D4 D10 Information Systems

Information Systems
“What can I do ? I don’t understand IT

well enough to manage it in detail. And
my IT people –although they work hard
– don’t seem to understand the very
real business problems I face.”
Info systems
• Objective :
» To support decision making
in orgn
• Methodology:
» Understand types of:
» Managerial activity
» Decisions taken by
managers
• Output
» Effective Info Systems
Managerial Activity
Strategic Planning (SP)
 Choice of organizational
objective
 Resources to attain these

objectives
 Involves top mgmt
 Decisions are non-

repetitive+ creative
Management Control (MC)
 Resources are used
Effectively
Efficiently
 Interpersonal
interactions
 Performance
Operational Control (OC)
 Tasks are done
Effectively
Efficiently
 Less of judgment required

Information needs
Information Characteristics
Task SP MC OC
Accuracy Lo Hi
Detail Aggregate Detailed
Horizon Future Present
Frequency Lo Hi
Source External Internal
Scope Wide Narrow
(Info)
Age (Info) Old Current
Problems
?
“ MIS activity should wait until we get OC

systems in hand”
?
“ MC + SP ….do not necessarily need
information that is a mere
aggregation of data from the OC
database”
Use of sampling and statistical

techniques are much cost effective
means
Decisions
Programmed Vs Non-Programmed Decisions
• Programmed Example
( structured)
Rule book, Regulations
• Decision rules or
procedures are well
defined
• Outcomes are known
• Recur
• Non –Programmed Factory location

( unstructured)
• One time occurrence
• Recurring but do not
have known rules
Types of Decisions
Unstructured decisions: Examples
• Novel, non-routine
Approve capital budget;
decisions requiring
decide corporate strategy
judgment and insights
objectives
Structured decisions:
Restock inventory;
• Routine decisions with determine special
definite procedures
offers to customers
Semistructured decisions:
Allocate resources to
• Only part of decision has clear-cut
answers provided by accepted managers; develop a
procedures marketing plan
Decisions
Decisions
Programmed Non- Programmed
Structured Unstructured
+ +
Routine Consequential
+ +
Novel
Repetitive
Decision Making CAN Human judgment

be automated
Problem definition
Information Requirements of Key Decision-Making Groups in
a Firm
Information Requirements of Key Decision-Making
Groups in a Firm
Senior managers, middle managers, operational managers, and employees have different types of decisions and
information requirements.
The framework
IS : Framework
OC MC SP
S A/C Recv Budget Analysis Fleet Mix

Order booking Short term Factory loc S
forecasting D
Inv Control S
SS Prodn Schedule Variance Analysis M&A

Cash Mgmt Budgeting New product
design D
US PERT / Cost Systems Sales & Production R& D planning S
S
SDS = Structured Decision System = MIS

Decision making process
Stages in Decision Making
The decision-making process can be broken down into four stages.
 Intelligence :
searching for
conditions calling for
decision
 Design : thinking
about solutions
 Choice : selecting
the course of
action
Traits
Structured Semi Un
Problem Structured Structured
Problem Problem
Intelligence S - US
Design S - US
Choice S - US
Example Algorithms Job shop

EOQ scheduling
Decision making
• Ways to make decision affect
alternatives and choices.
• Knowledge of outcomes
• Outcome:
– “ what will happen, if a
particular alternative is
chosen?”
Concepts of decision making
Certainty
• Complete & accurate knowledge for each

alternative available
• Only one possible outcome for each

alternative
• Optimal solution can be found
• Example : Cost / Price as the differentiator
• 2 products with equal value.

