MB0044 – Production & Operations Management

Assignment set - 1
1. What are the components of systems productivity? Explain how CAD and
CIM help in improving productivity.

Production management encompasses all activities which go into conversion of a sate of inputs
into outputs which are useful to meet human needs. It involves the identification of the perquisite
materials, knowledge of the processes, and installation of equipments necessary to convert or
transform the materials to products. System productivity is generally expressed as the ratio of
outputs to inputs. Productivity can be calculated for a single operation, a functional unit, a
department division or a plant. It is a measure of the efficiency of the system and looks at the
economies achieved during the processes. Every process will have number of contributors-
people machines, facilitating goods, ancillary equipments, technology, etc. Which help in
achieving maximum productivity - each element attempting to enhance the contribution of other
elements? Enhancement of productivity is achieved by either reducing the inputs for the same
output or increasing the output by using the same input.

Opportunities exist at all stages of the workflow.

The entire system of introduce measures for increasing productivity. However in actual
manufacturing situations, the inefficiencies will have cascading effect in hampering productivity.
Communication, effective review processes and innovative methods will ensure optimization of
resources. Capital productivity: Capital deployed in plant, machinery, buildings and the
distribution system as well as working capital are components of the oust of manufacture and
need to be productive. Demand fluctuations, uncertainties of production owing to breakdowns
and inventories being crated drag the productivity down. Therefore, strategies are needed to
maximize the utilization of the funds allotted towards capital. Adapting to new technologies,
outsourcing and balancing of the workstations to reduce the proportion of idle times on
equipments are the focus of this section.

Computers in design and manufacturing applications make it possible to remove much of the
tedium and manual labor involved. For example, the many design specifications, blueprints,
material lists, and other documents needed to build complex machines can require thousands of
highly technical and accurate drawings and charts. If the engineers decide structural components
need to be changed, all of these plans and drawings must be changed. Prior to CAD/CAM,
human designers and draftspersons had to change them manually, a time consuming and error-
prone process. When a CAD system is used, the computer can automatically evaluate and
change all corresponding documents instantly. In addition, by using interactive graphics
workstations, designers, engineers, and architects can create models or drawings, increase or
decrease sizes, rotate or change them at will, and see results instantly on screen.

CAD is particularly valuable in space programs, where many unknown design variables are
involved. Previously, engineers depended upon trial-and-error testing and modification, a time
consuming and possibly life-threatening process. However, when aided by computer simulation
and testing, a great deal of time, money, and possibly lives can be saved. Besides its use in the
military, CAD is also used in civil aeronautics, automotive, and data processing industries.
CAM, commonly utilized in conjunction with CAD, uses computers to communicate
instructions to automated machinery. CAM techniques are especially suited for manufacturing
plants, where tasks are repetitive, tedious, or dangerous for human workers.

Computer integrated manufacturing (CIM), a term popularized by Joseph Harrington in 1975, is

also known as Autofacturing. CIM is a programmable manufacturing method designed to link
CAD, CAM, industrial robotics, and machine manufacturing using unattended processing
workstations. CIM offers uninterrupted operation from raw materials to finished product, with
the added benefits of quality assurance and automated assembly.

2. What do you understand by ‘industry best practice’? Briefly explain different types of
Benchmarking.

Industry best practice:

Each industry would have developed over years or decades. Materials would have changed,
processes would have changed. As all products or services are meant to serve needs of the
customers, they undergo continuous changes – both in shapes and features. Because of research
that is conducted, materials and methods go on improve incessarily. The companies that were at
the force innovate to stay in business as new entrants would be adopting the latest techniques
that the pioneers had taken decades to establish. So the practices adopted by various firms in any
industry would end up adopting almost similar methods of getting an output required. Such
practices would get refined to great extent giving rise what we call industry best practices. These
tend to get stabilized or changed owning to the development of new equipments which are
designed and manufacturers of those with an eye on growing markets which demand higher
quality and reduced prices. Competition benefits those who can use all these to their advantage.
Industry best practices open up the field for benchmarking by companies which need to improve
their performance.

Bench Marking:
It is a method of measuring a company’s processes, methods, procedures and in a way all
functions in great detail. Benchmarking is used to understand how these got into the system and
what circumstances brought them about. It is a learning process with a few to find out whether
some of the reasons have changed and bring in new processes for improvement.. The metrics
that could be used are – number of pieces per hour, cost per unit, number of breakdowns per
week, customer alienation during a week, return on investment, number of returns from
customers in a month, inventory turnover, and many others. As can be seen the figures as found
above determine the efficiency of the organisation. To keep focused, many organizations,
especially the large ones, select a
few processes for purposes of benchmarking. This helps in ensuring constant and deep attention
to those aspects which are to be dealt with. The following are the types of benchmarking firms
consider.

Types of benchmarking:
• Process benchmarking - the initiating firm focuses its observation and investigation of
business processes with a goal of identifying and observing the best practices from one or
more benchmark firms. Activity analysis will be required where the objective is to benchmark
cost and efficiency; increasingly applied to back-office processes where outsourcing may be a
consideration.

• Financial benchmarking - performing a financial analysis and comparing the results in an

effort to assess your overall competitiveness and productivity.

• Benchmarking from an investor perspective- extending the benchmarking universe to also

compare to peer companies that can be considered alternative investment opportunities from the
perspective of an investor.

• Performance benchmarking - allows the initiator firm to assess their competitive position by
comparing products and services with those of target firms.

• Product benchmarking - the process of designing new products or upgrades to current ones.
This process can sometimes involve reverse engineering which is taking apart competitors
products to find strengths and weaknesses.

• Strategic benchmarking - involves observing how others compete. This type is usually not
industry specific, meaning it is best to look at other industries.

• Functional benchmarking - a company will focus its benchmarking on a single function to

improve the operation of that particular function. Complex functions such as Human
Resources, Finance and Accounting and Information and Communication Technology are
unlikely to be directly comparable in cost and efficiency terms and may need to be
disaggregated into processes to make valid comparison.
• Best-in-class benchmarking - involves studying the leading competitor or the company that
best carries out a specific function.

• Operational benchmarking - embraces everything from staffing and productivity to office flow
and analysis of procedures performed.

3. List out the various automated systems for transfer of materials in the production plant.
What do you understand by Line Balancing? Explain with an example.
About the automated flow lines we can say it is a machine which is linked by a transfer system
which moves the parts by using handling machines which are also automated, we have an
automated flow line.

Human intervention ma is needed to verify that the operations ate taking place according to
standards. When these can be achieved with the help of automation and the processes are
conducted with self regulation, we will have automated flow lines established.

In fixed automation or hard automation, where one component is manufactured using services
operations and machines it is possible to achieve this condition. We assume that product life
cycles are sufficiently stable to interest heavily on the automate flow lines to achieve reduces
cast per unit. Product layouts ate designed so that the assembly tasks are performed in the
sequence they are designed at each station continuously. The finished item came out at the end
of the line.

In automated assembly lines the moving pallets move the materials from station to station and
moving arms pick up parts, place them at specified place and system them by perusing, riveting,
& crewing or even welding. Sensors will keep track of their activities and move the assembles to
the next stage. The machines are arranged in a sequence to perform operations according to the
technical requirements.

The tools are loaded, movements are effected, speeds controlled automatically without the need
for worker’s involvement.

The flexibility leads to better utilization of the equipments. It reduces the numbers of systems
and rids in reduction of investment as well as a space needed to install them. One of the major
cancers of modern manufacturing systems is to be able to respond to market
demands which have uncertainties.

Prototyping is a process by which a new product is developed in small number so as to

determine the suitability of the materials, study the various methods of manufactured, type of
machinery required and develop techniques to over come problems that my be encountered
when full scale manufacture is undertaken.

Prototypes do meet the specification of the component that enters a product and performance can
be measured on these. It helps in con be reforming the design and any shortcomings can be
rectified at low cost.

Flexibility has three dimensions in the manufacturing field. They are variety, volume and time.
There demands will have to be satisfied. In that sense they become constraints which restrict the
maximization of productivity. Every business will have to meet the market demands of its
various products in variety volumes of different time.

Flexibility is also needed to be able to develop new products or make improvements in the
products fast enough to cater to shifting marker needs.
Manufacturing systems have flexibility built into them to enable organization meet global
demand. You have understood how the latest trends in manufacturing when implemented help
firms to stay a head in business.

4. Explain the different types of Quality Control Tools with examples? How do
Crosby’s absolutes of quality differ from Deming’s principles?

Quality Control (QC) is a system of routine technical activities, to measure and control the
quality of the inventory as it is being developed. The QC system is designed to:
Provide routine and consistent checks to ensure data integrity, correctness, and
Completeness;
Identify and address errors and omissions;
Document and archive inventory material and record all QC activities.

The following seven are considered basic tools for achieving quality.
Flow Chart
Check sheet
Histogram
Pareto Analysis
Scatter Diagram
Control Chart
Cause and Effect Diagram

Flow Chart
It is a visual representation of process showing the various steps. It helps in locating the points at
which a problem exists or an improvement is possible. Detailed data can be collected, analyzed
and methods for correction can be developed. A sample is shown below lists out the various
steps or activities in a particular job. It classifies them as a procedure or a decision. Each
decision point generates alternatives. Criteria and Consequences that go with decision are
amenable to evaluation for purposes of assessing quality. The flow chart helps in pin-pointing
the exact at which errors have crept in. A simple chart is shown below.

Check Sheet
These are used to record the number of defects, types of defects, locations at which they are
occurring, times at which they are occurring, workmen by whom they are occurring. It keeps a
record of the frequencies of occurrence with reference to possible defect causing parameter. It
helps to implement a corrective procedure at the point where the frequencies are more, so that
the benefit of correct will be maximum. A sample sheet is shown below.

Histogram
Histograms are graphical representations of distribution of data. They are generally used
to record huge volumes of data about a process. They reveal whether the pattern of distribution –
whether there is a single peak, or many peak and also the extent of variation around the peak
value. This helps in identifying whether the problem is serious. When used in conjunction with
comparable parameters, the visual patterns help us to identify the problem which should be
attended to.
Pareto Analysis
This is a tool for classifying problem areas according to the degree of importance and attending
to the most important. Pareto principle, also called 80-20 rule, states that 80 percent of the
problems that we encounter arise out of 20 percent of items. If we find that, in a day, we have
184 assemblies have given problems and there are 11 possible causes, it is observed that 80 per
cent of them i.e. 147 of them have been caused by just 2 or 3 of them. It will be easy to focus on
these 2 or three and reduce the number of defects to a great extent. When the cause of these
defects have been attended, we will observe that some other defect

Scatter Diagram
These are used when we have two variables and want to know the degree of relationship
between them. We can determine if there is cause and effect relationship between and its extent
over a range of values. Sometimes, we can observe that there is no relationship, in which we can
change one parameter being sure that it has no effect on the other parameter.

Control Charts
These are used to verify whether a process is under control. Variables when they remain within a
range will render the product maintain the specifications. This is the quality of conformance. The
range of permitted deviations is determined by design parameters. Samples are taken and the
mean and range of the variable of each sample (subgroup) is recorded. The mean of the means of
the samples gives the control lines. Assuming normal distribution, we expect 99.97 per cent of
all values to lie within the UCL when we take 3 standard deviations – Upper Control Limit – and
LCL – Lower Control Limit. The graphical representation of data helps in changing settings to
bring back the process closer to the target.

Cause and Effect Diagram

This is a diagram in which all possible causes are classified on quality characteristics which lead
to a defect. These are arranged in such a way that different branches — the causes are – leading
the stem in the direction of the discovery of the problem. When each of them is investigated
thoroughly we will be able to pinpoint some factors which cause the problem. We will also
observe that a few of them will have cumulative effect or even a cascading effect.

Deming Wheel

Deming’s approach is summarized in his 14 points.

Constancy of purpose for continuous improvement
Adopt the TQM philosophy for economic purposes
Do not depend on inspection to deliver quality
Do not award any business based on price alone
Improve the system of production and service constantly
Conduct meaningful training on the job
Adopt modern methods of supervision and leadership
Remove fear from the minds of everyone connected with the organisation
Remove barriers between departments and people
Do not exhort, repeat slogans and put up posters.
Do not set up numerical quotas and work standards
Give pride of workmanship to the workmen
Education and training to be given vigorously
State and exhibit top management’s commitment for quality and productivity

Using the above principles, Deming gave a four step approach to ensure a purposeful journey of
TQM. The slope is shown to indicate that if efforts are let up the program will roll back

Plan – means that a problem is identified, processes are determined and relevant theories are
checked out.
Do – means that the plan is implemented on a trial basis. All inputs are correctly measured and
recorded.
Check/Study/Analyze – means that the trials taken according to the plan are in accordance with
the expected results.
Act – When all the above steps are satisfactory regular production is started so that quality
outcomes are assured

Crosby’s Absolutes of Quality

Like Deming, he also lays emphasis on top management commitment and responsibility for
designing the system so that defects are not inevitable. He urged that there be no restriction on
spending for achieving quality. In the long run, maintaining quality is more economical rather
than compromising on its achievement.

His absolutes can be listed as under.

Quality is conformance to requirements – not ‘goodness’.
Prevention, not appraisal, is the path to quality.
Quality is measured as the price paid for non-conformance and as indexes.
Quality originates in all factions – not quality department. There are no quality problems people,
design, process create problems.
Crosby also has given 14 points similar to those of Deming. His approach emphasizes on
measurement of quality, increasing awareness, corrective action, error cause removal and
continuously reinforcing the system, so that advantages derived are not lost over time. He desires
that the quality management regimen should improve the overall health of the organization and
prescribed a vaccine.

The ingredients are:

Integrity – honesty and commitment to produce everything right first time, every time.
Communication – Flow of information between departments, suppliers, customers – helps in
identifying opportunities.
Systems and operations – These should bring in a quality environment – so that nobody is
comfortable with anything less than the best.

5. Define project cycle, project management, and scope of project. List the various project
management knowledge areas? What are the reasons for failure of a project?

Project Cycle – A project cycle basically consists of the various activities of operations,
resources and the limitations imposed on them.
Definition of “Project Management”
It is the practice of controlling the use of resources, such as cost, time, manpower, hardware and
software involved in a project, that start with a problem statement and end with delivery of a
complete product. Project management involves understanding its scope and various processes
in the project cycle.

Project Management Definition

As per PMBOK (Project Management — Body of Knowledge, defined by PMI – Project
Management Institute) :
“Project management is the application of knowledge, skills, tools and techniques to project
activities to meet project requirements.

As per DIN 69901 (German Organization for Standardization):

“Project management is the complete set of tasks, techniques, tools applied during project
execution”

Scope – It refers to the various parameters that affect the project in its planning, formulation and
executions,

Like:-
The range of one's perceptions, thoughts, or actions.
Breadth or opportunity to function. See Synonyms at room.
The area covered by a given activity or subject. See Synonyms at range.
The length or sweep of a mooring cable.
Informal A viewing instrument such as a periscope, microscope, or telescope.

Before knowing the reasons of failure we have to know about project.

Project is a set of activities which are networked in order and aimed towards achieving goal of a
project.

Now, the reasons are project failure:

Incidence of Project failure
Projects being initiated of random at all levels
Project objective not in line with business objective
Project management not observed
Project manager with no prior experience in the related project
Non- dedicated team
Lack of complete support from clients
Factors contributing to project success not emphasized:
Project objective in alignment with business objective
Working within the framework of project management methodology
Effective scoping planning, estimation, execution, controls and reviews, project bottlenecks
Communication and managing expectations effectively with clients, team merits and stake
holders
Prior expectance of PM in a similar project

Overview of information and communication Technologies (ICT) project:

Involve information and communication technologies such as the word wide web, e-mail, fiber-
optics satellites.
ii) Enable societies to produce, access, adapt and apply information in greater amount, more
rapidly and at reduce casts.
iii) Offer enormous opportunities for enhancing business and economic viability.
iv) Common problems encountered during projects.
v) No prioritization of project activity from an organizational position.
vi) One or more of the stages in the project mishandled.
vii) Less qualified non-dedicated manpower.
viii) Absence of smooth flow of communication between the involved parties.

These basic reasons lead a project to failures. In the project failures business management and
project management is directly involved. From the management point of view it is basic things
to care above topics to success of a project. Project is the core business of a company.

6. Explain the various phases in project management life cycle. Explain the necessity and
objectives of SCM.

This is the initial phase of any project. In this phase information is collected from the customer
pertaining to the project and the requirements are analyzed. The entire project has to be planned
and it should be done in a strategic manner. The project manager conducts the analysis of the
problem and submits a detailed report to the top project justification, details on what the problem
is a method of solving the problem, list of the objectives to be achieved, project budget and the
success rate of completing the project.

The report must also contain information and the project feasibility, and the risks involved in the
project. Project management life cycle is the integrated part of management. It is attach with
project responsibility or failure of a project.

The important tasks of this phase are as follows:

Specification Requirements Analysis (SRA): It has to be conducted to determine the essential
requirements of a project in order to achieve the target.

Feasibility study: To analyze whether the project is technically, economically and practically
feasible to be undertaken.

Trade off analysis: To understand and examine the various alternatives which could be
considered.

Estimation: To estimate the project cost, effort requires for the project and functionality of
various process in the project.

System design: Choose a general design that can fusil the requirements.

Project evolution: Evaluate the project in terms of expected profit, cost and risks involved
marketing phase. A project proposal is prepared by a group of people including the project
manager. This proposal has to contain the strategies adopted to market the product to the
customers.

Design phase: This phase involves the study of inputs and outputs of the various project stages.

Execution phase: In this phase the project manager and the teams members work on the project
objectives as per the plan. At every stage during the execution reports are prepared.

Control: Inspecting, Testing and Delivery phase during this phase. The project team works under
the guidance of the project manager. The project manager has to ensure that the team working
under his, implements the project designs accurately, the project manager has to ensure ways of
managing the customer, perform quality control work.

Closure and post completion analysis phase upon satisfactory completion and delivery of the
intended product or service the staff performance has to be evaluated. Document the lessons
from the project. Prepare the reports on project feedback analysis followed by the project
execution report.

The phase which involve in the above are:

The preparation stage involves the preparation and approval of project outline, project plan and
project budget.

The next stage involves selecting and briefing the project team about the proposals followed by
discussions on the roles and responsibility of the project member and the organization.

The project management life cycle:

A Life cycle of a project consists of the following:
Understanding the scope of the project
Establishing objectives of the project
Formulating and planning various activities
Project execution and Monitor and control the project resources.

Risk Management:-
Risk is defined in ISO 31000 as the effect of uncertainty on objectives (whether positive or
negative). Risk management can therefore be considered the identification, assessment, and
prioritization of risks followed by coordinated and economical application of resources to
minimize, monitor, and control the probability and/or impact of unfortunate events or to
maximize the realization of opportunities. Risks can come from uncertainty in financial markets,
project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well as
deliberate attacks from an adversary. Several risk management standards have been developed
including the Project Management Institute, the National Institute of Science and Technology,
actuarial societies, and ISO standards. Methods, definitions and goals vary widely according to
whether the risk management method is in the context of project management, security,
engineering, industrial processes, financial portfolios, actuarial assessments, or public health and
safety.
The strategies to manage risk include transferring the risk to another party, avoiding the risk,
reducing the negative effect of the risk, and accepting some or all of the consequences of a
particular risk.

