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Knowledge-Based Systems 21 (2008) 148163 www.elsevier.com/locate/knosys

A knowledge-based decision support system for measuring enterprise performance

W. Wen *, Y.H. Chen, I.C. Chen
Department of Information Management, Lunghwa University, Taiwan, ROC Department of Restaurant Management, Northern Taiwan Institute of Science and Technology, Taiwan, ROC Received 4 December 2006; received in revised form 1 May 2007; accepted 22 May 2007 Available online 29 May 2007

Abstract This paper presents a knowledge-based decision support system for measuring enterprise performance. The KDSS system provides not only companys various nancial data query, but also enterprise performance based on knowledge reasoning. Additionally, an articial neural network is adopted to predict future total sales. The system integrates a database, a knowledge base, an inference engine, and a model base. It can oer a wide range of dierent queries and all rules in the knowledge base are explained in detail to illustrate the process of reasoning. Meanwhile, in order to reduce subjective judgment on performance measurement, a group assessment is used to assess the scores of each dimension for measuring enterprise performance. Finally, the result of enterprise performance evaluation is presented and some suggestions are given to managers for making decisions. 2007 Elsevier B.V. All rights reserved.
Keywords: Knowledge-based decision support system; Knowledge base; Database; Enterprise performance; Articial neural network

1. Introduction With the increasing complexity of globalization, there has been a rapid growing importance and discussion for more research on how to use information technology to gain competitive business advantages. However, this form of competition has been studied largely on a rm-to-rm level and not at an industry level that would provide greater insight into the relationship between information technology and enterprise performance. Additionally, the establishment of a company is for prots and sustainable development. Therefore, periodical performance evaluation is very important to keep the rm growing. According to the evaluation, managers can learn the eect of resource utilization and operation. Enterprise performance presents how a manager achieves an enterprises goal with available resources. Additionally, the performance is not only about

Corresponding author. Tel.: +886 2 29352227. E-mail address: wenwu@mail.lhu.edu.tw (W. Wen).

the expected goal, but also the future development of the corporation. For the above reasons, business activities should be periodically analyzed and evaluated by using formulas and measures based on the data internally or externally collected during operations. Generally, a corporation has a long-term plan based on its long-term goals and past performances. It has put all possible variables into consideration and amends its future direction and business plan gradually. The trends can therefore be predicted. In recent years, the electronics industry of Taiwan has become a focus of the domestic stock market. The electronic stocks lead this feverish market. Usually, the daily amount accounts for more than half of the total market transactions. The electronics industry is not only a mainstay of Taiwans domestic economics, but it also plays an important role in the international market. Any improper operation may result in serious crisis. Therefore, the performance of the electronics industry is an intense focus for managers, administrations, and investors. Financial statements can reect the operation of a company. They provide necessary data to evaluate enterprise

0950-7051/$ - see front matter 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.knosys.2007.05.009

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performance. The analysis of nancial statements is a process to help managers make decisions. Its goal is to evaluate the current and past nancial situation and operation, and to predict the future of the company. Furthermore, in todays age with innovations and variances, decisionmaking and eciency are considered the highest priority when managers try to improve operational processes. Yamin et al. [29] devoted themselves to relationships among general policies and the predominance in the competitive and organizational performances under dierent situations. Hoque [8] discussed an impact on performance of two factors: policy and environment uncertainty. Their results showed that policy was positively related to performance. But, there was no evidence to prove the relationship between environment uncertainty and performance. With the fast development of information technology, there are more and more tools available to decision makers. The most widely deployed systems are decision support systems. For nancial applications, Wen et al. [28] proposed a decision support system based on an integrated knowledge base for acquisition and merger. It not only provides merger processes, major problems, and related regulations practically or procedurally, but also gives rational suggestions according to related regulations. Finally, it can make suggestions on how to deal with uncertain growth rate and current evaluations. Zopounidis et al. [31] also developed a knowledge-based decision support system for nancial management. The system integrated the technologies of decision support systems and professional systems, and was employed to deal with the past and current problems that occurred frequently. Besides, decision support systems are also used in the HR planning and decision, nancial management, and marketing decision-makings. They are widely utilized and accepted [12,22,18,16,2,13,24,5,17,9]. Additionally, more and more attention has been paid to the application of articial neural networks (ANN). They have been utilized to solve problems such as identication, classication, and forecasting. Their application includes industry and engineering, business and nance, science and information etc. According to the related research [30,25], the neural network model is much better than the traditional statistical model in the eciency of prediction. ANNs have a precise mathematical base, parallel massive data process capability, fault-tolerant capability, and association and noise ltering capability. They can also be used to make up many assumptive conditions required by statistical modeling. Therefore, much literature has been published on market partitioning, stock index prediction, exchange rate prediction, bankruptcy prediction, credit prediction, credit evaluation, and moral crisis in the insurance cases [21,6,27,30,25,10]. In this paper, we focus on measuring business performance for an electronics company and then comparing its performance with that of the Taiwan electronics industry. Next, through knowledge reasoning, some actions or suggestions can be given for conducting the company. The remainder of the paper is organized as follows. Section 2 presents

