Business Intelligence: Basics of The Course

BUSINESS
INTELLIGENCE
BASICS OF THE COURSE
Teaching Scheme Examination Scheme
Lectures: 3 Hrs/ Week Class Test 1 :15 Marks
Credits : 3 Class Test 2 :15 Marks
Teacher’s Assessment : 10 Marks
End Semester Exam : 60 Marks
• Course Name – Business Intelligence
• Course Code – ITHS 1030
• Schemes -
• PREREQUISITES:
NA
• COURSE DESCRIPTION:
• To expose to the basics of Business
Intelligence System with an
understanding of modeling aspects
behind Business Intelligence
• COURSE OUTCOMES :
• CO1 : Understand the need of BI & its
applications
• CO2 : Know the BI Life Cycle and its
techniques
• CO3 : Explore different tools and techniques
for analysis and decision making
• CO4 : Discuss Modelling and analysis of Data

• Text and Reference Books
• 1. Efraim Turban, Ramesh Sharda, DursunDelen,
Decision Support and Business Intelligence Systems,
9th Edition, Pearson 2013.
• 2. Carlo VercellisPolitecnico di Milano, Business
Intelligence: Data Mining and Optimization for
Decision Making, A John Wiley and Sons, Ltd.,
Publication.
• 3. Ian Dodson, The Art of Digital Marketing: The
Definitive Guide to Creating Strategic, Targeted, and
Measurable, Wiley publications
• 4. Larissa T. Moss, S. Atre, “Business Intelligence
Roadmap: The Complete Project Lifecycle of
Decision Making”, Addison Wesley, 2003.
• 5. Carlo Vercellis, Business Intelligence: Data
Mining and Optimization for Decision Making ,
Wiley Publications, 2009.
• 6. David Loshin Morgan, Kaufman, Business
Intelligence: The Savvy Manager‟s Guide,
Second, Edition, 2012.
INTRODUCTION OF THE SUBJECT
• BUSINESS :
• Buying and Selling as a way of earning money
(Commerce)
• the work that you do as your job
• INTELLIGENCE :
• The ability to understand, learn and think
• The ability to learn, understand, and make
judgments or have opinions that are based on
reason
• BUSINESS INTELLIGENCE :
• Business intelligence combines business
analytics, data mining, data visualization, data
tools and infrastructure, and best practices to
help organizations make more data-driven
decisions.
UNIT - I
BUSINESS
INTELLIGENCE
SYLLABUS
• Effective and timely decisions – Data,
information and knowledge – Role of
mathematical models
• Business intelligence architectures:
Cycle of a business intelligence analysis –
Enabling factors in business intelligence
projects
• Development of a business intelligence
system – Ethics and business
intelligence.
BUSINESS
INTELLIGENCE
BUSINESS INTELLIGENCE
• What is business intelligence?
• Business intelligence combines
business analytics, data mining, data
visualization, data tools and
infrastructure, and best practices to
help organizations make more
datadriven decisions.
• How business intelligence works?
• Gather the necessary data, analyze it, and
determine which actions to take to reach their
goals.
• Raw data is collected from business systems
• Data is processed and then stored in data
warehouses, the cloud, applications, and files.
• Once it’s stored, users can access the data,
starting the analysis process to answer
business questions
• BI platforms also offer data visualization
tools, which convert data into charts or
graphs, as well as presenting to any key
stakeholders or decision-makers.
• ADVANTAGES AND DISADVANTAGES OF BI :
• Some of the advantages of BI include:
– Data visibility
– Accurate reports
– Streamlined processes
• And disadvantages of BI include:
– Initial cost
– User resistance
– Data skills gap
EFFECTIVE AND TIMELY