Certain aspects of many of the risk management standards have come under criticism for having
no measurable improvement on risk even though the confidence in estimates and decisions
increase.

Necessity and objectives of SCM:-

SCM is the abbreviation of supply chain Management. It is considered by many express
worldwide as the ultimate solution towards efficient enterprise management.

SCM is required by and enterprise as a tow to enhance management effectiveness with a

following organizational objective:
Reduction of inventory:-Enactment in functional effectiveness of existing systems like ERP,
Accounting. Software and Documentation like financial reports statements ISO 9000 Documents
etc.

Enhancement of participation level and empowerment level:-

Effective integration of multiple systems like ERP, communication systems, documentation
system and secure, Design R&D systems etc.

Better utilization of resources- men, material, equipment and money.

Optimization of money flow cycle within the organization as well as to and from external
agencies.
Enhancement of value of products, operations and services and consequently, enhancements of
profitability.
Enhancement of satisfaction level of customer and clients, supporting institutions, statutory
control agencies, supporting institutions, statutory control agencies, suppliers and vendors,
employees and executives .
Enhancement of flexibility in the organization to help in easy implementation of schemes
involving modernization, expansion and divestment, merges and acquisitions
Enhancement of coverage and accuracy of management information systems. With the
objectives of SCM its implementation are required. Implementation is in the form of various
functional blocks of an organization interpenetrated through which a smooth flow of the product
development is possible.

A relatively new SCM option involves web based software with a browser interface. Several
electronic marketplaces for buying and selling goods and materials.
Steps involved in the implementation of SCM:-
There is many steps which involved in SCM implementation are- Business Process, sales and
marketing. Logistics, costing, demand planning, trade- off analysis, environmental requirement,
process stability, integrated supply, supplier management, product design, suppliers, customers,
material specifications, etc.

Some important aspect of SCM-

The level of competition existing in the market and the impact of competitive forces on the
product development. Designing and working on a strategic logic for better growth through
value invention. Working out new value curve in the product development along with necessary
break point. Using it to analyze markets and the economies in product design. Time, customer,
quality of product and the concept of survival of fittest.

Steps of SCM principals:

Group customer by need: Effective SCM groups, customer by tie tinct service meets those
particular segment.

Customize the logistics networks: In designing their logistics network, companies need to focus
on the service requirement and profit potential of the customer segments identified. Listen to
signals of market demand and plan accordingly- sales and operations planners must monitor the
entire supply chain to detect early warning signals of changing customer demand and needs.

Differentiate the product closer to the customer: companies today no longer can afford to stock
pile inventory to compensate for possible forecasting errors, instead, they need to postpone
product differentiation in the manufacturing. Process closer to actual customer demand.

Strategically manage the source of supply: by working closely with their key suppliers to reduce
the overall casts of owning materials and services; SCM maximizes profit margins both for
themselves, and their supplies.

Develop a supply chain wide technology strategy: as one of the cornerstones of successful SCM
information technology must be able to support multiple levels of decision making.

Adopt channel spanning performance measures- Excellent supply performance measurement

systems do more than just monitor internal functions. They apply performance criteria that
embrace bathe service and financial metrics, including as such as each accounts true
profitability.

MB0045 – Financial Management

Assignment set - 1
Short Notes
1. Financial Management
Financial Management is Planning, directing, monitoring, organizing, and controlling of the
monetary resources of an organization. The management of the finances of a business /
organization in order to achieve financial objectives. Financial Management is the efficient and
effective planning and controlling of financial resources so as to maximize profitability and
ensuring liquidity for an individual(called personal finance), government(called public finance)
and for profit and non-profit organization/firm (called corporate or managerial finance).
Generally, it involves balancing risks and profitability.

The decision function of financial management can be divided into the following 3 major areas:

INVESTMENT DECISION

1. Determine the total amount of assets needed by a firm hence closely tied to the allocation
of funds
2. Two type of investment decisions namely:

• Capital Investment decisions re: large sums, non routine, longer term, critical to the
business like purchase of plant and machinery or factory
• Working Capital Investment decisions re: more routine in nature, short term but are also
very critical decisions like how much and how long to invest in inventories or
receivables

FINANCING DECISION

1. After deciding on the amount and type of assets to buy, the financial manager needs to
decide on HOW TO FINANCE these assets with the sources of fund
2. Financing decisions for example:

• Whether to use external borrowings/debts or share capital or retained earnings

• Whether to borrow short, medium or long term

• What sort of mix – all borrowings or part debts part share capital or 100% share capital

• The needs to determine how much dividend to pay out as this will directly affects the
financial decision.

Financial Planning
Financial Planning is an exercise aimed to ensure availability of right amount of money at the
right time to meet the individual’s financial goals
Concept of Financial Planning
Financial Goals refer to the dreams of the investor articulated in financial terms. Each dream
implies a purpose, and a schedule of funds requirements for realising the purpose
Asset Allocation refers to the distribution of the investor’s wealth between different asset classes
(gold, property, equity, debt etc.)
Portfolio Re-balancing is the process of changing the investor’s asset allocation
Risk Tolerance / Risk Preference refers to the appetite of the investor for investment risk viz.
risk of loss
Financial Plan Is a road map, a blue print that lists the investors’ financial goals and outlines a
strategy for realising them
Quality of the Financial Plan is a function of how much information the prospect shares, which
in turn depends on comfort that the planner inspires

Capital Structure

Capital structure of a firm is a reflection of the overall investment and financing strategy of the
firm.
Capital structure can be of various kinds as described below:

- Horizontal capital structure: the firm has zero debt component in the structure mix.
Expansion of the firm takes through equity or retained earnings only.

- Vertical capital structure: the base of the structure is formed by a small amount of
equity share capital. This base serves as the foundation on which the super structure
of preference share capital and debt is built.

- Pyramid shaped capital structure: this has a large proportion consisting of equity
capita; and retained earnings.

- Inverted pyramid shaped capital structure: this has a small component of equity
capital, reasonable level of retained earnings but an ever-increasing component of
debt.

SIGNIFICANCE OF CAPITAL STRUCTURE:

- Reflects the firm’s strategy

- Indicator of the risk profile of the firm
- Acts as a tax management tool
- Helps to brighten the image of the firm.

FACTORS INFLUENCING CAPITAL STRUCTURE:

- Corporate strategy
- Nature of the industry
- Current and past capital structure

Cost of Capital

Cost of capital is the rate of return the firm requires from investment in order to increase the
value of the firm in the market place. In economic sense, it is the cost
of raising funds required to finance the proposed project, the borrowing rate of the firm. Thus
under economic terms, the cost of capital may be defined as the weighted average cost of each
type of capital.
There are three basic aspects about the concept of cost
1. It is not a cost as such: The cost of capital of a firm is the rate of return which it requires on
the projects. That is why; it is a ‘hurdle’ rate.
2. It is the minimum rate of return: A firm’s cost of capital represents the minimum rate of return
which is required to maintain at least the market value of equity shares.
3. It consists of three components. A firm’s cost of capital includes three components
a. Return at Zero Risk Level: It relates to the expected rate of return when a project involves no
financial or business risks.
b. Business Risk Premium: Business risk relates to the variability in operating profit (earnings
before interest and taxes) by virtue of changes in sales. Business risk premium is determined by
the capital budgeting decisions for investment proposals.
c. Financial Risk Premium: Financial risk relates to the pattern of capital structure (i.e., debt-
equity mix) of the firm, In general, a firm which has higher debt content in its capital structure
should have more risk than a firm which has comparatively low debt content. This is because the
former should have a greater operating profit with a view to covering the periodic interest
payment and repayment of principal at the time of maturity than the latter.

Trading on Equity

When a co. uses fixed interest bearing capital along with owned capital in raising finance, is said
“Trading on Equity”.

(Owned Capital = Equity Share Capital + Free Reserves )

Trading on equity represents an arrangement under which a company uses funds carrying fixed
interest or dividend in such a way as to increase the rate of return on equity shares.
It is possible to raise the rate of dividend on equity capital only when the rate of interest on fixed
– interest – bearing – security is less than the rate of return earned in business.
•Two other terms:
•Trading on Thick Equity :- When borrowed capital is less than owned capital
•Trading on Thin Equity :- When borrowed capital is more than owned capital, it is called
Trading on thin Equity.

Interim Dividend and factors effecting it.

Usually, board of directors of company declares dividend in annual general meeting after
finding the real net profit position. If boards of directors give dividend for current year before
closing of that year, then it is called interim dividend. This dividend is declared between two
annual general meetings.
Before declaring interim dividend, board of directors should estimate the net profit which will
be in future. They should also estimate the amount of reserves which will deduct from net profit
in profit and loss appropriation account. If they think that it is sufficient for operating of
business after declaring such dividend. They can issue but after completing the year, if profits
are less than estimates, then they have to pay the amount of declared dividend. For this, they will
have to take loan. Therefore, it is the duty of directors to deliberate with financial consultant
before taking this decision.
Accounting treatment of interim dividend in final accounts of company :-

# First Case: Interim dividend is shown both in profit and loss appropriation account and
balance sheet, if it is outside the trial balance in given question.

( a) It will go to debit side of profit and loss appropriation account

(b) It will also go to current liabilities head in liabilities side.

# Second Case: Interim dividend is shown only in profit and loss appropriation account, if it is
shown in trial balance.

(a) It will go only to debit side of profit and loss appropriation account.

If in final declaration is given outside of trial balance and this will be proposed dividend and
interim dividend in trial balance will be deducted for writing proposed dividend in profit and
loss appropriation account and balance sheet of company, because if we will not deducted
interim dividend, then it will be double deducted from net profit that is wrong and error shows
when we will match balance sheets assets with liabilities.

Factors affecting dividend policy.

The dividend decision is difficult decision because of conflicting objectives and also because of
lack of specific decision-making techniques. It is not easy to lay down an optimum dividend
policy which would maximize the long-run wealth of the shareholders. The factors affecting
dividend policy are grouped into two broad categories.

1. Ownership considerations
2. Firm-oriented considerations

Ownership considerations: Where ownership is concentrated in few people, there are no

problems in identifying ownership interests. However, if ownership is decentralized on a wide
spectrum, the identification of their interests becomes difficult.

Various groups of shareholders may have different desires and objectives. Investors gravitate to
those companies which combine the mix of growth and desired dividends.

Firm-oriented considerations: Ownership interests alone may not determine the dividend
policy. A firm’s needs are also an important consideration, which include the following:

• Contractual and legal restrictions

• Liquidity, credit-standing and working capital
• Needs of funds for immediate or future expansion
• Availability of external capital.
• Risk of losing control of organization
 • Relative cost of external funds
• Business cycles
• Post dividend policies and stockholder relationships.

The following factors affect the shaping of a dividend policy:

Nature of Business: Companies with unstable earnings adopt dividend policies which are
different from those which have steady earnings.

Composition of Shareholding: In the case of a closely held company, the personal objectives of
the directors and of a majority of shareholders may govern the decision. To the contrary, widely
held companies may take a dividend decision with a greater sense of responsibility by adopting a
more formal and scientific approach.

Investment Opportunities: Many companies retain earnings to facilitate planned expansion.

Companies with low credit ratings may feel that they may not be able to sell their securities for
raising necessary finance they would need for future expansion. So, they may adopt a policy for
retaining larger portion of earnings.

Similarly, is a company has lucrative opportunities for investing its funds and can earn a rate
which is higher than its cost of capital, it may adopt a conservative dividend policy.

Liquidity: This is an important factor. There are companies, which are profitable but cannot
generate sufficient cash, since profits are to be reinvested in fixed assets and working capital to
boost sales.

Restrictions by Financial Institutions: Sometimes financial institutions which grant long-term

loans to a company put a clause restricting dividend payment till the loan or a substantial part of
it is repaid.

Inflation: In period of inflation, funds generated from depreciation may not be adequate to
replace worn out equipment. Under inflationary situation, the firm has to depend upon retained
earnings as a source of funds to make up for the shortfall. Consequently, the dividend pay out
ratio will tend to be low.

Other factors: Age of the company has some effect on the dividend decision.

The demand for capital expenditure, money supply, etc., undergo great oscillations during the
different stages of a business cycle. As a result, dividend policies may fluctuate from time to
time.

Reorder Level

This is that level of materials at which a new order for supply of materials is to be placed. In
other words, at this level a purchase requisition is made out. This level is fixed somewhere
between maximum and minimum levels. Order points are based on usage during time necessary
to requisition order, and receive materials, plus an allowance for protection against stock out.

The order point is reached when inventory on hand and quantities due in are equal to the lead
time usage quantity plus the safety stock quantity.

Formula of Re-order Level or Ordering Point:

The following two formulas are used for the calculation of reorder level or point.

Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead
time

The above formula is used when usage and lead time are known with certainty; therefore, no
safety stock is provided. When safety stock is provided then the following formula will be
applicable:

Ordering point or re-order level = Maximum daily or weekly or monthly usage × Lead
time + Safety stock

Problem
Sales Rs.400, 000 less returns Rs 10, 000, Cost of Goods Sold Rs 300,000, Administration and
selling expenses Rs.20, 000, Interest on loans Rs.5000, Income tax Rs.10000, preference
dividend Rs. 15,000, Equity Share Capital Rs.100, 000 @Rs. 10 per share. Find EPS.

400,00
Sales 0
390,00
Less Returns 10,000 0

Less
COGS 30,000
S&A 20,000
Int on
Loan 5,000
325,00
IT 10,000 0

Div 15,000
100,00
ESC 0 @ 10/-
NPAT - Pref Share
Div
No of Shares
NPAT 55,000
less Pref Share Div 15,000 40,000

EPS 40,000 =Rs.4/-

10,000

Techniques of Investment Evaluation

Three steps are involved in the evaluation of an investment:

•Estimation of cash flows

•Estimation of the required rate of return (the opportunity cost of capital)
•Application of a decision rule for making the choice.

The first two steps, discussed in the subsequent chapters, are assumed as given. Thus, our
discussion in this chapter is confined to the third step.speifically, we focus on the merits and
demerits of various decision rules.

Investment decision rule

The investment decision rules may be referred to as capital budgeting techniques, or investment
criteria. A sound appraisal technique should be used to measure the economic worth of an
investment project. The essential property of a sound technique is that it should maximize the
shareholders’ wealth. The following other characteristics should also be possessed by a sound
investment evaluation criterion.
• It should consider all cash flows to determine the true profitability of the project.
• It should provide for an objective and unambiguous way of separating good projects form bad
projects.

• It should help ranking of projects according to their true profitability.

• It should recognize the fact that bigger cash flows true profitability.
• It should recognize the fact that bigger cash flows are preferable to smaller once and early cash
flows are preferable to later ones.

• It should help top choose among mutually exclusive projects that project which maximizes the
shareholders’ wealth.

• It should be a criterion which is applicable to any conceivable investment project independent

of other.

These conditions will be clarified as we discuss the features of various investment criteria in the
following pages.

Evaluation criteria
A number of investments criteria (or capital budgeting techniques) are in use in proactive. They
may be grouped in the following two categories:

1. Discounted cash flow (DCF) criteria

• Net present value (NPV)

• Internal rate of return (IIR)

• Profitability index (PI)

2. Non-discounted cash flow criteria

• Payback period (PB)

• Discounted payback period

• Accounting rate of return (ARR).

Discounted payback is a variation of the payback method. It involves discounted cash flows, but
as we shall see later, it is not a true measure of investment profitability. We will show in the
following pages that the net present value criterion is the most valid technique of maximizing the
shareholders wealth.

Problems associated with inadequate working capital

Working capital may be regarded as the life blood of business. Working capital is of major
importance to internal and external analysis because of its close relationship with the current
day-to-day operations of a business. Every business needs funds for two purposes.

* Long term funds are required to create production facilities through purchase of fixed assets
such as plants, machineries, lands, buildings & etc

* Short term funds are required for the purchase of raw materials, payment of wages, and other
day-to-day expenses. . It is other wise known as revolving or circulating capital

It is nothing but the difference between current assets and current liabilities. i.e. Working Capital
= Current Asset – Current Liability.

Businesses use capital for construction, renovation, furniture, software, equipment, or

machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is also
used often by businesses to put a down payment down on a piece of commercial real estate.
Working capital is essential for any business to succeed. It is becoming increasingly important to
have access to more working capital when we need it.
Importance of Adequate Working Capital

A business firm must maintain an adequate level of working capital in order to run its business
smoothly. It is worthy to note that both excessive and inadequate working capital positions are
harmful. Working capital is just like the heart of business. If it becomes weak, the business can
hardly prosper and survive. No business can run successfully without an adequate amount of
working capital.

Danger of inadequate working capital

When working capital is inadequate, a firm faces the following problems.

Fixed Assets cannot efficiently and effectively be utilized on account of lack of sufficient
working capital. Low liquidity position may lead to liquidation of firm. When a firm is unable to
meets its debts at maturity, there is an unsound position. Credit worthiness of the firm may be
damaged because of lack of liquidity. Thus it will lose its reputation. There by, a firm may not
be able to get credit facilities. It may not be able to take advantages of cash discount.

Disadvantages of Redundant or Excessive Working Capital

1. Excessive Working Capital means ideal funds which earn no profits for the business and
hence the business cannot earn a proper rate of return on its investments.
2. When there is a redundant working capital, it may lead to unnecessary purchasing and
accumulation of inventories causing more chances of theft, waste and losses.
3. Excessive working capital implies excessive debtors and defective credit policy which
may cause higher incidence of bad debts.
4. It may result into overall inefficiency in the organization.
5. When there is excessive working capital, relations with banks and other financial
institutions may not be maintained.
6. Due to low rate of return on investments, the value of shares may also fall.
7. The redundant working capital gives rise to speculative transactions.
Disadvantages or Dangers of Inadequate Working Capital
1. A concern which has inadequate working capital cannot pay its short-term liabilities
in time. Thus, it will lose its reputation and shall not be able to get good credit
facilities.
2. It cannot buy its requirements in bulk and cannot avail of discounts, etc.
3. It becomes difficult for the firm to exploit favourable market conditions and
undertake profitable projects due to lack of working capital.
4. The firm cannot pay day-to-day expenses of its operations and its creates
inefficiencies, increases costs and reduces the profits of the business.
5. It becomes impossible to utilize efficiently the fixed assets due to non-availability
of liquid funds.

6. The rate of return on investments also falls with the shortage of working capital.
Disadvantages or Dangers of Inadequate or Short Working Capital

• Can’t pay off its short-term liabilities in time.

• Economies of scale are not possible.
• Difficult for the firm to exploit favourable market situations
• Day-to-day liquidity worsens
• Improper utilization the fixed assets and ROA/ROI falls sharply

What is Leverage.? Compare and contrast Financial and operating leverage.

‘Leverage’ is the action of a lever or the mechanical advantage gained by it; it also means
‘effectiveness’ or ‘power’. The common interpretation of leverage is derived from the use or
manipulation of a tool or device termed as lever, which provides a substantive clue to the
meaning and nature of financial leverage.

