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Executive Information Systems and Metrics

Source: Decision Support Systems in the 21st Century, 2nd Edition by George M. Marakas

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An EIS is

An

EIS is a special type of DSS designed to support decision making at the top level of an organization.
An

EIS may help a CEO to get an accurate picture of overall operations, and a summary of what competitors are doing. These systems are generally easy to operate and present information in ways easy to quickly absorb (graphs, charts, etc.).

The EIS will allow the executive to drill down from any figure to see its supporting data.

The executive can select a level of detail (for example, sales by state) if further investigation is needed.

This top down approach should lead to better decisions.


MGS 8020 Methods of Business Intelligence

Executives are different because

They are enterprise-oriented in thinking The possess the broadest span of control They are responsible for establishing policy They represent the organization to the external environment Their actions have considerable financial and human consequences Disturbance management may require around-the-clock attention.

Entrepreneurial activities require the executive to predict changes in the environment. Resource allocation tasks require the manager to choose when and where the limited resources are deployed.

Negotiation requires up-to-the-minute info to help build consensus.


MGS 8020 Methods of Business Intelligence

Executives typically spend their time

Other, 6% Negotiation, 3% Resource Allocation, 17% Handling Disturbances, 42%

Entrepreneurial Activites, 32%

MGS 8020 Methods of Business Intelligence

Executives are different because

Disturbance management may require around-the-clock attention.

Entrepreneurial activities require the executive to predict changes in

the environment.

Resource allocation tasks require the manager to choose when and

where the limited resources are deployed.

Negotiation requires up-to-the-minute info to help build consensus.

MGS 8020 Methods of Business Intelligence

Types of information executives use

Accounting

systems that relate revenue to specific operational areas

are more important than traditional accounting systems.

Information about markets, customers and suppliers is valuable in

determining strategy.

The information required is often spread across several computer

systems and located throughout the organization.


The information used is often short-term and volatile. Information that represents key business performance indicators
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(metrics)
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EIS hardware components

An

EIS requires no specific or unique hardware.

A key

issue is to be sure that the EIS components optimize and

conform to the organizations computing resources.

The system must be configured so that the resources are well-matched

to the executives using them.

MGS 8020 Methods of Business Intelligence

EIS software components

In contrast to hardware, software is usually highly specialized to the

problem domain.

This specialization is often achieved by using off-the-shelf components

for the EIS backbone, and customized modules to meet specific needs.

Lotus Notes is a good example. It can be used alone, or can

accommodate third-party plug-in modules.

SAS is another robust system. [SAS interactive tour]

MGS 8020 Methods of Business Intelligence

EIS limitations

Cost: a 1991 survey showed an average development cost of $365,000

with annual operating costs of $200,000.


Proportion still holds today, but higher $$.

Technological limitations: the EIS needs to be seamlessly integrated

into the companys current IT architecture, so it is a formidable


challenge to the designer.

Organizational limitations: the organizational structure might not be

right.

MGS 8020 Methods of Business Intelligence

Organizational limits

Agendas and time biases: the EIS represents only part of executives

total agenda, and it may become easy to be overly reliant on it.

Managerial synchronization: heavy reliance on the timely, ad-hoc,

EIS reports may disrupt stable, well-established reporting cycles.

Destabilization: fast EIS response may cause the executive to react

too swiftly, leading to less stability in the organization.

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Executives are different because

Lack of management support

Political problems
Developer failures Technology failures Costs Time

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EIS of tomorrow

The intelligent EIS: advances in AI technology will be deployed in the EIS

The multimedia EIS: multimedia databases will allow future integration of text, voice and image

The informed EIS: future EISs will make wider use of data external to the company

The connected EIS: high-bandwidth communication allows greater interconnectivity

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Performance Management: The Balanced Scorecard


Purpose of Balanced Scorecard: A method of implementing a business strategy by translating it into a set of performance measures derived from strategic goals that allocate rewards to executives and managers based on their success at meeting or exceeding the performance measures.

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Performance Management: The Balanced Scorecard

(Source: Kaplan & Norton, 1996)

Reasons for the Need of a Balanced Scorecard 1. Focus on traditional financial accounting measures such as ROA, ROE, EPS gives misleading signals to executives with regards to quality and innovation. It is important to look at the means used to achieve outcomes such as ROA, not just focus on the outcomes themselves.