– 1st product costs 20% less.
– Buyer will prefer 1st product.
Risk
• Multiple outcomes for each alternative.
• Probability of occurrence for each

outcome is known.
• optimizing
• the outcome, (X)
• the expected value (√ ).
• Assume decision maker : rational
• 1% chance of $10,000 gain

VS
• 50% chance of $400 gain
• Expected value = probability * outcome

Uncertainty
• Outcomes known, but
• probability values unknown
• Solution Strategies
• Assign equal
• Maxi-Min
• MIN Regret
Criteria for decision making
Normative model
• tells how to make a decision or a class of
decision
• Techniques used:
– Linear programming
– Game theory
– Statistical decision making
– Maximization or optimization of utility
value
• Assumption: rational decision maker

Descriptive Model
• How decision maker actually makes a decision ?
• Assumptions:
• Decision maker is not (completely) rational
• Bounded rationality
• Not completely informed of alternatives
• Not thorough in search of alternatives
• Accepts 1st alternative which satisfies all the problem

constraints. It is called satisficing.
• This may be caused due to:

• Limited cognitive abilities
• Simplification of problem
• Dependent upon the behavioral model of the
decision maker
Methods of Deciding amongst
Alternatives
Alternatives : Certainty
Optimization Techniques under Certainty
• System of Equation
• Linear Programming
• Integer Programming
(i.e, 1 or 0)
• Dynamic Programming
Optimization Techniques under Certainty
• Queuing Models
• Inventory,
• Capital Budgeting,
• Break-Even Analysis
Alternatives : Risk
Payoff Matrices in Statistical Decision Theory
“Technique for evaluating (mathematically) potential

outcomes of alternative actions in a given decision
situation”
Strategy State of Nature (Events)

n1 n2 n3 n4
S1 V1 W1 Z1 X1
S2 V2 W2 Z2 X2
S3 V3 W3 Z3 X3
Payoff value (V2) if strategy S2 is adopted and event n1 happens

Payoff Matrix for a Restaurant
Events with Probability (States)

Same New Competitor. Highway Moves
Strategy (.50) (.20) (.30)
Do nothing 2000 0 -1000

Refurbish to 4000 3000 -3000
improve layout
Rebuild 7000 2000 -10000
to add capacity
Strategy Computation Expected Value
Do nothing 2000*0.5+0 *0.2 +(-1000)*0.3 $ 700
Refurb. 4000*0.5+3000*0.2+(-3000)*0.3 $1700
Rebuild 7000*0.5+2000*0.2+(-10000)*0.3 $ 900
Method : To maximize expected value of outcome.

Solution: Refurbish is the best strategy
Payoff Matrix for a Restaurant
Events with Probability (States)

Same New Competitor. Highway Moves
Strategy (.50) (.20) (.30)
Do nothing 2000 0 -1000

Refurbish to 4000 3000 -3000
improve layout
Rebuild 7000 2000 -10000
to add capacity
Strategy Computation Expected Value
Do nothing 2000*0.5+0 *0.2 +(-1000)*0.3 $ 700
Refurb. 4000*0.5+3000*0.2+(-3000)*0.3 $1700
Rebuild 7000*0.5+2000*0.2+(-10000)*0.3 $ 900
Method : To maximize expected value of outcome.

Alternatives : Uncertainty
Min regret
• Select a strategy
• that minimizes the sum of
regret for the strategy.
Events with Probability(State)
Regret = Best payoff for Same New Comp. Highway.
event(state) - Other Outcomes Strategy (.50) (.20) Moves(.30)
Probability values are not known

Do 2000 0 -1000
nothing
Refurbish 4000 3000 -3000
Rebuild 7000 2000 -10000
Events with Probability(State)

Same New Highway.
Strategy (.50) Comp. Moves(.30)
(.20)
Do 5000 3000 0 8K
nothing Min. Regret
Refurbish 3000 0 2000 5K with equal
Rebuild 0 1000 9000 10K probability
Maxmin rule
• Identify state of Events with Probability (State)
Same New Comp. Highway.
nature (event) with (.50) (.20) Moves(.30)
worst payoff and Strategy
• choose the strategy

Do 2000 0 -1000
with least nothing
unfavorable payoff Refurbish 4000 3000 -3000
(Pessimistic) Rebuild 7000 2000 -10000
• Solution :Do nothing

is the best strategy
Maximax rule
• Identify the most Strategy Events with Probability(State)
favorable state of Same

