1

MANAGEMENTDECI
SIONTOOLS
CORRELATI
ONANDREGRESSI
ON
1. For
ecast
ingMet
hods
a. For
ecastsaret
hebasisforbusi
nesspl
ansandbudgets.For
ecast
sar
eusedt
o
pr
ojectpr
oductdemand,inv
entor
ylev
els,
cashf
low,etc.
1) Quali
tati
vemet
hodsoffor
ecast
ingr
elyont
hemanager
’sexper
ienceand
i
ntui
tion.
2) Quantit
ati
vemet
hodsusemathemati
calmodel
sandgr
aphs.
a) Whensomef actori
ntheorgani
zation’
senvi
ronmenti splot
tedont
he
xaxis,
thet
echniqueiscausalr
elati
onshi
pforecasti
ng.
b) Whent i
meperiodsarepl
ottedonthexax i
s,thetechniqueisti
me-
ser
iesanal
ysis.
2. Cor
rel
ati
onAnal
ysi
s
a. Cor
rel
ati
onanal
ysi
sist
hef
oundat
ionofanyquant
it
ati
vemet
hodoff
orecast
ing.
1) Correl
ationi
sthestrengt
hoft heli
nearr
elati
onshi
pbetweentwovari
ables,
expressedmathemat i
cal
lyintermsofthecoeffi
ci
entofcor
rel
ati
on(r)
.Itcan
begr aphi
cal
lydepi
ctedbypl ot
ti
ngthevaluesforthev
ari
abl
esonagr aphin
theform ofascatt
erdiagram.
a) Thev ueofrr
al angesfrom 1(
perfectdi
rectrel
ati
onshi
p)to–1(per
fect
i
nver
serelat
ionship)
.Themoret hescatterpat
ter
nresemblesa
st
rai
ghtl
ine,thegreat
ertheabsolutev
alueofr.

b) Per
fectdi
rectr
elat
ionshi
p(r=1)

Fi
gur
e8-
1

c) Per
fecti
nver
ser
elat
ionshi
p(r=–1)

Fi
gur
e8-
2

d) St
rongdi
rectr
elat
ionshi
p(r=0.
7)

Fi
gur
e8-
3

e) Nol
i
nearr
elat
ionshi
p(r=0)
 Fi
gur
e8-
4

i
) Notef
rom t
heri
ght-
handgr aphofthepairabovethatacoeff
ici
entof
cor
rel
ati
onofzer
odoesnotmeant hereisnor el
ati
onshi
patall
bet
weenthetwovariabl
es,onl
ythattherelati
onshi
ptheymay
hav
ecannotbeexpressedasal i
nearequation.
2
2) Thecoef
fi
cientofdet
ermi
nat
ion(r),ort
hecoeff
icientofcorr
elat
ionsquar
ed,
is
ameasureofhowgoodthefitbet
weent het
wov ariabl
esis.
a) Mathemat i
call
y,thecoeff
icientofdeterminati
oni stheproporti
onof
thetotal var
iat
ioninthedependentv ar
iabl
ethati saccountedforby
thei
ndependentv ari
abl
e.
b) EXAMPLE: Acardealer
shipdet er
mi nesthatnewcarsal esar eafunct
ion
ofdisposabl ei
ncomewi t
hacoef fici
entofcor relat
ionof.8.Thi
sis
2
equi
v alenttostati
ngthat64%( .
8)oft hev ar
iationofnewcarsal esf
rom
theav eragecanbeex plainedbychangesi ndi sposableincome.

3. Regr
essi
onAnal
ysi
s

a.Regressi
onanaly
sis,al
socall
edleast
-squaresanal
ysi
s,isthepr ocessofder
ivi
ngthe
l
inearequati
onthatdescribestherel
ati
onshipbetweent wov ar
iableswithanonzero
coeff
ici
entofcor
rel
ation.
1) Si
mpleregressi
onisusedwhent her
eisoneindependentv ar
iabl
e.
a) Thesi
mpl
eregr
essi
onequat
ioni
stheal
gebr
aicf
ormul
aforast
rai
ghtl
i
ne:
y=a+bx
Wher
e:y=t
hedependentvar
iable
a=theyi
nter
cept
b=thesl
opeoftheregressi
onl
i
ne
x=thei
ndependentvar
iable
b) Thebeststr
aightlinethatf i
tsasetofdatapoint
sisderivedusingcal
culus
tominimizethesum oft hesquaresofthev er
ti
caldistancesofeach
poi
nttotheli
ne( hencet henamel east-
squar
esmet hod).
c) EXAMPLE:Af ir
m hascol lectedobserv
ati
onsonadv ert
isingexpendi
tur
es
andannualsales.
Advert
isi
ng Sales
($000s) (
$0 00,000s)
 71 26.
3
31 13.
9
50 19.
8
60 22.
9
35 15.
1
i
) Sol
vingwit
hthel
east
-squar
esmethodr
eveal
st hatexpectedsal
es
equal$4.
2mil
li
onpl
us311.741t
imestheadverti
si
ngex pendi
tur
e.
y=$4,
200,
000+311.
741x
i
i
) Theobser
vat
ionsar
egr
aphedasf
oll
ows:

Fi
gur
e8-
5

i
i
i) Thefi
rm cannowprojectt
heamounti
twi
ll
havet
ospendon
adv
erti
singt
ogenerate$32,
000,
000i
nsal
es.
y=$4,
200,000+311.741x
$32,
000,
000=$4,200,000+311.
741x
311.
741x=$27,800,000
x=$89,177

2)Regressi
onanaly
sisispart
icul
arl
yval
uabl
eforbudget
ingand
costaccount
ingpurposes.
a) Regr essi
onanalysi
sisalmostanecessityforcomputi
ngthefi
xedand
variableport
ionsofmixedcostsforf
lexibl
ebudgeti
ng.They-
axis
intercepti
sthefixedport
ionandtheslopeoftheregr
essionl
i
neisthe
variableport
ion.
3) Regr
essiondoesnotdet ermi
necausali
ty.
a) Althoughxandymov etogether,t
heapparentr
elati
onshi
pmaybecaused
bysomeot herfact
or.Forinstance,carwashsalesvol
umeandsunny
weat herarestr
onglycorrel
ated,butcarwashsalesdonotcausesunny
weat her.
4) Mult
ipl
er egr
essionisusedwhent hereismor ethanoneindependentv
ari
abl
e.
a) Theex ampl eont heprevi
ouspager elat
ingadver
ti
singtosal
esiscl
ear
ly
unreali
stic.Salesaredependentuponmor et
hanjustadver
ti
si
ng
expenditures.
b) Multipl
eregr essional
lowsaf i
rmtoi denti
fymanyfactor
s
(i
ndependentv ari
abl
es),andtoweighteachoneaccor di
ngtoit
s
i
nfluenceont heoveral
loutcome.
y=a+b1x1+b2x2+b3x3+b4x4+et
c.
5) Assumpt
ionsoft
hel
i
nearr
egr
essi
onmodel
.
a) Thelinearrel
ati
onshipest abl
ishedf orxandyi sonl yval
idacr
ossthe
rel
evantrange.Theusermusti denti
fytherelevantrangeandensure
that(s)hedoesnotpr ojectt
her el
ati
onshipbey ondit.
i
) Anegat i
veyinterceptint hesimpleregressionequati
onusuall
y
indi
catesthatitisoutsidet herel
evantrange.
b) Regressionanaly
sisassumest hatpastrel
ationshipscanbevali
dly
 project
edintothef
uture.Economistscall t
histheceteri
spar i
bus
assumpt i
on.Thus,
alimi t
ati
onofther egressionmethodi sthatitcan
onlybeusedwhencostpat t
ernsremai nunchangedf rom pri
orper i
ods.
c) Thedi st
ri
buti
onofyaroundt heregressionli
nei sconstantfor
dif
ferentval
uesofx,refer
redtoashomoscedast ici
tyorconst ant
vari
ance.

LEARNI
NGCURVEANALYSI
S
1. Lear
ningCur
ves
a. Learni
ngcur
veanalysi
sref
lect
sthei
ncr
easedr
ateatwhi
chpeopl
eper
for
mtasksas
theygai
nexper
ience.
1) Thet
imer
equi
redt
oper
for
m agi
vent
askbecomespr
ogr
essi
vel
yshor
terdur
ing
t
heear
lyst
agesofpr
oduct
ion.

Fi
gur
e8-
6

2) Thecur
veisusuall
yexpr
essedasaper
cent
ageofr
educedt
imeeacht
ime
cumul
ati
veproducti
ondoubl
es.
a) Whendetermini
ngwhet hercumul
ati
vepr oduct
iondoubl
es,
iti
simport
ant
tol
ookatunitsproducedaswellasbatchnumber s.
b) EXAMPLE:Af i
rm producesuni
tsi
nbatchesof100andex peri
encesan
80%lear
ningcurve.
Bat
ch Cumul
ati
veUni
tsPr
oduced Doubl
i
ng
1 10
st
2 200 1 doubl
i
ngf
rom 100t
o200
3 300
nd
4 400 2 doubl
i
ngf
rom 200t
o400
5 500
6 600
7 700
r
d
8 800 3 doubl
i
ngf
rom 400t
o800
 3) I
npracti
ce,themostcommonper centageusedis80%.However
,ontheexam,
beprepar
edt oseeavar
ietyofper centages.
a) Thef oll
owi
ngtabl
eill
ustratest hi
sphenomenonf orapr
oductwhose
f
ir
stunitt
akes100mi nutest oproduce:
70% 80% 90%
Cumulat
ive CumulativeAv
erage CumulativeAv
erage CumulativeAv
erage
Batch Uni
tsPr
oduced TimeperUni t TimeperUni t TimeperUni t
1(
Unit1) 1 100 100 100
2(
Unit2) 2 70 (100×70%) 80 (100×80%) 90 ( 100×90%)
3(
Units3-4) 4 49 (70×70%) 64(80×80%) 81 ( 90×90%)
4(
Units5-8) 8 34.
3(49×70%) 51.
2(64×80%) 72.
9(81×90%)
5(
Units9-16) 16 24.
01( 34.3×70%) 40.
96( 51.2×80%) 65.
61( 72.9×90%)

b) Thet imel istedinthecumul ati

veav eraget imeperuni tcolumnisan
averageofal ltheunitsproducedupt ot hatpoint.Not ethatwithan80%
l
ear ningcur veuponcompl eti
onoft hef inalbatch( unit
s9–16) ,t
he
averagehadcomedownt o40.96mi nut esperuni t.Forittor
eacht hi
s
l
ev elfrom t he51.2mi nutesithadr eachedatt heendoft hefourt
hbatch
(units5–8) ,
theav erageoftheuni tsint hefif
thbat chalonemusthav e
been30. 72mi nutes[(40.96mi nutes×2)–51. 2mi nutes].
c) Withmor esophi st
icatedquant i
tati
vet echniques, amor eaccurateaverage
canbecal cul
atedoft heunit
swi thineach“ batch.”

Youneedt
obeal
ertast
othenat
ureoft
hequest
ionbei
ngasked.Somet
imest
hequest
ionmi
ghtask,
“Whatistheaveragetimeperuni
taft
ertwounits?
”From thetabl
eabove,wit
han80%l ear
ningcurve,
you
canseet hatt
heansweris80.Alt
ernat
ivel
y,someti
mest hequesti
onasks,“
Whatistheti
met oproduce
thesecondunit?
”Theanswerwoul dbe60.Sincethefi
rstuni
ttook100minutesandtheaveragefort
he
twounitsis80mi nut
es(atot
alof160),
thenthesecondunitmusthavetakenonly60minutes.

2. Appl
i
cat
ion
a. Twomet
hodsofappl
yi
ngl
ear
ningcur
veanal
ysi
sar
eincommonuse.
1) Thecumul ati
veaverage-t
imel ear
ningmodel pr
oj ectsthereductioni nthe
cumul ati
veaver
aget i
mei ttakestocompl eteacer t
ainnumberoft asks.
2) Theincrementalunit
-ti
mel earni
ngmodel projectst hereductionint he
i
ncrement alt
imeittakest ocompletet
hel astt ask.
3) EXAMPLE: Afi
rm determinesthat100mi nutesofl aborarer equiredtocompl
ete
oneuni tofpr
oduct.Assumi ngan80%l earningcur ve,thefollowingt abl
e
i
ll
ustratesthedi
fferencebetweent het
womet hods.
Lear
ningCurv
e
80%atEachDoubli
ng Cumul
ati
veAv
erage-
TimeModel I
ncr
emental
Uni
t-
TimeModel
(A) (B) (
A)×(B) (B) (
B)/(A)
Cumul at
ive Ti
meSpent I
ncr
ement
al Aver
ageTime

Uni
t Av
erage Cumulat
ive onMost UnitTot
al SpentonMost
Pr
oduced Ti
meperUnit Total
Time RecentUni
t Time RecentUni
t
1 100.
00 100.
00 100.
00 100.
00 100.
00
2 80.
00 160.
00 60.
00 180.
00 90.
00
3 70.
21 210.
63 50.
63 250.
21 83.
40
4 64.
00 256.
00 45.
37 314.
21 78.
55

a) CMAcandi dateswill
notneedtoknowhowt ocal cul
ateuni
tswithina
batch.Youshoul dknowhowt ocal cul
atethel earni
ngcurvesfor1, 2,and
4unit(s)produced.
4) Thedif
ferencebet weent hetwomethodsi scleari
nt hewayeachcal culatest ot
al
ti
me.MostCMAquest i
onshavehistor
icall
yusedt hecumul ati
ve-av
erage- t
ime
method,andi tisoftencall
edthe“t
radi
tional”l
earningcurvemodel .
 3. Li
mit
ati
ons
a. Thel
imi
tat
ionoft
helear
ningcur
vei
npr
act
icei
sthedi
ff
icul
tyi
nknowi
ngt
heshape
oft
hel
earni
ngcurv
e.
1) Thereisnoquest
ionthatthelearni
ngcurveef
fectex i
sts,butcompaniestypi
cal
ly
donotknowwhatper centagetheyshoul
duseincal culati
onsuntil
afteri
tis
toolatet
ousetheinfor
mat ioneff
ect
ivel
y.Asar esul
t,manycompani essimply
assumean80%l earni
ngcur veandmakedecisionsbasedont hoseresul
ts.

