Management Process: How It Impacts the Organization
Best Practice of IT Strategy Driven by Management Process
- Pepsi-Cola Case Example
3. Where to Position the Analytical System
4. The Critical Success Factors Approach
- GE Power Systems Case Example
5. The Balanced Scorecard
6. Market-Driven Performance Measurement
- Dannon Yogurt Case Example
7. Planning vs. Control Systems
8. Expert Systems: Potential for Automating Processes
- OceanSpray Case Example: Extracting News from Data
9. Automated Decision Technologies: The New Frontier
- DeepGreen Financial Case Example
Linking Strategy to Operations - A Closed-Loop Management System Stage 1 Develop the Strategy Stage 2 Translate the Strategy Into Specific Objectives And Initiatives of a Strategic Plan
Map out the Operational
Plans and resources to
Stage 4 Execute the Strategy & Operational Plans Stage 5 Monitor & Learn Stage 6 Reassess the Strategy And Update it Source: R.S. Kaplan & D.P. Norton, “Mastering the Management System,” HBR, Jan. 2008, p.65
Management Process Organization Structure and the Corporate Culture Individuals and Roles The Organization’s Strategy Technology MANAGEMENT PROCESSES: Planning, Control, Rewards EXTERNAL ENVIRONMENT: Social, Economic, Political EXTERNAL ENVIRONMENT: Technological Competitors Customers - The Glue that Holds the Organization Together Adapted from M.S. Scott Morton & J.F. Rockart, “Implications of Changes in IT for Corporate Strategy,” Interfaces , Jan-Feb, 1984
Management Processes That Merit Examination
Planning and Budgeting
Performance Measurement and Reporting
Human Resource Management
LESSON: Investments in providing good quality information are a waste if managers do not use the system. Hence, improve the management process first and then develop the information system to support the improved management process.
PEPSI-COLA CASE EXAMPLE
The Bottler has to be well-managed for the Pepsi-Cola Company to prosper.
Focus on the Management Process Identify the Revenue Drivers and Cost Drivers of the Bottler's operations. Develop the Management Process or " how-to " procedures for managing these drivers. An Information System to implement the "how-to" procedures.
PEPSI - COLA'S Thinking in 1982
All Bottlers face essentially the same problems with regard to improving their operating efficiency and profitability.
Why should each Bottler reinvent the wheel?
Pepsi-Cola Company will make the investment in developing an information system that can be used by all Bottlers.
The PC will enable a "standard" software package to be developed for the Bottler Information System.
A Comprehensive Information System to Support the Management Process Developed over a three-year period: Phase I: Sales Analysis & Tank/Cylinder Monitoring Phase II: Equipment Tracking & Service Analysis Phase III: Financial Analysis
Information Provided by the System - Some Examples
How are My Route Drivers Performing?
What is the Average Drop Size for Each Route?
Are the Trucks being Overloaded?
What is the Sales Trend in Different Channels for Pepsi-Free?
Where are My Tanks?
How Many Pieces of Equipment are on Loan?
What is the Productivity of My Mechanics?
Which Makes of Equipment are Less Dependable?
Where to Position the Analytical System ? Initial Target of Most BI Systems: - Corporate Financial Data Why? - Area of great interest for top management - Data readily available - Easy to implement Is a Corporate Financial BI Really “Useful” ?
A Corporate Financial BI System Is “Useful” IF...
It has Micro-Level Data
e.g. Expenditures at the Detail Level
Data on Individual Debtors by Ageing Period
BI System can then Trace Problems to the Root Causes
The CSF Approach What Is It? A method to determine the information requirements to improve management effectiveness. Why? Existing MIS systems are “data-rich but information-poor” - too much financial data - unfiltered data - irrelevant operational data - no external environment data We need information about what really counts; just because data is available doesn’t mean it’s important.