DECISIONS
DECISIONS
• The main purpose of business intelligence
systems is to provide knowledge workers
with tools and methodologies that allow
them to make effective and timely
decisions.
• Effective decisions –
• The application of rigorous analytical
methods allows decision makers to rely on
DECISIONS
information and knowledge which are more
dependable
• Timely decisions –
• The ability to rapidly react to the actions
of competitors and to new market
conditions is a critical factor in the
DECISIONS
success or even the survival of a
company.
DECISIONS
DATA, INFORMATION
AND KNOWLEDGE
KNOWLEDGE
• DATA:
• For a retailer data refer to primary entities
such as customers, points of sale and items,
while sales receipts represent the commercial
transactions.
DATA, INFORMATION AND
• Data is unprocessed facts and figures without
any added interpretation or analysis.
• "The price of crude oil is $80 per barrel."
KNOWLEDGE
• INFORMATION:
• Information is the outcome of extraction and
processing activities carried out on data, and it
appears meaningful for those who receive it in a
specific domain Information is data that has
been interpreted so that it has meaning for the
user.
• "The price of crude oil has risen from $70 to $80
per barrel" gives meaning to the data and so is
said to be information to someone who tracks oil
prices.
KNOWLEDGE
• KNOWLEDGE:
• Information is transformed into knowledge
when it is used to make decisions and
develop the corresponding actions.
• Knowledge is a combination of information,
experience and insight that may benefit the
individual or the organization.
• "When crude oil prices go up by $10 per
barrel, it's likely that petrol prices will rise by
2p per litre" is knowledge.
KNOWLEDGE
ROLE OF MATHEMATICAL
MODELS
• A business intelligence system provides
decision makers with information and
knowledge extracted from data, through the
application of mathematical models and
algorithms.
MODELS
• In some instances, this activity may reduce to
calculations of totals and percentages,
graphically represented by simple histograms,
whereas more elaborate analyses require the
development of advanced optimization and
learning models.
• A business intelligence system provides
decision makers with information and
knowledge extracted from data, through the
MODELS
application of mathematical models and
algorithms.
• First, the objectives of the analysis are
identified and the performance indicators that
will be used to evaluate alternative options
are defined.
• Mathematical models are then
developed by exploiting the relationships
MODELS
among system control variables,
parameters and evaluation metrics.
• Finally, what-if analyses are carried out
to evaluate the effects on the
performance determined by variations in
the control variables and changes in the
parameters.
ARCHITECTURES
ARCHITECTURES
ARCHITECTURES
• The architecture of a business
intelligence system, includes
three major components –
–Data sources
–Data warehouses and data marts
–Business intelligence methodologies
ARCHITECTURES
• DATA SOURCES :
• In a first stage, it is necessary to gather and
integrate the data stored in the various primary
and secondary sources, which are
heterogeneous in origin and type.
• The sources consist for the most part of data
belonging to operational systems, but may also
include unstructured documents, such as emails
and data received from external providers.
• Generally speaking, a major effort is required to
unify and integrate the different data sources.
ARCHITECTURES
• DATA WAREHOUSES AND DATA MARTS :
• Using extraction and transformation tools
known as extract, transform, load (ETL), the
data originating from the different sources
are stored in databases intended to support
business intelligence analyses.
• These databases are usually referred to as
data warehouses and data marts.
ARCHITECTURES
• BUSINESS INTELLIGENCE METHODOLOGIES :
• Data are finally extracted and used to feed
mathematical models and analysis
methodologies intended to support decision
makers.
• In a business intelligence system, several
decision support applications may be
implemented
ARCHITECTURES
• Multidimensional cube analysis
• Exploratory data analysis
• Time series analysis
• Inductive learning models for data
mining
• Optimization models
ARCHITECTURES
• COMPONENTS OF BUSINESS
INTELLIGENCE :
–1. Data sources
–2. Data warehouses and data marts
–3. Data exploration
–4. Data Mining
–5. Optimization
–6. Decision
ARCHITECTURES
• DATA EXPLORATION:
• Passive Business Intelligence Analysis consists
of
– 1. Query and Reporting Systems
– 2. Statistical Methods.
These are referred to as passive methodologies
because decision makers are requested to generate
prior hypotheses or define data extraction criteria, and
then use the analysis tools to find answers and
confirm their original insight.
ARCHITECTURES
• For instance, consider the sales manager of a
company who notices that revenues in a given
geographic area have dropped for a specific
group of customers.
• Hence, she might want to bear out her
hypothesis by using extraction and
visualization tools, and then apply a statistical
test to verify that her conclusions are
adequately supported by data.
ARCHITECTURES
• 4. DATA MINING:
• The fourth level includes active business
intelligence methodologies, whose
purpose is the extraction of information
and knowledge from data
• These include mathematical models for
pattern recognition, machine learning
and data mining techniques
ARCHITECTURES
• Unlike the tools described at the
previous level of the pyramid, the
models of an active kind do not require
decision makers to formulate any prior
hypothesis to be later verified.
• Their purpose is instead to expand the
decision makers’ knowledge.
ARCHITECTURES
• 5. OPTIMIZATION :
• By moving up one level in the pyramid
we find optimization models that allow
us to determine the best solution out of
a set of alternative actions, which is
usually fairly extensive and sometimes
even infinite.
ARCHITECTURES
• 6. DECISION :
• Finally, the top of the pyramid
corresponds to the choice and the actual
adoption of a specific decision, and in
some way represents the natural
conclusion of the decision-making
process
ARCHITECTURES
• Even when business intelligence
methodologies are available and successfully
adopted, the choice of a decision pertains to
the decision makers, who may also take
advantage of informal and unstructured
information available to adapt and modify the
recommendations and the conclusions
achieved through the use of mathematical
models.
CYCLE OF A BUSINESS
INTELLIGENCE ANALYSIS
ANALYSIS
CYCLE OF A BUSINESS INTELLIGENCE
ANALYSIS
• 1. ANALYSIS :
• During the analysis phase, it is necessary to
recognize and accurately spell out the
problem at hand
• Decision makers must then create a mental
representation of the phenomenon being
analyzed, by identifying the critical factors
that are perceived as the most relevant.
ANALYSIS
• The availability of business intelligence
methodologies may help already in this stage,
by permitting decision makers to rapidly
develop various paths of investigation.
• For instance, the exploration of data cubes in
a multidimensional analysis, according to
different logical views, allows decision makers
to modify their hypotheses flexibly and
rapidly, until they reach an interpretation
scheme that they deem satisfactory
ANALYSIS
• Thus, the first phase in the business
intelligence cycle leads decision makers
to ask several questions and to obtain
quick responses in an interactive way.
ANALYSIS
• 2.INSIGHT :
• The second phase allows decision makers to
better and more deeply understand the
problem at hand, often at a causal level.
• For instance, if the analysis carried out in the
first phase shows that a large number of
customers are discontinuing an insurance
policy upon yearly expiration, in the second
phase it will be necessary to identify the
profile and characteristics shared by such
customers.
ANALYSIS
• The information obtained through the
analysis phase is then transformed into
knowledge during the insight phase
• On the one hand, the extraction of
knowledge may occur due to the intuition
of the decision makers and therefore be
based on their experience and possibly on
unstructured information available to
them
ANALYSIS
• On the other hand, inductive
learning models may also prove
very useful during this stage of
analysis, particularly when applied
to structured data.
ANALYSIS
• 3. DECISION :
• During the third phase, knowledge obtained
as a result of the insight phase is converted
into decisions and subsequently into actions.
• The availability of business intelligence
methodologies allows the analysis and insight
phases to be executed more rapidly so that
more effective and timely decisions can be
made that better suit the strategic priorities
of a given organization.
ANALYSIS
• This leads to an overall reduction in
the execution time of the analysis–
decision–action– revision cycle, and
thus to a decision-making process of
better quality
ANALYSIS
• 4. EVALUATION:
• Finally, the fourth phase of the business
intelligence cycle involves performance
measurement and evaluation
• Extensive metrics should then be devised that
are not exclusively limited to the financial
aspects but also take into account the major
performance indicators defined for the
different company departments.
ENABLING FACTORS IN
PROJECTS
INTELLIGENCE PROJECTS
• Some factors are more critical
than others to the success of a
business intelligence project:
–Technologies
ENABLING FACTORS IN BUSINESS
–Analytics
–Human resources
• A. TECHNOLOGIES:
• Hardware and software technologies are
significant enabling factors that have
facilitated the development of business
intelligence systems within enterprises and
complex organizations.
• On the one hand, the computing capabilities
of microprocessors have increased on average
by 100% every 18 months during the last two
decades, and prices have fallen
• This trend has enabled the use of advanced
algorithms which are required to employ
inductive learning methods and
optimization models, keeping the
processing times within a reasonable
range.
• Moreover, it permits the adoption of
stateof-the-art graphical visualization
techniques, featuring real-time
animations.
• A further relevant enabling factor derives
from the exponential increase in the capacity
of mass storage devices, again at decreasing
costs, enabling any organization to store
terabytes of data for business intelligence
systems
• And network connectivity, in the form of
Extranets or Intranets, has played a primary
role in the diffusion within organizations of
information and knowledge extracted from
business intelligence systems
• Finally, the easy integration of hardware
and software purchased by different
suppliers, or developed internally by an
organization, is a further relevant factor
affecting the diffusion of data analysis
tools.
• B. ANALYTICS :
• As stated above, mathematical models and
analytical methodologies play a key role in
information enhancement and knowledge
extraction from the data available inside most
organizations.
• The mere visualization of the data according to
timely and flexible logical views, plays a relevant
role in facilitating the decision-making process,
but still represents a passive form of support.
• Therefore, it is necessary to apply more
advanced models of inductive learning
and optimization in order to achieve
active forms of support for the
decisionmaking process
• C. Human resources :
• The human assets of an organization are
built up by the competencies of those who
operate within its boundaries, whether as
individuals or collectively.
• The overall knowledge possessed and shared
by these individuals constitutes the
organizational culture.
• The ability of knowledge workers to acquire
information and then translate it into practical
actions is one of the major assets of any
organization, and has a major impact on the quality
of the decision-making process.
• If a given enterprise has implemented an advanced
business intelligence system, there still remains
much scope to emphasize the personal skills of its
knowledge workers, who are required to perform
the analyses and to interpret the results, to work
out creative solutions and to devise effective action
plans.
• All the available analytical tools being equal, a
company employing human resources
endowed with a greater mental agility and
willing to accept changes in the
decisionmaking style will be at an advantage
over its competitors.
DEVELOPMENT OF A
BUSINESS
INTELLIGENCE SYSTEM
DEVELOPMENT OF A BUSINESS
INTELLIGENCE SYSTEM
• The development of a business
intelligence system can be
assimilated to a project, with a
specific final objective, expected
development times and costs, and
the usage and coordination of the
resources needed to perform
planned
• Analysis – Identification of the needs •
Design – infrastructure recognition -
Project Micro Planning
INTELLIGENCE SYSTEM
• A. ANALYSIS:
• During the first phase, the needs of the
organization relative to the development of a
business intelligence system should be
carefully identified.
• This preliminary phase is generally conducted
through a series of interviews of knowledge
workers performing different roles and
activities within the organization
INTELLIGENCE SYSTEM
• It is necessary to clearly describe the
general objectives and priorities of the
project, as well as to set out the costs
and benefits deriving from the
development of the business intelligence
system.
INTELLIGENCE SYSTEM
• B. Design:
• The second phase includes two sub-phases
and is aimed at deriving a provisional plan
of the overall architecture, taking into
account any development in the near
future and the evolution of the system in
the mid-term
• First, it is necessary to make an assessment
of the existing information infrastructures
INTELLIGENCE SYSTEM
• Moreover, the main decision-making processes
that are to be supported by the business
intelligence system should be examined, in order
to adequately determine the information
requirements.
• Later on, using classical project management
methodologies, the project plan will be laid
down, identifying development phases, priorities,
expected execution times and costs, together
with the required roles and resources.
INTELLIGENCE SYSTEM
• C. Planning:
• The planning stage includes a sub-phase
where the functions of the business
intelligence system are defined and
described in greater detail.
• Subsequently, existing data as well as
other data that might be retrieved
externally are assessed.
INTELLIGENCE SYSTEM
• This allows the information structures of the
business intelligence architecture, which consist
of a central data warehouse and possibly some
satellite data marts, to be designed.
• Simultaneously with the recognition of the
available data, the mathematical models to be
adopted should be defined, ensuring the
availability of the data required to feed each
model and verifying that the efficiency of the
algorithms to be utilized will be adequate for the
magnitude of the resulting problems.
INTELLIGENCE SYSTEM
• Finally, it is appropriate to create a
system prototype, at low cost and with
limited capabilities, in order to uncover
beforehand any discrepancy between
actual needs and project specifications.
INTELLIGENCE SYSTEM
• D. Implementation and control:
• The last phase consists of five main
subphases
• First, the data warehouse and each specific
data mart are developed
• These represent the information
infrastructures that will feed the business
intelligence system
INTELLIGENCE SYSTEM
• In order to explain the meaning of the data
contained in the data warehouse and the
transformations applied in advance to the
primary data, a metadata archive should be
created.
• Moreover, ETL procedures are set `out to
extract and transform the data existing in the
primary sources, loading them into the data
warehouse and the data marts.
INTELLIGENCE SYSTEM
• The next step is aimed at developing the
core business intelligence applications
that allow the planned analyses to be
carried out.
• Finally, the system is released for test
and usage.
ETHICS AND BUSINESS
INTELLIGENCE
• The type of ethics in business intelligence (BI) is
the ethical principles of conduct that govern an
individual in the workplace or a company in
general.
• It is also known as professional ethics and not to
be confused with other forms of philosophical
ETHICS AND BUSINESS INTELLIGENCE
ethics including religious conviction, or popular
conviction
• Professional ethics according to Griffin (1986) is
that profit is not the only important strategy of a
business anymore.
• There is also more of a concern and motivator
of companies to do what is right.
• Companies must acknowledge that they have
a common good to protect their local
community, improve employee relations and
promote informational press to the public.
• Everyday in BI management professionals
may be at risk of making unethical practices
in there decisions that regards the consumer,
business and/or other employees data
• Ethics is a touchy subject, there is always
going to be controversy on how companies
choose to handle business decisions.
• There is no definite decision to make when it
comes to ethical decisions
• While sometimes it may involve illegal
practices, other times it is just a decision that
needs to be made in a company to promote a
better way of life for all.
• An example of an ethical decision:
• A manager of a BI system that chooses to use
cheaper data in his/her data mining activities
to save money
• The cheaper data sets have a 20% possibility
of being incorrect.
• The manager did not see it as being an
unethical decision when it was made, just a
way to continue to generate close-to-
accurate reports and save money.
• PAPA Framework
• privacy, accuracy, property, and accessibility
UNIT - II
DECISION MAKING,
SYSTEMS,
MODELING
DECISION MAKING, SYSTEMS,
MODELING
• SYLLABUS :
• Introduction and Definitions, Models,
Phases of the Decision-Making Process
• Decision Making: The Intelligence
Phase,
• Decision Making: The Design Phase,
• Decision Making: The Implementation
Phase
INTRODUCTION AND
DEFINITIONS
INTRODUCTION AND DEFINITIONS
• DECISION MAKING: a process of choosing
among alternative courses of action for the
purpose of attaining a goal or goals
• Managerial Decision Making is synonymous
with the whole process of management
• A SYSTEM is a collection of objects such as
people, resources, concepts, and procedures
intended to perform an identifiable function or
to serve a goal
• System Levels (Hierarchy): All systems are
subsystems interconnected through interfaces
• Inputs are elements that enter the system
• Processes convert or transform inputs into