EXPECTEDVALUE
1. Expect
edVal
ue
a. Expectedv
aluei
sameansofassoci ati
ngadol
l
aramountwi
theachoft
hepossi
ble
outcomesofaprobabi
l
itydi
str
ibut
ion.
1) Theoutcomeyi
eldi
ngthehi
ghestex
pectedmonetaryval
ue(
whi
chmayormay
notbethemostli
kel
yone)i
stheopti
mal al
ter
nat
ive.
a) Thedeci sionalter
nativeisunderthemanager ’
scontr
ol.
b) Thest ateofnat ureisthefutur
eev entwhoseoutcomethemanageris
attempt i
ngt opredict.
c) Thepay offisthefinancialr
esultofthecombinati
onofthemanager’
s
decisionandt heact ualst
ateofnat ur
e.
2) Theexpectedv alueofanev entiscalcul
atedbymul t
ipl
yi
ngthepr
obabil
i
tyof
eachoutcomebyi tspayoffandsummi ngtheproduct
s.
a) EXAMPLE:Aninvestorisconsideri
ngthepurchaseoftwoident
ical
l
y
pri
cedpi
ecesofpr oper
ty.Thev al
ueofthepropert
ieswi
ll
changeifa
road,
cur
rent
lyplannedbyt hestate,
isbui
lt
.
i
) Thef
oll
owi
ngar
eest
imat
est
hatr
oadconst
ruct
ionwi
l
loccur
:
Fut
ureState
ofNatur
e( SN) Event Pr
obabil
i
ty
SN1 Noroadiseverbuilt
. .1
SN2 Aroadisbuil
tthi
sy ear
. .2
SN3 Ar
oadi
sbui
ltmorethan1y earfr
om now. .7
i
i
) Thefol
lowingar
eesti
matesoftheval
uesoft
hepr
oper
ti
esunder
eachofthethr
eepossi
bleev
ents:
Proper
ty SN1 SN2 SN3
BivensTract $10,
000 $40,
000 $35,
000
NewnanTr act $20,
000 $50,
000 $30,
000
i
i
i) Theex pect
edvalueofeachpr opertyi
sdet erminedbymulti
plyi
ngt
he
probabil
it
yofeachstateofnat ur
ebyt hev alueundert
hatstat
eof
natureandaddingalloft
hepr oducts.
Expect ed
Val ue
Bi
vensTr
act:.1(
$10,000)+.2(
$40,000)+.7($35,000)= $33, 500
NewnanTract
:.1(
$20,000)+.2(
$50,000)+.7($30,000)=$33, 000
Thus,
Biv
ensTr
acti
sthebet
teri
nvest
ment
.
i
v)Acal
cul
ati
onsuchast
hisi
sof
tenr
efer
redt
oasapay
offt
abl
e.

3) Thedi
ffi
cultaspectofconst
ruct
ingapay of
ftabl
eist
hedeterminat
ionof
al
lpossible outcomes ofdecisi
ons and t
hei
rprobabi
l
iti
es.Thus,a
pr
obabi
li
tydistr
ibuti
onmustbeestabl
i
shed.
a) Theassi
gnedpr
obabi
li
ti
esmayr ef
lectpri
orex
peri
encewit
hsimil
ar
deci
si
ons,t
her
esult
sofresear
ch,orhighl
ysubj
ecti
veest
imat
es.
4) I
tisi
mport
antt
ocapt ur
eallv
alueswhenconst
ruct
ingapay
offt
abl
e.Ot
her
wise,
r
esul
tsmaybeinaccurat
e.
a) Forexampl
e,unsolditemsmaybesol df orscr
apormayrequir
est
orage
costs.
b) Fai
lur
etoaccountfortheseandotherfactorswil
lskewr
esul
ts.
c) EXAMPLE:Av endorcanorder10,
20, or30hats.
i
) Thepr
obabi
l
iti
esofdemandar
easf
oll
ows:
Demand Pr
obabil
i
ty
10 60%
20 30%
30 10%
i
i
) Eachhatcanbesoldfor$5.Unsoldhatscanbesol dasscrapf
or$1.
i
i
i)Theexpectedpr
ofi
torlossiftheabi
li
tytosel
lunsoldhatsasscrapi
s
incl
udedwhencalcul
ati
ngt hepayof
ftabl
eisasf oll
ows:
St
atesofNat
ure Expect
edVal
ue
Deci
sion Demand=10 Demand=20 Demand=30 Tot
als
10hats $50 $50 $50 $50
20hats $60 $100 $100 $76
30hats $70 $110 $150 $90

$50=[
.6×$50]+[
.3×$50]+[.
1×$50]
$76=[
.6×$60]+[
.3×$100]+[
.1×$100]
$90=[
.6×$70]+[
.3×$110]+[
.1×$150]
i
v)Theex
pectedpr
ofi
torl
ossi
ftheabi
li
tytosell
unsol
dhat
sasscr
api
s
noti
ncl
udedwhencal
cul
ati
ngthepayofft
ablei
sasfol
l
ows:
St
atesofNat
ure Expect
edVal
ue
Deci
sion Demand=10 Demand=20 Demand=30 Tot
als
10hats $50 $50 $50 $50
20hats $50 $100 $100 $70
30hats $50 $100 $150 $75

$50=[
.6×$50]+[
.3×$50]+[.
1×$50]
$70=[
.6×$50]+[
.3×$100]+[
.1×$100]
$75=[
.6×$50]+[
.3×$100]+[
.1×$150]

v
) Inthi
sex ample,
fai
li
ngtoincludetheopt i
ontosellunsoldhatsfor$1
result
sinmuchmor esimi l
arexpectedvaluesacrossthediff
erent
decisi
ons.
v
i)Eventhoughtheresul
tisthesame, thegoal i
stoprovidethemost
accurateandusefuli
nformati
onf ordeci
sion-makingpurposes.

5) Theexpectedval
uecri
ter
ionislikel
ytobeadopt
edbyadeci
si
onmakerwhois
ri
skneutral
.However
,othercir
cumstancesmaycauset
hedeci
si
onmakert
obe
ri
skaverseorevenri
skseeking.
a) EXAMPLE: Adeal
erinl
uxur
yyacht
smayor
der0,
1,or2y
acht
sfort
his
season’
sinvent
ory
.
i
) Thedeal
erpr
oject
sdemandf
ort
heseasonasf
oll
ows:
Demand Pr
obabil
it
y
0yacht
s 10%
1yacht 50%
2yacht
s 40%
i
i
) Thecostofcarr
yingeachex cessyachti
s$50,000,andthegainfor
eachyachtsol
dis$200,000.Theprofi
torlossresul
ti
ngfrom each
combinat
ionofdeci
sionandout comeisthusasfoll
ows:
 St
atesofNat
ure Expect
edValue
Deci
sion Demand=0 Demand=1 Demand=2 Total
s
St
ock0y
acht
s $ 0 $ 0 $ 0 $ 0
St
ock1y
acht (
50,
000) 200,
000 200,
000 175,
000
St
ock2y
acht
s (
100,
000) 150,
000 400,
000 225,
000
$175,
000 = [
.1×-
$50,000]+ [.
5×$200,000]+ [
.4×$200,
000]
$225,
000 = [
.1×-
$100,000]+ [
.5×$150,
000]+ [
.4×$400,
000]

b) Inthi
sex ample,ar
isk-av
ersedeci
sionmakermaynotwi shtoacceptt
he
ri
skoflosing$100,000byorderi
ngtwoy achts.
6) Thebenefi
tofexpectedvalueanaly
sisi
sthatital
lowsamanagert oapply
sci
ent
ifi
cmanagementt echniquestoappl
icati
onst hatwoul
dother
wise
beguesswork.
a) Al thoughex actprobabili
tiesmaynotbeknown, theuseofexpectedv al
ue
analysi
sf orcesmanager st oeval
uatedecisi
onsinamor eorganized
manner .Att heleast,
manager sareforcedtothi
nkofall
oft he
possibi
lit
iest hatcouldhappenwi t
heachdecision.
7) Acr i
ti
cism ofexpect edvalueist hati
tisbasedonr epeti
ti
vet
ri
als,whereasin
real
ity
, mostbusinessdeci sionsi nv
olveonlyonetri
al.
a) EXAMPLE:
Acompanywi
shest
olaunchacommuni
cat
ionssat
ell
i
te.
i
) Thepr obabi
l
ityoflaunchfail
ureis.2,andtheval
ueofthesatel
li
tei
f
thelaunchfail
sis$0.Thepr obabil
ityofasuccessf
ull
aunchis.8,
andt heval
ueoft hesatel
li
tewoul dthenbe$25,000,
000.The
expectedvalueiscalcul
atedasf ol
lows:
.
2($0)+.
8($25,
000,
000)=$20,
000,
000
i
i
) But$20,
000,
000isnotapossi
bleval
ueforasi
ngl
esat
ell
i
te;ei
theri
t
fl
i
esfor$25,
000,
000oritcr
ashesfor$0.
10 SU8:Anal
ysi
sand
For
ecast
ingTechni
ques

2. Per
fectI
nfor
mat
ion
a. Per
fecti
nfor
mat
ioni
sthecer
tai
nknowl
edgeofwhi
chst
ateofnat
urewi
l
loccur
.
1) Theex pectedvalueofper
fecti
nfor
mati
on(
EVPI)i
stheaddit
ional
expect
ed
valuethatcouldbeobtai
nedifadeci
si
onmakerknewaheadoftimewhich
stateofnaturewouldoccur.
a) EXAMPLE:They achtdealerontheprevi
ouspagewoul
dmaximiz
eprof
it
s
i
f(s)hewereabletodetermineexactl
ywhatal
lpot
ent
ial
cust
omers
i
ntendedtodofortheseason.
i
) Si
ncet heyachtdealerhasper f
ecti
nfor
mation,t
hev al
uesusedi nthe
pay of
ftablear
ebasedont heknowndemand; i.
e.,i
fdemandwi ll
be
0y achts,
thedealerknowst hi
sandpurchases0y achts,
ifdemand
willbe1y acht
,thedealerknowsthi
sandonl ypurchases1y acht
,
etc.
Expect
edVal ue
wi
thPerfect
St
atesofNat
ure I
nfor
mat i
on
Deci
sion Demand=0 Demand=1 Demand=2 Total
s
St
ock0y
acht
s $ 0 $ 0 $ 0 $ 0
St
ock1y
acht (
50,
000) 200,
000 200,
000 100,
000
St
ock2y
acht
s (
100,
000) 150,
000 400,
000 160,
000
$260,
000

i
i
) Theprof
itthatcoul
dbeobtai
nedwi tht
hisper
fectknowl
edgeof
themarketiscal
culat
edasfol
lows:
$260,
000=( .1×$0)+( .
5×$200,000)+(.
4×$400,000)
 i
i
i) Thedif
fer
encebet
weenthi
samountandt
hebestchoi
cewi
thout
per
fecti
nfor
mati
oni
stheEVPI
.
Expect
edv al
uewithperfectinf
ormati
on $260,000
Expect
edv al
uewithoutperfecti
nfor
mati
on (225,
000)
Expectedvalueofperf
ectinformat
ion(
EVPI
) $35,000
i
v)Thedeal eri
st herefor
enotwill
ingtopaymorethan$35,
000for
perf
ectinf
ormat i
onaboutfutur
edemand.
2) Themax i
mum any oneshouldbewi l
lingtopayforper
fecti
nfor
mati
onisthe
expect
edvalueofperfectinformat
ion.