Critical Success Factors are ... The key areas where “things must go right” for the business to flourish They should receive constant and careful attention from management - Determine the Key Indicators Measure the performance of each indicator - Determine the data needed for each indicator IDENTIFY MUST - DOs FOCUS BI ON MUST - KNOWs
The Critical Success Factors Approach Identify the specific factors most responsible for the organization to achieve its goals Determine the KPIs for monitoring each CSF Define the data requirements for measuring each KPI Develop prototype system. Modify prototype based on user feedback
Goals vs. CSFs For For-Profits
Earnings per share
Return on investment
New product success
Quality dealer system
Meeting energy standards
Measures for Tracking CSFs -- An Example
Merits of the CSF Approach 1. Focuses on what management absolutely needs to do and know -- not those which would be merely nice to do and know 2. Sets priorities in the Information Systems Plan 3. Limits data collection to what is necessary 4. Avoids the trap of building systems on data which is readily available or easy to collect 5. Forces consideration of external and soft data 6. Highlights the need for change in information systems in response to environmental and business changes
GE Power Systems: Focus BI on “MUST - DOs” Changing Business Focus: from new machine to replacement parts market from U.S. to international more price sensitive Improve "Customer Service" Increase Productivity Reduce Costs
What Are the “MUST - KNOWs” ? New Data on "DATES" Quote Performance Shipment Performance
Data On “Dates” Needed For BI
· "QUOTE CYCLE" FROM:
- Date of request for quote
- Date of quote release
· "REQUESTED CYCLE" FROM:
- Date of order
- Customer "want" date
· "SHIP CYCLE" FROM:
- Date of order
- Date of shipment
Tracking Cycle Times: Important For Changing Organization Culture From Technology-driven to Market-driven
Traditional Performance Measurement Systems Are Inadequate...
Each function has its own set of “results measures”. For example:
Marketing - Market Share
Operations - Inventory
Finance - Costs
These narrow functional measures could
lead to overall system Suboptimization.
The few cross-functional results measures are financial:
Revenues, Gross Margins, Operating Income,
Return on Investment, etc.
Report on what happened last period without indicating
how managers can improve performance on the next
What is Needed: Process Measures
To monitor activities throughout the organization
that produce a given result.
The Balanced Scorecard
Translates a company’s strategic objectives into a coherent set of performance measures with four different perspectives:
Internal Business Processes
Innovation and Learning
A limited number of critical indicators should be selected within each perspective - about 15 to 20.
Real benefit: Scorecard is the core of the management system - the way the business is run.
Rockwater’s Balanced Scorecard Financial Perspective Customer Perspective Internal Business Perspective Innovation & Learning Perspective Return-on-Capital Employed Cash Flow Project Profitability Profit Forecast Reliability Sales Backlog Pricing Index, Tier II Customers Customer Ranking Survey Customer Satisfaction Index Market Share Business Segment, Tier I Customers, Key Accounts Hours with Customers on New Work Tender Success Rate Rework Safety Incident Index Project Performance Index Project Closeout Cycle % Revenue from New Services Rate of Improvement Index Staff Attitude Survey # of Employee Suggestions Revenue per Employee
Market-based Performance Measures... MUST be linked to Reward Systems Measurement and reward systems are critical in developing a market-oriented business. Just as managers will emphasize those things that top management’s statements of beliefs and values focus their attention on, they will also do those things for which they are evaluated and rewarded Source : F. Webster, “Rediscovering the Marketing Concept,” Marketing Science Institute Working Paper, 1988.
The Dannon Yogurt Case Example
Critical Success Factor: Customer Service
Key Performance Indicators :
For Each Customer
Fill Ratio of Each SKU = Shipments Orders
Freshness of Product of Each SKU = Shelf-Life of Shipments
New Data Requirements:
Fill Ratio of the SKU: Orders for that SKU from Customer
Freshness of Product of SKU: Code Dates on Containers of SKU Shipped to Customer
(Available Shelf-Life = Code Date minus Ship Date)
Result : The legacy Invoicing System, which only had data on
Shipments, had to be replaced with a new system that
captured the additional data needed for management control.
A Market-Driven Performance Measurement System
Customer Service became the metric in Dannon for measuring performance of: Marketing Sales Distribution AND Production
Uniform Performance Measurement is critical for integrating the important functional areas in the business process.