the vital measures of evaluating enterprise performance for an electronics company. In Section 3, we propose the structure and functions of the decision support system. Then, the functions and processes of the database and knowledge base, knowledge reasoning, and neural network forecasting are explained, respectively, in Sections 3.1, 3.2, and 3.3. Section 4 demonstrates the systems functions and evaluates its benets through system implementation. Finally, in Section 5, some suggestions for future directions are also given. 2. The vital measures of evaluating enterprise performance There are many views and thoughts in the measuring of enterprise performance. Venkatraman and Ramanujam [26] stated that there were non-nancial performance indicators (operational performance) besides nancial indicators in the evaluation of performance. Examples include, market share, product quality, R&D capability, manufacture eciency, and customer satisfaction etc. Moreover, Murphy et al. [19] surveyed 124 articles and classied the performance measures in these papers as nancial and operational performance. Then, the performance measures were split into 8 dimensions: eciency, growth, prot, size, liquidity, success/failure, market share, and leverage. Each dimension has its own measures and a total of 71 dierent measures of performance were collected. Finally, they summed the total number of articles in which each dimension and measure were considered. They found that eciency, growth, size, and prot were the widely employed dimensions for measuring performance. Nearly 60 percent of their studies only make use of one or two dimensions. No study in the research uses more than ve of the eight dimensions. Some studies show that 19 percent of 52 articles adopt one measure and 71 percent use four or fewer measures. Furthermore, according to other related work, [19,3,14,29,8,4,7], enterprise performance can roughly be classied into two domains presented below (see Table 1): 2.1. Financial Financial measures include eciency (e.g., return on investment, return on equity, return on assets, return on
Table 1 Measures for nancial and non-nancial performance Financial Financial performance Return on assets Return on sales Overall nancial performance

Non-nancial Innovation performance

R&D outlays Process innovations Product innovations Employment growth/stability Employee morale Customer relations Supplier relation

Stakeholder performance

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net worth, etc.), growth (e.g., change in sales), prot (e.g., return on sales, net prot margin, gross prot margin, net prot level, etc.), liquidity (e.g., sales level, cash ow level, current ratio, quick ratio, etc.), leverage, sales growth, protability (e.g., return on investment, return on sales, return on equity, etc.), earnings per share, overall nancial performance, and so forth. Other measures include longterm capital/xed assets ratio, circulating ratio in the debt payment aspect, receivable account velocity, duration of account receivable, stock velocity, xed assets velocity, and total assets velocity in the operating capability aspect. Enterprise performance can be analyzed and evaluated by collecting and calculating nancial data for the reference of decision makers. Basically, these measures can be referred to as primary data and secondary data. In the research of Murphy et al. [19], 70% of data were based on primary data. Since most of corporations are not willing to let their internal data public, data collection is dicult. Meanwhile, we need to assume the dominance and legitimacy of nancial goals in the businesss system of goals [3]. 2.2. Non-nancial In addition to measures of nancial performance, some of enterprise performance would involve non-nancial performance such as innovation and stakeholder performance. The indicators of innovation performance are composed of R&D outlays, product innovations, and process innovations. The stakeholder performance contains employment growth/stability, employee morale, customer relations, and supplier relations. Of course, some others will also include in the non-nancial performance such as new product introduction, product quality, marketing eectiveness, and manufacturing value-added. The rest of research about non-nancial performance is giving as the following. Maiga [14] examined the relationship between enterprise benchmarking and enterprise performance. He found three elements in the benchmarking, which aected the enterprise performance positively, including prior experience with benchmarking, the commitment of the organization to benchmarking, and internal preliminary competence analysis. Also, many of researches focus on the impacts of strategies and competition predominance on enterprise performance. Yamin et al. [29] devoted themselves to the relationships among generic strategies, competitive advantage, and organizational performance under dierent situations. They suggested that there are signicant dierences when dierent generic strategies and types are adopted. Meanwhile, combination strategies under certain circumstances are more successful than those organizations dedicated to single strategy. Using a path analytical model, Hoque [8] surveyed and discussed the impact on performance of two factors: strategy and environmental uncertainty from 52 samples of manufacturing. His result shows that managements strategy choice is positively related to performance