(.50)
New
Comp.
Highway.
Moves(.30)
nature (.20)
Do 2000 0 -1000
• Select the strategy

nothing
Refurbish 4000 3000 -3000
with best payoff for
the event
Rebuild 7000 2000 -10000
• Strategy: Rebuilding
[optimistic approach]
Utility & Indifference curve
Prob(fire) =0.003 Loss indemnified
insurance -$240
Premium
No insurance -$50,000
Prob (No fire)=0.997
Loss indemnified
insurance -$240
Premium
No insurance +$0
Expected loss (no insurance) = 0.003 * -50,000=-$150

Expected loss (insurance) = -$240 (Loss indemnified)
Should he insure??
Utility & Indifference curve
Prob(fire) =0.003 Loss indemnified
insurance -$240
Premium
No insurance -$150,000
Prob (No fire)=0.997
Loss indemnified
insurance -$240
Premium
No insurance +$0
Expected loss (no insurance) = 0.003 * -150,000=-$450

Expected loss (insurance) = -$240 (Loss indemnified)
Should he insure?? Premium ?
Information Systems
Different Kinds of Systems
3 main categories of IS serve different organizational levels:
1. Operational-level systems:
support operational managers,
keeping track of the elementary
activities and transactions
2. Management-level systems:
serve the
 monitoring, controlling,
decision-making, and
 administrative activities
3. Strategic-level systems: help

senior management tackle and
address strategic issues
Types of Information Systems
Executive Support Systems (ESS)
Decision-Support Systems (DSS)
Management Information Systems (MIS)
Transaction Processing Systems (TPS)

TPS
• Transaction: any
business-related
exchange:
• payments to
employees,
• sales to
customers,
• payments to
suppliers
• an organized collection of
•people,
•procedures,
•software,
•databases, and
•devices
•used to record completed business transactions
• Basic business systems that serve the

operational level
• A computerized system that

• performs and
• records the daily routine transactions
necessary to the conduct of the business
A Symbolic Representation for a Payroll TPS
Typical Applications of TPS
MIS
Management level
• Inputs: High volume transaction level data
• Processing: Simple models
• Outputs: Summary reports
• Users: Middle managers
Example: Annual budgeting

• MIS :
• provide info on firm’s performance
• address structured problems
• Outcome: managers monitor and control business
• Reports
• scheduled reports :based on data from TPS
• exception reports: Highlighting exceptional
conditions,(e.g., sales quotas < anticipated level)
• E.g. California Pizza Kitchen MIS
t io ns COMPARE(amount of
e por ingredients used per
of -lin ordered menu item,

-
o ut Greater predefined portion LESS
measurements)
Sources of Managerial Information
58
59
An Executive Dashboard
Output of a Management Information
Systems (MIS)
Reports Generated by an MIS
Scheduled report: produced periodically, or on schedule (i.e., daily, weekly, or

monthly)
Key-indicator report: summary of previous day’s critical activities

61
Demand report: developed to give certain information at someone’s request
Exception report: automatically produced when a situation is unusual or

requires management action 62
Drill-down reports: provide increasingly detailed data about a situation
1st level
2nd level 63
Drill-down reports: provide increasingly detailed data about a situation
3rd level
4th level
64
A sample MIS report

DSS
Management level
• Inputs: Transaction level data
• Processing: Interactive
• Outputs: Decision analysis
• Users: Professionals, staff
• Focus of a DSS is on decision-making effectiveness
• Example: Contract cost analysis

• Support unstructured and semistructured decisions
• Model-driven DSS
• Earliest DSS were heavily model-driven
• Data-driven DSS
• Some contemporary DSS are data-driven
• Use OLAP (On-Line Analytical Processing) and data mining to
analyze large pools of data
Components of a Decision-Support System
• Components of DSS
• Database used for query and analysis
• Current or historical data from
number of applications or groups
• May be small database or large data
warehouse
• User interface
• Often has Web interface
• Software system with models, data
mining, and other analytical tools
The main components of the DSS are the DSS database, the user interface, and the DSS
software system. The DSS database may be a small database residing on a PC or a large
data warehouse.
Essential DSS Elements