The Management Cycle Establish Objectives Formulate Plan Implement Plan Monitor Performance Control the Implementation, React to Deviations between Plan and Actual Revise Objectives Replan
Management Process: Planning and Control
Deciding “Today” what to do “Tomorrow”
The Planning Horizon: Strategic Planning may be Years Budgeting may be a Year Production may be Weeks
Get Organizational Buy-in
Restructure Organization if necessary
Measuring Actual Performance is Critical for Control
How has Actual Performance deviated from Plan?
What corrective action must we take?
Deviations may also represent an opportunity
A BI TO SUPPORT PLANNING IS NOT EASY TO DESIGN
(1) Large number of available alternatives
how to determine the "best" plan
(2) Uncertainty about the outcomes
how to evaluate the consequences
(3) Multiple criteria for measuring outcomes
how to combine "apples" and "oranges"
"SATISFICING" vs. "OPTIMIZING" IN DECISION-MAKING
Search for the best solution using an optimizing model
Problems: Model may not fit the problem
More data needed
More time and cost
Higher intellectual cost
Choose a solution that is good enough using manager's rules of thumb or heuristics. Benefits: Saves time and cost Easy to implement versus
(1) WHAT ?
What "readings" of actual performance should be
(2) HOW ?
Where should the "meters" for taking the readings be placed?
(3) HOW OFTEN ?
How often should the "meters" be read?
(4) HOW CURRENT ?
How quickly should the "readings" be transmitted to management?
(5) HOW ACCURATE ?
How accurate do the "readings" have to be?
MONITORING THE MARKET
Sales: Volume? Value?
Shares: Total Market? Segments?
Call reports of sales force
MONITORING THE MARKET
How Often ?
Daily? Weekly? Monthly?
How Timely ?
Enough advance warning to steer around the iceberg
How Accurate ?
Satisficing versus Numerical accuracy
Aggregating Data Evens out Market Fluctuations BUT… must be balanced with burden of collecting data
REQUIREMENTS OF A BI TO SUPPORT CONTROL
(1) Summary reports not useful
they can hide problems
(2) Exception reports
a "must" for reducing data overloads
(3) Drill - down capability to access detailed data
to trace a problem to the root cause
(4) Graphics capability
(5) "What happened" is not enough
analysis needed for " what if "
(6) Intelligent drill-down
to signal problems at a detail level
“ WHAT IF” ANALYSIS - An Example
Standard Sales Performance Report
Actual vs. Target vs. Last Period
% Achievement of Target
What are the implications of performance to-date?
THE Question : Will Annual Targets be achieved?
Compare Current Sales Speed with
Balance-To-Achieve Sales Speed
BTA Speed = BTA Target / Balance # of Months
Standard vs. “What If” Sales Reports Fiscal Year: April-March Standard Year-to-Date Sales Report for December 77% 390 300 Totals 111% 90 100 P3 56% 180 100 P2 83% 120 100 P1 % of Target Target Actual Product 210% (39%) 320% 50% Change 6.67 46.67 16.67 BTA Speed 33.33 11.11 11.11 11.11 Current Speed “ What If” Sales Report for December 210 510 300 Totals 20 120 100 P3 140 240 100 P2 50 150 100 P1 BTA Annual Target Actual Product
What are Expert Systems?
A technology that enables expertise to be distributed in a firm without the presence of the human expert
If “This”, Then “That”
Rules are determined from expert knowledge and programmed in the software
Feedback Loop to Improve Rules
An HR Application
Screening a large number of resumes for relatively low-level positions with well-defined and precise skill requirements
- e.g., Call Center Agents
Expert System can weed out applicants who do not meet the requirements
Using Expert Systems: Extract News from Scanner Data
The Promise: Better Data
Compared to Retail Store Audits
Frequency: Weekly vs. Bimonthly
Level of Detail: UPCs vs. Brands
Scope: Top 50 Markets vs. Regions
The Problem: Too Much Data
At least 100 times more data
The Result: Impossible to Use Quality Data
"CoverStory"- An Expert System Replaced The Human Analyst
Before . . .
Companies circulated top-line reports, including tables and charts from the retail store audit data. An analyst prepared the cover memo highlighting important news in the data.
Now. . .
Not feasible to have an army of analysts to sift through the mountain of scanner data. Instead, "CoverStory" automatically writes this memo !