SENSI
TIVI
TYANALYSI
S
1. Sensi
ti
vi
tyanal
ysi
sreveal
showsensi
ti
veex
pect
edv
aluecal
cul
ati
onsar
etot
heaccur
acyof
thei
nit
ial
esti
mates.
a. Sensit
ivi
tyanal
ysi
sist
hususef
ulindet
erminingwhet
herex
pendi
ngaddi
ti
onal
resour
cestoobtai
nbett
erf
orecast
sisjust
if
ied.
1) I
fachangeinthepr obabili
ti
esassignedtothev ar
iousst
atesofnat urer
esult
s
i
nlargechangesint heexpectedv al
ues,
thedecisionmakerisjusti
fi
edin
expendi
ngmor eefforttomakebet t
erpr
edict
ionsabouttheoutcomes.
2) Thebenefi
tofsensiti
v i
tyanal
ysisi
st hatmanagerscanseet heeffectofchanged
assumpti
onsont hef i
nalobject
ive.

a) Forexample,i
nacapit
albudgeti
ngsi tuat
ion,
aproposedinv
estmentmight
promisearetur
nof$10,
000pery earandarateofretur
nof15%.Butt
hat
$10,
000isbasedonanest i
mat e.Whatmanagementneedst oknowis
howacceptablewoul
dtheinvestmentbei fther
eturnwasonly$6,
000per
year
.
b. EXAMPLE: Theyachtdeal
eri
ntheex pect
edvaluecomputat
ionil
lust
rat
edont he
previ
ouspagei
st est
ingdi
ff
erentcombinat
ionsofprobabi
l
iti
es.All
threeofthe
scenari
osdepi
ctedhereyi
eldthesamedecision(st
ocktwoyachtsfortheseason)
:
Ori
ginal Fi
rstAlt
ernat
ive SecondAlt
ernat
ive
Deci
sion Stat
esof Expect
ed Expected Expected
Al
ter
nativ
es Natur
e Pay
off Pr
obabi
l
ity Val ue Pr
obabil
i
ty Val ue Pr
obabil
it
y Val ue

St
ock Demand=0 $ 0 0.
1 $ 0 0.
5 $ 0 0.
333 $ 0
0Yacht
s Demand=1 0 0.
5 0 0.
1 0 0.
333 0
Demand=2 0 0.
4 0 0.
4 0 0.
333 0
$ 0 $ 0 $ 0

St
ock Demand=0 (50,
000) 0.
1 (5,
000) 0.
5 (25,000) 0.
333 (16,
650)
1Yacht Demand=1 200,
000 0.
5 100,
000 0.
1 20,000 0.
333 66,
600
Demand=2 200,
000 0.
4 80,
000 0.
4 80,000 0.
333 66,
600
$175,
000 $75,000 $116,
550

St
ock Demand=0 (
100,
000) 0.
1 (10,
000) 0.
5 (50,
000) 0.
333 (33,
300)
2Yacht
s Demand=1 150,
000 0.
5 75,
000 0.
1 15,
000 0.
333 49,
950
Demand=2 400,
000 0.
4 160,
000 0.
4 160,
000 0.
333 133,
200
$225,
000 $125,
000 $149,
850

1) However,
thef
oll
owi
ngcombi
nat
ioni
ndi
cat
est
hatonl
yoney
achtshoul
dbe
st
ocked:
Thi
rdAl
ter
nat
ive
Deci
sion St
atesof Expect
ed

Al
ter
nat
ives Nat
ure Pay
off Pr
obabi
l
ity Val
ue
 St
ock Demand=0 $ 0 0.
1 $ 0
0Yacht
s Demand=1 0 0.
8 0
Demand=2 0 0.
1 0
$ 0

St
ock Demand=0 (50,
000) 0.
1 (5,
000)
1Yacht Demand=1 200,
000 0.
8 160,
000
Demand=2 200,
000 0.
1 20,
000
$175,
000

St
ock Demand=0 (
100,
000) 0.
1 (
10,
000)
2Yacht
s Demand=1 150,
000 0.
8 120,
000
Demand=2 400,
000 0.
1 40,
000
$150,
000

2) Cl early ,
themor eaccuratelythedeal
erisabletoantici
patedemand, themor e
pr ofit(s)hewillmake.Int hi
scase,thedealerconsi
dersitworthwhiletoex pend
fur t
herr esourcesgather i
ngmor edataaboutmar ketcondit
ionsfory achts.
c. Atri
al-and- errormethodi nherentinsensit
ivi
tyanaly
sisisobviousl
ygreatlyfacil
itated
bytheuseofcomput ersoft
war e.
d. Amaj oruseofsensi ti
vit
yanalysisisincapit
albudgeti
ng,wher esmallchangesi n
pr
ev ail
ingi nterestratesorpay offamountscanmakeav erygreatdif
ferencei nthe
pr
ofitabi l
i
t yofapr oject.

STRATEGI
CMANAGEMENT
1. St
rat
egi
cManagement
a. St
rat
egi
cmanagementsetsover
allobject
ivesforanenti
tyandgui
desthepr
ocessof
r
eachi
ngt
hoseobj
ecti
ves.I
tistheresponsibi
l
ityofuppermanagement.
1) St r
ategicpl
anningist
hedesi gnandi mpl ement at
ionofthespecifi
cstepsand
processesnecessar
ytor eachtheov erallobject
ives.
b. Str
ategicmanagementandst rategicplanningaret huscloselyl
inked.Bythei
rnatur
e,
st
rategicmanagementandst rategicplanninghav ealong-term pl
anninghori
zon.
2. St
epsi
ntheSt rategi
cManagementPr ocess
a. St
rat
egi
cmanagementi
saf
ive-
stagepr
ocess:
1) Theboar dofdirectorsdraftstheor ganizat
ion’smi ssionstatement.
2) Theor ganizati
onper formsasi t
uationalanalysis,alsocall
edaSWOTanal ysis.
3) Basedont heresul t
soft hesituati
onal anal
y si
s, uppermanagementdev el
opsa
groupofst r
ategiesdescr i
binghowt hemi ssionwi ll
beachi eved.
4) Str
ategicpl ansar eimplement edthrought heex ecut i
onofcomponentpl ansat
eachl eveloftheent it
y.
5) Str
ategiccont rolsandf eedbackar eusedt omoni t
orprogress,isol
atepr
oblems,
andt akecor r
ect i
veact i
on.Ov erthelongt erm, feedbackist hebasi
sfor
adjustingtheor i
ginalmi ssi
onandobj ecti
ves.

Fi
gur
e8-
7

b. Themi
ssi
onstat
ementsummarizest
heent
it
y’
sreasonforex
ist
ing.I
tpr
ovi
dest
he
fr
amewor
kforfor
mulat
ionoft
hecompany’
sstr
ategi
es.
1) Mi
ssi
onst
endt
obemostef
fect
ivewhent
heyconsi
stofasi
ngl
esent
ence.
a) Forexampl
e,t
hemissi
onofStar
bucksCoff
eeCompanyis“t
oinspir
eand
nurt
uret
hehumanspir
it–oneperson,
onecupandonenei
ghborhoodat
 at i
me.”
2) Missionstendtobest at
edingeneralter
ms.Setti
ngspecifi
cobj ecti
vesi
n
themi ssi
onstatementcanlimitanenti
ty’
sabil
it
ytorespondt oa
changingmar ketpl
ace.
3) Ami ssionstat
ementandav isionstat
ementservedif
ferentpurposesfora
companybutar esometi
mesconf usedwitheachother.Ami ssion
statementdescribeswhatacompanywant stoachievenow, whi l
eav i
sion
statementoutli
neswhatacompanywant stoachiev
eint hefuture.
a) Themi ssionst at
ementconcent r
atesont hepr esent;itdefi
nest he
customer sandcr it
icalprocesses,anditex plainsthedesiredlevelof
perf
ormance.
b) Thevisionst atementf ocusesont hefut
ur e;itisasour ceofinspir
ationand
motivation.Itoft
endescr ibesnotjustt
hef utureoft heorgani
zation,but
thefutureoft heindustryorsocietyinwhi cht heorganizati
onoper ates.I
t
answer sthequest i
on, “Wheredowewantt obei nthefuture?
”

c) Amissi
onstatementdescri
beshowacompanywill
achievei
tsvi
si
on.
I
tdefi
nestheenti
ty’
spurposeandpr
imar
yobject
ivesandanswerst
he
quest
ion,
“Whatdowedo, andwhatmakesusdif
ferent
?”
c. Thesit
uati
onalanaly
sisi
smostof t
encall
edaSWOTanalysi
sbecausei
tident
if
ies
theenti
ty’
sstr
engths,weaknesses,oppor
tuni
ti
es,
andt
hreat
s.
1) Str
engthsandweaknessesareusual
lyi
dent
if
iedbyconsi
der
ingt
heent
it
y’
s
capabil
i
tiesandr
esources(
it
sinter
nal
envi
ronment)
.
a) Whatt heentitydoespar ti
cular
lywell orhasingr eaterabundancear e
it
scor ecompet encies.Butmanyent it
iesmayhav et hesamecor e
compet enci
es( cutti
ng-edgeIT,effi
cientdistr
ibution,etc.
).
b) Anent i
tygainsacompet i
ti
veadv ant
agei nthemar ketpl
acebydev el
opi
ng
oneormor edistinct
ivecompet encies,i.
e.,
compet enciesthatareunli
ke
thoseofitscompet i
tors.
2) Oppor
tunit
iesandt hreatsexistintheentit
y’sexternalenv i
ronment .Theyare
i
dent
ifi
edbyconsi dering
a) Macr oenvironmentf actors(economi c,demogr aphi
c,poli
ti
cal,
legal
,social,
cul
tur
al,andt echnical)and
b) Mi cr
oenvironmentf actors(suppliers,customers,di
stri
butor
s,competitors,
andothercompet itiv
ef act
orsint heindustry).
d. Basedont heresult
soft hesituationalanalysis,uppermanagementdev el
opsagr oup
ofstr
ategiesdescri
binghowt hemi ssionwi l
l beachieved.Thestrat
egiesanswer
suchquest i
onsas
1) “Whi chl i
nesofbusi nesswi l
l webei n?”
2) “Howdowepenet rateandcompet eintheinternati
onalmar ketplace?”
3) “Howwi l
lthi
slineofbusi nessr eachitsobjecti
vesthatcont ri
butet o
achievementoft heov erallentit
y’smission?”
4) “Howdoweper f
orm eachst rategicbusinessunit’
sbasi cprocesses( mater
ial
s
handling,assembl y,shippi
ng,humanr esources,customerr elati
ons,et
c.)as
effi
cientl
yaspossi ble?”
e. I
mplement i
ngt hechosenst rategiesinvolveseveryempl oyeeatev eryleveloft
he
ent
ity
.Incent i
vesy stemsandempl oyeeper f
ormanceev aluationsmustbedesi gned
sothattheyencour ageempl oyeest ofocust hei
reffort
sonachi evi
ngt heenti
ty’
s
obj
ectives.
1) Thisapproachr equi
rescommuni cati
onamongseni ormanagers,whodev ise
str
ategi
es;middlemanager s,whosuperviseandev al
uateemployees;and
humanr esour
cesmanager s, whomustappr oveevaluat
ionandcompensat ion
pl
ans.
f
. Asplansareexecutedateachor ganizati
onall
evel,
str
ategiccontr
olsandf eedback
al
lowmanagementt odeterminet hedegreeofprogresstowardthestatedobjecti
ves.
1) Forcont
rol
stobeef
fect
ive,
standar
dsagai
nstwhi
chper
for
mancecanbe
 measur edmustbeest abl
ished.Then,t
heresultsofactualper
formancemust
bemeasur edagainstthestandardsandreportedtotheappropri
atemanager
s.
Ifperf
ormanceisunsat i
sfactory
,managerstakecorrecti
veacti
on.
2) Result
sar esentt
ohi gher
-l
ev elmanagementforconti
nual r
efi
nementofthe
strat
egies.

3. Por
ter
’sFi
veCompet
it
iveFor
ces
a. Busi
nesstheori
stMichaelE.Porterhasdev
elopedamodel ofthest
ruct
ureof
i
ndustr
iesandcompet i
ti
on.Iti
ncludesananalysisoft
hef i
vecompetit
ivef
orces
t
hatdetermi
nelong-t
erm profi
tabil
i
tyasmeasur edbylong-t
ermretur
non
i
nvest
ment .
1) Thi
sanal ysisincl
udesanevaluationofthebasi
ceconomi candtechni
cal
characterist
icst
hatdet
erminet hestrengt
hofeachf or
ceandthe
attr
acti
v enessofthei
ndustry.Thecompet i
ti
veforcesaredepi
ctedinthe
diagram belowanddiscussedi ndetail
onthefol
lowingpages.

Fi
gur
e8-
8
b. Rival
ryamongexi st
ingfir
mswi llbeintensewhenanindustr
ycontainsmanyst rong
compet i
tor
s.Pri
ce-cutt
ing,l
argeadv ert
isi
ngbudget
s,andfrequentint
roducti
onof
newpr oductsaret
y pi
cal.Theintensi
tyofriv
alr
yandthethreatofentr
yv ar
ywi t
hthe
foll
owingfactor
s:
1) Thestageoft
hei
ndust
ryl
i
fecy
cle,
e.g.
,rapi
dgr
owt
h,gr
owt
h,mat
uri
ty,
decl
i
ne,
orr
apiddecl
i
ne
a) Thus, growthispref
erabletodecli
ne.I
nadecl ini
ngorevenastabl
e
i
ndust r
y,afi
rm’sgrowthmustcomef r
om winningotherfi
rms’
customers,t
herebystrengt
heningcompetit
ion.
2) Thedisti
nctionsamongpr oducts(pr
oductdi
ffer
entiati
on)andthecost
sof
switchi
ngf r
om onecompet it
or’
sproductto
another
a) Lessdiff
erenti
ati
ontendst oheight
encompetit
ionbasedonpri
ce,
wit
h
pri
cecutti
ngleadingtolowerpr of
it
s.Buthi
ghcostsofswi
tchi
ng
suppli
ersweakencompet ition.
3) Whet
herfix
edcost sarehighinrelati
ontovari
abl
ecosts
a) Highfi
xedcost
sindi
cat
ethatr
ival
rywil
lbeint
ense.Thegreat
erthecostt
o
gener
ateagiv
enamountofsalesrev
enues,t
hegreatert
heinvest
ment
 i
ntensi
tyandtheneedt
ooperat
eatornearcapaci
ty.Hence,
pri
cecut
ti
ng
t
osustaindemandisty
pical
.