When an organization is planning to raise its capital requirements (funds), these may be raised
either by issuing debentures and securing long term loan 0r by issuing share-capital. Normally, a
company is raising fund from both sources. When funds are raised from debts, the Co. investors
will pay interest, which is a definite liability of the company. Whether the company is earning
profits or not, it has to pay interest on debts. But one benefit of raising funds from debt is that
interest paid on debts is allowed as deduction for income tax. ‘When funds are raised by issue of
shares (equity) , the investor are paid dividend on their investment. Dividends are paid only
when the Company is having sufficient amount of profit. In case of loss, dividends are not paid.
But dividend is not allowed as deduction while computing tax on the income of the Company. In
this way both way of raising funds are having some advantages and disadvantages. A Company
has to decide that what will be its mix of Debt and Equity, considering the liability, cost of funds
and expected rate of return on investment of fund. A Company should take a proper decision
about such mix, otherwise it will face many financial problems. For the purpose of determination
of mix of debt and equity, leverages are calculated and analyzed.

Concept of Financial Leverage

Leverage may be defined as the employment of an asset or funds for which the firm pays a fixed
cost or fixed return. The fixed cost or return may, therefore be thought of as the full annum of a
lever. Financial leverage implies the use of funds carrying fixed commitment charge with the
objective of increasing returns to equity shareholders. Financial leverage or leverage factor is
defined, as the ratio of total value of debt to total assets or the total value of the firm. For
example, a firm having a total value of Rs. 2,00,000 and a total debt of Rs. 1,00,000 would have
a leverage factor of 50 percent. There are difficult measures of leverage such as.

i. The ratio of debt to total capital

ii. The ratio of debt to equity
iii. The ratio of net operating income (earning before interest and taxes) to fixed’ charges)
The first two measures of leverage can be expressed either in book v8lue or market value
the debt of equity ratio as a measure of financial leverage is more popular in practice. “
Risk & Financial Leverage:
Effects of financial Leverage: The use of leverage results in two obvious effects:

i. Increasing the shareholders earning under favorable economic conditions, and

ii. Increasing the financial risk of the firm. Suppose there are two companies each having a
Rs. 1,00,000 capital structure. One company has borrowed half of its investment while
the other company has only equity capital: Both earn Rs. 2,00,000 profit. The ratio of
interest on the borrowed capital is 10%and the rate of corporate tax 50%. Let us calculate
the effect of financial leverage, both in the shareholders earnings and the Company’s
financial risk in these two companies.

(a) Effect of Leverage on Shareholders Earnings:

Company Company
A B
Rs. Rs.
Profit before Interest and Taxes 2,00,000 2,00,000
Equity 10,00,000 5,00,000
Debt —- 5,00,000
Interest (10%) —- 50,000
Profit after interest but before 2,00,000 1,50,000
Tax
Taxes @ 50% 1,00,000 75,000

Rate of return on Equity of Company A Rs. 1,00,000/Rs. 10,00,000 = 10%

Rate of return on Equity of Company B Rs. 75,000/Rs. 5,00,000 = 15%

The above illustration points to the favorable effect of the leverage factor on earnings of
shareholders. The concept of leverage is 5 if one can earn more on the borrowed money that it
costs but detrimental to the man who fails to do so far there is such a thing as a negative leverage
i.e. borrowing money at 10% to find that, it can earn 5%. The difference comes out of the
shareholders equity so leverage can be a double-edged sword.

(b) Effect of Leverage on the financial risk of the company: Financial risk broadly defined
includes both the risk of possible insolvency and the changes in the earnings available to equity
shareholders. How does the leverage factor leads to the risk possible insolvency is self-
explanatory. As defined earlier the inclusion of more and more debt in capital structure leads to
increased fixed commitment charges on the part of the firm as the firm continues to lever itself,
the changes of cash insolvency leading’ to legal bankruptcy increase because the financial
‘charges incurred, by the firm exceed the expected earnings. Obviously this leads to fluctuations
in earnings’ available to the equity shareholders.

Relationship: Financial and Operating leverage:

Relationship between financial and operating leverage: In business terminology, leverage is

used in two senses: Financial leverage & Operating Leverage
Financial leverage: The effect which the use of debt funds produces on returns is called
financial leverage.

Operating leverage: Operating leverage refers to the use of fixed costs in the operation of the
firm. A firm has a high degree of operating leverage if it employs a greater amount of fixed
costs. The degree of operating leverage may be defined as the percentage change in profit
resulting from a percentage change in sales. This can be expressed as:

= Percent Change in Profit/Percent Change in Sales

The degree of financial leverage is defined as the percent change in earnings available to
common shareholders that is associated with a given percentage change in EBIT. Thus,
operating leverage affects EBIT while financial leverage affects earnings after interest and taxes
the earnings available to equity shareholders. For this reason operating leverage is sometimes
referred to as first stage leverage and financial leverage as second stage leverage. Therefore, if a
firm uses a considerable amount of both operating leverage and financial leverage even small
changes in the level of sales will produce wide fluctuations in earnings per share (EPS). The
combined effect of both these types of leverages is after called total leverage which, is closely
tied to the firm’s total risk.

MB0046 -Marketing Management

Assignment Set - 1

Q.1 ]a. Explain the different micro-environmental forces

with examples.

Forces in the micro environment

1 The Company

Remember, in the previous unit we discussed about marketing mix and

marketing plan. Safe Express, a leader in the supply chain management
solution wants to hold its number one position in the US $ 90 billion Indian
logistics market. The company plans to expand its service areas in the
coming months. To meet the targets of the marketing plan, other
departments of safe express also expanding their horizon. The Company is
coming out with logistics parks in different cities; plans to hold seven million
square feet of warehousing capacity in the next three years and invest Rs 10
billion in three years to meet those targets. The above example shows that
the company’s marketing plan should be supported by the other functional
departments also.

2 Intermediaries

Marketing intermediaries: These are firms which distribute and sell the
goods of the company to the consumer.

Marketing intermediaries play an important role in the distribution, selling

and promoting the goods and services. Stocking and delivering, bulk
breaking, and selling the goods and services to customer are some of the
major functions carried out by the middlemen. Retailers, wholesalers,
agents, brokers, jobbers and carry forward agents are few of the
intermediaries. Retailers are final link between the company and the
customers. Their role in the marketing of product is increasing every day.

3 Publics

These are microenvironment groups, which help a company to generate the

financial resources, creating the image, examining the companies’ policy
and developing the attitude towards the product.

We can identify six types of publics

1. Financial publics influence the company’s ability to obtain funds. For

example, Banks, investment houses and stockholders are the major financial
publics.

2. Media publics carry news and features about the company e.g. Deccan
Herald

3. Advertisement regulation agencies, telecom regulation agency( TRAI),

and insurance regulation agency(IRDA) of the government

4. Citizen action groups: Formed by the consumer or environmental

groups. For example, people for ethical treatment of animals (PETA) or
Greenpeace.

5. General publics: a company should be concerned towards general

publics’ attitude towards its products and services.

6. Internal publics: Employees who help in creating proper image for the
company through word of mouth.

4 Competitors

A company should monitor its immediate competitors as its sale will be

affected by the nature and intensity of the competitors. The sale of Coca
cola will be affected by Pepsi cola, or Britannia cheese by Amul cheese.
Michael Porter, the author of Competitive Advantage of Nations suggested
that, in addition to direct competition, companies should also consider
competition from substitutes. In addition to existing competitors, the
potential competitors should also be anticipated. Competition may arise
from

a. Small firms with low overheads producing duplicates.

b. Firms which diversify into certain products by merely being in the
particular industry for e.g. Pepsi entered the snacks sector competing with
pure snack producers like Haldiram.

c. Firms which expand in the same vertical for e.g. Godrej which
manufactured office furniture and steel cupboards went on to the entire
range of home furniture thereby giving competition to pure home furniture
makers.

How do companies or enterprises survive and grow under the above

circumstances. While we shall study this in detail later, a simple step could
be that the product should be positioned differently and the company should
be able to provide better services.

5 Suppliers

There are many kinds of suppliers to an enterprise or an institution. There

are typically, raw material suppliers, energy and fuel suppliers, labour
suppliers, office item suppliers and so on.

Suppliers are the first link in the entire supply chain of the company. Hence
any problems or cost escalation in this stage will have direct effect on the
company. Many companies adopted supplier relation management system
to manage them well. Suppliers are a source of competition to firms today.
For a large retail store like Reliance Retail or Big Bazaar the suppliers play
the most significant role in both cost and time. Timely supplies reduce
stocking of goods and blocking of space, at the same time meet customer
requirements.

In a globalised scenario suppliers are even more important as competition

goes up manifold! The Tamil Nadu State Electricity Board imports coal from
New Zealand despite huge coal reserves in India. For Volvo, India is a
manufacturing hub.

6 Customers

A company may sell their products directly to the customer or use marketing
intermediaries to reach them. Direct or indirect marketing depends on what
type of markets Company serves. Generally we can divide the markets into
five different categories. They are

a. Consumer market.

b. Business market

c. Reseller market
d. Government market and

e. International market

You will come to know about these five different markets from the following
example.

MRF, a tyre company sells its product directly to consumer (in case of
urgency, customer purchases directly from showroom) i.e. operates in
consumer market. It operates in business markets by selling tyres to
companies like Maruti Udyog limited. MRF also sells TYREs to BMTC and
KSRTC, transport organizations of Karnataka government. If MRF sells tyres
in African or American countries then it is operating in the international
market. If MRF buys the old tyres, retreads it and sells it to the consumer at
a profit then company is operating in the reseller market.

b. Mention the different ad appeals with suitable

examples. (4 marks)

The different ad appeals-

A)Emotional appeal:
Positive emotional appeal or negative emotional appeals are strong tools
used to intensify the purchasing activity of the customer. Positive emotions
like love, pride, joy and humor are used in the message. Following are the
advertisement where such attributes of positive emotions used.

e.g. BMW fastest saloon car in the world- pride

e.g. Fevicol – humor
e.g. Wheel- love.

The negative emotions like fear guilt and shame are also used in the
advertisement to attract the customer.

e.g. NIIT- if you are not studying at NIIT you are missing something- guilt
e.g. Rexona deodorant – shame

B)Rational appeals:
The rational appeals highlight on the desired benefits about the products.
They highlight quality, economy value or performance of the product.

e.g. Dabur Amla – value appeal ( long Hair)

e.g. Lakme brilliance- Quality products.
e.g. Reliance India mobile- performance( works even in flood situations)
e.g. Reliance Infocom- Like the first three, the mobile phone must come to
me as a necessity and not as a luxury- economy

C)Moral appeal:
These are concerned towards public health or environment or social
responsibility.

e.g. Shell lubricants show its commitment towards environment in their

advertisements.

Q.2 What are the different market entry strategies if a

company wants to enter international markets?

Organizations that plan to go for international marketing should know the

answers for some basic questions like – a. In how many countries would the
company like to operate? b. What are the types of countries it plans to
enter?That’s why companies evaluate each country against the market size,
market growth, and cost of doing business, competitive advantage and risk
level.

Checklist for country evaluation

The Characteristics, weightages and score should be checked.

1. Political rights.
2. Civil liberties.
3. Control of corruption.
4. Government effectiveness.
5. Rule of law or legal issues.
6. Health expenditure.
7. Education expenditure.
8. Regulatory quality.
9. Cost of starting a business.
10. Days to start a business.
11. Trade policy.
12. Inflation.
13. Fiscal policy.
14. Consumption patterns.
15. Competition.

International Market Entry Strategies

Once the market is found to be attractive, companies should decide how to

enter this market. Companies can enter the international market by
adoptingany one of the following strategies. They are
a. Exporting

b. Licensing

c. Contract manufacturing

d. Management contract

e. Joint ownership

f. Direct investment

Exporting is the technique of selling the goods produced in the domestic

country in a foreign country with some modifications. For example, Gokaldas
textiles export the cloth to different countries from India. Exporting may be
indirect or direct. In case of indirect exporting, company works with
independent international marketing intermediaries. This is cost effective
and less risky too. Direct exporting is the technique in which organization
exports the goods on its own by taking all the risks. Maruti Udyog Limited,
India’s leading car manufacturer exports its cars on its own. Company can
also set up overseas branches to sell their products. Adani Exports, another
leading exporter from India has international office in Singapore.

Licensing: According to Philip Kotler, licensing is a method of entering a

foreign market in which the company enters into an agreement with a
license in the foreign market, offering the right to use a manufacturing
process, trademark, patent, or other item of value for a fee or royalty. For
example, Torrent Pharmaceuticals has license to sell the cardiovascular
drugs of Chinese manufacturer Tasly. Licensing may cause some problems
to the parent company. Licensee may violate the agreement and can use the
technology of the parent company.

Contract manufacturing: Company enters the international market with a

tie up between manufacturer to produce the product or the service. For
example, Gigabyte Technology has contract manufacturing agreement with
D- link India to produce and sell their mother boards. Another significant
manufacturer is TVS Electronics; it produces key boards in its own name as
well as for other companies too.

Management contracting: In this case, a company enters the

international market by providing the know how of the product to the
domestic manufacturer. The capital, marketing and other activities are
carried out by the local manufacturer, hence it is less risky too.

Joint ownership: A form of joint venture in which an international company

invests equally with a domestic manufacturer. Therefore it also has equal
right in the controlling operations. For example, Barbara, a lingerie
manufacturer has joint venture with Gokaldas Images in India.

Direct Investment: In this method of international market entry, Company

invests in manufacturing or assembling. The company may enjoy the low
cost advantages of that country. Many manufacturing firms invested directly
in the Chinese market to get its low cost advantage. Some governments
provide incentives and tax benefits to the company which manufactures the
product in their country. There is government restriction in some countries
to opt only for direct investment, as it produces the jobs to the local people.
This mode also depends on the country attractiveness. It may become risky
if the market matures or unstable government exists.

Q.3.a. State the meaning of Product life cycle and explain

the different stages involved in it. (8 marks)

Meaning of Product Life Cycle: It means a product has to go through the

various stages since its inception and till it completely fades out from the
market. The following graph represents the PLC curve and the 5 stages that
it has to undergo

The product which is introduced into the market will undergo some
modifications over the period. Its sales also fluctuate. Therefore a marketer
will be interested in finding out how sales changes over a period and what
strategies are best suited at that point. A product life cycle can be graphed
by plotting aggregate sales volume for a product category over time.
Generally the curve resembles a bell shaped curve. We can obtain style,
fashion or fad style of product life cycles also.
Product life cycle (bell shaped curve)

According to PLC, a product passes through five stages which are as follows:

1. Product development stage: In this stage company identifies the viable

idea and develops it. Even if sales in this stage are nil it requires huge
research and development budget. Therefore company incurs losses at this
stage. For example, TATA Docomo before entering the cellular services
market had done research and found that calls were charged for minutes
rather than seconds.

2. Introduction stage: Company introduces the product into the market. As

the product is new to the market, consumer awareness is usually very low.
Here company adopts heavy sales promotion and product awareness
programs. The cost of product is very high and sales are very low. At this
juncture the company charges high price to the customers. For example,
TATA Docomo has entered into cellular services initially through the
Billboards.

3. Growth stage: Company gets experience over the period and now tries to
get the maximum market share (takes ‘first mover’ advantage). Sales will
grow rapidly, resulting in lesser cost and better profit. Company reduces the
price of the product and offers varieties and values in it. It focuses on
building better distribution network and pushes the product through it.
Therefore company needs less sales promotion. There will be increase in
Competition and the company is forced to keep a tab on its competitors. For
example, TATA Docomo has entered into the growth stage by aggressively
advertising on Television and other mediums and at the same time giving
competition to the existing players.

4. Maturity stage: In this stage, the product has already established itself in
the market. These are the characteristics of this stage – a. Peak sales.b. Low
cost per customer. c. High profits.d. Competition based pricinge.
Communicating the product differentiation (or USP) to consumers.f.
Improving supply chain efficiency.g. Defend the market share h. Industry
experiences consolidation.
5. Decline stage: In this stage, product sales and profit decline. Company
should phase out weak items from their product mix and may even lower the
prices of the existing products. The advertisement budget of the company
also comes down and the company may struggle to meet its costs. For
example, VCR’s have been replaced with DVD players and so VCR entered
into the decline stage and is almost out of the market.

Other product life cycles:

1. Style: A style is a basic and distinctive mode of expression that appears

in the study of human behavior. For example, style is evident in homes, art,
accessories and clothing. Once the style is invented it will be there for a
longer period.

2. Fashion: Currently accepted or popular style in a given field. For

example, cargo jeans are now the fashion with college going students.
Fashion changes with time.

3. Fad: A fashion that enters quickly is adopted with great zeal, peaks early,
and declines very fast. For example, when pager was introduced, everybody
wanted to have the product. But when people found mobiles as alternative,
the demand for pager went down drastically.

b. Define Customer Relationship Management. (2 marks)

Berry defines CRM as “attracting, maintaining and – in multi-service

organizations – enhancing customer relationships.”

Berry and Parasuraman define CRM as “attracting, developing and retaining

customer relationships.”

In Industrial Marketing, Jackson defines CRM as “marketing oriented toward

strong, lasting relationships with individual accounts.”

Doyle and Roth define CRMS as “the goal of relationship selling is to earn the
position of preferred supplier by developing trust in key accounts over a
period of time.”

The sequence of activities for performing relationship marketing would

include developing core services to build customer relationship,
customization of relationship, augmenting core services with extra benefits,
and enhancing customer loyalty and fine-tuning internal marketing to
promote external marketing success.
Christopher considers relationship marketing as “a tool to turn current and
new customers into regularly purchasing clients and then progressively
moving them through being strong supporters of the company and its
products to finally being active and vocal advocates for the company.”

Relationship marketing is in essence “selling by using psychological rather

than economic inducements to attract and retain customers. It seeks to
personalize and appeal to the hearts, minds and purses of the mass
consumers.”- James J. Lynch

From the above definitions, it could be concluded that Customer Relationship Management
refers to all marketing activities directed towards establishing, developing, and sustaining long
lasting, trusting, win-win, beneficial and successful relational exchanges between the focal firm
and all its supporting key stakeholders.

Q.4.
a. You are a sales manager in ABC firm. You have taken
some interviews and shortlisted a few candidates. How
will you select the right candidate for the sales job? (5
marks)

1. Create an Ideal Salesperson Profile. It has always surprised me how

many companies have fully documented profiles of their ideal client. Yet, few
have a profile of their ideal salesperson. How can you screen when you don't
know what you are screening for?

This profile should be fully detailed. Some of the areas to address in the
profile are the experience you expect that candidate to already have, the
skills that the candidate should already possess and the skills you are NOT
willing to teach.

The lack of a fully-defined profile of the ideal salesperson is the most

common cause of bad sales marriages. It is also the major point of
frustration between sales managers and recruiters. Recruiters often tell me
that they feel they are throwing darts while blindfolded because they have
so little detail about the desired profile.

2. Always be recruiting. In sales, there is an old expression: "The toughest

time to make a sale is when you really need one." The same holds true for
recruiting. When a slot is open on the sales team, it becomes an "all hands
on deck" exercise to fill it. While the seat is open, revenue targets are in
jeopardy. This leads many to forget the profile of the ideal salesperson
profile in the interest of filling a seat. Playing this forward a bit, the seat
becomes vacant again a short time later when either side determines that it
is not a good fit.