outputs
• Outputs describe finished products or
consequences of being in the system
• Feedback is the flow of information from the
output to the decision maker, who may modify
the inputs or the processes (closed loop)
• The Environment contains the elements that

lie outside but impact the system's
performance
• A Closed System is totally independent of other
systems and subsystems
• An Open System is very dependent on its
environment
• An Information System : Collects, processes, stores,
analyzes, and disseminates information for a specific
purpose. It is often at the heart of many
organizations. Accepts inputs and processes data to
provide information to decision makers and helps
decision makers communicate their results
• Effectiveness is the degree to which goals are
achieved
• Efficiency is a measure of the use of inputs (or
resources) to achieve outputs
• A model is a simplified representation or
abstraction of reality. Reality is generally too
complex to copy exactly. Much of the
complexity is actually irrelevant in problem
solving
• Iconic (Scale) Model: Physical replica of a
system
• Analog Model behaves like the real system but
does not look like it (symbolic representation)
• Mathematical (Quantitative) Models use

mathematical relationships to represent
complexity
Used in most DSS analyses
MODELS
MODELS
• Major component of DSS
• Use models instead of experimenting on the
real system
• A model is a simplified representation or
abstraction of reality.
• Reality is generally too complex to copy
exactly
• Much of the complexity is actually irrelevant
in problem solving
MODELS
• TYPES OF MODELS :
–Mathematical Model
–Quantitative Model
–Linear Programming Model
–Normative Models –Descriptive
Models
MODELS
• BENEFITS OF MODELS :
1. Time compression
2. Easy model manipulation
3. Low cost of construction
4. Low cost of execution (especially that of errors)
5. Can model risk and uncertainty
6. Can model large and extremely complex systems
with possibly infinite solutions
7. Enhance and reinforce learning, and enhance
training.
MODELS
• SOLUTION APPROACHES
– Trial-and-Error
– Simulation
– Optimization
– Heuristics
MODELS
• MATHEMATICAL MODEL :
• Identify variables
• Establish equations describing their
relationships
• Simplifications through assumptions
• Balance model simplification and the
accurate representation of reality
MODELS
• QUANTITATIVE MODELS :
• Components of Quantitative Models :
– Decision Variables
– Uncontrollable Variables (and/or Parameters) –
Result (Outcome) Variables
– Mathematical Relationships or
– Symbolic or Qualitative Relationships
MODELS
• DECISION VARIABLES :
• Describe alternative courses of action
• The decision maker controls them
MODELS
• RESULT (OUTCOME) VARIABLES:
• Reflect the level of effectiveness of the
system
• Dependent variables
MODELS
• UNCONTROLLABLE VARIABLES OR
PARAMETERS :
• Factors that affect the result variables
• Not under the control of the decision
maker
• Generally part of the environment
• Some constrain the decision maker and
are called constraints
MODELS
• THE STRUCTURE OF QUANTITATIVE
MODELS :
• Mathematical expressions (e.g.,
equations or inequalities) connect
the components
• Simple financial model P = R - C
• Present-value model P = F / (1+i)n
MODELS
• LINEAR PROGRAMMING MODEL:
• Components
Decision variables
Result variable
Uncontrollable variables (constraints)
MODELS
• NORMATIVE MODELS :
• The chosen alternative is demonstrably the
best of all (normally a good idea)
• Optimization process
• Normative decision theory based on
rational decision makers
MODELS
• Descriptive Models
• Describe things as they are, or as they are
believed to be
• Extremely useful in DSS for evaluating
the consequences of decisions and
scenarios
• No guarantee a solution is optimal
• Often a solution will be good enough
DECISION MAKING
DECISION MAKING
• Decision Making can be done under
following circumstances:
–Decision Making Under certainty
–Decision Making Under Risk
–Decision Making Under Uncertainty
DECISION MAKING
• DECISION MAKING UNDER CERTAINTY :
• Assumes complete knowledge available
(deterministic environment)
• Typically for structured problems with
short time horizons
• Sometimes DSS approach is needed for
certainty situations
• DECISION MAKING UNDER RISK :
DECISION MAKING
• Probabilistic or stochastic decision situation
• Must consider several possible outcomes for
each alternative, each with a probability
• Long-run probabilities of the occurrences of
the given outcomes are assumed known or
estimated
• Assess the (calculated) degree of risk associated

with each alternative
DECISION MAKING
• DECISION MAKING UNDER UNCERTAINTY :
• Several outcomes possible for each course of
action
• BUT the decision maker does not know, or cannot
estimate the probability of occurrence
• More difficult - insufficient information

• Assessing the decision maker's (and/or the
organizational) attitude toward risk
DECISION MAKING
• Example: poker game with no cards face up (5
card stud or draw)
DECISION MAKING
• IMPORTANT DECISION- MAKING ISSUES :
1. Personality types
2. Gender
3. Human cognition
4. Decision styles
DECISION MAKING
1. Personality (Temperament) Types :
• Strong relationship between personality and
decision making
• Type helps explain how to best attack a problem
• Type indicates how to relate to other types
– important for team building
• Influences cognitive style and decision style
DECISION MAKING
2. Gender:
• Sometimes empirical testing indicates
gender differences in decision making
• Results are overwhelmingly
inconclusive
DECISION MAKING
3. Cognition:
• Activities by which an individual resolves
differences between an internalized view of the
environment and what actually exists in that
same environment
• Ability to perceive and understand information
• Cognitive models are attempts to explain or

understand various human cognitive processes
• COGNITIVE STYLE:
• The subjective process through which individuals
perceive, organize, and change information during
the decision-making process
• Often determines people's preference for
humanmachine interface
• Impacts on preferences for qualitative versus
quantitative analysis and preferences for
decisionmaking aids
• Affects the way a decision maker frames a
problem
DECISION MAKING
DECISION MAKING
• Impacts on the design of management
information systems
• May be overemphasized
• Analytic decision maker