4) Capaci
tyex
pansi
on
a) Ifthesizeoft heexpansi
onmustbel argetoachieveeconomiesofscale,
compet i
ti
onwi l
lbemor eintense.Theneedforlarge-
scal
eex pansi
onto
achi
ev eproducti
oneffi
ciencymayr esul
tinanex cessofindust
rycapaci
ty
overdemand.
c. Thepr
ospectsoflong-ter
m prof
it
abil
itydependont heindustr
y’sbar
ri
erstoentry.
1) Fact
orst
hati
ncr
easet
het
hreatofent
ryar
ethef
oll
owi
ng:
a) Economi esofscal e(andlearningcurveeffect
s)arenotsignifi
cant.
b) Brandident i
tyofex i
sti
ngproduct sisweak.
c) Costsofswi tchingsuppli
ersar elow.
d) Ex i
sti
ngf i
rmsdonothav ethecostadv ant
agesofv ert
icali
ntegrat
ion.
e) Productdi ff
er encesarefew.
f) Accesst oex isti
ngsuppli
ersisnotbl ocked,anddi
st r
ibuti
onchannelsare
wil
li
ngt oacceptnewpr oduct s.
g) Capitalrequirement sarelow.
h) Ex i
tbarri
ersar elow.
i
) Thegov ernment ’spol
icyi
st oencour agenewentrants.
2) Themostf avorablei ndustr
yconditionisonei nwhichentrybarri
ersarehighand
exi
tbarri
ersar elow.
a) Whent het hreatofnewent rantsismi ni
mal andex itisnotdif
fi
cul
t,r
etur
ns
arehigh, andr iskisreducedi ntheev entofpoorper for
mance.
b) Lowent rybar r
ierskeepl ong-term profi
tabil
itylowbecausenewf ir
mscan
entert heindust r
y,increasingcompet i
ti
onandl ower ingpr
icesandthe
mar ketshar esofex i
stingfir
ms.
d. Thethr
eatofsubstituteslimitspriceincreasesandpr ofitmar gins.Thegreat
erthe
t
hreat
,thel
essat tracti
vet heindust r
yist opotenti
al entrants.
1) Substi
tutesaret y
pes( notbr ands)ofgoodsandser vi
cesthathav
ethesame
purposes, f
orexampl e,plasti
candmet al ormini
vansandSUVs.Hence,a
changei nthepriceofonesuchpr oduct(servi
ce)causesachangeint
he
demandf orit
ssubst i
tutes.
2) Str
ucturalconsiderat
ionsaf fecti
ngthethreatofsubst
itut
esare
a) Relat
ivepri
ces,
b) Costsofswitchingtoasubst i
tut
e,and
c) Customers’i
nclinati
ontouseasubst itut
e.
e. Asthet hr
eatofbuyer
s’bar gai
ningpowerincreases,theappeal ofanindust
ryt
o
potenti
alent
rant
sdecr eases.Buyersseeklowerprices,betterqual
it
y,andmore
servi
ces.Moreover
,theyuset hei
rpurchasi
ngpowert oobt ainbet
terter
ms,possi
bly
thr
oughabi ddi
ngprocess.Thus, buyer
saffectcompet i
tion.
1) Buy
ers’
bar
gai
ningpowerv
ari
eswi
tht
hef
oll
owi
ngf
act
ors:
a) Whenpur chasingpowerisconcent r
atedi nafewbuy ersorwhenbuy er
s
arewellorganiz
ed,t
heirbargainingpoweri sgreater.Thiseffecti
s
rei
nforcedwhenseller
sarei nacapi t
al-i
ntensi
vei ndustry
.
b) High(l
ow)swi t
chingcostsdecr ease( i
ncrease)buy ers’bargai
ningpower.
c) Thethreatofbackward(upst
r eam)v ert
icali
ntegration,t
hatis,the
acquisi
tionofasupplycapacity,increasesbuy ers’bargaini
ngpower.
 d) Buy ersaremostl i
kel
yt obargainaggressivel
ywhent heirprofi
tmargins
arelowandasuppl ier’spr
oductaccount sforasubst ant i
alamountoft hei
r
costs.
e) Buy ersareinast rongerpositi
onwhent hesuppl i
er’
spr oductis
undiffer
enti
ated.
f) Themor ei
mpor tantthesupplier’
sproductist obuyers, t
helessbargaining
powert heyhav e.
f
. Asthet hr
eatofsuppl i
ers’bargainingpoweri ncr
eases, t
heappeal ofani ndustryto
potenti
alentrantsdecreases.Accor di
ngly,suppl
iersaffectcompet it
ionthrough
pri
cingandt hemani pulat
ionoft hequant i
tysuppli
ed.
1) Suppl
i
ers’
bar
gai
ningpoweri
sgr
eat
erwhen
a) Swi t
chingcost saresubstanti
al.
b) Pr i
cesofsubst it
utesarehigh.
c) Theycant hreat
enf orwar
d( downst r
eam)v ert
icalintegr
ati
on.
d) Theypr ov i
desomet hi
ngthatisasi gni
ficantinputt othevalueaddedbyt
he
buyer.
e) Thei rindustryisconcentrat
ed, ortheyareor ganized.
2) Buyers’bestr esponsesar etodevelopfav or
able, mutuallybenef
icial
rel
ationshipswi t
hsuppl ier
sortodi ver
sifytheirsourcesofsuppl y.
4. Gener
icCompet
it
iveAnal
ysi
s(St
rat
egi
es)Model
a. St
rat
egi
eswi
thaBr
oadCompet
it
iveScope
1) Costleadershipisthegenericstrategyofent i
ti
esthatseekcompeti
ti
ve
advantagethroughlowercost sandt hathaveabr oadcompeti
ti
vescope.
2) Dif
ferenti
ati
oni sthegeneri
cst rategyofent i
ti
esthatseekcompeti
ti
ve
advantaget hr
oughpr ovi
dingauni quepr oductandthathaveabroad
compet i
ti
vescope.
b. St
rat
egi
eswi thaNar rowCompet i
tiveScope
1) Costfocusist hegener i
cst rat
egyofentit
iesthatseekcompet i
ti
veadvantage
thr
oughl owercost sandt hathaveanar rowcompet i
ti
vescope( aregi
onalor
smallermar ket).
2) Focuseddifferenti
ati
oni sthegenericst
rategyofenti
ti
esthatseekcompetiti
ve
advantaget hroughprovidingauniqueproductandthathaveanar r
ow
compet i
ti
vescope( ar egionalorsmall
ermar ket
).

Fi
gur
e8-
9
5. Fi
veOper
ati
onsSt
rat
egi
es
a. Acostst r
ategyi ssuccessf ulwhent heent i
tyist hel ow- costproducer .Howev er,the
product( e.g.,acommodi t
y)tendst obeundi ff
er entiatedinthesecases, t
hemar ketis
oftenv erylarge, andt hecompet i
tiont endst obei ntensebecauseoft hepossi bil
ityof
high-volumesal es.
b. Aqualitystrategyi nv olv
escompet iti
onbasedonpr oductqual i
tyorpr ocessqual ity.
Productqual i
tyr elatestodesi gn,forex ampl e,thedi fferencebet weenal uxurycar
andasubcompact .Processqual ityconcer nst hedegr eeoff reedom f rom def ects.
c. Adel i
veryst rategymayper mitanent i
tytochar geahi gherpricewhent hepr oducti s
consistentlydel i
v eredrapidlyandont i
me.Anex ampl ecompanyi sUPS.
d. Af l
exibil
itystrategyi nvolvesof fer
ingmanydi ff
er entpr oducts.Thisst rategyal somay
refl
ectanabi l
ityt oshiftrapidlyfr
om onepr oductl inet oanother.Anex ampl e
companyi sapubl i
shert hatcanwr i
te,edit
,pr i
nt, anddi stri
buteabookwi thi
nday sto
exploitthepubl ic’sshor t-t
ermi nt
er estinasensat i
onal event.
e. Aser vi
cest rategyseekst ogainacompet it
iveadv antageandmax i
miz ecust omer
valuebypr ovidi
ngser vices,especiallypost-purchaseser vi
cessuchaswar r
ant ieson
automobi l
esandhomeappl i
ances.
6. TheGr
owt h-
Shar eMat ri
x
a. Sinceal argefir
m maybev i
ewedasapor t f
olioofinvestmentsi nthef
orm ofst r
ategic
businessunits( SBUs),t
echni quesofpor tfoli
oanalysishavebeendev elopedtoai d
managementi nmaki ngdeci sionsaboutr esourceallocati
on, newbusi
nessst art
ups
andacqui sit
ions,downsiz i
ng, anddi v
est
itures.
b. Oneoft hemodel smostf requent lyusedforcompet i
ti
v eanaly
si swascreatedby
theBost onConsul ti
ngGr oup( BCG) .Thi
smodel ,
thegr owth-sharematri
x,hastwo
vari
ables.Themar ketgrowthr ate(MGR)i sont hev erti
calaxis,andt
hef i
rm’srelat
ive
mar ketshare(RMS)i sont hehor i
zontalaxis.

Fi
gur
e8-
10
1) TheannualMGRi sst at
edinconstantuni t
soft hecurrencyusedi nthe
measurement.Itreflectsthemat ur
it
yandat tract
ivenessoft hemar ketand
therel
ati
veneedf orcasht of
inanceex pansi
on.
2) TheRMSr efl
ectst heSBU’ scompet i
ti
veposi t
ioninthemar ketsegment.Itequal
s
theSBU’sabsolutemar ketsharedividedbyt hatofit
sl eadingcompet i
tor.
3) Thegr owt h-shar emat r
ixhasf ourquadr ants.Thef i
rm’sSBUsar ecommonl y
represent edint hei rappr opr i
at equadr antsbyci rcl
es.Thesi zeofaci r
cleis
dir
ectlypr opor tional t
ot heSBU’ ssal esv olume.
a) Dogs( lowRMS, lowMGR)ar eweakcompet it
orsinl ow- gr owt hmar kets.
Thei rnetcashf low( pl usormi nus)i smodest .
b) Quest i
onmar ks(lowRMS, hi ghMGR)ar eweakcompet itorsandpoor
cashgener at orsinhi gh- growt hmar ket s.Theyneedl argeamount sof
cashnotonl ytof i
nancegr owt handcompet eint hemar ket,butalsot o
i
ncr easeRMS.I fRMSi ncr easessi gnificantl
y,aquest ionmar kmay
becomeast ar.Ifnot, itbecomesadog.
c) Cashcows( highRMS, lowMGR)ar est rongcompet i
tor sandcash
gener ators.Acashcowor di nar i
lyenj oy shi
ghpr of i
tmar ginsand
economi esofscal e.Fi nanci ngf orex pansi onisnotneeded, sotheSBU’ s
excesscashcanbeusedf orinv est ment si
not herSBUs.Howev er,
mar ketingandR&Dex pensesshoul dnotnecessar il
ybesl ashed
excessi vely .Max i
mi zingnetcashi nflowmi ghtpr ecipitateapr emat ure
declinef rom cashcowt odog.
d) St ars( hi
ghRMS, highMGR)ar est rongcompet i
torsi nhi ghgr owth
mar kets.SuchanSBUi spr of itablebutneedsl argeamount sofcashf or
expansi on, R&D, andmeet ingcompet itors’
attacks.Netcashf l
ow( plusor
minus)i smodest .
4) Apor tf
olioofSBUsshoul dnothav et oomanydogsandquest i
onmar ksort oo
fewcashcowsandst ars.
5) EachSBUshoul dhav eobject ives, ast rategyshoul dbef ormul atedt oachi eve
thoseobj ect i
ves, andabudgetshoul dbeal located.
a) Ahol dst rategyi susedf orstrongcashcows.
b) Abui ldst rategyi snecessaryf oraquestionmarkwitht
hepot entialt
obe
ast ar.
c) Ahar v estst rat egymax i
mi zesshor t
-t
erm netcashinf
low.Har vesti
ng
meansz ero-budget i
ngR&D,r educi
ngmar ket
ingcost
s,notr eplaci
ng
facil
ities, etc.Thi sstrategyisusedf orweakcashcowsandpossi bly
quest ionmar ksanddogs.
d) Adiv estst rategyi snormal l
yusedf orquesti
onmarksanddogst hat
reducet hef irm’ sprofi
tabil
ity.Theproceedsofsal
eorliqui
dat i
onar ethen
i
nv est edmor ef avor
ably.
i
) Ahar vestst
rat
egymayundermineaf
utur
edi
vest
it
urebydecr
easi
ng
thef
airval
ueoftheSBU.
6) Theli
fecycl
eofasuccessful
SBUisrefl
ect
edbyi
tsmovementwit
hint
he
gr
owth-shar
emat ri
x.
a) Thepr ogressionisfrom quest
ionmarkt ost
ar ,cashcow, anddog.
Accor di
ngly,af i
rm shoul
dconsideranSBU’ scur r
entstatusandi
ts
probablepr ogressi
onwhenf ormulati
ngast rategy.
7) Aseriousmi stakeistonott ail
orobj
ecti
ves(e.g.
,ratesofr et
urnorgrowth)t
othe
ci
rcumst ancesofeachSBU.

