MGS4020_03.ppt/Feb 19, 2013/Page 1 Georgia State University - Confidential MGS 4020 Business Intelligence Ch 2 – Decision & Decision Makers Ch 4 – Modeling Decision Processes Feb 19, 2013

MGS4020_03.ppt/Feb 19, 2013/Page 2 Georgia State University - Confidential Agenda Direct Marketing Decisions and Decision Makers Decision Tree

MGS4020_03.ppt/Feb 19, 2013/Page 3 Georgia State University - Confidential Example of a Decision-Making Process Stimulus Decision Maker Problem Definition Alternative Selection Implement Opportunities, Feedback, Threats External Pressures and Personal Values Bias, Risks, Costs, and Assumptions Frame of Reference Reframing, Strategy, Creativity Acceptance, Evaluation, and Control

MGS4020_03.ppt/Feb 19, 2013/Page 4 Georgia State University - Confidential Decision Making Process Basics Stimulus – External forces that the Decision Maker must evaluate to determine if he or she perceives a problem A problem is defined simply as the perception of a difference between the current state of affairs and a desired state. Decision Maker – Evaluates the stimulus to determine if he or she perceives a problem

MGS4020_03.ppt/Feb 19, 2013/Page 5 Georgia State University - Confidential Decision Making Process Basics Problem Definition – Decision Maker must define or frame the problem before an alternative solutions can be searched Alternative Selection – Evaluating the alternative solution to determine the best decision Implementation – Putting the solution into production Creating Consensus Negotiation Strategizing Politicking Intense Planning

MGS4020_03.ppt/Feb 19, 2013/Page 6 Georgia State University - Confidential Classification of Decision Makers & Decision Style Classification of Decision Makers Individual Decision Maker Multiple Decision Maker Group Decision Maker Team Decision Maker Organizational Decision Maker Meta-Organizational Decision Maker Decision Style Problem Context Perceptions of the Decision Maker Personal Values

MGS4020_03.ppt/Feb 19, 2013/Page 7 Georgia State University - Confidential Decision Style Classification Value Orientation Cognitive Complexity Structure Need for Structure Complexity Tolerance for Ambiguity Logical Task/Technical Relational People/Social AnalyticalConceptual DirectiveBehavioral AnalyticalDirectiveConceptualBehavioral

MGS4020_03.ppt/Feb 19, 2013/Page 8 Georgia State University - Confidential Decision Forces A Decision Maker must balance various forces and constraints that act on a problem context in formulating a decision. Personal / Emotional Forces Feelings, Health, Security, Rewards, etc. Personal and Emotional forces can reinforce or debilitate a decision makers ability to make a sound decision Economic / External Forces Societal Values, Competitive Pressures, Consumer Demands, New Technology, etc. The ultimate decision is often adjusted to account for these external forces. Organizational Forces Organizational Culture, Polices and Procedures, Resources Allocation, etc. What is the Risk Tolerance of the Organization? Is it a Conformity or Innovative Culture? Contextual and Emergent Forces Time Requirements, Motivation to reach a decision, Skills Inventory etc.

MGS4020_03.ppt/Feb 19, 2013/Page 9 Georgia State University - Confidential Why are decision so hard? Factors that determine the relative difficulty of a decision Structure A Structured Problem vs. An Unstructured Problem Cognitive Limitations Miller’s study of cognitive limitations resulted in the “7 slots” theory Uncertainty Must rely on Subjective Probability Alternatives and multiple objectives The more alternative solutions to choose from, the more difficult the decision

MGS4020_03.ppt/Feb 19, 2013/Page 10 Georgia State University - Confidential Simon’s Model of Problem Solving Intelligence DesignChoice Implementation Outcome Reality Of Situation Success Failure Model ValidationSolution Testing

MGS4020_03.ppt/Feb 19, 2013/Page 11 Georgia State University - Confidential Rational Decision Making Optimal Solution vs. Acceptable Solution Most economic theory built on the concept of individuals always seeking the optimal solution Impractical because it is cost prohibitive to search, analyze and compare every possible alternative to determine which is optimal. Simon suggested that we tend to “simplify reality” by searching for solutions that meet our preconceived notion of an acceptable solution given the problem context.