• Heuristic decision maker
4. Decision styles
The manner in which decision makers
• Think and react to problems
• Perceive their
– Cognitive response
– Values and beliefs
• Varies from individual to individual and from situation to
situation
• Decision making is a nonlinear process
The manner in which managers make decisions (and the
way they interact with other people) describes their decision
style
DECISION MAKING
• SOME DECISION STYLES :
• Heuristic
• Analytic
• Autocratic
• Democratic
• Consultative (with individuals or groups)
• Combinations and variations
• For successful decision-making support, an MSS must fit

the
– Decision situation
– Decision style
DECISION MAKING
• The system
– should be flexible and adaptable to different users
– have what-if and goal seeking
– have graphics
– have process flexibility
• An MSS (Management Support System) should help
decision makers use and develop their own styles,
skills, and knowledge
• Different decision styles require different types of
support
• Major factor: individual or group decision maker
DECISION MAKING
• THE DECISION MAKERS :
– Individuals
– Groups
• INDIVIDUALS :
DECISION MAKING
• May still have conflicting objectives
• Decisions may be fully automated
• GROUPS:
• Most major decisions made by groups
DECISION MAKING
• Conflicting objectives are common • Variable size
• People from different departments
• People from different organizations
• The group decision-making process can be very
complicated
• Consider Group Support Systems (GSS)
• Organizational DSS can help in enterprise-wide

decision-making situations
DECISION MAKING
PROCESS : 7 STEPS
DECISION MAKING PROCESS : 7
STEPS
STEPS
• Step 1: Identify the decision
• You realize that you need to make a decision.
• Try to clearly define the nature of the
decision you must make.
• This first step is very important.
STEPS
• Step 2: Gather relevant information
• Collect some pertinent information before you make
your decision: what information is needed, the best
sources of information, and how to get it.
• This step involves both internal and external “work.”
• Some information is internal: you’ll seek it through a
process of self-assessment.
• Other information is external: you’ll find it online, in
books, from other people, and from other sources.
STEPS
• Step 3: Identify the alternatives
• As you collect information, you will probably
identify several possible paths of action, or
alternatives.
• You can also use your imagination and
additional information to construct new
alternatives.
• In this step, you will list all possible and
desirable alternatives.
STEPS
• Step 4: Weigh the evidence
• Draw on your information and emotions to
imagine what it would be like if you carried out
each of the alternatives to the end.
• Evaluate whether the need identified in Step 1
would be met or resolved through the use of
each alternative.
• As you go through this difficult internal process,
you’ll begin to favor certain alternatives: those
that seem to have a higher potential for reaching
your goal.
• Finally, place the alternatives in a priority order,
based upon your own value system.
STEPS
• Step 5: Choose among alternatives
• Once you have weighed all the evidence, you
are ready to select the alternative that seems
to be best one for you.
• You may even choose a combination of
alternatives.
• Your choice in Step 5 may very likely be the
same or similar to the alternative you placed
at the top of your list at the end of Step 4.
STEPS
• Step 6: Take action

• You’re now ready to take some
positive action by beginning to
implement the alternative you chose
in Step 5.
STEPS
• Step 7: Review your decision & its
consequences
• In this final step, consider the results of your
decision and evaluate whether or not it has
resolved the need you identified in Step 1.
• If the decision has not met the identified need,
you may want to repeat certain steps of the
process to make a new decision.
• For example, you might want to gather more
detailed or somewhat different information or
explore additional alternatives.
PHASES OF THE DECISIONMAKING
PROCESS
PHASES OF THE DECISION-MAKING
PROCESS
• When a manager makes a decision, it is, in
effect, the organization’s response to a
problem.
• As such, a decision should be thought of as a
means rather than an end.
• Every decision is the outcome of a dynamic
process which is influenced by multiple
forces.
PROCESS
• Herbert Simon, an expert on decision making
has proposed three phases of decision making
intelligence, design and choice.
• As against these phases, Rubenstein and
Haberstroh have proposed five
phasesrecognition of problem or need for a
decision, analysis and statement of alternatives,
choice among the alternatives, communication
and implementation of decision, and follow-up
and feedback results of decision
PROCESS
• Following are the phases of decision making
process :
– Intelligence
– Design
– Choice
– Implementation
PROCESS
PROCESS
• Various phases of decision-making process presented
in Figure are more relevant for non-programmed
decisions.
• Problems that occur infrequently are unstructured and
are characterized by a great deal of uncertainty
regarding the outcomes of various alternatives,
require the managers to utilize the entire process.
• For frequently occurring structured problems, it is not
necessary to consider the entire process because
decision rules are developed to handle such problems
and it is not necessary to develop and evaluate various
alternatives each time such a problem arises.
PROCESS
• The Decision-Making Process :
• Intelligence phase
– Reality is examined
– The problem is identified and defined
• Design phase
– Representative model is constructed
– The model is validated and evaluation criteria
are set
PROCESS
• Choice phase
– Includes a proposed solution to the model
– If reasonable, move on to the
• Implementation phase
– Solution to the original problem
Failure: Return to the modeling process
Often Backtrack / Cycle Throughout the Process

DECISION MAKING: THE
INTELLIGENCE PHASE
INTELLIGENCE PHASE
Scan the environment to identify problem
situations or opportunities
Find the Problem

• Identify organizational goals and objectives
• Determine whether they are being met
• Explicitly define the problem
INTELLIGENCE PHASE
• PROBLEM CLASSIFICATION :
Structured versus Unstructured
Programmed versus Nonprogrammed
Problems
NonprogrammedProgrammed Problems
Problems
INTELLIGENCE PHASE
• Problem Decomposition: Divide a complex
problem into (easier to solve) subproblems
Chunking (Salami)
• Some seemingly poorly structured
problems may have some highly structured
subproblems
INTELLIGENCE PHASE
• Problem Ownership Outcome:
Problem Statement
INTELLIGENCE PHASE
• Intelligence phase of decision-making process
involves searching the environment for
conditions calling or decisions.
• This is related with the identification and
formulation of the problem which is to be
solved by the decision.
• A problem is the gap between present state
of affairs and desired state of affairs on the
subject matter of decision.
INTELLIGENCE PHASE
• When a problem is identified, it remains
vague at the initial stage.
• In order to make it more clear and specific,
problem formulation is required so that
design and choice phases operate on the right
problem.
• At this stage, the problem identified earlier, is
defined more precisely and some complexity
is reduced.
INTELLIGENCE PHASE
• MacGrimmon and Taylor have suggested four
strategies for reducing complexity and
formulating a problem :
• 1. Determining the boundaries (clearly identifying
what is included in the problem).
• 2. Examining changes that may have precipitated
the problem.
• 3. Factoring the problem into smaller
subproblems.
• 4. Focusing on controllable elements.
INTELLIGENCE PHASE
• For this phase of decision making, information
requirement is in the form of exception
reporting, that is, what kind of deviation exists
between desired state of affairs and actual
state of affairs.
• Such type of information is provided by
structured information- systems that deliver a
wide variety of detailed information.
DECISION MAKING: THE DESIGN
PHASE
PHASE
• Generating, developing, and analyzing possible
courses of action
Includes
• Understanding the problem
• Testing solutions for feasibility
• A model is constructed, tested, and validated
Modeling
• Conceptualization of the problem
• Abstraction to quantitative and/or qualitative forms
PHASE
• Design phase of decision making involves
generation of possible alternatives through
which the problem can be solved.
• A problem can be solved in several ways,
however, all the ways cannot be equally
satisfying.
• Further, if there is only one way of solving a
problem, no question of decision arises.
PHASE
• Therefore, the decision maker must try to find out the
various alternatives available in order to get the most
satisfactory result of a decision.
• Identification of various alternatives not only serves the
purpose of selecting the most satisfactory one, but it
also avoids bottlenecks in operation as alternatives are
available if a particular decision goes wrong.
• However, it should be borne in mind that - it may not be
possible to consider all alternatives either because some
of the alternatives cannot be considered for selection
because of obvious limitations of the decision maker or
information about all alternatives may not be available.
PHASE
• Therefore, while generating alternatives, the
concept of limiting factor should be applied.
• A limiting factor is one which stands in the way of
accomplishing a desired objective.
• If these factors are identified, managers will
confine their search for alternatives to those
which will overcome the limiting factors.
• For example, if an organization has limitation in
raising sizable finances, it cannot consider
projects involving high investment.
PHASE
• A decision maker can use several sources for
identifying alternatives his own past experience,
practices followed by others, and using creative
techniques.
• Past experience applied in most cases of decision
making, takes into account the actions taken by
the decision maker in the past with obvious
differences between the former challenges and
the present one.
• The successful action of the past may become an
alternative for the future.
PHASE
• This is a very simple approach but has obvious
limitations because there may be so much
chances in the decision context that old
action becomes totally irrelevant.
• Copying from the experiences of others is
another way of generating alternatives.
• Thus, alternatives used by successful decision
makers can be thought of as alternatives of
decision making.
PHASE
• This is also practiced by many organizations after
making suitable amendments in the light of
changed decision context.
• Importing of technology from foreign countries
with suitable changes is good example of this
type of alternatives.
• The third method of generating alternatives is
through creative process where various exercises
are taken to generate entirely new ideas.
PHASE
• The design phase of decision making may
require more intelligence so that the manager
can decide if a particular alternative is
suitable for solving the problem.
• This phase may entail more carefully specified
and directed information activities which are,
generally, provided by decision support
systems as they operate on simple models
and can be operated with limited data.
IMPLEMENTATION PHASE
Important Issues
• Resistance to change
• Degree of top management support
• Users’ roles and involvement in system