8) Cashcowsshouldnotbeunderf
undedbecausepremat
uredecl
i
nei
sri
sked.
However
,overf
undingcashcowsmeanslessinv
estmenti
nSBUswit
hgreat
er
growt
hprospects.
a) Al argei nvest menti
nadogwi t
hl i
tt
leli
kel
ihoodofaturnaroundisalsoa
typicalmist ake.
b) Af irm shoul dnothavet oomanyquestionmarks.Resul
tsareex cessri
sk
andunder fundedSBUs.
9) Accordi
ngt oKotler,managersneedtobeawar eoftheli
mitati
onsinherenti
n
theuseofamat rix(Pri
nci
plesofMarketi
ng,14thedi
ti
on).Managersmayf ind
i
tdiffi
culttomeasur emarketshar
eandgr owthorevendef i
neSBUs.Thus,
BCG’sgr owth-shar ematri
xmayhav eli
mitedstrat
egi
cv al
ue.
THEBALANCEDSCORECARD
1. KeyPer
for
manceI
ndi
cat
ors(
KPI
s)
a. Thetr
endinper
for
manceev
aluat
ionisthebal
ancedscor
ecar
dappr
oacht
omanagi
ng
thei
mplement
ati
onoft
hefi
rm’sstr
ategy.
1) Thebal ancedscorecardisanaccount i
ngr eportt
hatconnect
sthefi
rm’scri
ti
cal
successfactorstomeasur ementsofitsperformance.
b. Keyperfor
mancei ndicat
ors(KPIs)arespecif
ic,measur abl
efi
nanci
alandnonfi
nanci
al
elementsofaf i
rm’sperfor
mancet hatar
ev i
taltoit
scompet i
ti
veadvant
age.
1) Mul t
iplemeasur esofperformancepermitadeterminat
ionastowhet hera
manageri sachievi
ngcertainobj
ecti
vesattheexpenseofothersthatmaybe
equal l
yormor ei mport
ant.Forexample,animprovementinoperati
ngresul
tsat
theex penseofnewpr oductdevel
opmentwoul dbeapparentusi
ngabal anced
scor ecardapproach.
c. Thebalancedscor ecardisagoal congr
uencetoolthati
nformsmanager saboutthe
nonf
inancialfactor
st hatt
opmanagementbel ievestobeimportant
.
1) Measuresonthebal ancedscorecar dmaybef inanci
alornonf i
nanci al,i
nter
nalor
ext
ernal,
andshor tter
m orlongt erm.
2) Thebalancedscorecardfaci
li
tatesbestpr act
iceanalysis.Bestpracticeanalysi
s
deter
minesamet hodofcarryi
ngonabusi nessfunctionorpr ocesst hatis
consi
deredtobesuper iort
oall otherknownmet hods.Al essonl earnedf r
om
oneareaofabusi nesscanbepassedont oanotherar eaofthebusi nessor
betweenbusinesses.
2. SWOTAnal
ysi
s
a. Afi
rmi
denti
fi
esi
tsKPI
sbymeansofaSWOTanal ysist
hataddr
essesint
ernal
factor
s
(
it
sst
rengt
hsandweaknesses)andex
ter
nal
fact
ors(i
tsoppor
tuni
ti
esandthreat
s).
1) Thef i
rm’sgreateststrengthsareit
scor ecompetencies,whi
char efunct
ions
thecompanyper formsespeci al
l
ywel l
.Thesearethebasisf orit
scompet i
ti
ve
advantagesandst r
ategy.
b. Strengt
hsandweaknessesar einternalr
esourcesoralackt her
eof,forexample,
technologi
call
yadv ancedpr oducts,abroadproductmix,capablemanagement ,
l
eadershipinR&D, moder npr oducti
onf aci
l
iti
es,andastrongmar keti
ngorganizat
ion.

c. Opportuni
tiesandthreat
sari
sefr
om suchext
ernal
iti
esasgover
nmentr
egulati
on,
advancesi nt
echnology
,anddemographi
cchanges.Theymayber
efl
ectedinsuch
compet i
ti
vecondit
ionsas
1) Rai
singorl ower i
ngofbar ri
erstoent r
yi ntot hefirm’
si ndustrybycompet i
tor
s
2) Changesi nt heintensit
yofrival
rywi thi
nt hei ndustr
y,forex ample,becauseof
overcapacityorhi ghexitbarri
ers
3) Therelati
veav ailabil
i
tyofsubst i
tutesf ort hef i
rm’sproduct sorservices
4) Bargaini
ngpowerofcust omers,whi cht endst obegr eaterwhenswi tchingcosts
arelowandpr oduct sarenothighl ydifferent i
ated
5) Bargaini
ngpowerofsuppl i
ers,whicht endst obehi gherwhensuppl i
ersar efew
d. TheSWOTanal y sistendst ohighl
ightthebasi cf actorsofcost ,qual
it
y,andt hespeed
ofpr
oductdev elopmentanddel i
very.
3. PESTAnal
ysi
s
a. APESTanalysi
sisananaly
sisofcer
tai
nfact
orsi
ntheext
ernal
env
ironmentofan
or
gani
zat
ion,whichcanaff
ecti
tsacti
vi
ti
esandper
for
mances.
1) Iti
susedtoident
if
yKPI
s.
b. PESTanal
ysi
sincl
udes
1) Poli
ti
calfactor
s,
2) Economicf act
ors,
3) Soci
alfactors,
and
 4) Technologi
cal
fact
ors.
c. PESTanalysi
smayalsoincl
udeenv
ironment
al,
legal
,andet
hical
consi
der
ati
ons,
amongothers.
4. Measur
es
a. Oncethefi
rm hasidenti
fi
editsKPIs,i
tmustestabl
ishspeci
fi
cmeasuresforeachKPI
thatar
ebothr el
evanttothesuccessoft
hef i
rm andcanberel
i
ablystat
ed.
1) Thus,thebalancedscor ecardv ari
eswiththest rategyadoptedbythef i
rm.
2) Forexample,productdi f
ferenti
ationorcostl eadershipei
therinabroadmar ket
oranar r
owlyf ocusedmar ket( afocusst
r ategy).Thesemeasur esprovi
dea
basisforimplement i
ngt hefir
m’ scompetitivestrategy.
b. Thescorecardshouldincludelaggingindicat
ors( suchasout putandfinancial
measures)andleadingindicators(suchasmanyt ypesofnonf i
nanci
almeasur es)
.
1) Thelatt
ershouldbeusedonlyift
heyarepr
edi
ctor
sofult
imat
ef i
nanci
al
perfor
mance.
c. Thescorecar
dshouldpermitadeter
minat
ionofwhet
hercer
tai
nobject
ivesar
ebei
ng
achi
evedattheexpenseofother
s.
1) Forex ample,reducedspendi ngoncust omerser v
icemayi mproveshort-t
erm
fi
nanci
alresultsatasi gni f
icantcostt hati
sr ev
ealedbyal ong-
ter
m decli
nein
cust
omersat isfacti
onmeasur es.
d. Byprovi
dingmeasur est hatarenonf inancialaswel l
asf i
nancial,l
ongterm
aswel l
asshortterm, andi nternal aswel lasex t
ernal,t
hebal ancedscorecard
de-emphasiz
esshor ttermf i
nanci al resul
tsandf ocusesattentiononKPI s.
e. Anef f
ecti
vebalancedscor ecardrequi resavastamountofdat aofmanydi f
fer
ent
ty
pes.
1) Forthi
sreason,anenter
pri
seresourceplanni
ng(ERP)system i
salmosta
necessi
ty.AnERPintegr
atesinf
ormationsystemsacrosstheorgani
zat
ionby
creat
ingonedatabaseli
nki
ngallofthefir
m’sappli
cat
ions.

5. Possi
bleKPI
sandMeasur
es
a. At y
picalbal
ancedscor
ecar
dcl
assi
fi
esobj
ect
ivesi
ntooneoff
ourper
spect
iveson
thebusiness.
b. Fi
nancial
KPI Measur
e
Sal
es NewPr
oductSal
es
FVofFi
rm’
sSt
ock Pr
ice/
Ear
ningsRat
io
Pr
ofi
ts Ret
urnonI
nvest
ment
Li
qui
dit
y Qui
ckRat
io

1) Othermeasur esmayi ncl

udesal es,pr
ojectedsales, accuracyofsal esproject
ions,
stockprices,operat
ingearnings,ear
ningstrend,rev enuegrowt h,grossmar gin
percentage,costreduct
ions,resi
dualincome, cashf lowcov erageandt rends,
turnover(assets,
recei
vables,andinventory
),andi nterestcoverage.
c. Cust
omerSatisfacti
on
KPI Fi
nanci
alMeasur
e Nonf
inanci
alMeasur
e
Cust
omerSat
isf
act
ion Tr
endsi
ndol
l
aramount
sofr
etur
ns Mar
ketshar
e
Tr
endsindoll
aramount
sof
Deal
erandDi
str
ibut
orRel
ati
onshi
ps Leadt
ime
di
scount
staken
Mar
ket
ingandSel
l
ingPer
for
mance Tr
endsi
ndol
l
aramount
sofsal
es Mar
ketr
esear
chr
esul
ts
Pr
omptDel
i
ver
y Tr
endi
ndel
i
ver
yex
penses On-
ti
medel
i
ver
yrat
e
Qual
i
ty Dol
l
aramountofdef
ect
s Rat
eofdef
ect
s

1) Ot
herfi
nanci
almeasuresmayi ncl
udedol
l
aramountofsal
es,
dol
l
aramountof
r
etur
ns,andwar
rantyexpense.
 2) Othernonfinancialmeasuresmayi ncludeunitsal
es,trendsinunitsal
es,tr
end
i
nmar ketshare,numberofr etur
ns,rateofret
urns,customerretenti
onrate,
numberofdef ects,numberofwar r
antyclaims,r
ateofwar rant
yclaims,survey
resul
ts,coverageandst rengthofdistr
ibuti
onchannels,tr
aini
ngofmar keti
ng
people,servi
cer esponsetime,andserv i
ceeff
ecti
veness.
d. I
nter
nal
BusinessPr ocesses
KPI Fi
nanci
alMeasur
e Nonf
inanci
alMeasur
e
Qual
i
ty Scr
apcost
s Rat
eofscr
apandr
ewor
k
Changei
ncompanyr
evenue/
changei
n Uni
tspr
oducedper
Pr
oduct
ivi
ty
companycost
s machi
nehour
Fl
exibi
l
ityofResponset
o Ti
metorepurpose
Costt
ore-
pur
posemachi
nef
ornewuse
Changi
ngCondi t
ions machi
nefornewuse
Oper
ati
ngReadi
ness Set
-upcost
s Downt
ime
Saf
ety Dol
l
aramountofi
njur
ycl
aims Numberofi
njur
ycl
aims

1) Otherfi
nancialmeasur esmayi ncludesuchthingsasqual i
tycostsandlevelof
i
nv ent
orycar r
yingcosts.
2) Othernonfinancialmeasuresmayi ncl
udenewpr oductsmar keted,
technol
ogical
capabil
it
ies,surveyresult
s,f
ieldser v
icer
eports,vendordefectrat
e,cycl
eti
me,
l
aborandmachi neeffi
ci
ency,setupt i
me,scheduli
ngeffecti
veness,capaci
ty
usage,mai nt
enance, andaccidentsandtheirresult
s.

e. Lear
ningandGr
owt
h
KPI Fi
nanci
alMeasur
e Nonf
inanci
alMeasur
e
Numberofnewpat
ent
s
Dev
elopmentofNewPr
oduct
s R&Dcost
s
appl
i
edfor
Lostr
evenue(fr
om sl
owintr
oduct
ion Lengthofti
metobri
nga
Pr
ompt
nessofThei
rInt
roduct
ion
ofnewproducttomarket
) productt
omarket
HumanResour
ceDev
elopment Recr
uit
ingcost
s Per
sonnel
tur
nov
er
Mor
ale Or
ient
ati
on/
team-
bui
l
dingcost
s Per
sonnel
compl
aint
s
Compet
enceofWor
kFor
ce Tr
aini
ng/
ret
rai
ningcost
s Hour
soft
rai
ning

1) Otherfinanci
al measur esmayi ncludefinancialandoper ati
ngresults.
2) Othernonf i
nancial measur esmayi ncl
udenumberofdesi gnchangesand
copy r
ightsregistered,R&Dper sonnelquali
ficati
ons,actualversuspl anned
shippingdates, skil
lsetlevel
sat t
ained,personnelsurveyresults,
or ganizat
ional
l
ear ni
ng,andi ndust r
yleadership.
6. Dev
elopment
a. Theact
ivesuppor
tandpar
ti
ci
pat
ionofseni
ormanagementar
eessent
ial
.
1) Thisi nvol
vementwilli
nturnensurethecooper ati
onoflower-
level
managers
i
nt heident
if
icat
ionofobjecti
ves,appropr
iatemeasures,tar
getedresul
ts,
and
met hodsofachi
evingtheresult
s.
b. Thescorecardshouldcontai
nmeasur esatt hedetai
llevel
thatpermitever
yoneto
understandhowhi sorhereffor
tsaffectthefi
rm’sresult
s.
1) Thescor
ecar
dandthest
rat
egyitr
epr
esent
smustbecommunicat
edt
oal
l
manager
sandusedasabasisf
orcompensat
iondeci
si
ons.

7. Funct
ional
i
ty
a. Eachobject
ivei
sassoci
atedwit
honeormoremeasur
est
hatper
mitt
heor
gani
zat
ion
togaugeprogr
esstowardtheobj
ect
ive.
1) I
nor
derf
ort
hebal
ancedscor
ecar
dtobeusef
ul,
theor
gani
zat
ionmustbeabl
eto
 i
dent
ifyacause-and-
effectr
elat
ionshi
pbet
weenanact
iont
hatcoul
dbet
aken
(
oravoided)andaneffectonaKPI .
a) Forex ample,ift
heor ganizati
onincreasesit
sR&Dbudget ,t
hent
he
organiz
ati
oncani ncreasethenumberofnewpat entsappli
edf
or.
2) Achievementoftheobjecti
v esineachper spect
ivemakesitpossi
blet
oachi
eve
theobjecti
vesinthenexthi gherperspecti
ve.
3) Thischaini
ngofobjecti
vesandper specti
vesembodiestheimplement
ati
onofa
strat
egymap.

b. Toachi
evei
tsobj
ect
ives,
theor
gani
zat
ionmustest
abl
i
sht
hef
oll
owi
ng:
1) Rel
evantcr
it
eri
atomeasur
eout
comes.
a) Thi srequi
restheuseofl
aggi
ngi
ndi
cat
orswhi
chmeasur
ether
esul
tsof
acti
ons.
2) Rel
evantper f
ormancedri
ver
s
a) Thisrequir
est heuseofl eadi
ngindicator
swhichareusedt odet
ermine
howanout comecanbemet .
c. Whenmeasuringresul
tsandpl anningacti
onst otake,t
heorganizat
ionmustst
ay
f
ocusedonthecost-effect
ivenessofanyactiontaken(ornottaken).
1) Achi
evi
nggoal
sshoul
dnotbecomeendsunt
othemsel
ves.
a) Achi
evementofgoal
sshouldbeli
nkedtot
hebott
om li
ne.
d. Thef
oll
owi
ngareprobl
emsinimplementat
ionoft
hebal
ancedscor
ecardappr
oach:
1) Usingt oomanymeasur es,wit
haconsequentl ossoffocusonKPIs
2) Fail
ingt oevaluatepersonnelonnonf i
nancialaswellasfi
nanci
almeasures
3) Incl
udi ngmeasur esthatwi l
lnothav elong-ter
mf i
nanci
albenefi
ts
4) Notunder st
andingthatsubjectivemeasur es(suchascustomersati
sfacti
on)ar
e
e. i
mpr ecise
5) Tryingt oachieveimprov ementsinal l
areasatal lt
imes
6) Notbei ngawar ethatthehy pothesizedconnect i
onbetweennonfi
nanci
al
measur esandul t
imatef i
nancialsuccessmaynotcont i
nuetobetrue

