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IT for Financial Decisions 

Contents

Introduction:

Analysis and construction of hierarchy:

Method:

Big lots AHP hierarchy.

Evaluation on basis of Extrinsic, Intrinsic, and Investors’ Objectives factors.

Meaning:

nvestment analysis:

a) Extrinsic factors:

b) Intrinsic factors.

Investor’s objective:

Limitations of AHP and the need to represent investment criteria using ANP framework and fuzzy logic.

Limitations of AHP.

Need to represent investment criteria using ANP framework and fuzzy logic.

Introduction to AHP Hierarchy Analysis

The analytic hierarchy process (AHP) is a multi-criteria decision making (MCDM) method. (Saaty, (1972). ). It is a multi-faceted decision making tool which deals with both qualitative and quantitative measures to evaluate and project people’s decision to derive at effective and relevant projection. AHP has its use in various streams like drugs and medication, Banks and Investments, Software evaluation, business competition ranking, site selection, project selection and even in war for weapon selection.

Analysis and Construction of Hierarchy:

Method:

  1. Collection of Information regarding
  • Overall objective of the organization/group/entity
  • Goals and targets of subsystem/ sub parts/ sub ordinates
  • Decision making scope/ authority / responsibility
  • Strategy to be followed
  • Technique adopted
  • Measures to be taken
  1. Establish a multi-level hierarchy. Divide the system hierarchy in achievable goals.
  2. Determine the correlation degree of adjacent level elements. The corresponding mathematical function is constructed and calculated to determine the relative weight. The information collected are aligned with the decision to be made.
  3. Sorting of information is to be done, relevant data are extracted and arranged in hierarchy level.
  4. Analyze the data, calculate and evaluate the results based on defined quantitative and qualitative measures
  5. Make decision and evaluate the decision on the basis of overall objective. Do a cause-effect or cost-benefit analysis.

In AHP priorities are derived from consistent or near consistent matrices. A measure of consistency is the consistency index CI. From this a consistency ratio CR = CI/RI is derived, using a randomized index RI, the average CI for randomly filled matrices.

3. Evaluation on Basis of Extrinsic, Intrinsic, and Investors’ Objectives Factors

Meaning:

 

Extrinsic Factors (A):

Intrinsic Factors (B):

Investor’s objectives (C):

Meaning

Outside the control of organization that effect organization performance

Internal factors or characteristics within the organization

Values that define the actions the investor undertakes in the

business world.

Primary Factors

· Economic

· Political

· Social

· Technological

· Size

· Profitability

· Return

· Risk

       

Nvestment Analysis:

 Investment analysis using AHP-based decision support system and factors influencing individual investor behaviour for Big lots Inc.

a) Extrinsic factors:

a) Technological Criteria that Impact Big Lots, Inc.

  • Technological Development by Big lots and its competitors
  • Technology's impact on product offering and customer after sales service
  • Impact on cost structure in Discount, Variety Stores industry
  • Impact on value chain structure in Services sector and logistics involved in procurement og goods
  • Rate of technological diffusion and time to cope with technological disruption.

b) Political Factors that Impact Big Lots, Inc.

  • Political stability, Bureaucracy and Government regulation and intervention regarding various pricing, taxation and regulatory conditions of the industry or economy as a whole.
  • Trade regulations & tariffs related to Services and goods
  • Regulations on trade with other countries
  • Risk of military invasion
  • Pricing regulations – Are there any pricing regulatory mechanism for Services
  • Taxation - tax rates and incentives
  • Wage legislation - minimum wage and overtime
  • Work week regulations in Discount, Variety Stores
  • Mandatory employee benefits
  • Industrial safety regulations in the Services sector.
  • Product labeling and other requirements in Discount, Variety Stores

b) Intrinsic factors

a) Size criteria

Strong Brand Portfolio and Expansion – Over the years Big Lots, Inc. has invested in building a strong brand portfolio. The SWOT analysis of Big Lots, Inc. just underlines this fact. This brand portfolio can be extremely useful if the organization wants to expand into new product categories. (Fern Fort University, 2019)

Successful Amalgamation and merger projects to gain synergy benefits especially with its logistics partner have resulted in cast expantion of the company.

  • Sales: The sales of the company is scaling upward showing its increasing reach to customers. High level of customer satisfaction – the company with its dedicated customer relationship management department has able to achieve a high level of customer satisfaction among present customers and good brand equity among the potential customers.
  • Labour force: The vision of big lots says, that the vision for future is being a “best places to work” culture, this means that it treats its labour force as first in line stakeholders and treat them as biggest asset of the company. This enriches it a vast labour force.

 (Annual Report of Biglots Inc, 2019, 2019)

b) Profitability criterion

  • Net Income: Net income shows the profitability of the business. It is the profit calculated after deducting all the expenses from the revenue of the organization.

As it can be seen that Big lots has shown a leap in net profit in 2019 as compared to 2018, it is on right track and has is efficiently operating its business activities.

  • Innovativeness: Innovativeness is the process of using creativity to improve the performance of a company, which makes the enterprise face unprecedented changes. Specifically, for these companies, innovation represents the amount of money the company is willing to invest in research and development, as well as the current innovation impact of companies. The average growth rate of the most recent three years of R&D funding of companies were selected.

Big lots Inc, during the first quarter of 2019, incurred $15.3 million in costs associated with our transformational restructuring initiative, which were recorded in selling and administrative expenses. During the second quarter of 2019, we incurred an additional $19.5 million in costs from this initiative. In the third quarter of 2019, we incurred $3.6 million in costs associated with this initiative. Transformational restructuring costs recorded in the fourth quarter of 2019 were immaterial.