development
• Users’ training
• Once an alternative is chosen.
• It is implemented, that is, it is put into action.
• Truly speaking, the actual process of decision
making ends with the choice of an alternative
through which the objectives can be
achieved.
• However, decision making, being a
continuous and ongoing process, must ensure
that the problem has been solved and the
objectives have been achieved by the chosen
alternative.
• Unless this is done, managers will never know what
way their choice has contributed.
• Therefore, the implementation of decision may be
seen as an integral aspect of decision.
• Once the creative and analytical aspects of decision
making through which an alternative has been chosen
are over the managerial priority is one of converting
the decision into something effective.
• This is the implementation aspect of decision making.
The basic difference between decision making as an
analytical process and implementation is that the
former requires the use of conceptual skills since it
translates the abstract ideas into reality
• For example, suppose that there is a change in
consumers tastes.
• This change is very abstract and cannot be seen
unless some specific techniques and
measurements are applied.
• How this change can provide opportunity to the
organization is mostly a conceptual exercise
requiring managers to interpret what changes
are taking place and what products or services
w1ll be preferred in the changed situation.
• Implementation. on the other hand, relates to
putting a decision into practice so that objectives
of decision are achieved.
• This practice will provide further feedback for
evaluating the soundness of the decision and if need
be, a change in the decision.
• Implementation of a decision requires the
communication to subordinates, getting acceptance of
subordinates over the matters involved in the decision,
and getting their support for putting the decision into
action.
• The decision should be effected at appropriate time
and in proper way to make the implementation more
effective.
• The effectiveness of implementation is important
because it is only effective action through which
organizational objectives can be achieved.
• When a decision is put into action, it brings
certain results.
• These results provide indication whether
decision making and its implementation is
proper.
• Therefore, managers should take follow-up
action in the light of feedback received from the
results.
• If there is any deviation between objectives and
results this should be analyzed and factors
responsible for this deviation should be located.
• The feedback may also help in reviewing the decision
when conditions change which may require change in
the decision.
• At the implementation phase, managers can use
structured information system that provides routine
reports on the progress of a solution.
• This system should also indicate the difficulties that
arise, resource constraints, and possible corrective
actions.
• For this purpose. Information systems may -range
from integrated management information systems to
much smaller systems as well as project planning
software operating on microcomputers
UNIT - III
DECISION SUPPORT
SYSTEM
DECISION SUPPORT SYSTEM
• Syllabus :
WHAT IS A DECISION SUPPORT
• How Decisions Are Supported, Decision
Support System Configurations, Decision
Support System Characteristics and
Capabilities, Decision Support System
Classifications, Components of Decision
Support Systems
SYSTEM (DSS)?
• A Decision Support System (DSS) is a
computerbased tool designed to aid individuals
and organizations in making informed decisions.
• It integrates data, models, and analytical tools to
solve complex problems.
• The primary purpose of a DSS is to provide timely
and relevant information & facilitate analysis to
help decision-makers evaluate potential
outcomes.
SYSTEM (DSS)?
SYSTEM (DSS)?
• A Decision Support System (DSS) is a
computerized tool that assists individuals and
organizations in making well-informed
decisions.
• It combines data analysis, modeling, and
interactive interfaces to tackle complex
problems and aid decision-makers in various
fields
SYSTEM (DSS)?
• DSSs offer real-time data access, scenario
simulation, and predictive analytics,
enabling users to explore multiple options
and their potential outcomes.
• By enhancing decision accuracy and reducing
uncertainty, DSSs play a crucial role in
strategic planning, operational efficiency, and
competitive advantage across industries.
CHARACTERISTICS
CHARACTERISTICS
• Interactive: DSSs provide an interactive interface
that allows users to manipulate data, adjust
parameters, and explore different scenarios.
Users can engage with the system in real-time
and receive instant feedback.
• Support for Decision-Making: The primary
purpose of a DSS is to assist decision-makers in
making informed choices. DSSs provide relevant
data, analyses, and insights to facilitate
decisionmaking.
CHARACTERISTICS
• Modeling and Analysis: DSSs incorporate
various models, algorithms, and analytical
tools to process data and generate insights.
These tools aid in predicting outcomes,
identifying trends, and evaluating
alternatives.
• User-Friendly Interface: DSSs offer
userfriendly interfaces that make it accessible
to non-technical users. These interfaces often
include visualizations and easy-to-understand
reports.
CLASSIFICATIONS
CLASSIFICATIONS
• Types of DSS:
1. Model-Driven DSS:
• These systems use mathematical and analytical
models to support decision-making.
• They rely on data inputs and algorithms to
generate predictions, simulations, and
optimization solutions.
• Examples include financial forecasting systems
and inventory management tools.
CLASSIFICATIONS
2. Data-Driven DSS:
• These DSSs focus on data analysis and
visualization to aid decisions.
• They help users explore patterns, trends, and
relationships in data through charts, graphs,
and reports.
• Business intelligence and data visualization
tools fall into this category.
CLASSIFICATIONS
3. Document-Driven DSS:
• These DSSs manage and provide access to
textual information relevant to
decisionmaking.
• They can organize documents, reports, and
research papers, making them easily
accessible to users.
CLASSIFICATIONS
4. Knowledge-Driven DSS:
• These systems incorporate expert knowledge
and rules to support decisions.
• They can answer queries, provide advice, and
offer recommendations based on predefined
rules and expertise.
• Medical diagnosis systems and legal advisory
systems are examples.
COMPONENTS OF DECISION
SUPPORT SYSTEMS
SYSTEMS
1. Data Management:
• This involves gathering, storing, and
organizing relevant data from various
sources.
SUPPORT
• It may include historical data, real-time
information, external databases, etc.
SYSTEMS
2. Modeling and Analysis Tools:
• DSSs use various models, algorithms, and
analytical techniques to process data and
generate insights.
SUPPORT
• These tools can include statistical
analysis, optimization algorithms,
forecasting models, and simulation
methods.
SYSTEMS
3. User Interface:
SUPPORT
• The user interface allows decisionmakers
to interact with the DSS.
• It presents data, visualizations, and
results in a user-friendly manner,
enabling users to input parameters, run
analyses, and interpret outcomes.
SUPPORT
SYSTEMS
4. Database Management System (DBMS):
• A DBMS manages the storage and
retrieval of data for the DSS.
• It ensures data integrity, security, and
efficient access to the required
information.
SUPPORT
SYSTEMS
5. Knowledge Base:
• This component stores domain-specific
knowledge, rules, and guidelines for
decision-making.
• It helps the DSS understand the context
and constraints of the problem.
SUPPORT
SYSTEMS
6. Communication and Collaboration
Tools:
• DSSs often support communication and
collaboration among team members.
SUPPORT
• They enable sharing of information,
analysis results, and scenarios,
facilitating group decision-making.
APPLICATION BASED CATEGORIES
• There are several ways to classify DSS based
on its applications.
• Not every DSS fits neatly into one of the
categories, but may be a mix of two or more
architectures.
• Holsapple and Whinston classify DSS into the
following six frameworks:
• Text-oriented DSS,
• Database-oriented DSS,
• Spreadsheet-oriented DSS,
• Solver-oriented DSS,
• Rule-oriented DSS, and
• Compound DSS
• Text Oriented DSS: contains information in
text form allowing documents to be
electronically created, revised and viewed as
needed.
• Database Oriented DSS: Driven by a
database of organized and highly structured
data.
• Spreadsheet Oriented DSS: contains information
in spread sheets. A spread sheet makes it easy to
create, view, or modify procedural knowledge. It
is also possible to instruct the system to execute
self-contained instructions.
• Solver Oriented DSS: based on an algorithm or
procedure written for performing certain
calculations and executing a particular program
type.
• Rules Oriented DSS: follows certain
procedures adopted as rules.
• Compound DSS : A compound DSS is the
most popular classification for a DSS; it is a
hybrid system that includes two or more of
the five basic structures.
CAPABILITIES
CAPABILITIES
• A decision support system increases the speed
and efficiency of decision-making activities. It is
possible, as a DSS can collect and analyze
realtime data.
• It promotes training within the organization, as
specific skills must be developed to implement
and run a DSS within an organization.
• It automates monotonous managerial
processes, which means more of the manager’s
time can be spent on decision-making.
• It improves interpersonal communication within
the organization.
CAPABILITIES
• What-if analysis
• Goal-seeking
• Sensitivity analysis • Exception reporting
analysis
• More capabilities, such as:
– Graphical analysis, forecasting, simulation,
statistical analysis, and modeling analysis
APPLICATIONS
APPLICATIONS
• Business Management:
• DSS aids in strategic planning, resource
allocation, and performance analysis for
businesses.
• It assists in setting goals, evaluating
alternatives, and optimizing operational
processes.
APPLICATIONS
• Healthcare:
• DSS supports medical professionals in
diagnosis, treatment planning, and patient
management.
• It helps doctors make informed decisions by
providing access to patient records, medical
literature, and clinical guidelines.
APPLICATIONS
• Finance:
• DSS is used for financial forecasting, risk
assessment, portfolio management, and
investment analysis.
• It helps financial analysts make informed
decisions about investment opportunities
and market trends.
APPLICATIONS
• Supply Chain Management:
• DSS assists inventory management,
demand forecasting, and logistics
optimization.
• It helps organizations maintain optimal
inventory levels, reduce costs, and
improve supply chain efficiency.
ADVANTAGES
AND
DISADVANTAGES
ADVANTAGES AND DISADVANTAGES
• ADVANTAGES :
• Informed Decision-Making: DSS provides
timely and relevant information to
decisionmakers, enabling them to make well-
informed choices based on accurate data and
analyses.
• Complex Problem Solving: DSS can handle
complex problems by employing sophisticated
models, algorithms, and simulations that may
be challenging to solve manually.
• Scenario Analysis: DSS allows users to
evaluate various scenarios and their potential
outcomes, helping decision-makers
understand the implications of different
choices.
• Collaboration: DSS facilitates collaboration
among decision-makers, enabling them to
share insights, analyses, and scenarios for
more effective group decisions.
• DISADVANTAGES :
• Complex Implementation: Developing and
implementing a DSS requires skilled
professionals, resources, and integration with
existing systems.
• Cost: Building and maintaining a DSS can incur
significant costs, including software
development, hardware, training, and ongoing
support.
• User Expertise: Effective use of DSS may require
