CHAPTER TWO

STRATEGIC DECISION MAKING and BUSINESS PROCESSES

Introduction to Decision Making

How do we make decisions? What methods do we use as a basis

for the decisions we make? How do we assess whether a decision

was good or bad? Could the decision have been improved?

Today, decisions are made using massive amounts of data and quantitative (statistical) analysis Fact-based decision making

Decision-making Steps

Problem identification Gather facts to

Fully understand the problem Who will fix it What recourses are needed

Devise possible solutions Evaluate and select Implement

Types of Decisions

Operational Structured decisions Software systems are making more and

more of these Managerial

Sem-istructured decisions Strategic

Unstructured decisions

Measuring IT Performance (1)

IT capital expenditures can be huge Software / hardware / training 112 Million for Hershey’s ERP

Expenditures need to be measured to determine whether they are worthwhile

We measure efficiency and effectiveness The two are interrelated

Measuring IT Performance (2)

Efficiency metrics (The technology itself) System uptime (availability) Response time (time to render a Web

page) Transaction processing performance

(database transactions per second)

Information accuracy

Measuring IT Performance (3)

Effectiveness metrics (How well the technology works) Customer satisfaction Sales increases Cost reductions

Use accounting and financial methods to assess Cost/benefit analysis, NPV, ROI, cash flow

Usability How many clicks to accomplish a task

Measuring Success

Efficiency and effectiveness metrics Critical success factors

These should be quantitative Don’t create to many CSFs

Key performance indicators How do we measure those CSFs

WHAT YOU MEASURE IS WHAT YOU GET

IT Systems and Decision Making

Transaction processing systems Management information systems Decision support systems Executive information systems

Supply chain systems

Transaction Processing Systems (1)

POS transactions All of those Amazon sales Routine banking debit and credits Every credit card swipe

VISA processes roughly 12,000,000,000 transactions / year (growing at 14% / year)

http://investor.visa.com/phoenix.zhtml?c=215693&p=quarterlyearnings

Transaction Processing Systems (2)

System runtime functions Ensures data integrity, availability,

security System administration functions

Configuration and monitoring Development functions

Development of custom business applications

Transaction Processing Systems (3)

Management Information Systems

The core role of IT in the 1970’s and early 1980’s

Aggregate transaction and produce summary reports Accounting (AR / AP / Payroll / GL) Inventory control Financial statements

These are analytical systems

MIS Critical Success Factors

Timeliness Users get information when they need

it Accuracy

Automated and manual internal controls must ensure accuracy

Consistency In data collection and processing

Decision Support Systems (1)

Decision Support Systems (DSS) provide quantitative tools to help managers make better decisions

Executive Information Systems (EIS) are a specialized form of DSS

DSS and EIS systems often use data warehousing and data mining to find interesting nuggets

DSS and EIS systems often use artificial intelligence

Decision Support Systems (2)

Quote from Frito-Lay President Ten years ago, I could have told you

how Doritos were selling west of the Mississippi

Today, I can tell you how well they are selling in California, in Orange County, in the town of Irvine, in the local Vons supermarket, in the special promotion, at the end of Aisle 4, on Thursdays

Decision Support Systems (3)

What-If analysis Sensitivity analysis

(Elasticity) Goal-seeking Optimization analysis

Excel’s Solver is a good example Data mining may play a part

Market basket analysis (AM/PM example)

Who Uses a DSS?

Insurance (Florida hurricanes) Assess regions most prone to disaster and the

probable risk Predict types of structures most prone to

hurricanes Telecommunications

Examine call patterns of delinquent customers to predict which will become bad debts

Use neural networks to detect fraudulent calls and charges

Make sure to watch the FedEx custom critical video

Who Uses a DSS?

Credit cards Examine transactions and compare

against known spending patterns Use known customers to predict credit

worthiness of new accounts Airlines

Fares change every hour or soMaximize revenue per seat mile

Think of the scheduling problem during a snowstorm

Executive Information Systems

These are a specialized form of DSS Goals

Consolidation of information Drill-down Slice and dice

Many EIS systems rely on digital dashboards

View of IT

Artificial Intelligence (Introduction)

Designed to leverage human capabilities rather than replace them

Goals Develop machines that think We are trying to mimic human

intelligence There philosophical and moral debates

about AI

Artificial Intelligence (The Turing Test)

A human interviewer and computer interact

The test is passed if: The computer did not know if it was

interacting with a person The person did not know if it was

interacting with a computer No machine has ever passed the

Turing test

AI (Case Studies)

Authorizing financial transactions AMEX fraud detection

Configure hardware and software Dell and others

Problem diagnosis

Applications of AI

Decision management Diagnostic Design Product or process selection Process control

Domains of AI

Expert systems and knowledge-based systems

Neural networks Fuzzy logic

Soft computing Neural networks

Generic Algorithms Robotics Natural Interfaces

Expert Systems

The machine is acts as the expert They are knowledge-based information

systems Types of knowledge bases

Case based Frame based Object bases Rule based

Pharmacologic interaction Medical diagnosis

AI (Neural Networks)

Try to mimic the operation of the human brain Software that learns Handwriting recognition Medical diagnosis Pattern recognition Sports betting systems

AI (Fuzzy Logic)

Deals with uncertainty Near, far, similar to

Example Auto-focus cameras

AI (Genetic Algorithms and Intelligent agents)

Genetic algorithms Conceptually similar to evolution and

genetic mutation Intelligent agents

Outlook detects spam and deletes it The Roomba vacuum (

http://store.irobot.com/corp/index.jsp)

AI (Intelligent Agents)

Software surrogate for an end user Uses built in rules to make decisions for

an end user Adaptive testing Outlook to delete junk e-mail User interface agents

Help users run software

Data Mining

Use data mining to sift through information to uncover hidden patterns

More later

Business Processes

A standardized set of activities that accomplish a specific task

Business processes are typically connected together

A process should be stable (have few, if any, exceptions)

Business Process (Order to Cash)

Issue a sales quotation (sales) Receive a purchase order (sales) Issue a sales order (sales) Ship goods (warehouse) Issue an invoice (accounting) Receive payment (accounting

Optimizing Business Processes

Improving a business process can Speed the checkout process

(automated check stands) Reduce cost (online banking and other

transactions) Production and manufacturing

optimization

Business processes exist in every functional area of a business

Categorizing Business Processes

Customer facing processes Seen by the customer Your Web site

Business facing processes Seen by the business Human resource systems

Enhancing Business Processes

Business Process Improvement Business Process Reengineering Business Process Modeling

A graphical description of a business process

Business Process Improvement

Make incremental improvements on existing business processes

Take advantage of new technologies Simple automation tasks

Process improvement can be continuous or apply to a discrete processes

Business Process Reengineering

Redesign workflow and existing business processes

Reengineering is a sliding scale From a simple change to a process To a complete overhaul of the way a

company does businessThis can carry a high risk of failure

Deciding What to Reengineer

Analyze the costs and benefits of the project using financial and accounting methods

Perform risk assessment

Modeling (General)

A model is a simplified, often pictorial, representation of reality

We can model many things Architectural plans and drawing 3-dimensional electronic models Models of business processes

Business Process Modeling

Models can be used reverse engineer as system (as-is process)

Models can be used to design new processes and workflows (to-be process)

Several diagramming tools are used to model systems Flowcharts / UML diagrams / Use case

diagrams / etc…

Flowchart of a Business Process

Business Process Management

We take a proactive and enterprise-wide approach to Understanding processes Optimizing them Integrating processes across functional

business units