSIFICATION PROCESS

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Technological diversification (TD) is defined as:a “corporation's expansion of its technological

competence into a broader range of technological areas”(Granstrand and Oskarsson 1994).

the diversity in the knowledge system underlying the nature of products and their methods of production (Quintana and Benavides, 2008).

the diversification of a company’s technology base (Breschi, et. al. 2003) that can be measured by R&D intensity and number of patents (García-Vega 2006, Leten et. al. 2007).

This work-related view allows a company to identify the right work that specific technology is suited for by means ofinternal or external technology exploitation.

TECHNOLOG.. DIVERSIFICATION PROCESS

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TECHNOLOG.. DIVERSIFICATION PROCESSDEF. We refer to the TDP as the search for new products

and markets based on the exploitation of the technological power of the company by means of the identification of its key technologies, competitive advantages and potential opportunities (concentric diversif. with related technologies).

Methodology for TDP (Larrodé et al., 2012):Phase 1: Suitability Evaluation

Stage 1.1: Problem formulationStage 1.2: AHP-multicriteria suitability evaluation

Phase 2: Integral Diversification ProcessStage 2.1: Diversification suitability confirmation Stage 2.2: An AHP selection of technological strategyStage 2.3: Preparation of a business strategy.Stage 2.4: Implementation of the business strategy

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TECHNOLOG.. DIVERSIFICATION PROCESSPhase 2: Integral Diversification Process

Stage 2.1: Diversification suitability confirmationIt involves a more profound analysis in order to confirm

the initial evaluation and to extract the informationnecessary to develop its “technological tree”.

This is a graphical visualization, represented by a tree, of the technological power of the firm. The roots of the technological tree present the generic technologies, the trunk is the technological and industrial potentialdeveloped by the firm, the branches are the industrial activity sectors, and subsectors and products are represented by the fruit (G.E.S.T, 1986).

The tree is a formal representation of new alternativesfor a product or service derived from a technology of the company (usually a key technology).

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1

2

3

4

5

61. Roots: Generic technologies2. Trunk: Technological power3. Branch_1: Key technology4. Branch_2: Sub-technologies5. Branch_3: Applications6. Fruits: Products

Figure 1: Example of a schematic technological tree:





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KEY TECHNOLOGY: I+D+i (1T/6ST/10AP/25PR)

v

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Stage (2.1.) comprises:

(i)an analysis of the technological potential(ii) an inventory of the key technologies(iii) the identification of the technological

diversification alternatives (branches or/and set of fruits of the technological tree), as a basis for the selection of the best technological strategy(next stage).The identification of the technological diversification alternatives or strategies is a very complex and general problem, which directly depends of the objectives of the company

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AHP-MULTICRITERIA SELECTION OF PRODUCTS

Stage 2.2: Selection of the technological strategy (branches & fruits)

Once the technological tree of the firm has been constructed and the technological alternatives for the diversification process have been identified, the next stage selects the best strategy (branches and fruits) to be harvested. This is done by means of the Analytic Hierarchy Process (AHP).

The selection of the best alternatives (branches & fruits of the technological tree) is also a highly complex problem that requires the consideration of multiple scenarios, actors and criteria.

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Stage 2.2: Selection of the technological strategy

Its resolution requires the consideration of multicriteria approaches which allow us to combine the objective information related to the market, competition and the company (economic and technological aspects), with the subjective knowledge and preferences of the decision maker (the company management).

The objective of this paper is to design an AHP based tool that can be used for the selection of the best product, in other words, the most effective, efficaciousand efficient product in a technological diversification process (Moreno-Jiménez et al, 1999).





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Two approaches:

Top-Down: Market based orientation. After the identification of a set of products that are potentially interesting from a market perspective and that can be developed with relational technologies, we select the mostappropriated product or portfolio of products for achieving the goals pursued by the company, taking into account the technological and economics considerations.

Bottom-Up: Technology based orientation. After the identification of the key technologies of the firm and their corresponding sub-technologies, some potential applications and products are proposed and, finally, the most appropriated technology strategy (branches and fruits) is selected.





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Top-Down (Market) Orientation [4C/11SC/39AT]

To achieve this objective, a group of criteria, organised into four blocks, must be satisfied, the blocks are: Economic (E), Social (S), Technological (T) and Environmental (A).

The sub-criteria of the four previous criteria are:

Economic: Production (PR), Financial (FI), Human Resources (RH) and Commercial (CO)

Social: Socio-demographic (SO), Cultural (CU) and Political (PO);

Technological: Capacity (CA) and Adaptability (AD)

Environmental: Environment (ME) and Environmental policy (PA).





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CASE STUDY AND RESULTSCase Study:

The methodology was applied to a Spanish company working in the automotive auxiliary sector. The company’s main activity is the production and development of water pumps and the distribution of automotive components such as fuel pumps and filters.

The first phase was an AHP multicriteria analysis that concluded that the company was suitable for a diversification strategy.

The second phase corresponded to a technological study that identified three key technologies: i) the capacity for process automation; ii) research and development (R+D); iii) aluminium smelting. This information was used to design the technological tree.





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CASE STUDY AND RESULTSCase Study:

Three products (fruits) were proposed as the alternatives by the commercial employees of the company:

• A1.Automated Guided Vehicles (AGV),• A2. Mini wind-power generators (MIN) • A3. Diaphragm pumps (BOM).

Each of these three products employs a different key technology and sub-technology. The group of experts then analysed and evaluated the alternatives (products).