Voyage-estimating decision-support system

P & G Restructures Its Supply Chain
• One of the world’s largest consumer good companies
• Annual revenue :$51 billion

• 80 000 employees in 140 countries
• 300 brands ;
• more than 100 000 suppliers,
• very complex supply chain
• Pressure to reduce costs because
• of competitors
• pressure from large customers like Wal-Mart
Procter & Gamble Restructures Its Supply Chain
• How many plants should there be for a new

product?
• Where should the plants be located?
• Where should distribution centres be

located?
• How can we deliver our products faster to

our customers?
• P&G Global Beauty Care division alone has

– hundreds of combinations of suppliers,
– manufacturing facilities and
– markets.
• 10-15 new product launches per year
• Each product has multiple sizes and package designs
• Even small changes – changes are constant – ripple
through the supply chain and affect inventory levels,
service levels and costs.
• New global healthcare product:

• where to locate the plant(s)?
• What are the sources of raw materials?
• Managers in the countries marketing
this product want the plants in their
country
• Corporate experts prefer one megaplant
• And there are millions of other solutions in
between
• IT Global Analytics group used:

– Excel enhanced by LINDO (add-on) for
optimization
– Palisade’s @Risk for Monte Carlo simulation (add-
on)
– X-press-MP from Dash Optimiztion Inc.
(optimization models)
– Cplex from Ilog Inc. (optimization models)
– Extend from Imagine That Inc. (simulation models)
• Data from Oracle data warehouse (36 months
of supplier, manufacturing, customer and
consumer history by region)
• Optimization models to allocate supply chain resources
• Simulation models to mathematically try various options to

see the impact of changes in important variables
• Decision trees to combine the possibilities of various
outcomes with their financial results
 Success of a supply chain is not necessarily the most optimal

solution but rather a robust solution that would stand up in
real world conditions
 Result:
consolidation of plants by 20%
Supply chain costs reduced by $200 million each year
• Problem: Cost pressures, complex supply chain.
• Solutions: Deploy modeling and optimization software to

maximize return on investment and predict the most
successful supply chain.
• Modeling software : fueled with data from Oracle data

warehouse improved efficiency and reduced costs.
• Demonstrates: IT’s role in restructuring a supply

chain.
• Illustrates: digital technology improving decision

making through information systems.
Characteristics of a Decision-Support Systems (DSS)
• Perform complex, sophisticated analysis and comparisons

using advanced software packages
• Support optimization, satisficing, and heuristic approaches
• What-if analysis: making hypothetical changes to

problem data and observing impact on results
• Goal-seeking analysis: determining problem data required

for a given result
• Simulation: ability of the DSS to duplicate features of a

real system
79
With a spreadsheet program, a manager can enter a goal, and the spreadsheet will
determine the input needed to achieve the goal.
80
• Model:
• Abstract representation that illustrates
components or relationships of phenomenon; may
be physical, mathematical, or verbal model
• Statistical models
• Optimization models
• Forecasting models
• Sensitivity analysis models
Sensitivity Analysis
This table displays the results of a sensitivity analysis of the effect

of changing the sales price of a necktie and the cost per unit on the
product’s break-even point.
Question, “What happens to the break-even point if the sales

price and the cost to make each unit increase or decrease?”
• Using spreadsheet pivot tables to support decision

making
• Online Management Training Inc. (OMT Inc.), sells online
management training books and streaming online videos to
corporations and individuals
• Records of online transactions can be analyzed using Excel to
help business decisions, e.g.:
• Where do most customers come from?
• Where are average purchases higher?
• What time of day do people buy?
• What kinds of ads work best?
The Excel PivotTable Wizard
The PivotTable
Wizard in Excel
makes it easy to
analyze lists and
databases by
simply dragging
and dropping
elements from
the Field List
Business value of Decision-Support Systems (DSS)
• Burlington Coat Factory: DSS for pricing