MGS4020_03.ppt/Feb 19, 2013/Page 12 Georgia State University - Confidential The Process of Choice While quantitative models can be used to compare and evaluate the alternatives, the Decision Maker is always faced with some uncertainty and must make a judgmental decision. “If you choose not to decide, you still have made a choice.” Cognitive Processes The need for a DSS comes from the limits of the Decision Makers cognitive abilities. - Cognitive Limitations - Perception - Judgment

MGS4020_03.ppt/Feb 19, 2013/Page 13 Georgia State University - Confidential Agenda Direct Marketing Decisions and Decision Makers Decision Tree

MGS4020_03.ppt/Feb 19, 2013/Page 14 Georgia State University - Confidential Decision Tree Buy Stock Do Not Buy Stock Price goes up Price goes down Gain Loss Loss/gain nothing

MGS4020_03.ppt/Feb 19, 2013/Page 15 Georgia State University - Confidential Decision Tree Buy Stock Leave money in savings Return > 4 % Return < 4 % Reach Objective - 40% Miss Objective - 60% Return > 4 % Return < 4 % Reach Objective - 70% Miss Objective - 30%

MGS4020_03.ppt/Feb 19, 2013/Page 16 Georgia State University - Confidential Decision Tree – Activation Test SkyMiles Enrollment Message A Returned within xx days Message B Returned within xx days Did not return within xx days Message C Did not return within xx days If Vc ¥ xx, send Message D Graduate to “SOW” Did not return within xx days If Vc < xx, no more messages Graduate to “SOW” If Vc ¥ xx, send Message D If Vc < xx, no more messages

MGS4020_03.ppt/Feb 19, 2013/Page 17 Georgia State University - Confidential Decision Tree - Activation Test Channels Enrollment Message E/F flied within xx days Message G flied within xx days Did not fly within xx days Message H Did not return within xx days If Vc ¥ xx, send Message J Graduate to “SOW” Did not return within xx days If Vc < xx, no more messages Graduate to “SOW” If Vc ¥ xx, send Message J If Vc < xx, no more messages

MGS4020_03.ppt/Feb 19, 2013/Page 18 Georgia State University - Confidential Decision Tree - Retention / SOW Test HURDLE SkyMiles w/ x flies last year, fly x+y this year Messages R* Returned within xx days Non-SkyMiles w/ x lx days since last trip Message P** Did not return within xx days If Vc ¥ xx, send Message Q Next promotion (responsive) Did not return within xx days If Vc < xx, no more messages (non-responsive) Next promotion (responsive) If Vc ¥ xx, send Message S Returned within xx days If Vc < xx, no more messages (non-responsive)

MGS4020_03.ppt/Feb 19, 2013/Page 19 Georgia State University - Confidential Decision Tree - Reactivation Test RATE OF trip SkyMiles w/ xx days since last trip Messages L,M,N,O* Returned within xx days Non- SkyMiles w/ xx days since last trip Message P** Did not return within xx days If Vc ¥ xx, send Message Q Next promotion (responsive) Did not return within xx days If Vc < xx, no more messages (non-responsive) Next promotion (responsive) If Vc ¥ xx, send Message Q Returned within xx days If Vc < xx, no more messages (non-responsive)

MGS4020_03.ppt/Feb 19, 2013/Page 20 Georgia State University - Confidential Probability The Three Requirements of Probabilities: 1.All Probabilities must lie with the range of 0 to 1. 2.The sum of the individual probabilities equal to the probability of their union 3.The total probability of a complete set of outcomes must be equal to 1.

MGS4020_03.ppt/Feb 19, 2013/Page 21 Georgia State University - Confidential Decomposing Complex Probabilities Severe Winter 70% Sales > 25,000 units Sales <= 25,000 units 80% 20% Sales > 25,000 units Sales <= 25,000 units 50% Moderate Winter 30% Probability [ Sales > 25,000 units ] = (.70 X.80 ) + (.30 X.50 ) = =.71.

MGS4020_03.ppt/Feb 19, 2013/Page 22 Georgia State University - Confidential Agenda Direct Marketing Decisions and Decision Makers Decision Tree

MGS4020_03.ppt/Feb 19, 2013/Page 23 Georgia State University - Confidential Direct Marketing Campaign Platform

MGS4020_03.ppt/Feb 19, 2013/Page 24 Georgia State University - Confidential Communication “Variables” Vehicles  =  = Kits  = Statement  = Telephone  = Direct Mail (USPS) Message / Offer (incentive) Hurdle (SOW) › trip x get y Next trip (Re-Activation) › Rate of trip triggers Points (double/flat?) Miles (front & back-end) Other Creative Execution Can test several executions tailored to clusters/segments Timing/Frequency Monthly (statements) Repeat/Follow-up Mailings

MGS4020_03.ppt/Feb 19, 2013/Page 25 Georgia State University - Confidential “Measuring Effectiveness: Lift/Gains Chart Percent of population targeted Percent of potential responders captured Targeting Random mailing

MGS4020_03.ppt/Feb 19, 2013/Page 26 Georgia State University - Confidential Example Direct Mail Optimization Using multivariate model we are able to maximize profit while minimizing costs In comparison to methodology used last year model savings = $XXX –Savings attributable to reduced mailing to achieve last years result (variable cost savings). Other benefits - Customer Behavior, Planning Tool