remarkably. But there is no evidence to prove the relationship between environmental uncertainty and performance. Murphy et al. [19] considered that accurate performance evaluation is a key to success for enterprises. Their paper can be divided into two parts: (1) They collected literatures about enterprise performance from 1987 to 1993 for statistics and learned that more than 60% of research evaluated enterprise performance by one or two aspects. Generally, in the evaluation of performance, there is no appropriate choice. (2) They stepped further into the relationships among performance variables and explained the results weighted by multiple performance aspects. They found that if the performance of an aspect increases, the performance of another is going to decrease. For example, if an enterprise wants to broaden its business, a huge amount of capital is needed. Therefore, the enterprises eciency and cash ow will drop. Lebas [11] paid attention to the relationship between performance management and measurement, and found that they are closely related. Performance management could reference the result of performance measurement, and performance management supported performance measurement correspondingly. He also mentioned that common criteria of measuring enterprise performance include (1) employment creation, (2) social goods, (3) security of employment for the rms personnel, (4) providing a satisfying return to corporate headquarters, (5) innovativeness in processes and product, (6) customer satisfaction, (7) growth of market share, (8) environmental contribution, and (9) technological leading edge. Many scholars also state that outsourcing aects enterprise performance. In the research by Gilley et al.[7], they found by statistics that the outsourcing of training and compensation might aect enterprise performance. In this paper, owing to uneasy judgment and lack of non-nancial data, we only use nancial measurement to build a model to assess enterprise performance. We pick out 12 nancial measures based on the previous paper survey and data collected from public information sources. Meanwhile, we classify these measures into four dimensions including nancial structure, liquidity, activity/eciency, and protability. Besides, to understand what a company position is, such measuring should be compared the companys measures with the minimum, maximum, average, and quartile value of the electronics industry. Although only 12 nancial measures adopted in the measuring model, it has easy scalability if researchers hope to extend the assessment model for considering non-nancial indicators. However, due to dicult collection and measurement for non-nancial data, we will adopt Analytical Hierarchical Process (AHP) method in which nancial and non-nancial measures are included to evaluate business performance in our next working paper. 3. The structure and functions of the decision support system The decision support system has four components: a data management subsystem, a knowledge management

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subsystem, a model management subsystem, and a dialogue subsystem (see Figs. 1 and 2). A user utilizes and maintains data in the database through the dialogue subsystem, and analyzes the enterprise performance by using the knowledge management subsystem. Predictions in the model base can be made by using articial neural network models. The major functions of the system include: Data management subsystem: The data management subsystem is an eective mechanism for storing, modifying, deletion, and appending nancial data. It is managed by software called the database management system (DBMS). Knowledge management subsystem: The knowledge management subsystem can support the operation of other subsystems or operate independently. It provides decision makers with reasoned knowledge to broaden their mind. Model management subsystem: To provide a better nancial control and management for the future, the system uses articial neural network models to make nancial forecasting. Dialogue subsystem: The dialogue subsystem is responsible for the internal/external communications. A user sends requests to the system through this subsystem and the internal system sends feedback accordingly.