Sales recruiting is a year-round exercise. The best sales forces are always on
the look out for strong sales talent. Find a company that identifies a strong
candidate that meets their profile who wouldn't find a way to hire this
individual. It is a rarity to say the least. Sales teams have turnover either
driven by the company or the employee. It is best to have a candidate
portfolio at the ready than to begin a process of surfacing candidates when a
seat is open. Poor hiring decisions are made out of desperation to fill a seat.
The open seat is a cost to the company every day it is unfilled. Yet, the cost
is more painful if the seat is filled by someone who doesn’t fit.

3. Practice Reverse Interviewing. Since the intent of the process is for

both sides to be able to determine if a marriage should be formulated, a
wonderful technique is reverse interviewing—an interview performed by a
member of the sales team who would be a peer if the candidate was hired. It
is important that the individual(s) selected to participate in this step are
loyal to the company, knowledgeable and make a favorable impression.

However, unlike traditional interviews, the "interviewer" does not ask any
questions of the candidate (as you know, it is very easy to get yourself in hot
water if illegal questions are asked). Thus, you don't want untrained people
asking questions. Rather, this "questionless" exercise has two different
purposes. The first is to provide the candidate with an opportunity to ask
questions of someone who would be their peer if they were to be hired. In
essence, it is a way for them to get a picture of a day in the life of this job.
The second purpose is to measure how the candidate prepares for a sales
call.

Afterwards, conduct a debrief with the "reverse interviewer" to see what

questions were asked. Did the candidate take advantage of this opportunity,
bring prepared and insightful questions and write down answers? If they
didn't, what kind of preparation will the candidate do for a sales call? How
interested are they really in this job?

5. Host a Mock Sales Call. What better way to see if someone fits into
your company's selling environment than to put them right in it? To do this
effectively, you need to create a scenario for the candidate. I've found it
most beneficial to give the candidate the scenario a day ahead of time so
they can prepare. They should be provided with the same amount of
information a sales person in your company normally has before making an
initial sales call.

Those members of your company who participate in the exercise should be

somewhat scripted. I say "somewhat" because you don't want it to be so dry
that it is unrealistic, but without any scripting it can be hard to stay in
character.

The last piece you need to do this well is a score sheet. Know what you are
looking to measure in the process and score accordingly. Can they conduct a
thorough needs analysis? Did they identify the challenges faced by this
prospect? Would you buy from them?

6. Use Online Assessment Testing Wisely. There are a myriad of tools

that are very helpful in the screening process for both personality and skill.
However, few, if any, of the online assessment companies suggest that their
tool should be used to make a hiring decision. The most appropriate
application is to treat it as an additional data point in the sales talent
screening program.

Linda Moeller, product director of Employee Continuum, has seen companies

use this great tool incorrectly. "We have seen many organizations fail to take
the context of an organization into account when deciding the most
appropriate assessment to use. For example, many organizations assume
that implementing a sales assessment will guarantee them improved sales
performers. This is not necessarily the case. For example, the personality
characteristics required for a sales person selling office supplies to
purchasing agents are very different than those required for a salesperson
selling everything needed for a dentist office. In order to be successful, an
organization needs to consider the type of relationship they have with their
clientele and the competencies that will make these relationships
successful," she says.

b. As a consumer, what are the steps you will undertake

before you decide to buy a car? (5 marks)

The steps undertaken before deciding to buy a car-

1. Need recognition: customer posses two type of stimuli’ at this juncture.

One is driven by the internal stimuli and another is external stimuli. The
examples of internal stimuli are customer’s desire, attitude or perception
and external stimuli are advertising etc. From both stimuli customers
understand the need for the product. Here marketer should understand what
customers needs have that drew customers towards the product and should
highlight those in the communication strategy.
2. Information search: In this stage customer wants to find out the
information about the product, place, price and point of purchase. Customer
collects the information from different sources like

a. Personal sources: Family, friends and neighbors

b. Commercial sources: Advertising, sales people, dealers, packaging and

displays.

c. Public sources: mass media and consumer rating agencies.

d. Experiential sources: Demonstration, examining the product.

In this stage marketer should give detailed information about the product.
The communication should highlight the attributes and advantages of the
product in this stage so that he created the positive image about the
product.

3. Evaluation of alternatives: After collecting the information, consumers

arrive at some conclusion about the product. In this stage he will compare
different brands on set parameters which he or she thinks required in the
product. The evaluation process varies from person to person. In general
Indian consumer evaluate on the following parameters

a. Price

b. Features

c. Availability

d. Quality

e. Durability

At this stage marketer should provide comparative advertisements to

evaluate the different brands. The advertisement should be different for
different segments and highlight the attribute according to the segment.

4. Purchase decision

In this stage consumer buy the most preferred brand. In India affordability
plays an important role at this stage. Organizations’ bring many varieties of
the products to cater to the needs of customers.

5. Post purchase behavior

After purchasing the product the consumer will experience some level of satisfaction and
dissatisfaction. The consumer will also engage in post purchase actions and product uses of
interest to the marketer. The marketer’s job does not end when the product is bought but
continues into the post purchase period. Customer would like to see the performance of the
product as he perceived before purchase. If the performance of the product is not as he expected
then he develops dissatisfactions. Marketer should keep an eye on how consumer uses and
disposes the product. In some durable goods Indian consumer want resale value also. Many
automobile brands that were not able to get resale value lost their market positions.

Q. 5 a. What are the features of Business markets? How is it different from consumer
markets? (5 marks)

Features or Characteristics of Business Markets

Following are some of the unique features of business markets where large
establishments purchase the required goods and services from other
businesses. Such B2B operations determine the organizations as buyers and
those organizations who supply the various requirements will be the sellers
or suppliers or service providers.

1. Few but bulk Buyers: The no. of buyers is few but they buy in large
quantity. For example, major airlines buy the necessary equipments from
the aircraft manufacturers

2. Geographical concentration of buyers: Buyers are geographically

concentrated. For example, shipping industries are located on the east and
west coasts of India than in any other places.

3. Variable demand: The nature of demand is fluctuating because the

demand is basically a derived one. Based on the requirements of the
consumer markets, organizations buy the goods and make the finished
goods available in the market for final consumption. Larger the consumer
demand, larger will be the organizational buying. For example, mobiles are
being used by a large population and so cellular companies have to meet
this rising demand.

4. Inelastic demand: The demand is also inelastic because organizations

cannot make rapid changes in the production structure and so prices remain
constant in the short-term. For example, Shoe manufacturers will not buy
much leather if the price of leather is less neither will they buy less leather if
the price increases.

5. Systematic purchasing: The purchasing activity is directly between the

buyer and supplier organization which means there are no or very few
middlemen involved. Purchasing activity is usually undertaken by purchase
departments based on a proper structure and through various mechanisms
like having purchase requisitions from other sections, inviting tenders and
sending invoices from the suppliers, purchasing agreements or contracts
with the key suppliers, renewing agreements etc. For example, Reliance
Fresh has regular contracts with the agricultural producers for smooth
supply of fresh fruits and vegetables.

6. Multiple buying influences: there will be several parties involved in

deciding about the purchases because organizations will have several
departments and units functioning under it with different requirements. So,
unless they have the proper resources to work with there will be problems in
the departments. For example, purchase department in a Hospital must be
aware about the specific requirements in the clinical wards, operation
theaters, labs, etc.

7. Reciprocation: This means that when an organization buys goods from

another organization then the supplier organization also might need certain
other goods that are produced by the buyer organization. For example, a
stationery supplier will supply the necessary stationeries to the paper
manufacturer who in turn provides papers to the supplier.

8. Lease agreements: Most organizations take on lease the expensive

equipments required by them rather than buy it. So, in this way, they reduce
cost, get better service and the lessor or one who provides the equipments
will also profit from the rent or lease charges. For example, TATA provides
the transport trucks to other organizations on lease.

b. List out the 5 important requisites of an effective

segmentation by giving suitable examples. (5 marks)

Requisites of Effective Segmentation

1. Measurable and Obtainable: The size, profile and other relevant

characteristics of the segment must be measurable and obtainable in terms
of data. If the information is not obtainable, no segmentation can be carried
out. For example, Census of India provides the data on migration and
education level, but does not specify how many of the migrated employees
are educated and if educated how many are in white collared jobs. If a
company wants to target white color collared employees who are migrated
to particular city, it will not able to measure the same. .

2. Substantial: The segment should be large enough to be profitable. For

consumer markets, the small segment might disproportionably increase the
cost and hence products are priced too high. For example, when the cellular
services started in India cost of the incoming calls and outgoing calls were
charged at Rs 12/minute. As the number of subscribers grew, incoming calls
became free. Further growth of subscribers resulted in lowering tariffs for
outgoing calls to the lowest level in the world.

3. Accessible: The segment should be accessible through existing network

of people at an affordable cost. For example, Majority of the rural population
is still not able to access the internet due to the high cost and non-
availability of connections and bandwidth.

4. Differentiable: The segments should be different from each other and

may require different 4Ps and programs. For example, Life Insurance
Corporation of India needs separate marketing programs to sell their
insurance plans, unit plans, pension plans and group schemes

5. Actionable: The segments which a company wishes to pursue must be actionable in the sense
that there should be sufficient finance, personnel, and capability to take them all.

Q. 6. Explain briefly what are the several processes

involved in new product development. (10 marks)

New Product Development

New products are essential for existing firms to keep the momentum and for
new firms they provide the differentiation. New product doesn’t mean that it
is absolutely new to the world. It may be a modification, or offered in a new
market, or differentiated from existing products. Therefore it is necessary to
understand the concept of new products.

Meaning of New Products:

a. They are really innovative. For example, Google’s Orkut, a networking site
which revolutionized social networking. In this site people can meet like
minded people; they can form their own groups, share photos, comments
and many more.

b. They are very different from the others: Haier launches path-breaking 4-
Door Refrigerators first time in India

c. They are imitative; these products are not new to the market but new to
the company. For example, Cavin Kare launched Ruchi pickles. This product
is new to Cavin Kare but not to the market.

New product development process:

Stage 1 – Idea generation: New product idea can be generated either

from the internal sources or external sources. The internal sources include
employees of the organization and data collected from the market. The
external source includes customers, competitors and supply chain members.
For example, Ingersoll Rand welcomes new ideas from the General public

Stage 2-Idea screening: Organization may have various ideas but it

should find out which of these ideas can be translated into concepts. In an
interview to Times of India, Mr. Ratan Tata, chairman TATA group discussed
how his idea saw many changes from the basic version. He told that he
wanted to develop car with scooter engine, plastic doors etc… But when he
unveiled the car, there were many changes in the product. This shows that
initial idea will be changed on the basis of market requirements.

Stage 3 – Concept development: the main feature or the specific desire

that it caters to or the basic appeal of the product is created or designed in
the concept development.

Concepts used for Tata Nano car are -

Concept I: Low-end ‘rural car,’ probably without doors or windows and with
plastic curtains that rolled down, a four-wheel version of the auto-rickshaw

Concept II: A car made by engineering plastics and new materials, and using
new technology like aerospace adhesives instead of welding.

Concept III: Indigenous, in-house car which meets all the environment
standards

Stage 4 – Concept testing: At this stage concept is tested with the group
of target customers. If any changes are required in the concept or the
message it will be done during this stage. Also the effectiveness is tested on
a minor scale. If the concept meets the specific requirements, then it will be
accepted.

Stage 5 Marketing strategy development: The marketing strategy

development involves three parts. The first part focuses on target market,
sales, market share and profit goals. TATA’s initial business plan consisted
sales of 2 lakhs cars per annum. The second part involves product price,
distribution and marketing budget strategies. TATA’s fixed Rs 1 lakhs as the
car price, and finding self employed persons who work like agent to
distribute the cars. The final part contains marketing mix strategy and profit
goals.

Stage 6 – Business analysis: it is the analysis of sales, costs and profits

estimated for a new product and to find out whether these align with the
company mission and objectives.
Stage 7 – Product development: during this stage, product is made to
undergo further improvements, new features or improvised versions are
added to the product. There is also scope for innovation and using the latest
technology into the product.

Stage 8 – Test marketing: is the most crucial stage for the testing
product’s performance and its future in the market. There are certain cases
where product has failed in the test marketing and had to be withdrawn.

– The product is introduced into the realistic market

– The 4P’s of marketing are tested.

– The cost of test marketing varies with the type of product.

Stage 9 – Commercialization: In this stage product is completely placed in the open market and
aggressive communication program accompanied with promotion activities is carried out to
support it.

MB0047 – MIS
Assignment Set - 1

Q1.What is MIS? Define the characteristics of MIS? What are the basic Functions of MIS?
Give some Disadvantage of MIS?

Answer:

MIS is popularly known as the Management Information System. MIS is considered as one such
method of generating information which is used by management of organization for decision
Making, control of activities, operations etc. During the period 1940 to 1960 computers were
commercially used for census and payroll work. This involved large amount of data and its
processing. Since then the commercial application exceeded the scientific applications for which
the computer were mainly intended for. MIS is an information System which helps in providing
the management of an organization with information which is used by management for decision
making.

Management information systems (MIS)

Management information systems (MIS) are a combination of hardware and software used to
process information automatically. Commonly, MIS are used within organizations to allow
many individuals to access and modify information. In most situations, the management
information system mainly operates behind the scenes, and the user community is rarely
involved or even aware of the processes that are handled by the system.
A computer system used to process orders for a business could be considered a management
information system because it is assisting users in automating processes related to orders. Other
examples of modern management information systems are websites that process transactions for
an organization or even those that serve support requests to users. A simple example of a
management information system might be the support website for a product, because it
automatically returns information to the end user after some initial input is provided.

MIS characteristics

• It supports transaction handling and record keeping.

• It is also called as integrated database Management System which supports in major
functional areas.
• It provides operational, tactical, and strategic level managers with east access to
timely but, for the most, structured information.
• It supports decision –making function which is a vital role of MIS.
• It is flexible which is needed to adapt to the changing needs of the organization.
• It promotes security system by providing only access to authorized users.
• MIS not only provides statistical and data analysis but also works on the basis on
MBO (management by objectives). MIS is successfully used for measuring
performance and making necessary change in the organizational plans and
procedures. It helps to build relevant and measurable objectives, monitor results, and
send alerts.
• Coordination: MIS provides integrated information so that all the departments are
aware of the problem and requirements of the other departments. This helps in equal
interaction of the different centers and connects decision centers of the organization.
• Duplication of data is reduced since data is stored in the central part and same data
can be used by all the related departments.
• MIS eliminates redundant data.
• It helps in maintaining consistency of data. It is divided into subsystems. Handlings
with small systems are much easier than an entire system. This helps in giving easy
access of data, accuracy and better information production.
• MIS assembles, process, stores, Retrieves, evaluates and disseminates the
information.

Function of MIS

The main functions of MIS are:

• Data Processing: Gathering, storage, transmission, processing and getting output of the
data. Making the data into information is a major task.
• Prediction: Prediction is based on the historical data by applying the prior knowledge
methodology by using modern mathematics, statistics or simulation. Prior knowledge
varies on the application and with different departments.
• Planning: Planning reports are produced based on the enterprise restriction on the
companies and helps in planning each functional department to work reasonably.
 • Control: MIS helps in monitoring the operations and inspects the plans. It consists of
differences between operation and plan with respect to data belonging to different
functional department. It controls the timely action of the plans and analyzes the reasons
for the differences between the operations and plan. Thereby helps managers to
accomplish their decision making task successfully.
• Assistance: It stores the related problems and frequently used information to apply them
for relative economic benefits. Through this it can derive instant answers of the related
problem.
• Database: This is the most important function of MIS. All the information is needs a
storage space which can be accessed without causing any anomalies in the data.
Integrated Database avoids the duplication of data and thereby reduces redundancy and
hence consistency will be increased.
• The major function of MIS lies in application of the above functions to support the
managers and the executives in the organization in decision-making.

MIS Function

Disadvantages of MIS

The following are some of the disadvantages of MIS:

• MIS is highly sensitive: MIS is very helpful in maintaining logging information of an

authorized user. This needs to monitor constantly.
 • Quality of outputs is governed by quality of inputs.
• MIS budgeting: There is difficulty in maintaining indirect cost and overheads. Capturing
the actual cost needs to have an accrual system having true costs of outputs which is
extremely difficult. It has been difficult to establish definite findings.
• MIS is not flexible to update itself for the changes.
• The changes in the decision of top level management decrease its effectiveness.
• Information accountability is based on the qualitative factors and the factors like
morality, confidence or attitude will not have any base.

2. Explain Knowledge based system? Explain DSS and OLAP with example?

Answer:

Knowledge based system are the systems based on knowledge base. Knowledge base is the
database maintained for knowledge management which provides the means of data collections,
organization and retrieval of knowledge. The knowledge management manages the domain
where it creates and enables organization for adoption of insights and experiences.

There are two types of knowledge bases.

a. Machine readable knowledge bases: The knowledge base helps the computer to process
through. It makes the data in the computer readable code which makes the operator to perform
easier. Such information sare used by semantic web. Semantic web is a web that will make a
description of the system that a system can understand.

b. Human readable knowledge bases: They are designed to help people to retrieve knowledge.
The information need to be processed by the reader. The reader can access the information and
synthesize their own.

Knowledge based system refers to a system of data and information used for decision making.
The system is automated to work on the knowledge based data and information required in a
particular domain of management activity. The processing is done based on the past decisions
taken under suitable conditions. Decision making is based on the fact that the condition is similar
to the past situation hence the decision is also is similar.

Examples of KBS are intelligent systems, robotics, neural networks etc.

Decision Support Systems (DSS)

DSS is an interactive computer based system designed to help the decision makers to use all l the
resources available and make use in the decision making. In management many a time problems
arise out of situations for which simple solution may not be possible. To solve such problems
you may have to use complex theories. The models that would be required to solve such
problems may have to be identified. DSS requires a lot of managerial abilities and managers
judgment.
You may gather and present the following information by using decision support application:

• Accessing all of your current information assets, including legacy and relational data
sources, cubes, data warehouses, and data marts
• Comparative sales figures between one week and the next
• Projected revenue figures based on new product sales assumptions
• The consequences of different decision alternatives, given past experience in a context
that is described.

Manager may sometimes find it difficult to solve such problems. E.g. – In a sales problem if
there is multiple decision variables modeled as a simple linear problem but having multiple
optima, it becomes difficult to take a decision. Since any of the multiple optima would give
optimum results. But the strategy to select the one most suitable under conditions prevailing in
the market, requires skills beyond the model.

It would take some trials to select a best strategy. Under such circumstances it would be easy to
take decision if a ready system of databases of various market conditions and corresponding
appropriate decision is available. A system which consists of database pertaining to decision
making based on certain rules is known as decision support system. It is a flexible system which
can be customized to suit the organization needs. It can work in the interactive mode in order to
enable managers to take quick decisions. You can consider decision support systems as the best
when it includes high-level summary reports or charts and allow the user to drill down for more
detailed information.

A DSS has the capability to update its decision database. Whenever manager feels that a
particular decision is unique and not available in the system, the manager can chose to update
the database with such decisions. This will strengthen the DSS to take decisions in future.