3. Investor’s objective:

a) Criterion of Risk:

  • Debt Ratio

Debt Ratio is company’s total debt divided by the total assets. It shows the dependence of company on external sources of finance. It shows what part of total assets is leveraged.

Debt Equity of Big lots Inc.

Year

Debt

Total Assets

Debt Ratio

2019

2,79,464

3189281

0.08762602

2018

3,74,100

2023347

0.184891667

2017

1,99,800

1651726

0.120964373

  • Beta

Beta coefficient is the risk index to measure fluctuation status of stock in the whole market.

It defines the sensibility of a stock with reference to the market. Lower the beta lower is the impact of market fluctuation on the market.

b) Criterion of Return:

  • Dividend payout ratio:

Dividend payout ratio is the dividends to stockholders divided by net income. It directly reflect the common stockholders can gain from the earning per share. Compare to other indicator, this ratio is more direct to show current profit for investor (Kenton & Hayes, 2019).

Year

Total Dividend paid

DPS

2019

48,421

1.2

2018

50,608

1.2

2017

44,671

1

 

Year

Stock price

2019

72.27

2018

132.74

2017

109.66

  • Return on capital employed

Return on equity is another criterion to assess the return ability of stocks. It is the percentage of net income divided by total equity. It reflects the efficiency of gaining profits by using equity capital. The higher ROE, the better efficiency of using compound interest, the better profitability, the higher return for investors. Another reason is, Warren Buffett regards ROE as the most important indicator to choose a stock for that the companies with high ROE tend to keep high return with better management and some special resources (Bassanese, 2018).

Year

Net Income

Total Equity

ROCE

2019

2,42,464

845464

0.286782169

2018

1,56,894

693041

0.226384875

2017

1,89,832

669587

0.283506102

4. Limitations of AHP And the Need to Represent Investment Criteria Using ANP Framework and Fuzzy Logic

Limitations of AHP

  • Explainable and User friendly: The method of AHP is not at times explainable for the developer and understandable for the end user that is managers and directors because it speaks of technicality which many end users are not familiar with. This creates a barrier in communication and hamper its key function of decision making.
  • Lacks convincing arguments: The AHP gives a framework of any system or project/ plan. It does not give in detail convincing or argumentative discussions which would help to analyze cause-effect or cost-benefit of any decision.
  • Time Consuming: The AHP hierarchy and MCDM consumes a lot of time in drafting the plan and even in explaining it to end user at it is not self-explainable. In such case time required to lead a project without AHP is reasonably lower. In this case it will not be feasible if a decision problem can be solved in an even shorter time without it.
  • The implementation as a spreadsheet template also resulted in some limitations; the template does not include the hierarchy of the decision problem and the final aggregation of weights, i.e. it is only suitable for finding the weights in each category or sub-category. Another limitation is the lack of sensitivity analysis of the final result.(Goepel, 2019)

Need to Represent Investment Criteria Using ANP Framework and Fuzzy Logic

  • Multi-Criteria Decision Making (MCDM) is a concept which enables to select the most appropriate one among predetermined alternatives by evaluating them in terms of many criteria [1]. MCDM methods, classified as conventional and fuzzy, are effectively used to rank alternatives. (İhsanKayaa, MuratÇolakb, & FulyaTerzi, 2019)
  • From the above discusses, we know the main problems for multi-attribute decision making are: (i) how to determine the reasonable and objective weights of attributes; (ii) how to obtain the optimal decisions considering the various factors; (iii) how to make the reasonable interpretations for the decision results.
  • AHP has many theoretical disputes like Rank Reversal in AHP is a major drawback and Independence of variable that is no correlation is a misleading assumption in AHP.

ANP can solve this problem as it has less formalized and more general approach. The Analytic Network Process (ANP), a generalization of AHP with feed-backs to adjust weights, may be a solution. However the decision- maker must answer a much larger number of questions, which may be quite complex. (Alessio Ishizaka ⇑, 2011)

List of References for AHP Hierarchy Analysis

2018 Annual Reoprts, Big lots. (2018). Financial Highlights (Unaudited Adjusted Results). Columbus: Big Lots. Retrieved from https://www.biglots.com/images/marketing/corporate/investors/annual_reports/2018-Annual-Report.pdf

Alessio Ishizaka ⇑, A. L. (2011). Expert Systems with Applications. Multicriteria decision making.

Annual Report of Biglots Inc, 2019. (2019). Management’s Discussion and Analysis of Financial Condition and Results of Operations. Columbus: Big lots Inc. Retrieved from https://www.biglots.com/marketingassets/BigLots2019-Annual-Report.pdf

Biglots. Inc, community page 2020. (n.d.). Retrieved from (https://www.biglots.com/corporate/about-us/our-mission)

Fern Fort University. (2019). Big Lots, Inc. SWOT Analysis / Matrix. USA: Fern Fort University. Retrieved from http://fernfortuniversity.com/term-papers/swot/nyse/2608-big-lots--inc-.php

Goepel, K. D. (2019). IMPLEMENTING THE ANALYTIC HIERARCHY PROCESS AS A STANDARD METHOD FOR MULTI-CRITERIA DECISION MAKING IN. A NEW AHP EXCEL TEMPLATE WITH MULTIPLE INPUTS. Retrieved from https://bpmsg.com/wordpress/wp-content/uploads/2013/06/ISAHP_2013-13.03.13.Goepel.pdf

İhsanKayaa, MuratÇolakb, & FulyaTerzi. (2019, April). Energy Strategy Reviews. A comprehensive review of fuzzy multi criteria decision making methodologies for energy policy making, 24, pp. 207-228. doi:https://doi.org/10.1016/j.esr.2019.03.003

Saaty, T. ((1972). ). An eigenvalue allocation model for prioritization and planning.

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