3.1. The functions and processes of the database and the knowledge base Database technology acts as an important role in building organizations information systems. A more common denition of a database is a collection of data designed to serve many applications eciently by storing data in

only one location and minimizing redundant data, whereas a database management system (DBMS) is the software that allows an information system to centralize data, manage them eciently, and provide easy retrieval. Currently, most DBMSs provide heterogeneous database retrieval (e.g., access dierent databases such as Oracle, Sybase, Informix, SQL Server, MySQL, etc.) by using an ODBC/ JDBC interface. Nowadays, relational database management systems are the most popular development tools for building business information systems because of their superior integration, distribution, and easy of use. The database consists of six tables, including Password, Production, Inventory, Finance, Sales, and Personnel. The main function of the Password table is to verify users identication. Thus, the Password table is composed of four attributes: id, password, unit, and management-level. The Production table provides diverse descriptions and functions for production management and planning. The attributes of the Production table are production name, production quantity, produce-date, delivery-date, etc. Inventory provides the number of stored products, parts, or materials. The attributes of the Inventory table consist of item no, item name, quantity, cost, purchase-date, and valid-date. The attributes of the Finance table are mainly item name, cost, price, quantity, year, and use-level. The Personnel table is used to store personnel data including the attributes such as code, name, employed-date, title, award, address, telephone, and so on. Finally, the Sales table contains the key items needed to maintain sales performance. The attributes of the table include code, item name, price, sales date, delivery date, quantity, total price, delivery-address, contact-tel, etc. As for the knowledge base, it involves two distinct bases. One is a rule base and the other is a case base. In this paper, the knowledge base only contains a rule base. In the rule

Knowledge Base

Knowledge Management Subsystem Database Model Management Subsystem Inference Engine Data Management Subsystem

Artificial Neural Network

Control Program

Dialogue Subsystem

User

Fig. 1. The KDSS framework for measuring enterprise performance.

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Financial Data

Extract

Data Management Subsystem Add Historical/ Modify Current Data delete

Knowledge Management Subsystem

Control Program

Model Management Subsystem

Dialogue Subsystem

User

Fig. 2. A structure of data management.

base, the specialized domain knowledge is presented in the form of if <antecedent clauses > then < consequent clauses> statements. If the antecedent clauses are true, then the consequent clauses are true. Therefore, the rule in the rule base is triggered if its antecedent matches. Here, knowledge engineers must elicit knowledge rules relied on professional experts experiences (e.g., operational, middle or senior managers, etc.) and judgments on routine working processes. All rules should be coded in IF-THENELSE statements or other computer language forms for execution on a computer and stored in the knowledge base. Fig. 3 presents the structure of the knowledge management. The inference engine needs to select a suitable rule from the rule base. Then, the engine gets the facts from the database to infer a conclusion. Upon receiving the known facts from the database, the engine needs to infer and explain the situation and trigger actions or give suggestions for decision makers. Furthermore, in order to enable

users to easily operate knowledge management, we have designed a user transparency approach that can be used to modify all vital information, if necessary, without revising program source codes. Users can modify, add or drop into the system their latest knowledge. Once the new knowledge has been added, the system is able to automatically diagnose all vital situations of which a company may face. Usually, data in an expert system or a decision support system (ES/DSS) database are extracted from internal or external data sources. Hence the data used in our study are not only internal nancial data of an enterprise, which come from the organizations transaction processing system, including data related to nancial structure, debt-paying ability, operating ability, and protability but also external data, which come from the Taiwan electronics industry. In our research, we collected the measures of the four dierent abilities of 237 electronics companies

Database

Knowledge Base

Inference Engine Data Management Subsystem Control Program Knowledge Management Subsystem

Dialogue Subsystem

User

Fig. 3. A structure of knowledge management.

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from 1999 to 2003. However, sometimes for understanding the ability of competition, (we suggest to use all nancial data retrieved from competitors) and calculate their maximum, minimum, average, 1st quartile (Q1), 2nd quartile (Q2) and 3rd quartile (Q3), as shown in Table 2. It is worth to mention that some abnormal observations were removed because their values were too large or too small before we calculated the quartiles. Then, the important nancial data were stored in a database and managed by a DBMS during retrieval, appending, deletion, updating, and other management. The database is integrated into the KDSS system and communicates with the data management subsystem through an ODBC or a DB driver. Finally, the dialogue subsystem provides a user-friendly interface to interact with the user. The purpose for calculating Q1, Q2, and Q3 is to use them in knowledge reasoning for comparing performance. When a company gets itself measures of company-liquidity/Debt-paying, nancial structure/Stability, activity/eciency, and protability, they will be compared with those of the electronics industry as shown in Table 2 for measuring its performance. These data are regarded as the major comparison for measuring enterprise performance. The knowledge management subsystem is for knowledge rule management (e.g., retrieval, updating, deletion, etc.) and reasoning. It utilizes its internal knowledge for reasoning, and communicates with the data management subsystem via an integration interface for knowledge updating. It also interacts with the user through the dialogue subsystem to master more in the measuring performance.