There is no scope for errors in decision making when such systems are used as aid to decision
making. DSS is a consistent decision making system. It can be used to generate reports of
various lever management activities. It is capable of performing mathematical calculations and
logical calculation depending upon the model adopted to solve the problem. You can summarize
the benefits of DSS into following:

• Improves personal efficiency

• Expedites problem solving
• Facilitates interpersonal communication
• Promotes learning or training
• Increases organizational control
• Generates new evidence in support of a decision
• Creates a competitive advantage over competition
• Encourages exploration and discovery on the part of the decision maker
• Reveals new approaches to thinking about the problem space

Online Analytical Processing (OLAP)

OLAP refers to a system in which there are predefined multiple instances of various modules
used in business applications. Any input to such a system results in verification of the facts with
respect to the available instances.

A nearest match is found analytically and the results displayed form the database. The output is
sent only after thorough verification of the input facts fed to the system. The system goes
through a series of multiple checks of the various parameters used in business decision making.
OLAP is also referred to as a multi dimensional analytical model. Many big companies use
OLAP to get good returns in business.

The querying process of the OLAP is very strong. It helps the management take decisions like
which month would be appropriate to launch a product in the market, what should be the
production quantity to maximize the returns, what should be the stocking policy in order to
minimize the wastage etc.

A model of OLAP may be well represented in the form of a 3D box. There are six faces of the
box. Each adjoining faces with common vertex may be considered to represent the various
parameter of the business situation under consideration. E.g.: Region, Sales & demand, Product
etc.

Model of OLAP

3. What are Value Chain Analysis & describe its significance in MIS? Explain what is
meant by BPR? What is its significance? How Data warehousing & Data Mining is useful
in terms of MIS?

Answer:

Value Chain
Every firm performs a set of activities that helps in designing, producing, marketing, delivering
and supporting its products. These activities form a process. At every stage of the process, the
firm adds value. The chain of activities from raw material procurement to the after-sales
service is called the value chain. It identifies nine strategic activities, i.e. five primary and four
support activities, to create value, as shown in below figure. Primary activities are the activities
that are involved in creating, distributing, selling and providing after sales assistance for a
product. Primary activities are those activities that are involved in the physical creation of the
product,

The Generic Value Chain

Why it is important MIS:

Value-addition activities like production, marketing delivery, and servicing of the product. These
activities are connected in a chain. Support activities include those providing purchased inputs,
technology, human resources, or overall infrastructure functions to support the primary
activities.

It is possible to reduce the transaction cost by proper coordination of all the activities. It should
be possible to gather better information for various controls and also replace the same by less
costlier activities. It will also be possible to reduce the overall time required to complete an
activity.

Therefore coordination is very important to achieve competitive advantage. For this it is

necessary to manage the value chain as a system rather than as separate parts. An enterprise’s
value chain for competing in a particular industry is embedded in a larger stream of activities.
What Porter termed as ‘value system’, may be referred to as the ‘industry value-chain’.

Business Process Re-engineering (BPR)

The existing system in the organization is totally reexamined and radically modified for
incorporating the latest technology. This process of change for the betterment of the organization
is called as Business process re-engineering. This process is mainly used to modernize and make
the organizations efficient. BPR directly affects the performance. It is used to gain an
understanding the process of business and to understand the process to make it better and re-
designing and thereby improving the system.

BPR is mainly used for change in the work process. Latest software is used and accordingly the
business procedures are modified, so that documents are worked upon more easily and
efficiently. This is known as workflow management.

Importance of BPR

Business process are a group of activities performed by various departments, various

organizations or between individuals that is mainly used for transactions in business. There may
be people who do this transaction or tools. We all do them at one point or another either as a
supplier or customer. You will really appreciate the need of process improvement or change in
the organizations conduct with business if you have ever waited in the queue for a longer time to
purchase 1 kilo of rice from a Public Distribution Shop (PDS-ration shop). The process is called
the check-out process. It is called process because uniform standard system has been maintained
to undertake such a task. The system starts with forming a queue, receiving the needed item form
the shop, getting it billed, payment which involves billing, paying amount and receiving the
receipt of purchase and the process ends up with the exit from the store. It is the transaction
between customer and supplier.

The above activities takes place between the customer and supplier which forms the process
steps this example explains the business process. The business process may be getting admission
to the college and graduating from the college, building house, and implementing new
technology to an organization (Example EDUNXT in SMUDE), etc

A Process can be represented by triangle:

Continuous process
Business process reengineering is a major innovation changing the way organizations conduct
their business. Such changes are often necessary for profitability or even survival.

BPR is employed when major IT projects such as ERP are undertaken. Reengineering involves
changes in structure, organizational culture and processes. Many concepts of BPR changes
organizational structure. Team based organization, mass customization; empowerment and
telecommuting are some of the examples. The support system in any organization plays a
important role in BPR. ES, DSS, AI (discussed later) allows business to be conducted in
different locations, provides flexibility in manufacturing permits quicker delivery to customers
and supports rapid paperless transactions among suppliers, manufacturers and retailers. Expert
systems can enable organizational changes by providing expertise to non experts. It is difficult to
carry out BPR calculations using ordinary programs like spreadsheets etc. Experts make use of
applications with simulations tools for BPR. Reengineering is basically done to achieve cost
reduction, increase in quality, improvement in speed and service. BPR enable a company to
become more competitive in the market. Employees work in team comprising of managers and
engineers to develop a product. This leads to the formation of interdisciplinary teams which can
work better than mere functional teams. The coordination becomes easier and faster results can
be achieved. The entire business process of developing a product gets a new dimension. This has
led to reengineering of much old functional process in organizations.

Data Warehousing
– Data Warehouse is defined as collection of database which is referred as relational database
for the purpose of querying and analysis rather than just transaction processing. Data warehouse
is usually maintained to store heuristic data for future use. Data warehousing is usually used to
generate reports. Integration and separation of data are the two basic features need to be kept in
mind while creating a data warehousing. The main output from data warehouse systems are;
either tabular listings (queries) with minimal formatting or highly formatted "formal" reports on
business activities. This becomes a convenient way to handle the information being generated by
various processes. Data warehouse is an archive of information collected from wide multiple
sources, stored under a unified scheme, at a single site. This data is stored for a long time
permitting the user an access to archived data for years. The data stored and the subsequent
report generated out of a querying process enables decision making quickly. This concept is
useful for big companies having plenty of data on their business processes. Big companies have
bigger problems and complex problems. Decision makers require access to information from all
sources. Setting up queries on individual processes may be tedious and inefficient. Data
warehouse may be considered under such situations.
Data warehouse Architecture

Data ware house is center part of data repository. Data warehousing provides a strategic
approach to all the business. Data warehouse is broadly famous for its characteristics like:

a. Subject oriented: Data warehouse has the ability to analyze the data. The ability to define by
subject matter makes DW subject oriented.

b. Integrated: This resolves the problems of conflicts and inconsistencies existing in the units of
measure.

c. Non volatile: Once the data is entered in the warehouse it shall not change. This characteristics
is very important because after all the purpose of heuristic data is for future use.

d. Time variant: The data warehouse focus on change over time. To discover new trends in
business, analysts need large amount of data which is contrasting to OLTP (Online transaction
Processing) which works on heuristic data.

It is observed that all the companies are profit oriented and also want to exist in the market along
with their competitors. Data warehousing is of strategic value because it enables us to achieve
the former while deftly avoiding the latter. This is the strategic spirit in which we should
understand, implement, and manage data warehousing. A very powerful introduction to a data
warehousing business case said the following:

"The strategic intent of our data warehousing is to enable the business to win in the marketplace
every day, with every customer, and with every purchase. By repositioning our operational data
and combining it with selected foreign data, we will empower our employees so that they can
routinely delight and excite our customers. Through our unique appreciation of the value of our
data assets, we will elevate our data warehouses to the point where they become a compelling
and durable contributor to the sustainable competitive advantage of the business. In this way,
data warehousing will enable the business to impress its attitude on the marketplace and prevail
over its competitors who have already lost."

Have you implemented data warehousing with such a cogent strategic intent? Sun Tzu said:

"Strategy is important to the nation-it is the ground of death and life, the path of survival and
destruction, so it is imperative to examine it. There is a way of survival which helps and
strengthens you; there is a way of destruction which pushes you into oblivion."

So data warehousing is a path to survival that helps and strengthens you. Our strategic
understanding of data warehousing is complete.

BPR uses all these technologies like data bases, data mining, and data warehousing helps the
company to perform a strategic and object oriented performance.

Data Mining

– Data mining is primarily used as a part of information system today, by companies with a
strong consumer focus – retail, financial, communication, and marketing organizations. It
enables these companies to determine relationships among "internal" factors such as price,
product positioning, or staff skills, and "external" factors such as economic indicators,
competition, and customer demographics. And, it enables them to determine the impact on sales,
customer satisfaction, and corporate profits. Finally, it enables them to "drill down" into
summary information to view detail transactional data. With data mining, a retailer could use
point-of-sale records of customer purchases to send targeted promotions based on an individual’s
purchase history. By mining demographic data from comment or warranty cards, the retailer
could develop products and promotions to appeal to specific customer segments.

Data Mining is a collaborative tool which comprises of database systems, statistics, machine
learning, visualization and information science. Based on the data mining approach used,
different techniques form the other discipline can be used such as neural networks, artificial
intelligence, fuzzy logic, knowledge representation, high performance computing and inductive
logic programming.
Data Mining Process

Data mining refers to extracting or mining knowledge from large amount of data. There may be
other terms which refer data mining such as knowledge mining, knowledge extraction,
data/pattern analysis, data archeology, and data dredging. The Knowledge discovery as a process
may consist of following steps:

1. Data Cleaning: It removes noise and inconsistent data.

2. Data integration: It is where multiple data sources are combined.

3. Data selection: Data relevant to the analysis task are retrieved from the database.

4. Data transformation: Data are transformed or consolidated into forms appropriate for mining
by performing summary or aggregation operations, for instance.

5. Data mining: An essential process where intelligent methods are applied in order to extract
data patterns.

6. Pattern evaluation: To identify the truly interesting patterns representing knowledge based on
some interesting measure.

7. Knowledge presentation: Visualization and knowledge representation techniques are used to

present the mined knowledge to the users.

When you look at the above step you will find that data mining is a very important step in
knowledge representation. It interacts with the user for knowledge base.

So it is found that there is necessity of a typical architecture for data mining as a big process.
The architecture of the data mining has the following components:

1. Database, data warehouse and information repository: This is one or a set of databases, data
warehouse, and information repository which can be used for data cleaning and data integration.

2. Database server: This Server is responsible for fetching the relevant data

3. Data mining engine: This helps in accessing the user through applications. It accesses data
from the warehouse with the help of standard data connectivity mechanisms. Usually database
drivers are used to connect the database.

4. Patterns evaluation model: It acquires the data to be evaluated form the database, producing
the pattern edge. This model scans the data. It searches and creates the interesting patterns based
on the thresholds.
5. Graphical user interface: It communicates between the user and the data mining system. It
allows the user to interact with the system and specifies the data mining queries or task.

Data mining is applicable to any kind of information repository. Some of these may be relational
databases, data warehouse, transactional databases, advanced database management systems,
WWW and files. Advance database systems include object oriented databases, object relational
databases, and application oriented databases.

The best example for data mining which is so close to our lives is Google. The success of
Google depends on the use of data mining techniques in the analysis of data in the search engine
to meet your search demand.

4. Explain DFD & Data Dictionary? Explain in detail how the information requirement is
determined for an organization?

Answer:

Data flow diagrams represent the logical flow of data within the system. DFD do not explain
how the processes convert the input data into output. They do not explain how the processing
takes place.

DFD uses few symbols like circles and rectangles connected by arrows to represent data flows.
DFD can easily illustrate relationships among data, flows, external entities an stores. DFD can
also be drawn in increasing levels of detail, starting with a summary high level view and
proceeding o more detailed lower level views.

A number of guidelines should be used in constructing DFD.

• Choose meaningful names for the symbols on the diagram.

• Number the processes consistently. The numbers do not imply the sequence.
• Avoid over complex DFD.
• Make sure the diagrams are balanced.

Data Dictionary
The data dictionary is used to create and store definitions of data, location, format for storage
and other characteristics. The data dictionary can be used to retrieve the definition of data that
has already been used in an application. The data dictionary also stores some of the description
of data structures, such as entities, attributes and relationships. It can also have software to
update itself and to produce reports on its contents and to answer some of the queries.

Information is useful for an Organization in many aspects. It is mainly use for planning
and developing process.

The information needs for the implementation of the business plan should find place in the MIS.
To ensure such an alignment possibility, it is necessary that the business plan – strategic or
otherwise, states the information needs. The information needs are then traced to the source data
and the systems in the organization which generate such a data. The plan of development of the
MIS is linked with the steps of the implementation in a business development plan. The system
of information generation is so planned that strategic information is provided for the strategic
planning, control information is provided for a short term planning and execution. The details of
information are provided to the operations management to assess the status of an activity and to
find ways to make up, if necessary. Once the management needs are translated into information
needs, it is left to the designer to evolve a plan of MIS development and implementation.

While preparing the schedule due consideration is given to the importance of the system in the
overall information requirement. Due regard is also given to logical system development. For
example, it is necessary to develop the accounting system first and then the analysis.

Further, unless the systems are fully developed their integration is not possible. This develop-
ment schedule is to be weighed against the time scale for achieving certain information
requirement linked to a business plan. If these are not fully met, it is necessary to revise the time
schedule and also the development schedule, whenever necessary.

The selection of the architecture, the approach to the information system development and the
choice of hardware and software are the strategic decisions in the design and development of the
MIS in the organization. The organizations which do not care to take proper decisions in these
areas suffer from over-investment, under-utilization and are not able to meet the critical
information requirements.

5. What is ERP? Explain its existence before and its future after? What are the advantages
& Disadvantages of ERP? What is Artificial Intelligence? How is it different from Neural
Networks?

Answer:

Enterprise resource planning (ERP) is a system that integrates all of these functions into a single
system, designed to serve the needs of each different department within the enterprise. ERP is
more of a methodology than a piece of software, although it does incorporate several software
applications, brought together under a single, integrated interface.
ERP (enterprise resource planning) is an industry term for the broad set of activities that helps a
business manage the important parts of its business. The information made available through an
ERP system provides visibility for key performance indicators (KPIs) required for meeting
corporate objectives. ERP software applications can be used to manage product planning, parts
purchasing, inventories, interacting with suppliers, providing customer service, and tracking
orders. ERP can also include application modules for the finance and human resources aspects of
a business. Typically, an ERP system uses or is integrated with a relational database system.

The deployment of an ERP system can involve considerable business process analysis, employee
retraining, and new work procedures.

ERP Before and After

Before

Prior to the concept of ERP systems, departments within an organization (for example, the
human resources (HR)) department, the payroll department, and the financial department) would
have their own computer systems. The HR computer system (often called HRMS or HRIS)
would typically contain information on the department, reporting structure, and personal details
of employees. The payroll department would typically calculate and store paycheck information.
The financial department would typically store financial transactions for the organization. Each
system would have to rely on a set of common data to communicate with each other. For the
HRIS to send salary information to the payroll system, an employee number would need to be
assigned and remain static between the two systems to accurately identify an employee. The
financial system was not interested in the employee-level data, but only in the payouts made by
the payroll systems, such as the tax payments to various authorities, payments for employee
benefits to providers, and so on. This provided complications. For instance, a person could not
be paid in the payroll system without an employee number.

Advantages and Disadvantages

Advantages – In the absence of an ERP system, a large manufacturer may find itself with many
software applications that do not talk to each other and do not effectively interface. Tasks that
need to interface with one another may involve:

• A totally integrated system

• The ability to streamline different processes and workflows
• The ability to easily share data across various departments in an organization
• Improved efficiency and productivity levels
• Better tracking and forecasting
• Lower costs
• Improved customer service

Change how a product is made, in the engineering details, and that is how it will now be made.
Effective dates can be used to control when the switch over will occur from an old version to the
next one, both the date that some ingredients go into effect, and date that some are discontinued.
Part of the change can include labeling to identify version numbers.

Some security features are included within an ERP system to protect against both outsider crime,
such as industrial espionage, and insider crime, such as embezzlement. A data tampering
scenario might involve a disgruntled employee intentionally modifying prices to below the
breakeven point in order to attempt to take down the company, or other sabotage. ERP systems
typically provide functionality for implementing internal controls to prevent actions of this kind.
ERP vendors are also moving toward better integration with other kinds of information security
tools.

Disadvantages – Many problems organizations have with ERP systems are due to inadequate
investment in ongoing training for involved personnel, including those implementing and testing
changes, as well as a lack of corporate policy protecting the integrity of the data in the ERP
systems and how it is used.

While advantages usually outweigh disadvantages for most organizations implementing an ERP
system, here are some of the most common obstacles experienced:

Usually many obstacles can be prevented if adequate investment is made and adequate training
is involved, however, success does depend on skills and the experience of the workforce to
quickly adapt to the new system.

• Customization in many situations is limited

• The need to reengineer business processes
• ERP systems can be cost prohibitive to install and run
• Technical support can be shoddy
• ERP’s may be too rigid for specific organizations that are either new or want to move in
a new direction in the near future.

Artificial Intelligence and Neural Networks

Artificial intelligence is a field of science and technology based on disciplines such as computer
science, biology, psychology, linguistics, mathematics and engineering. The goal of AI is to
develop computers that can simulate the ability to think, see, hear, walk, talk and feel. In other
words, simulation of computer functions normally associated with human intelligence, such as
reasoning, learning and problem solving.

AI can be grouped under three major areas: cognitive science, robotics and natural interfaces.
[Source MIS 7th edition, James O Brien and George M Marakas- Tata Mc Graw Hill].

Cognitive science focuses on researching on how the human brain works and how humans think
and learn. Applications in the cognitive science area of AI include the development of expert
systems and other knowledge-based systems that add a knowledge base and some reasoning
capability to information systems. Also included are adaptive learning systems that can modify
their behavior based on information they acquire as they operate. Chess-playing systems are
some examples of such systems.

Fussy logic systems can process data that are incomplete or ambiguous. Thus, they can solve
semi-structured problems with incomplete knowledge by developing approximate inferences and
answers, as humans do.

Neural network software can learn by processing sample problems and their solutions. As neural
nets start to recognize patterns, they can begin to program themselves to solve such problems on
their own.

Neural networks are computing systems modeled after the human brain’s mesh like network of
interconnected processing elements, called neurons. The human brain is estimated to have over
100 billion neuron brain cells. The neural networks are lot simpler in architecture. Like the brain,
the interconnected processors in a neural network operate in parallel and interact dynamically
with each other.

This enables the network to operate and learn from the data it processes, similar to the human
brain. That is, it learns to recognize patterns and relationships in the data. The more data
examples it receives as input, the better it can learn to duplicate the results of the examples it
processes. Thus, the neural networks will change the strengths of the interconnections between
the processing elements in response to changing patterns in the data it receives and results that
occur.

For example, neural network can be trained to learn which credit characteristics result in good or
bad loans. The neural network would continue to be trained until it demonstrated a high degree
of accuracy in correctly duplicating the results of recent cases. At that point it would be trained
enough to begin making credit evaluations of its own.