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Performance Management: The Balanced Scorecard

(Source: Kaplan & Norton, 1996)

Reasons for the Need of a Balanced Scorecard 2. Executive performance needs to be judged on success at meeting a mix of both financial and non-financial measures to effectively operate a business.

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Performance Management: The Balanced Scorecard

(Source: Kaplan & Norton, 1996)

Reasons for the Need of a Balanced Scorecard 3. Some non-financial measures are drivers of financial outcome measures which give managers more control to take corrective actions quickly. (Example: controls in jet cockpit for pilot)

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Performance Management: The Balanced Scorecard

(Source: Kaplan & Norton, 1996)

Reasons for the Need of a Balanced Scorecard 4. Too many measures, such as hundreds of possible cost accounting index measures, can confuse and distract an executive from focusing on important strategic priorities. The balanced scorecard disciplines an executive to focus on several important measures that drive the strategy.

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Performance Management: The Balanced Scorecard


Balanced Scorecard Perspectives

(Source: Kaplan & Norton, 1996)

1. Financial: How do we look to our Shareholders? 2. Customer: How do our Customers See Us? 3. Internal Business Process: What should we do that is Excellent? 4. Employee and Organization Innovation and Learning: Can we continue to Improve and Add Value?

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Performance Management: The Balanced Scorecard


Drivers (lead indicators) Moderators (lag indicators)

(Source: Kaplan & Norton, 1996)

Outcomes

Cycle Times Customer Satisfaction Customer order fulfillment Product assembly Quality cycle time Defect rate Scrap rate

ROA EVA EPS

Manufacturing Unit Costs


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Balanced Scorecard Chain of Causality of Performance Measures


(Source: Kaplan & Norton, 1996)

Drivers (lead indicators) Employee Satisfaction

Moderators (lag indicators) Employee Retention Rate Revenues Product and Process Innovations

Outcomes

Growth

Employee Suggestions

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Financial Measures & the Balanced Scorecard


(Source: Kaplan & Norton, 1996)

Financial measures are outcomes that represent the executives success at achieving strategic performance goals Financial measures are influenced by the Stage of the Life Cycle which reflects different strategic priorities

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Financial Measures & the Balanced Scorecard


(Source: Kaplan & Norton, 1996)

Life Cycle Stage Growth


Sales Growth Revenue Productivity Generate new accounts & increase market share

Sustain/Maturity
ROCE EVA

Harvest/Decline
Cash Flow Reduce Unit Costs
Obtain immediate payback on investments from cash cow

Earn excellent return on capital invested

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Customer Measures & the Balanced Scorecard (Source: Kaplan & Norton, 1996)
Different Customer Models Business Business
Relevant Customer Metrics

Inventory cycle time Quality defect rate


Customer Distributor satisfaction Customer satisfaction Distributor price margin

Business

Distributor/Dealer

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Customer Measures & the Balanced Scorecard (Source: Kaplan & Norton, 1996)
Different Customer Models Business Customer
Relevant Customer Metrics

Customer order fulfillment cycle time Customer satisfaction Customer price margin

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Internal Business Process Measures and the Balanced Scorecard


(Source: Kaplan & Norton, 1996)
Internal Business Process Measures

Quality Yield Throughput Cycle time Cost efficiency

Order Fulfillment Procurement Repair service quality/downtime Warranty quality

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Internal Business Process Measures and the Balanced Scorecard


(Source: Kaplan & Norton, 1996)
Model of Internal Business Process Logistics

Customer Need Identified

Innovation Process

Operations Post-Sale Process Service Process

Customer Need Satisfied

Identify Market

Create Product

Build Product

Deliver Product
Delivery Cycle Time

Service to the Customer


Service Satisfaction

Relevant Metrics:

Development Quality Cycle Time Defects


MCE

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Internal Business Process Measures and the Balanced Scorecard


(Source: Kaplan & Norton, 1996)
Manufacturing Cycle Effectiveness (MCE)

MCE = Processing Time

Throughput Time

Throughput Time = Processing time + inspection time + movement time + waiting/storage time MCE MCE 0, implies inefficient process 1, implies less wasted time, greater efficiency
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Employee and Organization Capabilities for Innovation and Learning Measures


(Kaplan & Norton, 1996)
What are employee and organization capabilities for innovation and learning measures? Represent ways to improve the other 3 scorecard outcomes or measures. They nurture the other 3 areas

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Employee and Organization Capabilities for Innovation and Learning Measures