riences. The awarding scores for a specic dimension can be collected from dierent managers. The corresponding weights of each dimension assigned by each manager in the group assessment are also summed and averaged. The method of computation for the group assessment is shown as the following steps: 1. Assume that there are k managers in a group assessment team and n dimensions will aect enterprise performance; each manager in the group assigns a score for each dimension in a scale of 04, and grants a weight to each measure in a range of 01. 2. Let Sij be manager is score for dimension j and Wij be manager is weight for dimension j. 3. Compute the averaged score S j for dimension j as dened by: Pk S ij i 1; 2; 3; . . . k j 1; 2; 3 . . . n 1 Sj 1 k 4. Let the averaged weight W j for dimension j be: Pk W ij Wj 1 i 1; 2; 3 . . . k j 1; 2; 3 . . . n k 5. Calculate the score of dimension Xj as dened by: X j SjW j j 1; 2; 3 . . . n 3

When the scores of dimensions Xj, are obtained, the measuring process begins as mentioned in the following sections. 3.3. Knowledge reasoning

3.2. The group assessment method Group assessment is very essential in a successful performance evaluation process. The assessment must have high credibility by involving middle or top managers for awarding scores for each dimension (e.g., liquidity ability, nancial structure, activity ability, and protability). Managers need to give the scores and corresponding weights for relative key dimensions based upon their own managerial expeTable 2 Results of various measures Maximum Debt to total assets ratio Permanent capital to xed assets ratio Current ratio Quick ratio Accounts receivable turnover Average accounts receivable collection Inventory turnover ratio Fixed asset turnover ratio Total asset turnover ratio Return on assets Return on equity Net prot ratio 80.124 28168.428 1577.57 1484.524 21.504 466.048 653.784 1456.364 20.34 48.368 66.974 199.706 Minimum 4.676 59.612 33.394 21.268 0.82 17.5 0.284 0.088 0.042 26.244 85.942 541.998

There are four dierent abilities that analysts commonly consider when analyzing the nancial health of a companyliquidity/Debt-paying, nancial structure/Stability, activity/eciency, and protability. Their meaning and formulas are given as follows [1,23,20,15]: (1) Liquidity/Debt-paying Ability: The ability of a company to meet its short-term obligations. Current ratio = Current assets/Current liabilities

Average 37.919 714.295 381.620 329.924 5.244 85.344 12.889 17.939 1.078 9.222 13.186 5.515

1st quartile 27.170 210.344 142.851 101.333 3.648 59.918 4.058 1.757 0.535 4.351 6.025 3.144

2nd quartile 37.364 364.366 187.663 140.43 4.616 79.436 6.686 4.58 0.833 8.763 13.219 8.316

3rd quartile 48.522 690.624 272.986 208.126 6.126 100.462 10.841 12.115 1.281 14.365 22.291 15.426

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Quick ratio = (current assets inventory)/current liabilities Working capital = Current assets current liabilities (2) Financial Structure/Stability: The ability of a company to reach its long-term solvency. Debtto assets = Total debt/Total assets Debt to equity = Total debt/Shareholders equity Times interest earn = Prot before interest & tax/ (Total interest charges) Cash Flow to Liabilities = Operating Cash Flow Total Liabilities Permanent capital to xed assets = Permanent capital/Fixed assets (3) Activity/Eciency: Activity ratios to measure the ability for managing current and non-current assets eciently. Receivables Turnover Ratio = (Net Credit Sales)/ AVG Net AR Average Collection Period = 365/ Receivables Ratio Turnover Inventory Turnover Ratio = Cost of Goods Sold/ Average Inventory Total Asset Turnover = Net Sales/Average Total Assets. (4) Protability: Prot or return on operation. Return on assets (ROA) = prot/Total assets Return on equity = Prot/Stockholders equity Earning per shares (EPS) = Prot/# shares outstanding Net prot ratio (also called Prot margin) = Net prot/ Sales = (Sales-Cost of goods sold)/Sales In Fig. 3, the evaluation of enterprise performance is based on the forward reasoning method. Once the inference engine nds the corresponding rules from the knowledge base and gets the known facts from the database, it goes forward in three phases until it reaches a satised conclusion. Fig. 4 shows the forward chaining reasoning to calculate the total scores of the 4 dimensions. In Fig. 4, the ranges for each dimension are obtained from the equation, 4n , where n is the number of measures in each dimension m and m is the score of each dimension, Xj, judged by managers via a group assessment. All values are transferred to the closest integer. 3.3.1. Phase 1: knowledge reasoning In Phase 1, the system evaluates enterprise performance by using 12 measures: debt to total assets ratio, permanent capital to xed assets ratio, current ratio, quick ratio, accounts receivable turnover, average accounts receivable collection, inventory turnover ratio, xed asset turnover ratio, total asset turnover ratio, return on assets, return on equity, and net prot ratio. Each value of measurement is compared with that of the industrys quartile. Here below are the details: As we stated in Section 3.1, let Q1 be the 1st quartile of L1 current ratio of the industry, Q2 be the 2nd quartile of curL1 rent ratio of the industry, and Q3 be the 3rd quartile of the L1