Genetic algorithm software uses Darwinian (survival of the fittest), randomizing and other
mathematics functions to simulate evolutionary processes that can generate increasingly better
solutions to problems.
Robotics: Ai, engineering and physiology are the basic disciplines of robotics. This technology
produces robot machines with computer intelligence and computer-controlled, humanlike
physical capabilities. This area thus includes applications designed to give robots the power of
sight, or visual perception; touch or tactile capabilities; dexterity or skill in handling and
manipulation; locomotion, or the physical ability to move over any terrain; and navigation, or the
intelligence to properly find one’s way to a destination.

Natural interfaces: The development of natural interfaces is essential to the natural use of
computers by humans. Development of natural languages and speech recognition are major
thrusts in this area of AI. Being able to talk to computers and robots in conversational human
languages and have them understand us as easily as we understand each other is a goal of AI
research. This involves research and development in linguistics, psychology, computer science
and other disciplines.

Other natural interface research applications include the development of multi-sensory devices
that use a variety of body movements to operate computers. This is related to the emerging
application area of virtual reality. Virtual reality involves using multi-sensory human– computer
interfaces that enable human users to experience computer simulated objects, spaces activities
and worlds as if they actually exist.

6. Distinguish between closed decision making system & open decision making system?
What is ‘What – if‘ analysis? Why is more time spend in problem analysis & problem
definition as compared to the time spends on decision analysis?

Answer:
The decision-making systems can be classified in a number of ways. There are two types of
systems based on the manager’s knowledge about the environment. If the manager operates in a
known environment then it is a closed decision-making system. The conditions of the closed
decision-making system are:

a) The manager has a known set of decision alternatives and knows their outcomes fully in terms
of value, if implemented.

b) The manager has a model, a method or a rule whereby the decision alternatives can be
generated, tested, and ranked for selection.

c) The manager can choose one of them, based on some goal or objective criterion.

Few examples are a product mix problem, an examination system to declare pass or fail, or an
acceptance of the fixed deposits.

If the manager operates in an environment not known to him, then the decision-making system is
termed as an open decision-making system. The conditions of this system in contrast closed
decision-making system are:

a) The manager does not know all the decision alternatives.

b) The outcome of the decision is also not known fully. The knowledge of the outcome may be a
probabilistic one.

c) No method, rule or model is available to study and finalise one decision among the set of
decision alternatives.

d) It is difficult to decide an objective or a goal and, therefore, the manager resorts to that
decision, where his aspirations or desires are met best.

Deciding on the possible product diversification lines, the pricing of a new product, and the plant
location, are some decision-making situations which fall in the category of the open decision-
making systems.

The MIS tries to convert every open system to a closed decision-making system by providing
information support for the best decision. The MIS gives the information support, whereby the
manager knows more and more about environment and the outcomes, he is able to generate the
decision alternatives, test them and select one of them. A good MIS achieves this.

What if analysis

Decisions are made using a model of the problem for developing various solution alternatives
and testing them for best choice. The model is built with some variables and relationship
between variables. In reality, the considered values of variables or relationship in the model may
not hold good and therefore solution needs to be tested for an outcome, if the considered values
of variables or relationship change. This method of analysis is called ‘what if analysis.’

For example, in decision-making problem about determining inventory control parameters

(EOQ, Safety Stock, Maximum Stock, Minimum Stock, Reorder level) lead time is assumed
fairly constant and stable for a planning period. Based on this, the inventory parameters are
calculated. Inventory manager wants to know how the cost of holding inventory will be affected
if lead time is reduced by one week or increased by one week. The model with changed lead
time would compute the cost of holding inventory under new conditions. Such type of analysis
can be done for purchase price change, demand forecast variations and so on. Such analysis
helps a manager to take more learned decisions. ‘What if analysis’ creates confidence in
decision-making model by painting a picture of outcomes under different conditions?

Behavioural Concepts in Decision-making

The manager, being a human being, behaves in a peculiar way in a given situation. The response
of one manager may not be the same as that of the two other managers, as they differ on the
behavioural platform. Even though tools, methods and procedures are evolved, the decision is
many a times influenced by personal factors such as behaviour.

The managers differ in their approach towards decision-making in the organisation, and, there-
fore, they can be classified into two categories, viz., the achievement-oriented, i.e., looking for
excellence and the task-oriented, i.e., looking for the completion of the task somehow. The
achievement-oriented manager will always opt for the best and, therefore, will be enterprising in
every aspect of the decision-making. He will endeavour to develop all the possible alternatives.
He would be scientific, and therefore, more rational. He would weigh all the pros and cons
properly and then conclude.

The manager’s personal values will definitely influence ultimately. Some of the managers show
a nature of risk avoidance. Their behaviour shows a distinct pattern indicating a conservative ap-
proach to decision-making – a path of low risk or no risk. Further, even though decision-making
tools are available, the choice of the tools may differ depending on the motives of the manager.
The motives are not apparent, and hence, are difficult to understand. A rational decision in the
normal course may turn out to be different on account of the motives of the manager.

The behaviour of the manager is also influenced by the position he holds in the organisation. The
behaviour is influenced by a fear and an anxiety that the personal image may be tarnished and
the career prospects in the organisation may be spoiled due to a defeat or a failure. The
managerial behaviour, therefore, is a complex mix of the personal values, the atmosphere in the
organisation, the motives and the motivation, and the resistance to change. Such behaviour
sometimes overrides normal decisions based on business and economic principles.

The interplay of different decision-making of all the managers in the organization shapes up the
organizational decision-making. The rationale of the business decision will largely depend upon
the individuals, their positions in the organization and their inter-relationship with other
managers.
If two managers are placed in two decision-making situations, and if their objectives are in
conflict, the managers will arrive at a decision objectively, satisfying individual goals. Many a
times, they may make a conscious decision, disregarding organization’s objective to meet their
personal goals and to satisfy their personal values. If the manager is enterprising, he will make
objectively rational decisions. But if the manager is averse to taking risk, he will make a decision
which will be subjectively rational as he would act with limited knowledge and also be
influenced by the risk averseness. Thus, it is clear that if the attitudes and the motives are not
consistent across the organization, the decision-making process slows down in the organization.

MB0048 – Operations Research

Assignment Set - 1
Q.1- a) “Operation Techniques is a bunch of mathematical techniques.” Comment.
Ans:
Operations Research is an interdisciplinary branch of applied mathematics and formal
science that uses methods such as mathematical modelling, statistics, and algorithms to arrive at
optimal or near optimal solutions to complex problems. It is typically concerned with optimizing
the maxima (profit, assembly line performance, crop yield, bandwidth, etc) or minima (loss, risk,
etc.) of some objective function. Operations research helps management achieve its goals using
scientific methods. The terms operations research and management science are often used
synonymously. When a distinction is drawn, management science generally implies a closer
relationship to the problems of business management. The field of operations research is closely
related to Industrial engineering. Industrial engineers typically consider Operations Research
(OR) techniques to be a major part of their toolset. Some of the primary tools used by operations
researchers are statistics, optimization, probability theory, queuing theory, game theory, graph
theory, decision analysis, and simulation. Because of the computational nature of these fields,
OR also has ties to computer science, and operations researchers use custom-written and off-the-
shelf software. Operations research is distinguished by its frequent use to examine an entire
management information system, rather than concentrating only on specific elements (though
this is often done as well). An operations researcher faced with a new problem is expected to
determine which techniques are most appropriate given the nature of the system, the goals for
improvement, and constraints on time and computing power. For this and other reasons, the
human element of OR is vital. Like any other tools, OR techniques cannot solve problems by
themselves.
Scope of operation Research:
Examples of applications in which operations research is currently used include:
1. Critical path analysis or project planning: identifying those processes in a complex
project which affect the overall duration of the project.
2. Designing the layout of a factory for efficient flow of materials.
3. Constructing a telecommunications network at low cost while still guaranteeing QoS
(quality of service) or QoS (Quality of Experience) if particular connections become
very busy or get damaged.
4. Road traffic management and 'one way' street allocations i.e. allocation problems.
5. Determining the routes of school buses (or city buses) so that as few buses are
needed as possible.
 6. Designing the layout of a computer chip to reduce manufacturing time (therefore
reducing cost) Managing the flow of raw materials and products in a supply chain
based on uncertain demand for the finished products.
7. Efficient messaging and customer response tactics.
8. Robotizing or automating human-driven operations processes.
9. Globalizing operations processes in order to take advantage of cheaper materials,
labour, land or other productivity inputs Managing freight transportation and delivery
systems (Examples: LTL Shipping, intermodal freight transport).
10. Scheduling.
11. Personnel staffing.
12. Manufacturing steps.
13. Project tasks.
14. Network data traffic: these are known as queuing models or queueing systems.
15. Sports events and their television coverage blending of raw materials in oil.
16. Refineries determining optimal prices, in many retail and B2B settings, within the
disciplines of pricing science.
Operations research is also used extensively in government where evidence-based
policy is used.
Q.1- b) “Operation Research is an aid for the executive in making his decisions based on
scientific methods analysis”. Discuss the above statement in brief.
Ans:
Operation Research is a scientific method of providing executive departments with a quantitative
basis for decisions regarding the operations under their control. Morse & Kimball Operations
research is a scientific approach to problem solving for executive management. – H.M. Wagner
Operations research is an aid for the executive in making these decisions by providing him with
the needed quantitative information based on the scientific method of analysis. The mission of
Operations Research is to serve the entire Operations Research (OR) community, including
practitioners, researchers, educators, and students. Operations Research, as the flagship journal
of our profession, strives to publish results that are truly insightful. Each issue of Operations
Research attempts to provide a balance of well-written articles that span the wide array of
creative activities in OR. Thus, the major criteria for acceptance of a paper in Operations
Research are that the paper is important to more than a small subset of the OR community,
contains important insights, and makes a substantial contribution to the field that will stand the
test of time. Operational research, also known as operations research, is an interdisciplinary
branch of applied mathematics and formal science that uses advanced analytical methods such as
mathematical modelling, statistical analysis, and mathematical optimization to arrive at optimal
or near-optimal solutions to complex decision-making problems. It is often concerned with
determining the maximum (of profit, performance, or yield) or minimum (of loss, risk, or cost)
of some real-world objective. Originating in military efforts before World War II, its techniques
have grown to concern problems in a variety of industries. Operational research, also known as
OR, is an interdisciplinary branch of applied mathematics and formal science that uses advanced
analytical methods such as mathematical modelling, statistical analysis, and mathematical
optimization to arrive at optimal or near-optimal solutions to complex decision-making
problems. It is often concerned with determining the maximum (of profit, performance, or yield)
or minimum (of loss, risk, or cost) of some real world objective. Originating in military efforts
before World War II, its techniques have grown to concern problems in a variety of industries.
Operational research encompasses a wide range of problem-solving techniques and methods
applied in the pursuit of improved decision-making and efficiency. Some of the tools used by
operational researchers are statistics, optimization, probability theory, queuing theory, game
theory, graph theory, decision analysis, mathematical modelling and simulation.
Because of the computational nature of these fields, OR also has strong ties to computer science.
Operational researchers faced with a new problem must determine which of these techniques are
most appropriate given the nature of the system, the goals for improvement, and constraints on
time and computing power.

Work in operational research and management science may be characterized as one of three
categories:
Fundamental or foundational work takes place in three mathematical disciplines: probability,
optimization, and dynamical systems theory.
Modelling work is concerned with the construction of models, analyzing them mathematically,
implementing them on computers, solving them using software tools, and assessing their
effectiveness with data. This level is mainly instrumental, and driven mainly by statistics and
econometrics. Application work in operational research, like other engineering and economics'
disciplines, attempts to use models to make a practical impact on real-world problems.
• The major sub disciplines in modern operational research, as identified by the journal
Operations Research, are:
• Computing and information technologies
• Decision analysis
• Environment, energy, and natural resources
• Financial engineering
• Manufacturing, service sciences, and supply chain management
• Policy modelling and public sector work
• Revenue management
• Simulation
• Stochastic models
• Transportation

Q. 2 Comment on the following statements:

Q. 2- a) Operation Research advocates a system approach and is concerned with optimization.
1. Systems approach:
The term system approach implies that each problem should be examined in its entirely to the
extent possible and economically feasible from the point of view of the overall system of which
the problem under consideration is one part. Under those approaches a manager makes conscious
attempt to understand the relationships among various parts of the organisation and their role in
supporting the overall performance of the organisation. Operations objective of operations
research is to provide managers of the organisation with a scientific basis for solving problems
involving the interaction of components of the organisation as a whole. The decision which is
best for the organisation as a whole is called an optimal decision. Operations research tries to
find the best decision relative to a large portion of the total organisation. Hence in operations
research every problem is considered in its totality, i.e. O.R. adopts systems approach for solving
the problem. In other words, “Operations Research is the scientific study of large systems with a
view to identify problem areas and provide the mangers with a quantitative basis for decisions
which will enhance their effectiveness in achieving the specified objectives.”
2. Inter-disciplinary Team Approach:
It is an important characteristic of O.R. According to this characteristic, no single individual can
be an expert on all aspects of a problem under consideration. Thus, O.R. utilizes the inter
disciplinary team approach. Under this approach, a team comprising experts from different
disciplines such as mathematics, statistics, economics, management, computer science,
engineering and psychology, etc. is constituted. Such a team when confronted with a problem
determines its solution by utilizing the diverse background and skills of the teammates. Every
expert of the team, while solving the problem, tries to abstract the essence of the problem and
then determines whether a similar type of problem has been dealt by his team or not. If the
answer is yes, then it is solution of the current problem. In this way, each member of the team,
by utilizing his experience and expertise, may be in a position to suggest an approach to
overcome a problem that otherwise may not be possible for an individual to tackle.
3. Methodological Approach:
O.R. utilizes scientific methods for solving a problem. Specifically, the process begins with the
careful observation and formulation of the problem. The next step is to construct a scientific
model (typically a mathematical model) that attempts to abstract the essence of the real problem.
From this model, conclusions or solutions are obtained which are also valid for the real problem.
In an interactive fashion, the model is then verified through appropriate experiments to
determine the best or optional solution to the problem under consideration.
4. Operations economy:
O.R. is a problem solving and a decision making science. Whenever we have conflicts,
uncertainty and complexity in any situation, O.R. can help in the end to reduce costs and
improve profits and effects substantial “Operations Economy”. Once the old approach of
management by intuit is buried, a scientific approach to decision making is bound to help. Often
the conflicts are so tangled that they defy any intuitive solution, viz., the marketing function
frequently caught up in recoiling the following conflicting objectives: i) product innovation, ii)
high scale volume, iii) increasing market share, iv) flexibility in the market place, and v)entry
into new markets and revenue markets. It is here that O.R. is likely to convincingly optimize the
total effectiveness.

From all above areas of applications, one may conclude that operations research can be
widely advocate a systems approach for making timely management decisions and also used as a
corrective measure. O.R. encourages systems approach which concerned with the cost
optimization, and hence we can say: Operation Research advocates a system approach and is
concerned with optimization.

Q.2- b). Operation Research replaces management by personality. Comment.

Operations research is today recognised as an applied science concerned with large number of
diverse human activities. To be precise an operation uses some valuable resources like men,
money, machines, time, effort, etc. The outcome of the operation has also some value. An
operations research worker is required: i) to minimize the input value for a specific output, or
/and ii) to maximize the output value for a specific input, or /and iii) maximize some function of
these values, e. g. the profit function (difference between output & input values) or return-on-
investment function (ratio of output and input values), etc.
Some of the areas of management where techniques of operations research are applied are listed
below:

1. Finance, Budgeting and Investments:

a) cash flow analysis, long range capital requirements, investment portfolios,

dividend policies, etc.

b) Credit policies, credit risks and delinquent account procedures.

c) Claim and complaint procedures.

d) Dividend policies, investment and portfolio management, balance sheet and cash
flow analysis.

2. Purchasing, procurement and Exploration:

a) Determining the quality and timing of purchase of raw materials, machinery, etc.

b) Rules for buying and supplies under varying prices.

c) Bidding policies.

d) Equipment replacement policies.

e) Determination of quantities and timings of purchases.

f) Strategies for exploration and exploitation of new material source.

3. Production Management:

a) Product planning:

i) Location and size of warehouses, distribution centres, retail outlets, etc.

ii) Distribution policy

b) Manufacturing & facility planning:

i) Production scheduling and sequencing

ii) Product scheduling and allocation of resources

iii) Selection & location of factories, warehouses and their sizes

iv) Determining the optimal production mix.

 v) Maintenance policies & preventive maintenance.

vi) Scheduling & sequencing the production run by proper allocation of machines.

4. Marketing Management:

a) Product selection, timing, competitive actions.

b) Advertising strategy & choice of different media of advertising.

c) Number of salesman, frequency of calling of accounts, etc.

d) Effectiveness of market research.

e) Size of the stock to meet the future demand.

5. Personnel Management:

a) Recruitment policies & assignment of jobs.

b) Selection of suitable personnel with due consideration for age and skills, etc.

c) Establishing equitable bonus systems.

6. Research & Development:

a) Determination of areas of concentration of research and development.

b) Reliability & evaluation of alternative designs.

c) Control of development projects.

d) Coordination of multiple research projects.

e) Determination of time & cost requirements.

From all above areas of applications, one may conclude that operations research can be
widely used in taking timely management decisions and also used as a corrective measure. The
application of this tool involves certain data and not merely a personality of decision maker, and
hence we can say: Operations Research has replaced management by personality.

Q.3. Explain how the profit maximization transportation problem can be converted to an
equivalent cost minimization transportation problem.

How to convert profit maximization transportation problem to an equivalent cost minimization

transportation problem can be understood by following Illustration as:
A firm has three factories located in city A, B & C and supplies goods to four dealers, dealer 1,
2, 3 & 4, spread all over the country. The production capacities of these factories are 1000, 700
& 900 units per month respectively. The monthly orders from the dealers are 900, 800, 500 &
400 units respectively. Per unit return (excluding transportation costs) are Rs. 8, 7 & 9 at the
three factories. Unit transportation costs from the dealers are given below:
Factory Dealers
1 2 3 4
City - A 2 2 2 4
City - B 3 5 3 2
City - C 4 3 2 1
Optimal distribution system to maximize the total r eturn to be determined.
From the given data, we compute a matrix of net returns as done in table below;
(Transportation matrix (Net return) for the Maximization problem)
Factory Dealers Factory
capacity
1 2 3 4
City - A 6 6 6 4 1000
City - B 4 2 4 5 700
City - C 5 6 7 8 900
To convert the given maximization problem to an equivalent minimization problem, we identify
the cell (element) which has the highest contribution per unit (in this problem C-4 has highest
per unit contribution, Rs.8), and subtract all elements from this highest element. The resultant
matrix is a transportation problem with minimizing objective function. This has been given in
the following table.
(Transportation matrix for the Minimization problem)
Factory Dealers Factory
capacity
1 2 3 4
City - A 2 2 2 4 1000
City - B 4 6 4 3 700
City - C 3 2 1 0 900
Dealer requirement 900 800 500 400 2600

The minimization problem is solved as a usual transportation problem. The resulting

optimal solution is also the optimal solution to the original (maximization) problem. The value
of the objective function is computed by referring the matrix of the maximization problem. It
should be noted that the converted minimization problem will have at least one element with
zero value.
4. Write the difference in the simplex solution procedure for a maximization problem and a
minimization problem of linear programming.