EXAMPLEofaBal
ancedScor
ecar
d
PERFORMANCE
OBJECTI
VES TARGETS I
NITI
ATI
VES
MEASURES
PERSPECTI
VE:
Financi
al
● Expandint
onewmarket
s
I
ncr
easesal
es Gr
ossr
evenues I
ncr
ease15%
● I
mpr ov
esame-st
oresal
es

PERSPECTI
VE:
Cust
omerSat
isf
act
ion
● Reducenumberofdef
ects
Reducer
etur
ns Numberofr
etur
ns Decr
ease10% ● Determi
necust
omerneeds
priort
osal
e

PERSPECTI
VE:
Int
ernal
Busi
nessPr
ocesses
● Employ
eetrai
ning
Reducescr
ap Cost
sofscr
ap Decr
ease5%
● Seekhi
gherquali
tymat
eri
als

PERSPECTI
VE:
Lear
ningandGr
owt
h

Reduceper
sonal Lengthofti
me ● I
mprovehir
ingpr
act
ices
tur
nover employed I
ncr
ease50%
● Reev
aluat
ecompensati
onpl
an
STRATEGI
CPLANNI
NG
1. Pl
anni
ng
a. Pl
anni
ngisthedeter
minationofwhati
stobedoneandofhow, when,where,andby
whom i
tistobedone.Plansser
vetodir
ecttheacti
vi
ti
esthatall
organi
zational
membersmustundertakeandsuccessf
ull
yperf
ormt omovetheorganizati
on
f
rom whereiti
stowhereitwantst
obe( accompl
ishmentofit
sobjecti
ves).
1) However
,notr
ansactionsoccurdur
ingt
heplanni
ngcycl
ethatmustberecor
ded
int
hegener
alledger.
b. Pl
anni
ngmustbecompl et
edbeforeunder
taki
nganyothermanager
ial
funct
ion.
1) For
ecast
ingist
hebasi
sofpl
anningbecauseitpr
oject
sthefut
ure.
c. Pl
anni
ngest
abl
ishest
hemeanstoreachorgani
zati
onalends(obj
ect
ives)
.
1) Thismeans-endr el
ati
onshi
pext
endsthroughoutt
heor gani
zat
ional
hier
archy
andtiest
oget hert
hepartsoft
heorganizat
ionsothatthevar
iousmeansall
focusonthesameend.
2) Oneorgani
zationallev
el’
sendsprov
idethenexthi
gherlevel
’smeans.

EXAMPLE
Managementbyobjecti
ves(MBO)ident
if
iesrelat
ionshi
psbetweenanindi
vidual’
sjobobj
ect
ives(
ends)andtheimmediat
e
super
ior
’sobj
ect
ives(ends)
.Thus,
thesubordinatecanunderst
andhowhisorherj obist
hemeansbywhi chthesuper
ior
’s
j
obisaccompli
shed.Thiswil
lbedi
scussedinmor edet
ail
lat
erinthi
ssubunit.

2. ThePl
anni
ngPr
ocess
a. Long-r
ange( st
rat
egic)pl
anni
ngincl
udesst
rat
egi
cbudgeti
ng.Ithasahori
zonof1
to10y ear
sormor e.Suchpl
anningi
sdif
fi
cul
tbecauseofuncert
aint
yaboutf
utur
e
event
sandcondi ti
ons.
1) Thus, strat
egicpl anst endtobegener alandexcl
udeoperat
ionaldetai
l.
2) Anent i
tymustcompl eteit
sstrategi
cplanbeforeanyspeci
fi
cbudget i
ngcan
begi
n.Thest r ategi
cpl anstatesthemeansbywhi chanentit
yex pect
st o
achi
ev eitsstatedmi ssi
on.
b. Str
ategicplanningembodi est heconcernsofseniormanagement.Iti
sbasedona
st
rategicanalysisthatincludest hefoll
owing:
1) I
dent i
fyi
ngandspeci fy i
ngor ganizat
ionalobj ecti
v es.
2) Evaluati
ngthest r
engt hs(compet iti
veadv ant ages)andweaknessesoft he
organizati
onandi t
scompet i
tors.
3) Assessingrisklevel
s.
4) I
dent i
fyi
ngandf orecast i
ngt heeffectsofex ternal (envi
ronmental)
factorsrel
evanttot heor ganizati
on.Forex ampl e,markettrends,
changesi ntechnology ,i
nternati
onal compet i
ti
on, andsocialchange
maypr ovi
deoppor t
uni t
ies,imposel i
mi t
ations, orr epr
esentthreat
s.
a) For ecasti
ngist hebasi sofpl anningbecausei tproject
st hefutur
e.Av ar
iet
y
ofquantitat
ivemet hodsar eusedi nforecast ing.
5) Derivi
ngt hebestst r
ategyf orreachingtheobj ectives,giventheorganizat
ion’
s
strengthsandweaknessesandt her el
evantf uturetrends.
6) Capitalbudget i
ng,apl anningpr ocessf orchoosi ngandf i
nanci
nglong-term
projectsandpr ograms.
7) Capacitypl anni
ng,anel ementofpl anningclosel yrelatedtocapitalbudgeti
ng
thatincludes,amongot herthings,considerationofbusi nesscombi nati
onsor
divestit
ures.
 c. Str
ategi
cpl ansaretransl
atedintomeasur
abl
eandachi ev
ablei
nter
mediat
eand
operat
ionalplans.Thus,i
ntermediat
eandoperat
ional
plansmustbeconsi
stentwi
th,
andcontri
butet oachiev
ing,str
ategi
cobj
ect
ives.
3. Pr
emises
a. Premisesar etheunderly
ingassumpt ionsaboutt heexpectedenvironmenti nwhich
thest r
ategicpl
anwi l
lbecarri
edout.Thus, thenex tst
epinplanningi spremisi
ng, or
thegener ati
onofplanningassumptions.Pr emisesshouldbelimitedt othose
crucialtothesuccessoftheplans.
b. Manager sshouldask,“Whatinter
nal andex ter
nal f
actorswouldinfluencetheactions
plannedf orthi
sorganiz
ation(di
vi
sion, depart
ment ,progr
am)?”Premi sesmustbe
consideredatalll
evelsoftheorganization.
1) Thus,capi
talbudgeti
ngplansshouldbepremi sedonassumpti
ons(for
ecast
s)
abouteconomi ccycl
es,pri
cemov ements,
etc.
2) Theinventor
ydepartment’spl
ansmi ghtbepremisedonstabi
l
ityofpar
tspri
ces
oronf or
ecaststhatpr
iceswil
lri
se.

EXAMPLES
● Thegeneraleconomywi l
lsuff
eran11%decl inenex tyear.
● Ourclosestcompeti
tor’snewmodel wi l
lprov
idegr eatercompeti
ti
onforpot
ent
ial
sal
es.
● Unionnegotiat
ionswil
lresultinageneralwagei ncreaseof8%.
● Overthenext5y ear
s,thecostofourr awmat erial
swi l
lincr
easeby30%.
● Theelasti
cit
yofdemandf orthecompany ’
spr oductsis1.2.

4. Or
gani
zat
ional
Obj
ect
ives
a. Or
gani
zat
ionsmayhav
emul
ti
pleobj
ect
ivest
hatar
econt
radi
ctor
y.
1) Theobjecti
veofmax i
mi zi
ngpr ofi
tandt heobject
iveofgrowthcouldbe
mutuall
yexclusiv
ewi thinagiv eny ear.Maximizi
ngshort-t
erm pr
ofitmi
ght
hamperorpr ecl
udef uturegrowt h.
2) Confl
i
ctamonganor ganizat
ion’sobj ecti
vesiscommon.
b. Obj
ect
ivesvar
ywi t
ht heorganizati
on’sty peandst ageofdevelopment.
5. ManagementObj
ect
ives
a. Thepr
imar
ytaskofmanagementi
stocar
ryonoper
ati
onsef
fect
ivel
yandef
fi
ci
ent
ly.
1) Eff
ecti
venessisthedegreetowhichtheobject
iveisaccompli
shed.Ef
fi
ciency
i
smax imizi
ngtheoutputforagivenquanti
tyofinput.
2) Eff
ecti
venessissometimescall
ed“ doi
ngtheri
ghtthings,
”andeffi
ci
encyis
knownas“ doi
ngthingsri
ght.
”
a) Trade-of
fsarefrequent
lymadebet
weeneff
ici
encyandef
fect
iveness.
b. Objecti
vesshouldbeclear
lyandspecifi
cal
l
yst
ated,
communicatedt
oallconcerned
parti
es,andacceptedbythoseaffect
ed.

6. Means-
EndHi
erar
chy
a. Obj
ect
ivesshoul
dbeestabl
i
shedatt
hetopandr
etr
ansl
atedinmor
especi
fi
cter
msas
t
heyarecommunicat
eddownwardi
nthemeans-
endhi
erarchy
.

EXAMPLE
● Anentit
yhasasoci oeconomicpur pose, suchaspr ovi
dingfood.
● Theentit
y’smissionistheaccompl i
shmentofi tssocioeconomi cpurposethrought heproduct
ionofbr eakf
ast
cereal
.
● Theentit
ydev el
opsl ong-
rangeorst rategicobjectiveswi t
hregardt oprof
it
abil
it
y ,
growth,orsurvi
val.
● Amor especifi
cov eral
lobject
ivemi ghtbet opr ovideinvestorswi t
hanadequater et
urnont hei
rinvestment.
● Div
isi
onalobjecti
vescanbedev eloped, e.g.
,toincreaset hesalesofacer t
ainkindofcereal.
● Depart
ment alobj
ect i
vesaredev el
oped, e.g.,
tor educewast ei nthepackagi
ngdepar tment.
● Low-l
evelmanager sandsuper vi
sor sthendev elopper sonal perf
ormanceanddev el
opmentobjectives.

7. Pol
i
cies,
Procedur
es,
andRul
es
 a. Afterpremisesandobj
ecti
vesareformulated,t
henex tst
epinthepl
anningprocessis
thedev el
opmentofpol
ici
es,pr
ocedures,andrules.Theseel
ementsarenecessaryat
alll
evelsoftheor
gani
zati
onandov erl
apbot hindefi
niti
onandinpr
acti
ce.
1) I ntermediateandoperati
onalplansaretranslat
edi nt
opoli
cies,pr
ocedures,
and
r
ules,whicharestandi
ngplansf orrepeti
ti
vesituati
ons.
b. Poli
ci
esandpr oceduresprovidefeedforwardcont r
olbecauset heyanti
cipateand
preventpr obl
emsandpr ovi
deguidanceonhowanact ivi
tyshouldbeperformedto
bestensur ethatanobjecti
veisachieved.
1) Pol
i
ciesaregeneral
stat
ement
sthatgui
dethi
nki
ngandacti
oni
ndeci
si
on
making.Pol
i
ciesmaybeexpl
ici
tl
ypubl
i
shedby,ori
mpl
iedbyt
heact
ionsof
,
management.
a) Ast r
ongorganizati
onalcult
uremeanst hattheorganiz
ati
on’
skeyval
ues
areint
enselyheldandwi del
yshar ed.Inthi
scase, t
heneedforf
ormal
writ
tenpoli
ciesismi ni
mized.
2) Proceduresarespecif
icdirect
ivesthatdefinehowwor kistobedone.
3) Rulesarespecif
ic,
detail
edgui desthatrestri
ctbehavi
or.
8. ManagementbyObj
ect
ives(
MBO)
a. MBOisabehavioral
,communicati
ons-or
iented,r
esponsi
bil
i
tyappr
oachto
managementandemployeeself-
dir
ecti
on.Itisacomprehensi
vemanagement
appr
oachandtheref
orei
srelevantt
oplanningandcontrol
.
b. MBOisbasedonthephil
osophythatempl oy
ees
1) Wanttoworkhardi
ftheyknowwhatisexpect
ed
2) Li
ketounderst
andwhatthei
rjobsact
ual
l
yentail
3) Arecapabl
eofsel
f-
dir
ecti
onandself-
moti
vati
on
c. MBOrequi
res
1) Seni
ormanagementpar
ti
ci
pat
ionandcommi
tmentt
othepr
ogr
am.These
manager
smust
a) Determinetheoveral
ldi
recti
onandobj ecti
vesfortheorganiz
ati
on
b) Communi catetheseeff
ecti
velyi
noperat i
onalormeasur abl
eter
ms
c) Coordinat
esubordinat
es’object
iveswithoverall
object
ives
d) Foll
owupatt heendoftheMBOcy cl
eper i
odt orewardperf
ormanceand
revi
ewpr obl
ems

2) Integrati
onofobj ect i
vesforal lsubunit
sintoacompat ible,balancedsy stem
dir
ectedtowar daccompl ishmentoft heov erallobjectiv
es.
3) Pr ovi
sionsforregul arperi
odi creporti
ngofper formancet owar dat t
ainmentof
theobjecti
ves.
4) Freeandhonestcommuni cationbetweensuper visorandsubor dinate.
5) Acommi t
mentt ot akingthei deasofsubor dinatesser iousl yonthepar t
ofsupervi
sors.
6) Anor ganizati
onal climatet hatencouragesmut ual tr
ustandr espect.
d. Stepsnecessarytoimpl ementanMBOpr ogram i
ncl udeest ablishingobjectivesand
acti
onplans( t
hepl anningst eps)andper i
odicr
ev iewandf inal apprai
sal(thecontr
ol
steps)
.