• DSS manages pricing and inventory nationwide, considering
complex interdependencies between initial prices,
promotions, markdowns, cross-item pricing effects and item
seasonality
• Syngenta: DSS for profitability analysis

• DSS determines if freight charges, employee sales
commissions, currency shifts, and other costs in proposed
sale make that sale or product unprofitable
• Compass Bank: DSS for customer relationship

management
• DSS analyzes relationship between checking and savings
account activity and default risk to help it minimize default
risk in credit card business
DSS for Customer Relationship Management
• Uses data mining to guide decisions
• Consolidates customer information into massive

data warehouses
• Uses various analytical tools to slice information

into small segments
DSS for Customer Relationship Management
DSS for Supply Chain Management
• Comprehensive examination of inventory, supplier

performance, logistics data
• To help managers search alternatives and decide on
the most efficient and cost-effective combination
• Reduces overall costs
• Increases speed and accuracy of filling customer
orders
DSS as visualization tool
• Data visualization tools:

• Help users see patterns and relationships in large amounts of
data that would be difficult to discern if data were presented
as traditional lists of text
• Geographic information systems (GIS):
• Category of DSS that use data visualization technology to
analyze and display data in form of digitized maps
• Used for decisions that require knowledge about geographic
distribution of people or other resources, e.g.:
• Helping local governments calculate emergency response times to
natural disasters
• Help retail chains identify profitable new store locations
DSS for GIS
California’s South Coast

Air Quality Management
District (AQMD) is
responsible for monitoring
and controlling emissions
in all of Orange County and
the urban portions of Los
Angeles, Riverside, and
San Bernardino counties.
Displayed is a map produced with ESRI

GIS software tracking particulate matter
emissions from building construction
activity in a two-by-two kilometer area.
Web-based customer decision-support systems (CDSS)
• Support decision-making process of

existing or potential customer
• Automobile companies that use CDSS to
allow Web site visitors to configure
desired car
• Financial services companies with Web-
based asset-management tools for
customers;
• Fidelity Investments: customer
portfolio allocations, retirement savings
plans...
• Home.com: mortgage, rent or buy...
ESS
EXECUTIVE SUPPORT SYSTEMS (ESS):
• Inputs: Aggregate data
• Processing: Interactive
• Outputs: Projections
• Users: Senior managers
Example: 5 year operating plan

Model of a Typical Executive Support System
Internal data External data

EXECUTIVE SUPPORT SYSTEMS (ESS)
• Top Level Management
• Designed to the individual senior manager
• Ties CEO to all levels
• Very expensive to keep up
• Extensive support staff

• Integrate data from different functional systems

for firmwide view
• Incorporate external data, e.g. stock market news,
competitor information, industry trends,
legislative action
• Include tools for modeling and analysis
• Primarily for status, comparison information
about performance
• Facilities for environmental scanning - detecting
signals of problems, threats, or strategic
opportunities
• Able to drill down from summary information to
lower levels of detail
• Business value of executive support systems

• Enables executive to review more data in less time
with greater clarity than paper-based systems
• Result: Needed actions identified and carried out
earlier
• Increases upper management’s span of control
• Can enable decision making to be decentralized
and take place at lower operating levels
• Increases executives’ ability to monitor activities of
lower units reporting to them
National Life: ESS for business intelligence
• National Life: Markets life insurance, health

insurance, and retirement/investment products
executive information system
• Executive information system:
• Allows senior managers to access corporate
databases through Web interface
• Shows premium dollars by salesperson
• Authorized users can drill down into these
data to see product, agent, and client for
each sale
• Data can be examined by region, by
product, and by broker, and accessed for
monthly, quarterly, and annual time periods
Bonita Bay Properties: Monitoring corporate performance with
digital dashboards
• Digital dashboard: Displays on single screen key