The difference in the simplex solution procedure for a maximization problem and a
minimization problem of linear programming can be explained by the steps followed to solve the
minimization/ minimization problem as follows ;

1. Introduce stack variables (Si’s) for “£” type of constraint.

2. Introduce surplus variables (Si’s) and artificial variables (Ai) for “³” type of constraint.

3. Introduce only Artificial variable for “=” type of constraint.

4. Cost (Cj) of slack and surplus variables will be zero and that of artificial variable will be
“M”

5. Find Zj – Cj for each variable.

6. Slack and artificial variables will form basic variable for the first simplex table. Surplus
variable will never become basic variable for the first simplex table.

7. Zj = sum of [cost of variable x its coefficients in the constraints – Profit or cost

coefficient of the variable].

8. Select the most negative value of Zj – Cj. That column is called key column. The variable
corresponding to the column will become basic variable for the next table.

9. Divide the quantities by the corresponding values of the key column to get ratios; select
the minimum ratio. This becomes the key row. The basic variable corresponding to this
row will be replaced by the variable found in step 6.

10. The element that lies both on key column and key row is called Pivotal element.

11. Ratios with negative and “a” value are not considered for determining key row.

12. Once an artificial variable is removed as basic variable, its column will be deleted from
next iteration.

13. For maximisation problems, decision variables coefficient will be same as in the
objective function. For minimisation problems, decision variables coefficients will have
opposite signs as compared to objective function.

14. Values of artificial variables will always is – M for both maximisation and minimisation
problems.

15. The process is continued till all Zj – Cj ³ 0.

Q.5 What do you mean by the two-phase method for solving a given LPP? Why is it used?

Two Phase Method:

Two-phase method for solving a given LPP can be divided in the two phses as mentioned below:

Phase I: Formulate the new problem. Start by eliminating the original objective function by the
sum of the artificial variables for a minimisation problem and the negative of the sum of the
artificial variables for a maximisation problem. The Simplex method optimizes the ensuing
objective with the constraints of the original problem. If a feasible solution is arrived, the
optimal value of the new objective function is zero (suggestive of all artificial variables being
zero). Subsequently proceed to phase -II. If the optimal value of the new objective function is
non-zero, it means there is no solution to the problem and the method terminates.

Phase II: Start phase II using the optimum solution of phase I as the base. Then take the
objective function without the artificial variables and solve the problem using the Simplex
method.

Why is it used?

The drawback of the penalty cost method is the possible computational error resulting from
assigning a very large value to the constant M. To overcome this difficulty, Two - Phase
Simplex method is considered where the use of M is eliminated by solving the problem in two
phases.
Q. 6 Indicate any four shortcomings of taking a simulation approach to solve an O.R.
problem.

Shortcomings of taking a simulation approach to solve an O.R. problem

The range of application of simulation in business is extremely wide. Unlike other mathematical
models, simulation can be easily understood by the users and thereby facilitates their active
involvement. This makes the results more reliable and also ensures easy acceptance for
implementation. The degree to which a simulation model can be made close to reality is
dependent upon the ingenuity of the OR team who identifies the relevant variables as well as
their behavior.

In case of other OR models, simulation helps the manager to strike a balance between opposing
costs of providing facilities (usually meaning long term commitment of funds) and the
opportunity and costs of not providing them.

The simulation approach is recognised as a powerful tool for management decision-making.

Shortcoming of taking a simulation approach to solve an O. R. problems are as follows;

1. It does not produce optimal results. Solutions are approximate, and it is some less than
formal but ‘satisfactory’ approach to problem-solving only.
2. To be able to simulate systems, a fairly good knowledge of the parts or components of
the system and their characteristics is required. The desire is to understand, explain and
predict the dynamic behavior of the system or the sum total of these parts. Adequate
knowledge of the system behavior.
3. Each simulation run like a single experiment conducted under a given set of conditions as
defined by a set of values for the input solution. A number of simulation runs will be
necessary and thus can be time consuming. As the number of variables increases in terms
of input, the difficulty in finding the optimum values increases considerably.
4. Since simulation involves repetitions of the experiment, it is a time consuming task when
manually done.
5. As a number of parameters, increase, the difficulty in finding the optimum values
increases to a considerable extent.
6. Because of the simplicity in adoption of simulation process, one may develop to rely on
this technique too often, although mathematical model is more suitable to the situation.
7. One should not ignore the cost associated with a simulation study for data collection,
formation of the model. A good simulation model may be very expensive. Often it takes
years to develop a usable corporate planning model.
8. The computer time as it is fairly significant.
9. A simulation application is based on the premise that the behaviour pattern of relevant
variables is known, and this very premise sometimes becomes questionable.
 10. Not always can the probabilities be estimated with ease or desired reliability. The results
of simulation should always be compared with solutions obtained by other methods
wherever possible, and “tempered” with managerial judgment.

MB0049 - Project Management

Assignment Set - 1

Q.1 Comment on the following

a. Importance of DMAIS in project management cycle

The projectised mantras of production management can be broadly identified as - Define

Measure, Analyze, Improve, Standardize (DMAIS). These projectised mantras help in
identifying, evaluating, and selecting the right improvement solutions for managing a project.
The mantras also help in identifying the critical issues thus assisting the organization to adapt to
the changes introduced through the implementation of different solutions.

The phases associated with each projectised mantra of production management are:

1. Define: benchmark, customer requirement, process flow map, quality function deployment,
project management plan
2. Measure: data collection, defect metrics, sampling
3. Analysis: cause and effect, failure modes and effect analysis, decision and risk analysis,root
cause analysis, reliability analysis
4. Improve: design of experiments, modeling, and robust design
5. Standardize: control charts, time series, procedural adherence, performance management,
preventive activities displays the various phases of DMIAS.

b. Knowledge areas of project management

• There are nine knowledge areas in Project Management:
• Project Integration Management
• Project Scope Management
• Project Time Management
• Project Cost Management
• Project Quality Management
• Project Human Resource Management
• Project Communications Management
• Project Risk Management
• Project Procurement Management
Each of the nine knowledge areas contains the processes that need to be accomplished within its
discipline in order to achieve an effective project management program. Each of these processes
also falls into one of the five basic process groups, creating a matrix structure such that every
process can be related to one knowledge area and one process group.

Q.2 Write few words on:

a. Project Characteristics
The word PROJECT comes from the Latin word PROJECTUM from the Latin verb
PROICERE; which means “to throw something forwards” which in turn comes from PRO-,
which denotes something that precedes the action of the next part of the word in time and
ICERE, “to throw”. The word PROJECT thus actually originally meant “something that comes
before anything else happens”.
A project in business and science is a temporary endeavor undertaken to create a unique product,
service, or result. Basically, it is planned to achieve a particular aim. The aim of a project is to
attain its objective and then terminate. Some of the reasons to start a project can be:
• A customer request or market demand
• An organizational need
• A customer request
• A technological advance
• A legal requirement
Projects and operations differ primarily in that operations are ongoing and repetitive, while
projects are temporary and unique. Generally, a project is a means of organizing some activities
that cannot be addressed within the normal operational limits.
Project characteristics:
• It is temporary – temporary means that every project has a definite beginning and a
definite end. Project always has a definitive time frame.
• A project creates unique deliverables, which are products, services, or results.
• A project creates a capability to perform a service.
• Project is always developed in steps and continuing by increments – Progressive
Elaboration.

b. WBS
A work breakdown structure (WBS) in project management and systems engineering, is a tool
used to define and group a project's discrete work elements in a way that helps organize and
define the total work scope of the project..
A work breakdown structure element may be a product, data, a service, or any combination. A
WBS also provides the necessary framework for detailed cost estimating and control along with
providing guidance for schedule development and control. Additionally the WBS is a dynamic
tool and can be revised and updated as needed by the project manager
The Work Breakdown Structure is a tree structure, which shows a subdivision of effort required
to achieve an objective; for example aprogram, project, and contract. In a project or contract, the
WBS is developed by starting with the end objective and successively subdividing it into
manageable components in terms of size, duration, and responsibility (e.g., systems, subsystems,
components, tasks, subtasks, and work packages) which include all steps necessary to achieve
the objective.
The Work Breakdown Structure provides a common framework for the natural development of
the overall planning and control of a contract and is the basis for dividing work into definable
increments from which the statement of work can be developed and technical, schedule, cost,
and labor hour reporting can be established.
A work breakdown structure permits summing of subordinate costs for tasks, materials, etc., into
their successively higher level “parent” tasks, materials, etc. For each element of the work
breakdown structure, a description of the task to be performed is generated. [3] This technique
(sometimes called a System Breakdown Structure ) is used to define and organize the
total scope of a project.
The WBS is organised around the primary products of the project (or planned outcomes) instead
of the work needed to produce the products (planned actions). Since the planned outcomes are
the desired ends of the project, they form a relatively stable set of categories in which the costs
of the planned actions needed to achieve them can be collected. A well-designed WBS makes it
easy to assign each project activity to one and only one terminal element of the WBS. In addition
to its function in cost accounting, the WBS also helps map requirements from one level of
system specification to another, for example a requirements cross reference matrix mapping
functional requirements to high level or low level design documents.

c. PMIS
Project Management Information System (PMIS) are system tools and techniques used in project
management to deliver information. Project managers use the techniques and tools to collect,
combine and distribute information through electronic and manual means. Project Management
Information System (PMIS) is used by upper and lower management to communicate with each
other.

Project Management Information System (PMIS) help plan, execute and close
project management goals. During the planning process, project managers use PMIS
for budget framework such as estimating costs. The Project Management Information System is
also used to create a specific schedule and define the scope baseline. At the execution of the
project management goals, the project management team collects information into one database.
The PMIS is used to compare the baseline with the actual accomplishment of each activity,
manage materials, collect financial data, and keep a record for reporting purposes. During the
close of the project, the Project Management Information System is used to review the goals to
check if the tasks were accomplished. Then, it is used to create a final report of the project close.
To conclude, the project management information system (PMIS) is used to plan schedules,
budget and execute work to be accomplished in project management.

d. Project Management strategies-Internal & external

Effective Internal Project Management Strategies
Projects fail for many internal reasons, some of them technical, some of them managerial.
However, even the technical failures can often be traced back to a failure on the part of the
project's executive management to recognize and deal with these inherent managerial risks. On
the other hand, probably the majority of apparently successful projects do not reflect their
optimum potential either.
As a matter of project experience, a number of prerequisites have been identified with the
successful project. While these prerequisites do not necessarily guarantee success of future
projects, their absence may well lead to sub-optimal success, if not outright failure. The Project's
Executive has a vital role to play in achieving project success and should therefore insist on the
following:
Executive Support - The Executive must clearly demonstrate support for the project management
concept by active sponsorship and control.
External Authority - The project manager must be seen as the authoritative agent in dealing with
all parties, and be the responsible and single formal contact with them.
Internal Authority - The project manager must have the necessary managerial authority within
his organization to ensure response to his requirements.
Commitment Authority - The project manager must have the responsibility and authority to
control the commitment of resources, including funds, within prescribed limits. The results of
these decisions must be both accountable and visible.
Project Manager Involved in All Major Decisions - No major technical, cost, schedule, or
performance decisions should be made without the project manager's participation.
Competence - The project manager and his team members must be competent. Other functional
personnel assigned to the project must also be competent.
Project Team - The project manager should have a say in the assembly of his project team,
which will help him to obtain their personal commitment, support and required quality of
service.
Management Information Systems - Effective project management information and control
systems must be in place.
Effective External Project Management Strategies
Prerequisites for avoiding internal project failure, or at least sub-optimal results, were discussed
earlier. However, it has also been noted earlier that external conditions and events also represent
uncertainty and risk to the successful accomplishment of the project. These conditions have been
linked to the external stakeholders of the project. Therefore, it is essential to develop a sound
stakeholder environment.

Developing a Sound Stakeholder Environment

Just as the means of influencing the project's cultural environment, as described above, was one
of developing the right attitude, so it is with developing a sound stakeholder environment.
Perhaps this attitude is best reflected by adopting a mind set that reverses the traditional
organization chart hierarchy. In other words, place the project stakeholders at the top of the
chart, followed by the front-line project team members, and on down to the project manager at
the bottom. Perhaps the project team will then be better visualized as a truly service
organization, designed to serve the best interests of a successful project outcome, both perceived
and in reality.
Some suggested steps in this process include:
• Learn how to understand the role of the various stakeholders, and how this information
may be used as an opportunity to improve both the perception and reception of the
project
• Identify the real nature of each stakeholder group's business and their consequent interest
in the project
• Understand their behavior and motivation
• Assess how they may react to various approaches
• Pinpoint the characteristics of the stakeholders' environment and develop appropriate
responses to facilitate a good relationship
• Learn project management's role in responding to the stakeholders drive behind the
project
• Determine the key areas which will have the most impact on the successful reception of
the project
• Remember always that even a minor stakeholder group may discover the "fatal flaw" in
the project and which could bring the project to a standstill!
•
Q.3 What are the various SCMo soft wares available in project management? Explain each
in brief.
The process documentation system is intranet based to provide immediate access to current, up-
to-date process documentation. The system allows users to navigate through graphical structures
to relevant documentation and processes which were created with the ARIS-Toolset.
The content of the process documentation system includes the area supply chain management
from the Odette Supply Chain Management Group. The system includes graphical process
documentation, in the form of process chains, as well as the entire range of documentation
related to the processes. The Process Documentation System gives, according to its objectives,
an overview and a detailed view of the relevant processes for SCMo.
The entry point in the documentations system is the model “Process Overview SCMo”. This
model is the starting point for the navigation to other models. The navigation between models is
done via the assignment symbol. The assignment symbol of a function / process Interface
indicates that there is a link to another model. The linked / assigned models can be opened by
double-clicking on the assignment symbol.
This can be classified into two different navigations as shown in figure.
a) Vertical Navigation: The vertical navigation is the navigation on different levels. Starting on
the work package level and going downwards into more detail, the first models of processes are
found on the sub-process level.
In the model “Process Overview SCMo” those processes are assigned to the functions on Level
2. In the models there can be assignments for some functions, e.g. for a Function Allocation
Diagram or a sub-process that describes that function. These two examples are currently the
models on the lowest level.
b) Horizontal Navigation: The horizontal navigation is on the same level. Some processes have a
link to other processes, which can be at the start or end or even in the process itself, when
another process is imbedded in the process. Those links are represented by Process Interfaces.
Microsoft has a team project management solution that enables project managers and their teams
to collaborate on projects. The Microsoft Project 2002 products in these solutions are:
1. Microsoft Project Standard 2002
2. Microsoft Project Server 2002
3. Microsoft Project Server Client Access License (CAL) 2002.
Support Software
Having learnt the basics of application software, you would have a fair idea of how and to what
extent project management processes could be automated. However, the challenge of “making
things work” remains unchanged. While software vendors are confident of “making it work”,
two yawning gaps still remain:
1. Business processes which are not covered in such software
2. Integration of multi vendor supported software applications
The enterprise is normally in a dilemma – whether to look at the same vendors to support such
customisation or not. This normally works out too expensive for their comfort or within their
tight budgets.
Several software vendors have seized the opportunity with offerings that substantially fill these
gaps effectively at a fraction of the costs quoted by the major vendors. The other carrot which
these vendors offer is a unilateral transfer of the facility to customise themselves which is seen
as a huge advantage. The various support software that may be used for managing projects are:
1. ARROW
2. FEDORA
3. VITAL
4. PILIN
5. MS EXCHANGE SERVER 2003
The ARROW Project
It is a consortia of institutional repository solution, combining open source and proprietary
Software .Arrow is preferred support software because it:
· Provides a platform for promoting research output in the ARROW context
· Safeguards digital information
· Gathers an institution’s research output into one place
· Provides consistent ways of finding similar objects
· Allows information to be preserved over the long term
· Allows information from many repositories to be gathered and searched in one step
· Enables resources to be shared, while respecting access constraints
· Enables effective communication and collaboration between researchers
The vision of project ARROW: “The ARROW project will identify and test software or
solutions to support best practice institutional digital repositories comprising e-prints, digital
theses and electronic publishing.” ARROW project wanted to be a solution for storing any
digital output. Their initial focus was on print equivalents such as thesis and journal articles
among others. It provided solution that could offer on-going technical support and development
past the end of the funding period of the project.

Fedora
ARROW wanted a robust, well architected underlying platform and a flexible object-oriented
data model to be able to have persistent identifiers down to the level of individual data streams.
It accommodates the content model to be able to be version independent.
Since the beginning of the project ARROW has worked actively and closely with Fedora and the
Fedora Community. The ARROW project’s Technical Architect is a member of Fedora
Advisory Board and sits on Fedora Development Group.
This association is reinforced by VTLS Inc. VTLS President is a member of Fedora Advisory
Board and VITAL Lead Developer sits on Fedora Development Group
VITAL
VITAL refers to ARROW specified software created and fully supported by VTLS Inc. built on
top of Fedora. It currently provides:
1. VITAL Manager
2. VITAL Portal
3. VITAL Access Portal
4. VALET – Web Self-Submission Tool
5. Batch Loader Tool
6. Handles Server (CNRI)
7. Google Indexing and Exposure
8. SRU / SRW Support
9. VITAL architecture overview
VITAL is part of creative development of ARROW institutional repositories. VITAL has the
following features:
1. Inclusion of multimedia and creative works produced in Australian universities
2. Limited exposure nationally or internationally
3. Addition of annotation capability
4. Inclusion of datasets and other research output not easily provided in any other publishing
channel
5. Being developed in conjunction with the DART (ARCHER) Project
6. Exploration of the research-teaching nexus tools that will allow value added services for
repositories
7. Integration with or development of new tools that will allow value added services for
repositories (for instance the creation of e-portfolios or CVs of research output of individual
academics)
PILIN – Persistent Identifiers and Linking Infrastructure
There has been a growing realisation that sustainable identifier infrastructure is required to deal
with the vast amount of digital assets being produced and stored within universities.
PILIN is a particular challenge for e-research communities where massive amounts of data are
being generated without any means of managing this data over any length of time. The broad
objectives are to:
1. Support adoption and use of persistent identifiers and shared persistent identifier management
services by the project stakeholders
2. Plan for a sustainable, shared identifier management infrastructure that enables persistence of
identifiers and associated services over archival lengths of time
3. Deploy a Worldwide Site Consolidation Solution for Exchange Server 2003 at Microsoft
4. Add Picture
5. Use Microsoft Exchange Server 2003 to consolidate more than 70 messaging sites worldwide
into seven physical locations
In this context, let us look at Microsoft Model Enterprises (MME).
Microsoft Model Enterprises (MME)
Objectives
· Maximising the number of management tasks performed centrally
· Decreasing the number of sites through the consolidation of the smaller locations into a
smaller number of RDCs
· Reducing the total number of infrastructure and application servers
· Standardising infrastructure and devices worldwide
Solution
· Consolidation of 75 tail sites into 6 regional data centers (RDCs) using local storage area
networks (SANs)
· Key Focus Areas
· Proactive, detailed monitoring and analysis of WAN bandwidth utilisation and latency
· Effective but flexible approach to project planning, scheduling, and cross-group
coordination
· Coordination and control of deployment of successive pre-release versions of Office
System 2003 (including Outlook 2003)
Business Benefits
· Four percent overall direct cost savings
· Key enabler of the Microsoft ME initiative which through fiscal year 2003 has produced
millions in overall consolidation savings including USE
IT Benefits
· Improved server utilisation
· Improved server management
· Strengthened security
· Increased reliability

Q.4 List the various steps for Risk management. Also explain GDM and its key features.