A model-imbedded expert system extracts the news from the data
Another expert system composes the memo using a built-in thesaurus to eliminate repetitious wording
Case Example: Ocean Spray Cranberries
A $1 billion grower-owned agricultural cooperative
Lean IS staff
Only one marketing professional for analyzing the scanner data
Scanner data for juices is imposing
-- 400 M numbers covering up to 100 data measures, 10,000 products, 125 weeks and 50 geographic markets
-- Grows by 10 million new numbers every four weeks
Impact of CoverStory
Enables a department of one to alert all Ocean Spray marketing and sales managers to key problems and opportunities and provide problem-solving information
Being done across 4 business units handling scores of company products in dozens of markets representing hundreds of millions of dollars of sales
System is totally integrated into business operations because it delivers information of competitive value in running the business
Automated Decision Technologies… … Are Coming of Age!
Best suited for decisions that must be made frequently and rapidly
Information for making decisions is available electronically
Knowledge and decision criteria must be highly structured
Good Example: Bank credit decisions
… Repetitive, Uniform Criteria; Plentiful Customer Credit Data Available
Poor Choice : Whom to Hire as CEO
… Rare Occurrence, Non-Standard Criteria (e.g., personal chemistry) that cannot be captured in a computer model
… More Consistent Decisions
… Respond Faster to Customers
… Leverage Scarce Expertise
… Reduce Labor Costs
… Enforce Policies
Case Example: DeepGreen Financial Competitive Advantage – Automated Credit Decisions
Targeted Customers: High-end Borrowers
- Want a standardized loan for a small fraction of the value of their home
Created an Internet-based system in 2000
Customer completes home-equity loan application online in 5 minutes
Receives decision within 2 minutes in 80% cases
No upfront paperwork from borrowers
- Traditional appraisal of credit worthiness not required
USP: Speed, Service and Convenience
- NOT Interest Rates
- Can tailor loan terms to needs of individual borrowers
Skimming off customers with the best credit
8 Employees process 400 applications a day
5 years: Originated over $4.4B of home-equity lines of credit
Automated Credit Decision Process Loan Approved? (2 mins) Joan’s Credit Report pulled out from Online Database - Joan’s Credit Score is calculated by system Joan’s Property Evaluation - Based on Online Data System selects a Notary Public near to Joan’s home Joan chooses Closing Date Loan documents printed from system - express-mailed to the Notary Notary visits Joan’s home to get signatures on loan documents End YES NO Joan applies online for loan ( 5 mins.) Checks for Fraud & Flood Insurance
DeepGreen’s Shrewd Strategy Feasible Because …
… All data needed to make home-equity loan decisions available online
… Relatively easy to make credit decisions involving affluent, low-risk borrowers
- Factors to be considered are well understood
- Experts can readily codify the decision rules
… High-end customers tend to be Internet-savvy
- Offer them what they need online, and they will come
Identify Revenue Drivers and Cost Drivers with Significant Bottom-Line Impact – the “MUST DOs”
Examine the Current Management Process for Managing These Drivers - Improve the Process - Develop Detailed “HOW-TO” Procedures
Determine the Key Performance Indicators (KPIs) for Each Driver
Measure the KPIs - “Satisficing” Information is Enough - But, Macro Information is Useless - Micro Information Needed to Pinpoint Root Causes to Enable Corrective Action - “DE-AVERAGE”
Reward System Must Be Aligned to KPIs
What Is Not The Solution 1. Give Users Access to the Data - They will Drown in All That Data 2. System has Everything - An Overdesigned System: NOT Usable 3. “Build It and They Will Come” - Users need Help “ What to Do with the Information”?
What Is The Solution - Some Pointers 1. A Rich Data Base - Business Problems Cannot be Solved in the Aggregate - Detailed Data Needed from Different Sources to Trace Problems/Opportunities to the Root Causes - Soft Data Vital in Marketing & HR 2. “Data” must be Converted into “Actionable” Information - System Design Must Enable Users to Glean the “News” in the Data 3. A Compact System - Ability to Drill Down to Detailed Data Where Needed 4. Problem-Finding Capabilities Built into the System - Ranking, Exception Reports, Trend Graphs 5. System Must be Inviting to Use