(Kaplan & Norton, 1996)
Employee Measures Employee satisfaction Employee retention Employee productivity
Learning Measures Employee skill levels (certification rate) # suggestions per employee Employee learning curve (time to reach acceptable level of output or quality)

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Balanced Scorecard: Cascading Goals

Customer Satisfaction Corporate SBU Retail Store

# Employee Suggestions Corporate SBU Department Team

ROCE Corporate SBU

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Incentive Compensation for Executives with the Balanced Scorecard


Executive Bonus Pool is designed as a percentage of Base Salary The bonus pool represents potential earnings from the bonus for an executive if all performance measures are achieved Partial success with meeting performance measures results in the allocation of a bonus representing a lesser amount of the total potential bonus. Example: The bonus pool for a CEO equals 100 percent of salary. Range of bonus equals 0 to 100 percent of salary depending on success of CEO performance.

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Example: Automobile Company Balanced Scorecard Reward Matrix for Bonus


Category Financial (50%) Measure EVA Unit Profit Market Growth Customer satisfaction survey Dealer satisfaction survey Above average rank on industry quality survey Decrease in dealer delivery cycle time.. Suggestions/employee Emp. satisfaction survey Weighting 25% 15% 10% 10% 10% 10% 10% 5% 5%

Customer (20%) Internal (20%) Process

Innovation (10%) and Learning

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The Balanced Scorecard

Critical Thinking Questions 1. What happens to the balanced scorecard when the strategy changes? (example: moving from a growth to an extract profits strategy) 2. How should resistance by executives or managers to new measures be handled? 3. What if executives or managers sub-optimize and only focus on categories in the reward matrix with the largest payoff such as EVA and Customer Satisfaction?

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Metrics attributes
(K. H. Rose, 1995)

Customer-centered indicators that provide value to customer (quality, dependability, timeliness)


associated with internal work that address system cost, waste reduction, team work, innovation, customer satisfaction

Measure performance across time (trends, not snapshots)

Provide information directly at level they are applied (no further processing)

Linked to business mission, strategy, and actions Contribute to organizational direction and control

Collaboratively developed by those who provide ,collect, process and use the data

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Sample scorecard
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Sample Quality Metric Learning Organization Quality Metric


2004 YTD: 79.5% 2004 Target: 80.0%

Sample Productivity Metric Learning Organization Productivity Metric


Res ource Hrs per Ins truction Hr Developed 2004 YTD: 58 hr / hr

2004 Target: 40 hr / hr

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Sample productivity indicator metrics


40 30 20 50 60 70 80

400 300 200

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600 700 800

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Customer Service Productivity Metric Sampleper Instruction Hr Developed 1 Resource Hrs Business Unit 2004 YTD: 48 hr / hr Productivity Metric
2004 Target: 40 hr / hr

Resource Hrs per Instruction Hr Developed

Sample Business Unit 2 2004 YTD: 625 / hr Productivity hrMetric 2004 Target: 400 hr / hr
40 50

E-Learning Productivity Metric

Resource Hrs per Instruction Hr Developed Sample Business Unit 3 2004 YTD: 38 hr / hr Productivity Metric 8 hr / hr 2004 Target: 40 hr / hr

Enterprise Productivity Metric

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60 70 80

60 70 80

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Leadership Metric SampleProductivity Developed Business Unit 4 Resource Hrs per Instruction Hr 2004 YTD: 66 / hr ProductivityhrMetric 8 hr / hr
2004 Target: 40 hr / hr

Resource Hrs per Instruction Hr Developed

Sample Business Unit 5 2004 YTD: 78 hr / hr Productivityhr Metric 8 hr / hr 2004 Target: 40 / hr

Six Sigma Productivity Metric

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Sample quality indicator metrics


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20 30 40 50 60 70 80

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Business unit 1Metric Customer Service Quality 2004 YTD: 83.0% quality metric
2004 Target: 80.0%

E-Learning unit 2 BusinessQuality Metric 2004 YTD: 81.0% quality metric 2004 Target: 80.0%

Enterprise Quality Metric Business unit 3 2004 YTD: 76.0% quality metric 2004 Target: 80.0%

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60 70 80 20 30

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Business77.0% 4 unit 2004 YTD: 2004 Target: 80.0% quality metric

Leadership Quality Metric

Six Sigma Quality Metric

Business unit 5 2004 YTD: 79.0% 2004 Target: 80.0% quality metric

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