After the prioritisation of the alternatives and calculations made with Expert Choice, the Diaphragm pumps alternative was selected as the best product for the TDP.





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RESULTS





Fig. Product selection model Fig. Simplified Technol. tree

Availabity NOYESNO

YES YES

NO

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RESULTS (Sensitivity Analysis)





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RESULTS (Sensitivity Analysis)





52% (51,4%), 16% inicial (> 200%). A*=MIN

20% (19,4%), 5,9% inicial (> 200%). A*=AVG

51.3% 26.8%

16.0% 5.9%

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CONCLUSIONSMethodology:

The objective of this study was to design a multicriteria methodology using the AHP for the selection of the best product for a company diversification strategy.

The methodology select the best alternative through the introduction of a hierarchical structure, the aggregation of the judgements that reflect the preferences of the decision-makers with reference to the criteria and the prioritisation of the alternatives.

The methodology is of a cognitive character - its application gives companies greater knowledge of their strategic options with regards to diversification projects (greater understanding of their structure, business environment and commercial opportunities).





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CONCLUSIONSMethodology:

The methodology is clearly a tool of great potential for growth and expansion. It can be applied to many contexts concerning the selection of a product or portfolio of products and other types of business strategies, it can also be used in a variety of business sectors.

Collaborative Decision Making and new decisional toolsare becoming more and more important in organisationsseeking to optimise their processes. Particularly, when the firms deals with the selection of more competitive strategiesin highly complex environments (competitive markets).

These tools do not require a great use of resources and may generate significant benefits for the company or organisation





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REFERENCESAmit, R. and Shoemaker, P. J. H. (1993): Strategic assets and

organizational rent. Strategic Management Journal 14(1), 33-46. Ansoff, H.I. (1976): From strategic planning to strategic management.

John Wiley & sons. New York. Breschi, S., Lissoni, F. and Malerba, F. (2003): Knowledge-relatedness in firm technological diversification. Research Policy32(1), 69-87. G.E.S.T. (1986): Grappes technologiques. Les nouvelles stratégies

d'entreprise. McGraw-Hill. Paris.García-Vega, M. (2006): Does technological diversification promote

innovation? an empirical analysis for european firms. Research Policy(35), 230-246. Granstrand, O. and Oskarsson, C. (1994): Technology diversification

in "MUL-TECH" corporations. IEEE Transactions of Engineering Management, Vol.41(4), 355-364. Larrodé, E.; Moreno-Jiménez, J.M.; Muerza, M.V. (2012):

Multicriteria Suitability Evaluation of Technological Diversification in the Automotive Industry. Forthcoming in International Journal of Production Research





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REFERENCESLeten, B., Belderbos, R., and Van Looy, B. (2007): Technological

diversification, coherence, and performance of firms. Journal of Product Innovation Management 24(6), 567-579. Moreno-Jiménez, J.M.; Aguarón, J.; Escobar, M.T.; Turón, A. (1999): The Multicriteria Procedural Rationality on SISDEMA. European Journal of Operational Research 119(2), 388-403.Quintana-García, C., and Benavides-Velasco, C. A. (2008): Innovative

competence, exploration and exploitation: The influence of technological diversification. Research Policy 37(3), 492-507. Saaty, T.L. (1980): The Analytic Hierarchy Process. McGraw-Hill. New York.Saaty, T.L. (1994): Fundamentals of Decision Making and Priority Theory with the Analytic Hierarchy Process. RWS Publications. Pittsburgh. PA. Thompson Jr, A.A.; Strickland III, A.J. (2003): Strategic

Management: Concepts and Cases. Mc Graw-Hill. Irwin.





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APPENDIX (Data)





Goal ECO SCO TEC ENV Priori.ECO 9 2 2 .513SOC 4 3 .059TEC 2 .269ENV .160RC .00616

Eco PRO FIN HRR COM Priori.PRO 9 3 4 .059FIN 3 2 .513HRR 2 .160COM .269

RC .00616

Soc SDM CUL POL Priori.SDE 3 6 .1CUL 2 .3POL .6RC .000

Tec CAP ADA Priori.CAP 3 .25ADA .75RC .000

Env ENV EPO Priori.ENV 3 .25EPO .75RC .000

ECOPro A1 A2 A3 Priori.A1 3 7 .093A2 2 .292A3 .615RC .00252

Fin A1 A2 A3 Priori.A1 7 1 .467A2 7 .067A3 .467RC .00252

HRe A1 A2 A3 Priori.A1 3 2 .292A2 7 .093A3 .615RC .00252

Com A1 A2 A3 Priori.A1 5 2 .319A2 9 .066A3 .615RC .00118

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APPENDIX (Data)





SOCSde A1 A2 A3 Priori.A1 5 1 0,455A2 5 .091A3 .455RC .000

Cul A1 A2 A3 Priori.A1 4 7 .715A2 2 .187A3 .098RC .00189

Pol A1 A2 A3 Priori.A1 7 4 .715A2 2 .098A3 .187RC .00189

TECCap A1 A2 A3 Priori.A1 3 8 .082A2 3 .236A3 .682RC .00147

Ada A1 A2 A3 Priori.A1 3 1 .429A2 3 .143A3 .429RC .000

ENVEnv A1 A2 A3 Priori.A1 1 1 .333A2 1 .333A3 .333RC .000

EPo A1 A2 A3 Priori.A1 7 1 .111A2 7 .778A3 .111RC .000

A1: AVG .370A2: MIN .179A3: BOM .451

an ahp- multicriteria selection of …...2 an ahp multicriteria selection of products in industrial...

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