EXTRANOTES:
FI
NTECH
 I nit
sbr oadestsense, t
het erm“ fi
ntech”gener allyr eferst ot echnol ogy -dr i
v eni nnov ationoccur ri
ng
i
nt hef i
nanci al ser v icesi ndust ry.Fort hepur posesoft hisr eadi ng, f i
nt echr efer st ot echnol ogical
i
nnov at ioni nt hedesi gnanddel i
ver yoff inanci al serv i
cesandpr oduct s.Not e, howev er, thati n
commonusage, fint echcanal sor efert ocompani es( of t
ennew, st artupcompani es)i nv ol v
edi n
developi ngt henewt echnol ogiesandt heirappl i
cat ions, aswel l ast hebusi nesssect ort hat
compr isessuchcompani es.Manyoft hesei nnov ationsar echal lengi ngt het radi tional busi ness
model sofi ncumbentf inanci al servicespr ov ider s.
 Ear lyf ormsoff int echi ncludeddat apr ocessi ngandt heaut omat ionofr out inet asks.Thenf ol
lowed
systemst hatpr ov i
dedexecut ionofdeci si onsaccor dingt ospeci fiedr ulesandi nst ruct ions.Fi ntech
hassi nceadv ancedi nt odeci sion- maki ngappl icat i
onsbasedoncompl exmachi ne- lear ningl ogic,
wher ecomput erpr ogr amsar eabl et o“ l
ear n”howt ocompl et et asksov ert i
me.I nsome
applicat i
ons, adv ancedcomput ersy st emsar eper for mingt asksatl ev elsf arsur passi nghuman
capabi lit
ies.Fi ntechhaschangedt hef i
nanci al ser vicesi ndust r yinmanyway s,gi vingr iset onew
systemsf ori nv est mentadv ice, fi
nanci alpl anni ng, businessl endi ng, andpay ment s.
 Wher easf intechcov er sabr oadr angeofser vicesandappl icat ions, ar easoff int echdev elopment
thatar emor edi rect lyr elev antt ot hei nv est menti ndust ryincl udet hef ol lowi ng:
 Anal ysisofl argedat aset s.Inaddi tiont ogr owi ngamount soft radi tional dat a, suchassecur i
ty
pr ices, cor por at ef inanci al statement s, andeconomi cindi cat ors, massi v eamount sof
al ternat ivedat agener at edf rom non- tradi ti
onal dat asour ces, suchassoci al medi aandsensor
net wor ks, cannowbei ntegr atedi nt oapor tfoli
omanager ’si nv est mentdeci sion- maki ng
pr ocessandusedt ohel pgener at eal phaandr educel osses.
 Anal ytical tool s.Forext r
emel ylar gedat aset s, techni quesi nv olv i
ngar tificial int elligence
(AI )—comput ersy stemscapabl eofper for mi ngt askst hatpr ev iousl yr equi redhuman
int ell
igence—maybebet tersui tedt oi dent ifycompl ex, non- linearr el at i
onshi pst hant raditi
onal
quant itativ emet hodsandst ati
st i
cal anal y sis.Adv ancesi nAI -basedt echni quesar eenabl i
ng
di fferentdat aanal ysisappr oaches.Forexampl e, analy st sar et urni ngt oar tificial i
ntel li
gencet o
sor tthrought heenor mousamount sofdat af rom companyf i
lings, annual repor ts,andear nings
cal lst odet er mi newhi chdat aar emosti mpor tantandt ohel puncov ert rendsandgener ate
insi ght sr elat i
ngt ohumansent imentandbehav i
or .
 Aut omat edt radi ng.Execut ingi nvest mentdeci sionst hroughcomput eral gor i
thmsoraut omat ed
tradi ngappl icat i
onsmaypr ovideanumberofbenef itst oi nv est or s, incl udi ngmor eef fi
cient
tradi ng, lowert r ansact ioncost s, anony mi ty, andgr eateraccesst omar ketl i
qui dity.
 Aut omat edadv ice.Robo- adv i
ser soraut omat edper sonal weal thmanagementser vicespr ov ide
inv est mentser v icest oal argernumberofr et ailinvest or satl owercostt hant radi tional adv i
ser
model scanpr ov ide.
 Fi nanci al recor dkeepi ng.Newt echnol ogy , suchasDLT, maypr ov idesecur eway st ot rack
owner shi poff inanci al asset sonapeer -to- peer( P2P)basi s.Byal lowi ngP2Pi nt eract ions—i n
whi chi ndi vidual sorf i
rmst ransactdi rect lywi theachot herwi t
houtmedi at i
onbyat hird
par ty—DLTr educest heneedf orf inanci al i
nt ermedi aries.

 Driver
sunderlyi
ngfintechdevelopmentintheseareasincl
udeextremelyr
apidgrowthin
data—incl
udingthei
rquant i
ty,
types,sources,
andqualit
y—andtechnologi
caladvancesthatenabl
e
thecaptureandextractionofi
nf or
mationfrom t
hem.Thedat aexplosi
onisaddressedi
nSect i
on3,
andselectedtechnological
advancesanddat ascienceareaddr
essedinSections4and5,
respecti
vel
y.

BI
GDATA
 Asnot ed,datasetsaregrowi ngr apidlyi ntermsoft hesizeanddi versit
yofdat at ypesthatar e
avail
ableforanal y
sis.Theter m BigDat ahasbeeni nusesincet helate1990sandr eferstot he
vastamountofdat abeinggener atedbyi ndustr
y ,gover
nment s,i
ndividuals,andel ect
roni c
dev i
ces.BigDat aincl
udesdat agener atedfrom tr
aditi
onalsour ces—suchasst ockexchanges,
compani es,andgov ernment s—aswel l asnon-
traditi
onaldat atypes,alsoknownasal ternative
data,ari
singfrom theuseofel ectroni cdev i
ces,socialmedia, sensornet works, andcompany
exhaust(datagener atedint henor mal courseofdoi ngbusiness) .
 Traditi
onaldatasour cesincludecor por atedat
ai ntheform ofannual reports,regulat
or yfil
ings,
salesandear ningsf i
gur
es, andconf er encecall
swi thanalysts.Traditi
onal dataal soi
ncl ude
datathataregener atedinthef inanci al market
s, i
ncludi
ngtr adepr i
cesandv olumes.Because
 thewor ldhasbecomei ncreasi
ngl yconnect ed, wecannowobt aindat afrom awi der angeof
dev i
ces, i
ncludingsmar tphones, camer as, micr ophones, r
adio-frequencyi dentification( RFID)
readers, wirel
esssensor s,andsat ellit
est hatar enowi nuseal lov erthewor l
d.Ast hei nternet
andt hepr esenceofsuchnet wor keddev iceshav egr own, theuseofnon- tradi t
ional dat a
sources, oralternat i
vedatasour ces—i ncludingsoci almedi a(post s,tweet s, andbl ogs) ,email
andt extcommuni cati
ons,webt raffic,onlinenewssi tes,andot herel ectroni cinfor mat ion
sources—hasr i
sen.
 Thet erm Bi gDat at ypi
call
yreferst odat aset shav i
ngt hef oll
owi ngchar act eristi
cs:
Volume: Theamountofdat acol lectedi nf i
les, r
ecords,andt ablesi sv eryl arge,
represent ingmanymi ll
ions, orev enbi l
lions, ofdat apoint s.
Velocity: Thespeedwi t
hwhi cht hedat aar ecommuni cat edisext remel ygr eat.Real-ti
me
ornear -real -
ti
medat ahav ebecomet henor mi nmanyar eas.
Var i
ety:Thedat aarecol l
ect edf r
om manydi fferentsour cesandi nav arietyoff ormats,
includingst r
uctur
eddat a( e.g.,SQLt abl esorCSVf il
es), semi-struct ureddat a( e.g.
,
HTMLcode) ,andunst r
uct ureddat a(e.g., v
ideomessages) .
Feat
uresr el
atingt oBi gDat a’svol
ume, velocity,andv ar ietyareshowni nExhi bi
t1.

Sour
cesofBigDat a
 Bi
gDat a,theref
ore,encompassesdat ageneratedby
 financialmarkets( e.g.,
equit
y,fi
xedincome, f
utures,opti
ons, andotherder i
vati
ves)
,
 busi nesses(e.g.
, corporat
ef i
nancial
s,commer ci
al t
ransactions,andcreditcardpurchases)
,
 gov ernments( e.
g. ,
trade,economic,employment, andpay r
olldata),
 individual
s(e.g.,creditcardpurchases,pr
oductrev i
ews,internetsearchlogs,andsocial
 medi aposts),
 sensors( e.
g.,
sat ell
it
eimager y,shi
ppingcargoinfor
mation,
andt raff
icpatt
erns),
and,i
n
part
icular,
 theInternetofThi ngs,orI
oT( e.g.,
datageneratedby“smart
”buildings,wherethebui
l
dingi
s
provi
dingast eadyst ream ofinformationaboutcli
matecontrol
,energyconsumpt i
on,
securit
y,andot heroper at
ionaldetail
s).

 Ther
earethr
eemainsourcesofalternat
ivedata:
 datagenerat
edbyi
ndividual
s,
 datagenerat
edbybusinessprocesses,and
 datagenerat
edbysensors.

 Datagener
atedbyi ndivi
dualsar eoftenproducedintext,
video,photo,andaudiofor
mat sand
mayalsobegener atedthroughsuchmeansaswebsi teclicksortimespentonawebpage.Thi s
ty
peofdatatendst obeunst ructured.Thev olumeofthi
st ypeofdataisgrowingdramat i
call
y
aspeoplepart
ici
patei ngreaternumber sandmor ef
requentlyinonli
neacti
vit
ies,
suchassoci al
mediaande-commer ce,i
ncludingonl i
nereviewsofproducts,servi
ces,andenti
recompani es,
andastheymakeper sonaldataav ail
ablethroughwebsear ches,email
,andotherelect
ronic
tr
ail
s.

 Businessprocessdat aincludeinf
or mati
onf l
owsf rom corporat
ionsandot herpublicenti
ti
es.
Thesedat atendtobest r
uctureddataandi ncludedi rectsal
esinformation,suchascr edi
tcar
d
data,aswellascor porateexhaust.Corporateexhausti ncl
udescor por
atesupplychain
i
nformat i
on,bankingrecords,andr etai
lpoint
-of-salescannerdat a.Busi
nesspr ocessdatacan
beleadingorreal-t
imei ndi
catorsofbusinessper formance,whereast r
aditi
onalcorporate
met r
icsmayber epor t
edonl yonaquar t
erl
yorev eny earl
ybasisandar etypical
lyl
agging
i
ndicatorsofperformance.

 Sensordat aar ecollect edf rom suchdev icesassmar tphones, camer as,RFI Dchips,and
satel
litesthatar eusual lyconnect edt ocomput ersv i
awi r
elessnet works.Sensordat acanbe
unstr
uct ured, andt hev olumeofdat ai smanyor dersofmagni tudegr eatert hanthatof
i
ndividualorbusi nesspr ocessdat ast reams.Thi sform ofdat aisgr owingexponent i
ally
becausemi cropr ocessor sandnet wor ki
ngt echnologyar eincr
easi ngl
ypr esentinawi dear r
ay
ofper sonal andcommer ci alel
ectronicdev i
ces.Extendedt oofficebuildi
ngs, homes, v ehi
cles,
andmanyot herphy sical forms,thiscul mi natesinanet workar r
angement ,knownast he
Int
ernetofThi ngs, thati sf ormedbyt hev astarrayofphy si
cal devices,homeappl iances,smart
buil
dings,v ehicles,andot herit
emst hatar eembeddedwi t
helect r
onics,sensor s,software,and
networ kconnect i
onst hatenabl etheobj ectsinthesy stem tointeractandshar einf ormation.

Bi
gDataChall
enges
 BigDataposessever
alchall
engeswheni ti
susedi ninvest
mentanaly si
s,i
ncludingthequali
ty,
volume,andappr
opri
atenessofthedata.Keyissuesrevolv
earoundt hefoll
owingquest i
ons,
amongot her
s:Doesthedatasethavesel
ecti
onbi as,
mi ssi
ngdata,ordataout l
i
er s?Ist
he
volumeofcoll
ect
eddatasuf f
ici
ent?I
sthedatasetwel l
suit
edforthet ypeofanaly si
s?I
nmost
 i
nstances, thedatamustbesour ced, cl
eansed, andorgani zedbef oreanalysiscanoccur.This
processcanbeext remelydif
ficultwi thal t
ernat
ivedataowi ngtot heunst r
uctured
characteri
sticsofthedatainvol v
ed, whichar emoreoftenqual it
ativ
e(e.g.,texts,
photos,and
vi
deos)t hanquant i
tati
veinnat ure.
 Giventhesi zeandcompl exit
yofal ternativedat
asets,traditionalanaly
ticalmet hodscannot
al
way sbeusedt ointerpr
etandev aluatet hesedatasets.Toaddr essthischal l
enge,art
if
ici
al
i
ntell
igenceandmachi nelearningt echni queshaveemer gedt hatsuppor twor konsuchlarge
andcompl exsourcesofinformat ion.