users to have a certain level of technical and
analytical expertise, which could be a barrier for
some individuals.
UNIT - IV
MODELING AND
ANALYSIS
MODELING AND ANALYSIS
• SYLLABUS :
• Management Support Systems Modeling,
Structure of Mathematical Models for
Decision Support, Certainty, Uncertainty, and
Risk Management Support Systems,
Mathematical Programming Optimization,
Spreadsheet Model, Linear Programming,
Multiple Goals, Sensitivity Analysis, What-If
Analysis, and Goal Seeking, Decision Analysis
with Decision Tables and Decision Trees
MANAGEMENT SUPPORT
SYSTEMS MODELING
MANAGEMENT SUPPORT SYSTEMS
MODELING
• Factors in modeling a Management Support
System :
• Support from the top management
• Objectives and benefits clearly defined
• Identifying executives’ information needs
• Keeping lines of communication open
• System’s complexity hidden; interface kept
simple
• Maintaining consistency in the approach of
designing
• Designing a flexible system
MATHEMATICAL
PROGRAMMING
OPTIMIZATION
OPTIMIZATION
• Mathematical optimization (alternatively
spelled optimisation) or mathematical
programming is the selection of a best
MATHEMATICAL PROGRAMMING
element, with regard to some criterion,
from some set of available alternatives.
• It is generally divided into two subfields:
– discrete optimization and
– continuous optimization
OPTIMIZATION
• In the more general approach, an optimization
problem consists of maximizing or minimizing a
real function by systematically choosing input
values from within an allowed set and
computing the value of the function.
• An optimization problem with discrete variables
is known as a discrete optimization, in which an
object such as an integer, permutation or
graph must be found from a countable set.
OPTIMIZATION
• A problem with continuous variables is known as
a continuous optimization, in which optimal
arguments from a continuous set must be found.
They can include constrained problems and
multimodal problems.
• Given: a function f : A → R from some set A to the
real numbers
• Sought: an element x0 A such that f(x0) ≤ f(x) for
all x A ("minimization") or such that f(x0) ≥ f(x)
for all x A ("maximization").
OPTIMIZATION
• Such a formulation is called an optimization
problem or a mathematical programming
problem
• Many real-world and theoretical problems
may be modeled in this general framework.
SPREADSHEET MODEL
• Spreadsheet modelling is the creation of various
models using spreadsheet software like MS
Excel.
• The software is used to organise data and apply
formulas to understand the reasons for various
events.
• Models are also used to predict events in the
future.
SPREADSHEET MODEL
• Spreadsheets are very versatile as they allow you
to enter different data types and apply various
formulas to arrive at a desired outcome.
• They automatically calculate the values as per
the formula you have fed. They also allow you
to visualise the outcome as charts and graphs
• There are numerous advantages to creating a
model using spreadsheets.
– Models allow us to communicate with different
people easily.
SPREADSHEET MODEL
– They also enable us to clarify and test our
understanding of various occurrences in business.
• Spreadsheet modelling creates credibility and
accountability as everyone can see how the
formulas have been applied and build trust in
the outcome.
• These models simplify problems and help you
solve them.
SPREADSHEET MODEL
• These models are ideal for analysing data as
you can feed the formula and see the results
by just changing the input value.
• You can keep changing the values until you
get the outcome you desire.
• Features Of Spreadsheet Models:
• There are various spreadsheets that one can
use for modelling.
SPREADSHEET MODEL
• MS Excel, Google Sheets and Airtable are
some popular applications used in data
analysis.
• Almost all of them have similar features,
though there may be differences in how you
input data or get your results.
• Rows and columns in which you enter your
data are common to all these applications.
SPREADSHEET MODEL
• Some other features are also common to all
software programmes used in spreadsheet
modelling :
– Formulas And Functions
– Enabling Visualisation
– Format The Way You Want
• Formulas And Functions
• All spreadsheets allow you to create unique
formulas that will help you analyse the
SPREADSHEET MODEL
available data and help you get the desired
outcome.
• Some functions and formulas are already
available with the application.
• But you can also make a custom function and
have it displayed for everyone to see what
formula you have used.
• Experts use functions in a spreadsheet to
evaluate values.
SPREADSHEET MODEL
• Formulas help to represent the
relationship between two cells in the
sheet.
• Formulas include basic arithmetic like
addition, subtraction and multiplication.
Functions are represented by sum,
average, count, etc.
• Enabling Visualisation
SPREADSHEET MODEL
• Visualisation is very important in data analysis.
• It is not possible to show the tables and the
outcome to everyone.
• It is also difficult for most people to understand
what you have represented in the spreadsheets.
One of the most important features of
spreadsheet modelling is visualisation.
• You can show the results of your analysis using
various visual aids like graphs and charts.
SPREADSHEET MODEL
• It is possible to use various styles when
presenting your graphs, like bar graphs, pie
charts, etc. Spreadsheets also enable you to
add different colours to make the
presentation more attractive and clear.
• Format The Way You Want
• The biggest advantage of using applications
like MS Excel for spreadsheet modelling is
that they allow you to format the way you
want.
SPREADSHEET MODEL
• You can separate information and create
headers.
• It is also possible to merge cells and make
them bigger to accommodate large amounts
of data without disturbing the other cells.
• The other advantage of spreadsheets is that
you can use different colours for different
cells to highlight any important information.
SPREADSHEET MODEL
• You can also apply conditional formatting in
individual cells to make them appear
different.
• It helps you locate critical information without
searching the whole sheet.
SPREADSHEET MODEL
• Elements Of A Spreadsheet Model:
• A spreadsheet model has different elements that
help you display the data and make the analysis
that you desire:
1. Input Variables
2. Output Variables
3. Model Requirements
4. Data Tables
SPREADSHEET MODEL
5. Data Labels
SPREADSHEET MODEL
1. Input Variables –
• These are numerals that the analyst
enters in the spreadsheet to arrive at an
outcome or response.
• The input variables will have an impact
on the output.
• Output Variables –
• Output variables are the result of the
operation in a spreadsheet.
• They help to know what will happen if there
are changes to the input.
SPREADSHEET MODEL
• These elements in spreadsheet modelling
help companies predict the result of changes
in various metrics.
SPREADSHEET MODEL
3. Model Requirements –
These are the requirements of a spreadsheet
model that are necessary for generating the
desired outcome.
4. Data Tables
• These represent the changes that a firm wants
to track.
• It could be the sales in the coming few years
or the number of customers added in a certain
period in the future.
SPREADSHEET MODEL
SPREADSHEET MODEL
5. Data Labels
• Data labels are names that the user gives to
various pieces of data to make it easy to
identify a data series in the spreadsheet.
• Best Practices For Building Spreadsheet
Models:
• Consistency
• Flexibility
• Transparency
• Accuracy
SPREADSHEET MODEL
• Consistency
• Consistency is very important when you
create a model.
• Using the same formatting style for all your
models is always better.
• It makes your models easy to understand for
others.
• Others can also add or delete information
easily if the formatting is consistent.
SPREADSHEET MODEL
• Flexibility
• One of the attributes that are important for
spreadsheet modelling is flexibility.
• Making a flexible model allows us to change
the formulas and see how they impact the
outcome.
• One of the ways to improve flexibility is by
only entering positive numbers so that it fits
in any formula.
SPREADSHEET MODEL
• Transparency
• A transparent model is one where there is
only one calculation in one spreadsheet.
• It is better for an easy understanding of the
information and the outcome.
• It is always better to have different
spreadsheets for different calculations.
• Accuracy
SPREADSHEET MODEL
• To get an accurate model is essential to feed
only correct data.
• If there are any errors in the data, it is better
to remove them to avoid more inaccuracies in
the model.
• One of the ways to avoid errors is to create a
filter that will show unique values in your
spreadsheet.
• Popular Spreadsheet Applications
SPREADSHEET MODEL
• MS Excel
• MS Excel, by far, is the most popular
spreadsheet application available today.
• It is used very commonly for various functions
and is a favourite among data analysts.
• Excel offers various features, from basic
mathematical calculations to highly complex
automation.
SPREADSHEET MODEL
• It is available as a desktop application or
webbased software.
• People prefer this for spreadsheet modelling
due to its versatility and ability to embed
spreadsheets on the website.
• Google Sheets
• Google sheets is an application that comes free
with all personal and business Gmail accounts.
SPREADSHEET MODEL
• It easily integrates with other programmes like
Google Analytics, Google Data Studio and
Google Forms.
• This makes importing and exporting data very
easy.
• One of the things that business owners like about
Google Sheets is its cloud and web-based
accessibility anywhere.
LINEAR PROGRAMMING
LINEAR PROGRAMMING
• Linear programming is a mathematical
concept that is used to find the optimal
solution of the linear function.
• This method uses simple assumptions for
optimizing the given function.
• Linear Programming has a huge real-world
application and it is used to solve various
types of problems.
LINEAR PROGRAMMING
• Linear programming is used in various
industries such as shipping industries,
manufacturing industries, transportation
industries, telecommunications, and others.
LINEAR PROGRAMMING
• Term “linear programming” consists of
two words linear and programming,
the word linear tells the relation
between various types of variables of
degree one used in a problem and the
word programming tells us the step-by-
step procedure to solve these
problems.
LINEAR PROGRAMMING
• What is Linear Programming?
• Linear programming or Linear
optimization is a technique that helps us
to find the optimum solution for a given
problem, an optimum solution is a
solution that is the best possible
outcome of a given particular problem.
• The situation that requires a search for
the best values of the variables subject
LINEAR PROGRAMMING
to certain constraints is where we use
linear programming problems.
• These situations cannot be handled by
the usual calculus and numerical
techniques.
• Linear Programming Definition
• Linear programming is the technique
used for optimizing a particular scenario.
LINEAR PROGRAMMING
• Using linear programming provides us
with the best possible outcome in a
given situation.
• It uses all the available resources in a
manner such that they produce the
optimum result.
• Components of Linear Programming
• The basic components of a linear programming(LP)
problem are:
LINEAR PROGRAMMING
• Decision Variables: Variables you want to determine
to achieve the optimal solution.
• Objective Function: Mathematical equation that
represents the goal you want to achieve
• Constraints: Limitations or restrictions that your
decision variables must follow.
• Non-Negativity Restrictions: In some real-world
scenarios, decision variables cannot be negative
LINEAR PROGRAMMING
• Objective Function: Z = ax + by
• Constraints: cx + dy ≥ e, px + qy ≤ r
• Non-Negative restrictions: x ≥ 0, y ≥ 0