Risk management may be classified and categorized as:

1. Risk assessment and identification The assessment and identification focuses on numerating
possible risks to the project. Methods that can aid risk identification include checklists of
possible risks, surveys, meetings and brainstorming and reviews of plans, process and work
products. The project manager can also use the process database to get information about risks
and risk management on similar projects.
2. Risk prioritization – focus on the highest risk. Prioritization requires analyzing the possible
effects of the risk event in case it actually occurs. This approach requires a quantitative
assessment of the risk probability and the risk consequences. For each risk rate the probability of
its happening as low, medium or high. If necessary, assign probability values in the ranges given
for each rating. For each risk, assess its impact on the project as low, medium, high or very high.
Rank the risk based on the probability. Select the top few risk items for mitigation and tracking.
3. Risk Control: The main task is to identify the actions needed to minimize the risk
consequences, generally called risk mitigation steps. Refer to a list of commonly used risk
mitigation steps for various risks from the previous risk logs maintained by the PM and select a
suitable risk mitigation step. The risk mitigation step must be properly executed by incorporating
them into the project schedule. In addition to monitoring the progress of the planned risk
mitigation steps periodically revisit project. The results of this review are reported in each
milestone analysis report. To prepare this report, make fresh risk analysis to determine whether
the priorities have

Risk Analysis
The first step in risk analysis is to make each risk item more specific. Risks such as, “Lack of
Management buy in,” and “people might leave,” are a little ambiguous. In these cases the group
might decide to split the risk into smaller specific risks, such as, “manager Jane decides that the
project is not beneficial,” “Database expert might leave,” and “Webmaster might get pulled off
the project.” The next step is to set priorities and determine where to focus risk mitigation
efforts. Some of the identified risks are unlikely to occur, and others might not be serious enough
to worry about. During the analysis, discuss with the team members, each risk item to
understand how devastating it would be if it did occur, and how likely it is to occur. For
example, if you had a
risk of a key person leaving, you might decide that it would have a large impact on the project,
but that it is not very likely. In the process below, we have the group agree on how likely it
thinks each risk item is to occur,using a simple scale from 1 to 10 (where 1 is very unlikely and
10 is very likely). The group then rates how serious the impact would be if the risk did occur,
using a simple scale from 1 to 10 (where 1is little impact and 10 is very large). To use this
numbering scheme, first pick out the items that rate 1 and 10, respectively. Then rate the other
items relative to these boundaries. To determine the priority of each risk item, calculate the
product of the two values, likelihood and impact. This priority scheme helps push the big risks to
the top of the
list, and the small risks to the bottom. It is a usual practice to analyze risk either by sensitivity
analysis or by probabilistic analysis. In sensitivity analysis a study is done to analyse the changes
in the variable values because of a change in one or more of the decision criteria. In the
probability analysis, the frequency of a particular event occurring is determined, based on which
it average weighted average value is calculated.

Each outcome of an event resulting in a risk situation in a risk analysis process is expressed as a
probability. Risk analysis can be performed by calculating the expected value of each alternative
and selecting the best alternative.
Ex: Now that the group has assigned a priority to each risk, it is ready to select the items to
mange. Some projects select a subset to take action upon, while others choose to work on all of
Project the items. To get started, you might select the top 3 risks, or the top 20%, based on the
priority calculation.

GDM –
 The Global Delivery Model (GDM) is adopted by an Industry or Business such that it has a
capability to plan design, deliver and serve to any Customers or Clients Worldwide with Speed,
Accuracy, Economy and Reliability. The key Features of GDM are ·

Standardization
Modularization
Minimum Customization
Maximum Micro structure

Adoption of a Combination of the Greatest Common Multiple and the Least Common
Factor of a Large Mass of Microbial Components-

• Standardization - Ingenious Design and Development of Components and Features which

are like to be accepted by 90% of Worldwide Customers. Global Standards of Design
focusing on highly standardized Methods and Processes of manufacture or
Development. Adopt Plug and socket Concepts with minimum adaptable joints or
Connections.

• Modularization - Product or Solution split up into smallest possible individual

Identifiable Entities, with limited Individual Functioning Capability but powerful and
robust in Combination with other Modules.

• Minimum Customization - Minimum Changes or Modifications to suit Individual

Customers.

• Maximum micro structuring - Splitting of the Product Modules further into much smaller
entity identifiable more through characteristics rather than application Features.
Approach through Standardization of these Microbial Entities even across Multiple
Modules. Application of these Microbial Entities to rest within multiple Projects or
Products or even as add-ons suit belated Customer Needs.

Special Features of GDM

Some of the special features of GDM are ·

• Cuts across Geographical and Time Zone Barriers

• Unimaginable Speeds of Response and Introduction.
• Common Pool of Microbial Components
• Largely Independent of Skill Sets required at Delivery Stages
• Highly automated Processes
• Quality Assurance as a Concurrent rather than a Control Process
• Near Shore Development, Manufacture and Delivery for better Logistics
• Mapping of Economical Zones rather than Geographic Zones
• Continuous Floating virtual Inventory to save Time and Efforts.
Q.5 Answer the two parts:
a. Importance of data management in project management-Comment.

The Role of Effective Data Management in the Success of Project Management

Data management consists of conducting activities which facilitate acquiring data, processing it
and distributing it. Acquisition of data is the primary function.
To be useful, data should have three important characteristics – timeliness, sufficiency and
relevancy. Management of acquisition lies in ensuring that these are satisfied before they are
stored for processing and decisions taken on the analysis.

There should be data about customers, suppliers, market conditions, new technology,
opportunities, human resources, economic activities, government regulations, political
upheavals, all of which affect the way you function. Most of the data go on changing because the
aforesaid sources have uncertainty inherent in them. So updating data is a very important aspect
of their management. Storing what is relevant in a form that is available to concerned persons is
also important. When a project is underway dataflow from all members of the team will be
flowing with the progress of activities. The data may be about some shortfalls for which the
member is seeking instructions. A project manager will have to analyse them, discover further
data from other sources and see how he can use them and take decisions. Many times he will
have to inform and seek sanction from top management.
The management will have to study the impact on the overall organisational goals and strategies
and convey their decisions to the manager for implementation. For example, Bill of Materials is
a very important document in Project Management. It contains details about all materials that go
into the project at various stages and has to be continuously updated as all members of the
project depend upon it for providing materials for their apportioned areas of execution. Since
information is shared by all members, there is an opportunity for utilising some of them when
others do not need them. To ascertain availability at some future point of time, information about
orders placed, backlogs, lead times are important for all the members. A proper MIS will take
care of all these aspects. ERP packages too help in integrating data from all sources and present
them to individual members in the way they require. When all these are done efficiently the
project will have no hold ups an assure success.

b. What is the significance of reviewing ROI?

ROI - Return on Investment (ROI) is the calculated benefit that an organization is projected to
receive in return for investing money (resources) in a project. Within the context of the Review
Process, the investment would be in an information system development or enhancement project.
ROI information is used to assess the status of the business viability of the project at key
checkpoints throughout the project’s lifecycle.
ROI may include the benefits associated with improved mission performance, reduced cost,
increased quality, speed, or flexibility, and increased customer and employee satisfaction. ROI
should reflect such risk factors as the project’s technical complexity, the agency’s management
capacity, the likelihood of cost overruns, and the consequences of under or nonperformance.
Where appropriate, ROI should reflect actual returns observed through pilot projects and
prototypes.

ROI should be quantified in terms of dollars and should include a calculation of the breakeven
point (BEP), which is the date when the investment begins to generate a positive return. ROI
should be recalculated at every major checkpoint of a project to se if the BEP is still on schedule,
based on project spending and accomplishments to date. If the project is behind schedule or over
budget, the BEP may move out in time; if the project is ahead of schedule or under budget the
BEP may occur earlier. In either case, the information is important for decision making based on
the value of the investment throughout the project lifecycle. Any project that has developed a
business case is expected to refresh the ROI at each key project decision point (i.e., stage exit) or
at least yearly.
Exclusions

If the detailed data collection, calculation of benefits and costs, and capitalization data from
which Return on Investment (ROI) is derived was not required for a particular project, then it
may not be realistic or practical to require the retrofit calculation of ROI once the project is
added to the Review portfolio. In such a case, it is recommended that a memorandum of record
be developed as a substitute for ROI. The memorandum should provide a brief history of the
program, a description of the major benefits realized to date with as much quantitative data as
possible, and a summary of the process used to identify and select system enhancements.

Some of the major benefits experienced by sites that installed the information system that would
be important to include in the memorandum are:

a) Decommissioning of mainframe computers

b) Reduction/redirection of labour
c) Elimination of redundant systems
d) Ability to more cost effectively upgrade all sites with one standard upgrade package.

In each case above, identify the specific site, systems, and labour involved in determining the
cited benefit. Identify any costs or dollar savings that are known or have been estimated. The
memorandum will be used as tool for responding to any future audit inquiries on project ROI.

For the Project Management Review, it is recommended that the project leader replace the text
on the ROI document through -

1) a note stating which stage of its cycle the project is in;

(2) A bulleted list of the most important points from the memorandum of record; and
(3) a copy of the memorandum of record for the Review repository.

In subsequent Reviews of the information system, the ROI slide can be eliminated form the
package. There is one notable exception to this guidance. Any internal use software project in
the maintenance phase of its lifecycle that adds a new site or undertakes an enhancement or
technology refresh that reaches the cost threshold established by Standard will need to satisfy
capitalization requirements. It requires all agencies to capitalize items acquired or developed for
internal use if the expected service life is two or more years and its cost meets or exceeds the
agency’s threshold for internal use software. The standard requires capitalization of direct and
indirect costs, including employee salaries and benefits for both Federal and Contractor
employees who materially participate in the Software project. Program managers are considered
to be the source of cost information for internal use software projects. If capitalization data is
collected for the project in the future, the project would be expected to calculate and track its
ROI.

Q.6 XYZ Company implements CMMI level-03. To make further changes it decides on
starting a new division in the organization. It decides to advance the existing project
management. What are the steps to be followed by the organization to drive project
management to a new horizon?

Capability Maturity Model Integration (CMMI) is a process improvement approach that helps
organizations improves their performance. CMMI can be used to guide process improvement
across a project, a division, or an entire organization.
CMMI in software engineering and organizational development is a process improvement
approach that provides organizations with the essential elements for effective process
improvement. CMMI is a trademark owned by Software Engineering Institute of Carnegie
Mellon University.
According to the Software Engineering Institute (SEI, 2008), CMMI helps "integrate
traditionally separate organizational functions, set process improvement goals and priorities,
provide guidance for quality processes, and provide a point of reference for appraising current
processes."[2]
CMMI currently addresses three areas of interest:
• Product and service development — CMMI for Development (CMMI-DEV),
• Service establishment, management, and delivery — CMMI for Services (CMMI-SVC),
and
• Product and service acquisition — CMMI for Acquisition (CMMI-ACQ).
CMMI was developed by a group of experts from industry, government, and the Software
Engineering Institute (SEI) at Carnegie Mellon University. CMMI models provide guidance for
developing or improving processes that meet the business goals of an organization. A CMMI
model may also be used as a framework for appraising the process maturity of the organization.
[1]
CMMI originated in software engineering but has been highly generalised over the years to
embrace other areas of interest, such as the development of hardware products, the delivery of
all kinds of services, and the acquisition of products and services. The word "software" does not
appear in definitions of CMMI. This generalization of improvement concepts makes CMMI
extremely abstract. It is not as specific to software engineering as its predecessor, the Software
CMM.
CMMI was developed by the CMMI project, which aimed to improve the usability of maturity
models by integrating many different models into one framework. The project consisted of
members of industry, government and the Carnegie Mellon Software Engineering Institute
(SEI). The main sponsors included the Office of the Secretary of Defense (OSD) and the
National Defense Industrial Association.
CMMI is the successor of the capability maturity model (CMM) or software CMM. The CMM
was developed from 1987 until 1997. In 2002, CMMI Version 1.1 was released. Version 1.2
followed in August 2006.
CMMI representation
CMMI exists in two representations: continuous and staged. The continuous representation is
designed to allow the user to focus on the specific processes that are considered important for the
organization's immediate business objectives, or those to which the organization assigns a high
degree of risk. The staged representation is designed to provide a standard sequence of
improvements, and can serve as a basis for comparing the maturity of different projects and
organizations. The staged representation also provides for an easy migration from the SW-CMM
to CMMI.
CMMI model framework
Depending on the CMMI constellation (acquisition, services, development) used, the process
areas it contains will vary. Key process areas are the areas that will be covered by the
organization's processes. The table below lists the process areas that are present in all CMMI
constellations. This collection of eight process areas is called the CMMI Model Framework, or
CMF.
Capability Maturity Model Integration (CMMI) Model Framework (CMF)
Abbreviatio Maturity
Name Area
n Level
REQM Requirements Management Engineering 2
PMC Project Monitoring and Control Project Management 2
PP Project Planning Project Management 2
CM Configuration Management Support 2
MA Measurement and Analysis Support 2
Process and Product Quality
PPQA Support 2
Assurance
OPD Organizational Process Definition Process Management 3
CAR Causal Analysis Support 5
Maturity Levels
There are Five maturity levels. However, maturity level ratings are awarded for levels 2 through
5.
Maturity Level 2 - Managed
• CM - Configuration Management
• MA - Measurement and Analysis
• PMC - Project Monitoring and Control
• PP - Project Planning
• PPQA - Process and Product Quality Assurance
• REQM - Requirements Management
• SAM - Supplier Agreement Management
Maturity Level 3 - Defined
• DAR - Decision Analysis and Resolution
• IPM - Integrated Project Management +IPPD
• OPD - Organizational Process Definition +IPPD
• OPF - Organizational Process Focus
• OT - Organizational Training
• PI - Product Integration
• RD - Requirements Development
• RSKM - Risk Management
• TS - Technical Solution
• VAL - Validation
• VER - Verification
Maturity Level 4 - Quantitatively Managed
• QPM - Quantitative Project Management
• OPP - Organizational Process Performance
Maturity Level 5 - Optimizing
• CAR - Causal Analysis and Resolution
• OID - Organizational Innovation and Deployment
CMMI models
CMMI best practices are published in documents called models, each of which addresses a
different area of interest. The current release of CMMI, version 1.2, provides models for three
areas of interest: development, acquisition, and services.
• CMMI for Development (CMMI-DEV), v1.2 was released in August 2006. It addresses
product and service development processes.
 • CMMI for Acquisition (CMMI-ACQ), v1.2 was released in November 2007. It addresses
supply chain management, acquisition, and outsourcing processes in government and
industry.
• CMMI for Services (CMMI-SVC), v1.2 was released in February 2009. It addresses
guidance for delivering services within an organization and to external customers.
• CMMI Product Suite (includes Development, Acquisition, and Services), v1.3 is
expected to be released in 2010. CMMI Version 1.3—Plans for the Next Version
Regardless of which model an organization chooses, CMMI best practices should be adapted by
an organization according to its business objectives.
Appraisal
An organization cannot be certified in CMMI; instead, an organization is appraised. Depending
on the type of appraisal, the organization can be awarded a maturity level rating (1-5) or a
capability level achievement profile.
Many organizations find value in measuring their progress by conducting an appraisal.
Appraisals are typically conducted for one or more of the following reasons:
• To determine how well the organization’s processes compare to CMMI best practices,
and to identify areas where improvement can be made
• To inform external customers and suppliers of how well the organization’s processes
compare to CMMI best practices
• To meet the contractual requirements of one or more customers
Appraisals of organizations using a CMMI model must conform to the requirements defined in
the Appraisal Requirements for CMMI (ARC) document. There are three classes of appraisals,
A, B and C, which focus on identifying improvement opportunities and comparing the
organization’s processes to CMMI best practices. Appraisal teams use a CMMI model and ARC-
conformant appraisal method to guide their evaluation of the organization and their reporting of
conclusions. The appraisal results can then be used (e.g., by a process group) to plan
improvements for the organization.
The Standard CMMI Appraisal Method for Process Improvement (SCAMPI) is an appraisal
method that meets all of the ARC requirements.
A class A appraisal is more formal and is the only one that can result in a level rating. Results of
an appraisal may be published (if the appraised organization approves) on the CMMI Web site
of the SEI: Published SCAMPI Appraisal Results. SCAMPI also supports the conduct of
ISO/IEC 15504, also known as SPICE (Software Process Improvement and Capability
Determination), assessments etc.
Achieving CMMI compliance
The traditional approach that organizations often adopt to achieve compliance with the CMMI
involves the establishment of an Engineering Process Group (EPG) and Process Action Teams
(PATs).This approach requires that members of the EPG and PATs be trained in the CMMI, that
an informal (SCAMPI C) appraisal be performed, and that process areas be prioritized for
improvement. More modern approaches that involve the deployment of commercially available,
CMMI-compliant processes, can significantly reduce the time to achieve compliance. SEI has
maintained statistics on the "time to move up" for organizations adopting the earlier Software
CMM and primarily using the traditional approach.[6] These statistics indicate that, since 1987,
the median times to move from Level 1 to Level 2 is 23 months, and from Level 2 to Level 3 is
an additional 20 months. These statistics have not been updated for the CMMI.
The Software Engineering Institute’s (SEI) Team Software Process methodology and the
Capability Maturity Modeling framework can be used to raise the maturity level.
Applications
The SEI published that 60 organizations measured increases of performance in the categories of
cost, schedule, productivity, quality and customer satisfaction.[7] The median increase in
performance varied between 14% (customer satisfaction) and 62% (productivity). However, the
CMMI model mostly deals with what processes should be implemented, and not so much with
how they can be implemented. These results do not guarantee that applying CMMI will increase
performance in every organization. A small company with few resources may be less likely to
benefit from CMMI; this view is supported by the process maturity profile (page 10). Of the
small organizations (<25 employees), 70.5% are assessed at level 2: Managed, while 52.8% of
the organizations with 1001–2000 employees are rated at the highest level (5: Optimizing).
Interestingly, Turner & Jain (2002) argue that although it is obvious there are large differences
between CMMI and agile methods, both approaches have much in common. They believe
neither way is the 'right' way to develop software, but that there are phases in a project where
one of the two is better suited. They suggest one should combine the different fragments of the
methods into a new hybrid method. Sutherland et al. (2007) assert that a combination of Scrum
and CMMI brings more adaptability and predictability than either one alone. David J. Anderson
(2005) gives hints on how to interpret CMMI in an agile manner. Other viewpoints about using
CMMI and Agile development are available on the SEI Web site.
The combination of the project management technique earned value management (EVM) with
CMMI has been described (Solomon, 2002). To conclude with a similar use of CMMI, Extreme
Programming (XP), a software engineering method, has been evaluated with CMM/CMMI
(Nawrocki et al., 2002). For example, the XP requirements management approach, which relies
on oral communication, was evaluated as not compliant with CMMI.
CMMI can be appraised using two different approaches: staged and continuous. The staged
approach yields appraisal results as one of five maturity levels. The continuous approach yields
one of six capability levels. The differences in these approaches are felt only in the appraisal; the
best practices are equivalent and result in equivalent process improvement results