ADVANCEDANALYTI
CALTOOLS:
ARTI
FICI
ALI
NTELLI
GENCEANDMACHI
NELEARNI
NG

 Ar t
ificial int el l
igencecomput ersy st emsar ecapabl eofper for mi ngt askst hathav et radi tional ly
requi redhumani nt elligence.AIt echnol ogyhasenabl edt hedev el opmentofcomput ersy st ems
thatexhi bi tcogni tiveanddeci si on- maki ngabi litycompar abl eorsuper iort ot hatofhuman
beings.
 Anear lyexampl eofAIwast he“ exper tsy stem, ”at ypeofcomput erpr ogr ammi ngt hat
attempt edt osi mul at et heknowl edgebaseandanal y ti
cal abi li
tiesofhumanexper tsi nspeci fic
probl em- sol vingcont ext s.Thi swasof t
enaccompl ishedt hrought heuseof“ i
f -
t hen”r ules.By
thel at e1990s, fast ernet wor ksandmor epower ful pr ocessor senabl edAIt obedepl oy edi n
l
ogi st i
cs, dat ami ni ng, fi
nanci al anal ysis, medi cal diagnosi s, andot herar eas.Si ncet he1980s,
fi
nanci al inst itutionshav emadeuseofAI —par ticul arly, neur alnet wor ks, pr ogr ammi ngbasedon
howourbr ainl ear nsandpr ocessesi nfor mat ion—t odet ectabnor mal char gesorcl ai msi n
credi tcar df rauddet ect ionsy stems.
 Machi nel ear ning( ML)i sat echnol ogyt hathasgr ownoutoft hewi derAIf iel d.MLal gor ithms
arecomput erpr ogr amst hatar eabl et o“ lear n”howt ocompl etet asks, i
mpr ov ingt hei r
perf ormanceov ert imewi thexper ience.Asi ti scur rent lyusedi nt hei nv est ingcont ext ,ML
requi resmassi veamount sofdat af or“ traini ng, ”soal thoughsomeMLt echni queshav eexi st ed
fory ear s, insuf fi
ci entdat ahav ehi st orical lylimi tedbr oaderappl icat ion.Pr ev iousl y, these
algor ithmsl ackedaccesst ot hel ar geamount sofdat aneededt omodel r
el at ionshi ps
successf ully.Thegr owt hi nBi gDat ahaspr ov idedMLal gor ithms, suchasneur al net wor ks, wi t
h
suffici entdat at oi mpr ov emodel ingandpr edi ctiv eaccur acy ,andgr eat eruseofMLt echni ques
i
snowpossi ble.
 InML, thecomput eral gor i
thm i sgi v en“ input s”( asetofv ariabl esordat aset s)andmaybe
given“ out put s”( thet ar getdat a) .Theal gor i
thm “ lear ns”f rom t hedat apr ov idedhowbestt o
model i
nput st oout put s( ifprov ided)orhowt oi dent i
f yordescr ibeunder l
yingdat ast ruct ur eif
noout put sar egi v en.Tr ainingoccur sast heal gor ithm i dent i
fiesr elat i
onshi psi nt hedat aand
usest hati nfor mat i
ont or ef i
nei tsl ear ningpr ocess.
 MLi nv ol v esspl i
ttingt hedat aseti nt oat raini ngdat asetandv alidat i
ondat aset( ev aluat ion
dataset ).Thet rai ningdat asetal lowst heal gor ithm t oi dent ifyr el ationshi psbet weeni nput sand
output sbasedonhi st or ical pat ter nsi nt hedat a.Theser elat i
onshi psar et hent est edont he
validat iondat aset .Onceanal gor i
thm hasmast er edt het rainingandv alidat iondat aset s, theML
model canbeusedt opr edi ctout comesbasedonot herdat aset s.
 MLst il
l requi reshumanj udgementi nunder standi ngt heunder l
y ingdat aandsel ect ingt he
appr opr iat et echni quesf ordat aanal ysis.Bef or et heycanbeused, thedat amustbecl eanand
freeofbi asesandspur i
ousdat a.Asnot ed, MLmodel sal sor equi resuf ficient l
yl ar geamount s
ofdat aandmaynotper for m wel lwher et her emaynotbeenoughav ailabl edat at ot rai nand
validat et hemodel .
 Anal y st smustal sobecogni z antofer ror st hatmayar i
sef r
om ov erfittingt hedat a, because
model st hatov erfitt hedat amaydi scov er“ fal se”r elat i
onshi psor“ unsubst ant iat ed”pat terns
thatwi ll leadt opr edict ioner ror sandi ncor rectout putf or ecast s.Ov er fitti
ngoccur swhent he
MLmodel lear nst hei nputandt ar getdat asett oopr eci sel y.Insuchcases, themodel hasbeen
“over -trai ned”ont hedat aandt reat snoi sei nt hedat aast ruepar amet ers.AnMLmodel that
hasbeenov er fi
ttedi snotabl et oaccur at elypr edi ctout comesusi ngadi ffer entdat asetand
maybet oocompl ex.Whenamodel hasbeenunder fitted, theMLmodel treat st ruepar amet ers
asi ft heyar enoi seandi snotabl et or ecogni zer elationshi pswi t hint het raini ngdat a.I nsuch
cases, themodel maybet oosi mpl ist i
c.Under fi
ttedmodel swi llty pical lyfai l tof ullydi scov er
patter nst hatunder liet hedat a.
 Inaddi t i
on, si ncet heyar enotexpl icitlypr ogr ammed, MLt echni quescanappeart obeopaque
or“ blackbox”appr oaches, whi char ri
v eatout comest hatmaynotbeent irelyunder st oodor
 expl
ainabl
e.

Ty
pesofMachi neLear ning
 MLappr oachescanhel pi dent ifyr elati
onshi psbet weenv ariabl es, det ectpat t
er nsort rends, and
createst ructur ef rom dat a, incl udi ngdat acl assi fication.Themai nt ypesofmachi nel earning
appr oachesi ncludesuper v i
sedandunsuper v isedl ear ning.
 Insuper visedl ear ning, comput ersl earnt omodel relationshi psbasedonl abeledt rainingdat a.
Insuper visedl ear ning, input sandout put sar el abel ed, ori dent ified, fort heal gor ithm.Af t
er
l
ear ninghowbestt omodel relationshi psf ort hel abeleddat a, thet rainedal gor ithmsar eusedt o
model orpr edi ctout comesf ornewdat asets.Tr y i
ngt oi dent ifyt hebestsi gnal ,orv ari
able,to
forecastf utur er etur nsonast ockort r
yingt opr edi ctwhet herl ocal stockmar ketper f
ormance
wi l
lbeup, down, orf latdur ingt henextbusi nessdayar epr obl emst hatmaybeappr oached
usingsuper visedl ear ni ngt echni ques.
 Inunsuper visedl ear ning, comput ersar enotgi v enl abel eddat abuti nst eadar egi v enonl ydat a
from whi cht heal gor ithm seekst odescr ibet hedat aandt hei rst ruct ure.Tr yingt ogr oup
compani esi ntopeergr oupsbasedont heirchar act eristicsr at hert hanusi ngst andar dsectoror
count rygr oupi ngsi sapr obl em t hatmaybeappr oachedusi ngunsuper visedl ear ning
techni ques.
 Under ly i
ngAIadv anceshav ebeenkeydev elopment sr elatingt oneur alnet wor ks.I ndeep
l
ear ning, (ordeepl ear ningnet s) ,comput ersuseneur al net wor ks, oftenwi thmanyhi ddenl ayers,
toper for m mul tistage, non- lineardat aprocessi ngt oident if
ypat terns.Deepl ear ningmayuse
super visedorunsuper visedmachi nel earningappr oaches.Byt aki ngal ay eredormul ti
stage
appr oacht odat aanal ysi s,deepl ear ningdev elopsanunder standi ngofsi mpleconcept sthat
i
nf ormsanal y sisofmor ecompl exconcept s.Neur alnet wor kshav eexi st edsi nce1958and
hav ebeenusedf ormanyappl i
cat ions, suchasf orecast i
ngandpat t
er nr ecogni tion, sincethe
early1990s.I mpr ov ement si nt heal gorit
hmsunder lyi
ngneur al net wor ksar epr ov idingmor e
accur at emodel st hatbet teri ncor por ateandl ear nf rom dat a.Asar esult, t
heseal gor i
thmsar e
nowf arbet t
eratsuchact ivitiesasi mage, pat ter n,andspeechr ecogni tion.Inmanycases, t
he
adv ancedal gor i
thmsr equi rel esscomput i
ngpowert hant heear li
erneur al networ ks, andthei r
i
mpr ov edsol utionenabl esanal yst st odiscov eri nsight sandi dent i
fyr elat i
onshi pst hatwer e
prev i
ousl yt oodi fficul tort oot i
meconsumi ngt ouncov er .

DATASCIENCE: EXTRACTI NGI NFORMATI ONFROM BI GDATA

 Datasciencecanbedef i
nedasani nterdi
sciplinaryfieldt hatharnessesadv ancesi ncomput er
science( i
ncludingmachi nelearni
ng),stati
stics,andot herdi sci
plinesforthepur poseof
extract
ingi nformationfrom BigDat a( ordataingener al).Compani esrelyont heexper ti
seof
datascient i
sts/analyststoext r
actinformationandi nsight sf r
om Bi gDataforawi dev ari
etyof
businessandi nvestmentpur poses.
 Ani mpor tantconsiderationforthedat ascientististhest ructureoft hedata.Asnot edinthe
discussiononBi gDat a,becauseoft heirunstructurednat ure,alternati
vedat aoftenr equi
re
special
izedt reatmentbef or
etheycanbeusedf oranal ysis.

DataProcessi
ngMet hods
Tohelpdeterminethebestdat amanagementt echni queneededf orBi gDat aanalysis,datascientists
usevari
ousdatapr ocessi
ngmet hods, i
ncludingcapt ure, curation,storage,search, andtransfer.
 Capt ure—Dat acaptur er eferstohowt hedat aar ecoll
ect edandt r
ansf ormedi ntoa
for
matt hatcanbeusedbyt heanal y ti
cal process.Low- l
atencysy stems—sy st
emst hat
operateonnet workst hatcommuni cat ehighv olumesofdat awithmi ni
mal delay
(l
atency)—areessent ial forautomat edt r
adi ngappl i
cat i
onst hatmakedeci sionsbased
onreal-t
imepr i
cesandmar ketev ent s.Incont rast,high-lat
encysy stemsdonotr equire
accesstor eal
-ti
medat aandcal cul ations.
 Cur ati
on—Dat acur ati
onr eferstot hepr ocessofensur i
ngdat aqual i
tyandaccur acy
thr
oughadat acleaningexer cise.Thi spr ocessconsi stsofr evi
ewi ngalldatat odetect
anduncov erdataer ror s—badori naccur atedat a—andmaki ngadj ustment sformi ssing
datawhenappr opriate.
  Storage—Dat ast oragereferstohowt hedat awill
ber ecorded,archived,andaccessed
andt heunder lyingdat abasedesi gn.Ani mpor t
antconsiderati
onf ordatastorageis
whet hert hedat aar estr
ucturedorunst ructuredandwhet heranal yt
icalneedsrequir
e
l
ow- latencysol utions.
 Search—Sear chr eferstohowt oquer ydata.BigDatahascr eatedt heneedf oradvanced
applicationscapabl eofexami ningandr eviewinglar
gequant it
iesofdat atolocate
request eddat acont ent.
 Transf er—Transf erreferstohowt hedatawi llmovefrom theunder lyi
ngdatasour ceor
storagel ocati
ont otheunder l
yinganal y
ticaltool
.Thiscouldbet hroughadi rectdata
feed, suchasast ockexchange’ spricefeed.

Dat aVi sual i

zat ion
Dat av isual i
zationi sani mpor tantt ool forunder standi ngBi gDat a.Visual izationr eferst ohowt hedat a
wi l
l bef ormat ted, displayed, andsummar izedingr aphi cal form.Tr aditional structur eddat acanbe
visual izedusi ngt abl es,char ts, andt rends, wher easnon- tr
adi ti
onal unst r
uct ureddat ar equirenew
techni quesofdat av i
sualizat ion.Thesev i
sualizat i
ont ool si nclude, forexampl e, i
nt eractivet hree-
dimensi onal (3D)gr aphics, wher euser scanf ocusi nonspeci fi
eddat ar angesandr otatet hedat a
acr oss3Daxest ohel pident ifyt rendsanduncov err elat i
onshi ps.Mul ti
dimensi onal dataanal ysi s
consi stingofmor et hant hreev ariabl esrequiresaddi t
ional datav i
sual i
zat iont echni ques—f orexampl e,
addi ngcol or,shapes, andsi zest ot he3Dchar ts.Fur ther ,awi dev arietyofsol ut i
onsexi ststor eflect
thest ruct ureoft hedat at hrought hegeomet ryoft hev isualizat i
on, withi nteract i
vegr aphicsal l
owi ng
forespeci allyrichpossi bili
ties.Exampl esincludeheatmaps, treedi agr ams, andnet wor kgr aphs.
Anot herv aluabl eBi gDat av isual izat i
ont echniquet hati sappl icablet ot ext ual datai sa“ t
agcl oud, ”
wher ewor dsar esi zedanddi splay edont hebasi soft hef requencyoft hewor di nt hedat af ile.For
exampl e, wor dst hatappearmor eof tenar eshownwi thal argerf ont ,andwor dst hatappearl essof ten
areshownwi t
hasmal l
erf ont .A“ mi ndmap”i sanot herdat av isualizationt echni que; itisav ar i
at i
onof
thet agcl oud, butr athert handi splay ingt hefrequencyofwor ds, ami ndmapshowshowdi f
f erent
concept sar er elat edt oeachot her .
Ex hibit3showsanexampl eofa“ tagcl oud”basedonasect i
onoft hisr eadi ng.Themor efrequent lya
wor di sf oundwi thint het ext, thel argeri tbecomesi nt het agcl oud.Asshowni nt het agcl oud, the
wor dsappear ingmostf requent lyint hesect i
oni nclude“ dat a,
”“ ML, ”“ l
ear ning,”“AI ,
”“techni ques, ”
“model ,”and“ relationshi ps.”

Goodl
uckev
ery
one!