• In the above condition x, and y are the
decision variables.
• Additional Characteristics of Linear
Programming
LINEAR PROGRAMMING
• Finiteness: The number of decision variables
and constraints in an LP problem are finite.
• Linearity: The objective function and all
constraints must be linear functions of the
decision variables. It means the degree of
variables should be one.
• Linear Programming Examples
• We can understand the situations in which
Linear programming is applied with the help
of the example discussed below,
LINEAR PROGRAMMING
• Suppose a delivery man has to deliver 8
packets in a day to the different locations of a
city.
• He has to pick all the packets from A and has
to deliver them to points P, Q, R, S, T, U, V,
and W.
• The distance between them is indicated using
the lines as shown in the image below.
LINEAR PROGRAMMING
• The shortest path followed by the delivery
man is calculated using the concept of Linear
Programming.
• Linear Programming Problems
LINEAR PROGRAMMING
• Linear Programming Problems (LPP) involve
optimizing a linear function to find the optimal
value solution for the function. The optimal value
can be either the maximum value or the
minimum value.
• In LPP, the linear functions are called objective
functions. An objective function can have
multiple variables, which are subjected to
conditions and have to satisfy the linear
constraints.
• Types of Linear Programming Problems
LINEAR PROGRAMMING
• There are many different linear programming
problems(LPP) but we will deal with three major
linear programming problems in this article.
• Manufacturing Problems
• Manufacturing problems are a problem that
deals with the number of units that should be
produced or sold to maximize profits when each
product requires fixed manpower, machine
hours, and raw materials.
• Diet Problems
LINEAR PROGRAMMING
• It is used to calculate the number of different
kinds of constituents to be included in the diet to
get the minimum cost, subject to the availability
of food and their prices.
• Transportation Problems
• It is used to determine the transportation
schedule to find the cheapest way of transporting
a product from plants /factories situated at
different locations to different markets.
LINEAR PROGRAMMING
• How to Solve Linear Programming
Problems?
• Before solving the linear programming
problems first we have to formulate the
problems according to the standard
parameters.
• The steps for solving linear programming
problems are,
LINEAR PROGRAMMING
• Step 1: Mark the decision variables in the
problem.
• Step 2: Build the objective function of the
problem and check if the function needs to be
minimized or maximized.
• Step 3: Write down all the constraints of the
linear problems.
• Step 4: Ensure non-negative restrictions of the
decision variables.
LINEAR PROGRAMMING
• Step 5: Now solve the linear programming
problem using any method generally we use
either the simplex or graphical method.
• Linear Programming Methods
• We use various methods for solving linear
programming problems. The two most
common methods used are,
• Simplex Method
• Graphical Method
• Linear Programming Applications
LINEAR PROGRAMMING
• Linear Programming has applications in various
fields.
• It is used to find the minimum cost of a process
when all the constraints of the problems are
given.
• It is used to optimize the transportation cost of
the vehicle, etc.
• Various applications of Linear Programming are
• Engineering Industries
LINEAR PROGRAMMING
• Engineering Industries use linear
programming to solve design and
manufacturing problems and to get the
maximum output from a given condition.
• Manufacturing Industries
• Manufacturing Industries use linear
programming to maximize the profit of the
companies and to reduce the manufacturing
cost.
• Energy Industries
LINEAR PROGRAMMING
• Energy companies use linear programming to
optimize their production output.
• Transportation Industries
• Linear programming is also used in
transportation industries to find the path to
minimize the cost of transportation.
SENSITIVITY ANALYSIS
• Sensitivity analysis is a financial modelling tool
used to analyse how different values of an
independent variable affect a particular
dependent variable under a certain set of
assumptions.
• It studies how various sources of uncertainty
contribute to the forecast’s overall uncertainty
by posing ‘what if’ questions.
• Sensitivity analysis is used within specific
boundaries that depend on one or more input
variables, and is implemented in a wide range of
fields.
• How Sensitivity Analysis works
• Most commonly used by financial analysts
and economists, it is also known as what-if or
simulation analysis.
• It can be used to ascertain how interest rates
affect bond prices and in making predictions
about the share price of publicly traded
companies.
• The technique allows analysts to establish
which variables are more critical than others
in affecting a decision.
• Thus, it offers investors insight into how
different variables can impact upon their
potential investment returns.
• The analyst will look at how the variables
move, as well as how the target is affected by
the input variable.
• Sensitivity analysis allows for forecasting using
historical data, paving the way for important
decisions to be made about businesses, the
economy and making investments
• An Example of Sensitivity Analysis
• X is the head of sales for a small garden centre
that sells everything from plants and garden
supplies to home products, garden furniture and
even pet essentials.
• He knows that revenue increases every summer
as more customers visit in the warmer weather
and focus on upkeep for their gardens.
• But this year he wants to find out exactly how
much sales will rise in accordance with higher
percentages of customer traffic.
• Sensitivity Analysis advantages
• The advantages of sensitivity analysis are
numerous. Because it’s an in-depth study of
all the variables, the predictions are far more
reliable.
• It allows decision-makers to see exactly where
they can make improvements and enable
people to make sound decisions about
companies, the economy or their
investments.
• Sensitivity analysis is also fairly simple to
understand.
• The numerical outcomes do not favour any
particular variables.
• Sensitivity Analysis disadvantages
• There are some disadvantages to sensitivity
analysis to consider.
• By using historical data to forecast the effect of
variables on outcomes, there is room for error.
• For example, Barry’s garden centre may not sell
as many BBQs this year for reasons not added
to the sensitivity analysis, such as cheaper
models offered by a competitor at a special
discount.
WHAT IF ANALYSIS
WHAT IF ANALYSIS
• What-if analysis is one way of spreadsheet
modelling that is used to find the effect of
certain values on the result.
• By changing certain values in the spreadsheet,
you can know what change it will have in the
outcome.
• For example, if you are calculating the profit
margin of a company after entering the income
WHAT IF ANALYSIS
and expense details, you can easily see how to
achieve the target profit margin.
• You can do this by changing the values in
different rows that represent each item of
income and expenditure.
• As the sales of products are dependent on
various external factors, the best way to
increase profit margins is to reduce expenses.
WHAT IF ANALYSIS
• You can start changing the values in each
expense head and see what changes it will
bring to your profits.
• If you have a target profit margin in mind, you
can change the values of expenses and find
out how much you can spend the most.
WHAT IF ANALYSIS
• You can keep the sales figures as an average
of the past few months to get the actual
value.
• This type of spreadsheet modelling is known
as the “what-if analysis”.
GOAL SEEK
• In the “what if analysis” method, it will take a
few tries to arrive at the correct values.
• You will have to keep changing each expense
item to see what will give you the desired
result.
GOAL SEEK
• But if you are sure about which expense can
be reduced, then it is best to use the goal-
seek method for spreadsheet modelling.
• In this method, the idea is to find out the
value in one cell that will give us the result we
seek.
GOAL SEEK
• Suppose we want to reduce salary expenses
to achieve a particular profit margin, you can
do so easily.
• To achieve this, we need to enter the right
inputs in the goal-seek dialogue box
• We must give the location of the cell that
contains the formula that needs solving.
GOAL SEEK
• We must also specify the cell containing our
desired profit margin.
• The other thing that needs to be mentioned is
the cell that contains the number that can be
changed.
• Once this is done, you must enter the desired
profit margin in the To Value text box.
GOAL SEEK
• This is an excellent spreadsheet modelling for
finding out the target value for achieving a
specific result.
DECISION ANALYSIS WITH
DECISION TABLES AND
DECISION TREES
TABLES AND DECISION TREES
1. Decision Table:
• Decision Table is just a tabular representation
of all conditions and actions.
DECISION ANALYSIS WITH DECISION
• Decision Table are always used whenever the
processing logic is very complicated and
involves multiple conditions.
• The main components used for the formation
of the Data Table are Conditions Stubs, Action
Stubs, and rules.
• Types of decision tables:
• Extended entry table
• Limited entry table
• Benefits:
• Visualization of Cause and effect
relationships in the table.
• Easy to understand
• In the case of a complex table, it can be
readily broken down into simpler tables.
• Tables are formatted consistently.
• Suggestions of possible actions need to be
taken from the summarized outcomes of a
situation.
• In these tables, semi-standardized languages
might be used.
• Table users are not necessarily know how to
use a computer.
• Drawbacks:
• Decision tables are not well suited to
largescale applications. There is a
requirement of splitting huge tables into
smaller ones to eliminate redundancy.
• The complete sequence of actions is not
reflected in the decision tables.
• A partial solution is presented.
• 2. Decision Tree: A decision tree is a graph
that always uses a branching method in order
to demonstrate all the possible outcomes of
any decision. Decision Trees are graphical and
show a better representation of decision
outcomes. It consists of three nodes namely
Decision Nodes, Chance Nodes, and Terminal
Nodes.
• Types of the decision tree:
• Categorical variable decision tree
• Continuous variable decision tree
• Benefits:
• A decision tree is simple to comprehend
and use.
• New scenarios are simple to add.
• Can be combined with other
decisionmaking methods.
• Handling of both numerical and
categorial variables
• The classification does not require many
computations.
• Useful in analyzing and solving various
business problems.
• Drawbacks:
• They are inherently unstable, which means
that a slight change in the data can have a
result in a change in the structure of the
optimal decision tree, and they are frequently
wrong.
• These are less suitable for estimation tasks
where the outcome required is the value of a
continuous variable.
• The alternative options perform better with
the same data. A random forest of decision
trees can be used as a replacement but it is
not as straightforward to comprehend as a
single decision tree.
• Calculations can become quite complicated,
especially when several values are uncertain
and/or multiple outcomes are related.
• Difference between Decision Table and
Decision Tree:
S. No. Decision Table Decision Tree
Decision Tables are a tabular Decision Trees are a graphical
1. representation of conditions and representation of every possible
actions. outcome of a decision.
We can derive a decision table from the We can not derive a decision tree
2.
decision tree. from the decision table.
It helps to take into account the