performance indicators as graphs and charts for executives
• Bonita Bay Properties Inc.: Develops planned communities
centered around golf courses and fitness centers
• Executive dashboard displays:
• Summaries from point-of-sale systems and general ledger
accounts
• Staffing levels
• Executives can drill down to performance of fitness
centers, activity on golf courses
Pharmacia Corporation: Monitoring corporate performance with
balanced scorecard systems
• Balanced scorecard model: Supplements
traditional financial metrics with
measurements from additional
perspectives (customers, internal
business processes, etc.)
• Pharmacia Corporation: global

pharmaceutical firm
• Balanced scorecard shows:
• Performance of U.S. or European clinical
operations in relation to corporate
objectives
• Attrition rate of new compounds under
study
• Number of patents in clinical trials
• How funds allocated for research are
being spent
Caesar’s Entertainment: Enterprise-wide performance analysis
• Has integrated reporting structure to help management

determine how well it is performing against forecasts on a
daily basis
• Integrates data from internal TPS with other internal and
external sources
• Financial data from general ledger system, personnel data,
weather pattern and real estate data
• Delivers daily cost, effect, impact analysis, and profit-and-
loss reports
• Reports predict combined effect of these factors on
company’s business performance
• System lets executives adjust plans as required online
The Four Major Types of Information Systems
Interrelationship of Systems
Specialized systems
Knowledge management systems (KMSs)
• an organized collection of people,

procedures, software, databases, and
devices to create, store, share, and use
the organization’s knowledge and
experience
Artificial Intelligence
The Major Elements of Artificial Intelligence
field in which the computer system takes on the characteristics of human intelligence
Expert Systems
• Give the computer the ability to make

suggestions and act like an expert in a
particular field
• Allow organizations to capture and use
the wisdom of experts and specialists
• The knowledge base contains the
collection of data, rules, procedures, and
relationships that must be followed to
achieve value or the proper outcome

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Information Systems

“What can I do ? I don’t understand IT

 Resources to attain these

 Involves top mgmt

 Decisions are non-

 Less of judgment required

“ MIS activity should wait until we get OC

Use of sampling and statistical

• Non –Programmed Factory location

Programmed Non- Programmed

Decision Making CAN Human judgment

S A/C Recv Budget Analysis Fleet Mix

SS Prodn Schedule Variance Analysis M&A

SDS = Structured Decision System = MIS

Example Algorithms Job shop

• Complete & accurate knowledge for each

• Only one possible outcome for each

• Optimal solution can be found

• Example : Cost / Price as the differentiator

• 2 products with equal value.

• Probability of occurrence for each

• Assume decision maker : rational

• 1% chance of $10,000 gain

• Expected value = probability * outcome

• Assumption: rational decision maker

• Accepts 1st alternative which satisfies all the problem

• This may be caused due to:

“Technique for evaluating (mathematically) potential

Strategy State of Nature (Events)

Payoff value (V2) if strategy S2 is adopted and event n1 happens

Events with Probability (States)

Do nothing 2000 0 -1000

Method : To maximize expected value of outcome.

Events with Probability (States)

Do nothing 2000 0 -1000

Method : To maximize expected value of outcome.

Probability values are not known

Events with Probability(State)

worst payoff and Strategy

• choose the strategy

unfavorable payoff Refurbish 4000 3000 -3000

(Pessimistic) Rebuild 7000 2000 -10000

• Solution :Do nothing

favorable state of Same

• Select the strategy

Prob(fire) =0.003 Loss indemnified

Expected loss (no insurance) = 0.003 * -50,000=-$150

Prob(fire) =0.003 Loss indemnified

Expected loss (no insurance) = 0.003 * -150,000=-$450

3. Strategic-level systems: help

Executive Support Systems (ESS)

Decision-Support Systems (DSS)

Management Information Systems (MIS)

Transaction Processing Systems (TPS)

• Basic business systems that serve the

• A computerized system that

• Inputs: High volume transaction level data

• Processing: Simple models

• Outputs: Summary reports

• Users: Middle managers

Example: Annual budgeting

e por ingredients used per

of -lin ordered menu item,