3. It helps to clarify the criteria. possible relevant outcomes of the
decision.

In Decision Tables, we can In Decision Trees, we can
include more than one ‘or’ not include more than
4. condition. one ‘or’ condition.
It is used when there are It is used when there are
small number of more number of
5. properties. properties.
It is used for simple logic It can be used for
6. only. complex logic as well.

7. It is constructed of rows It is constructed of
and tables. branches and nodes.
A decision tree’s
objective is to provide
The goal of using a decision an effective means to
table is the generation of visualize and understand
rules for structuring logic a decision’s available
on the basis of data possibilities and range of
8. entered in the table. possible outcomes.

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BUSINESS

BASICS OF THE COURSE

EFFECTIVE AND TIMELY

• Processes convert or transform inputs into

• The Environment contains the elements that

• Mathematical (Quantitative) Models use

• Present-value model P = F / (1+i)n

• Assess the (calculated) degree of risk associated

• More difficult - insufficient information

• Ability to perceive and understand information

• Cognitive models are attempts to explain or

• Analytic decision maker

• For successful decision-making support, an MSS must fit

• Organizational DSS can help in enterprise-wide

• Step 6: Take action

Often Backtrack / Cycle Throughout the Process

Find the Problem

• Degree of top management support

• Users’ roles and involvement in system

It helps to take into account the

TABLES AND DECISION TREES

TABLES AND DECISION TREES

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