current ratio of the industry. We also assume that VL1 is the actual value of current ratio and L1 represents the score of current ratio. In order to know the capability of enterprises to pay their debt by current assets, we must pay attention to the composition of current assets and their possibility to depreciate. It should then be compared with the quartiles of the electronics industry as follows: (1) VL1 6 0: The ratio is very low, indicating that the company has serious problems on nancial circulation. The current assets cannot cover current debts. The debts cannot be paid o. The score of this measure is awarded 0 points (i.e., L1 = 0). (2) 0 < V L1 6 Q1 : The ratio is low, indicating that the L1 company may have problems on nancial circulation. The current assets can only cover a small portion of current debts. The debts are not guaranteed. The score of this measure is awarded 1 point (L1 = 1). (3) Q1 < V L1 6 Q2 : The ratio is normal, indicating that L1 L1 the company has few problems with nancial circulation. The current assets can only cover a big portion of current debts. The debts may be guaranteed. The score of this measure is awarded 2 points (L1 = 2). (4) Q2 < V L1 6 Q3 : The ratio is high, indicating that the L1 L1 company has no problems with nancial circulation. The current assets can almost cover the current debts. The debts are guaranteed. The score of this measure is awarded 3 points (L1 = 3). (5) Q3 < V L1 : The ratio is very high, indicating that the L1 company has no problems with nancial circulation. The current assets can cover current debts. The debts are much more guaranteed. The score of this measure is awarded 4 points (L1 = 4). In the following, examples of evaluation based on the liquidity/debt-paying ability in Phase 1 are given. Suppose that L1 is the score of current ratio and L2 is the score of quick ratio. If VL1 = 208.568 and Q2 < V L1 6 Q3 , then the score L1 L1 for this measure, L1, is 3 points. Similarly, the inference engine in the system is able to count the score of L2 (see Figs. 4 and 5). 3.3.2. Phase 2: knowledge reasoning As for performance evaluation, there are 4 dimensions to be considered: nancial structure, liquidity/debt-paying ability, activity/eciency ability, and protability. In Phase 2, the measures for each dimension for computing enterprise performance are summed. Each dimension is granted a score based on experts group assessment as mentioned in Section 3.2. For example, in phase 2, the score of liquidity/ debt-paying ability is granted 5 points by a group assessment. Then, 5 dierent scales are adopted: very unsatised, unsatised, passable, satised, and very satised. Suppose that L represents liquidity/debt-paying ability and L is equals to L1+L2.

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Liquidity/Debt-paying Ability Range Current Ratio 0 -4 L0 0<L 2 2<L 4 0-4 4<L 6 6<L 8 Score 0 1 2 3 4

155

Quick Ratio

Financial Structure/Stability Range Debt to Total Assets Ratio 0-4 F0 0<F 2 2<F 3 3<F 5 5<F 6 6<F 8 Accounts Receivable Turnover 0-4 Activity/Efficiency Ability 0-4 Average Accounts Receivable Collection Inventory Turnover Ratio Fixed Asset Turnover Ratio Total Asset Turnover Ratio 0-4 Range A0 0<A 7 Score 0 1 2 3 Score 0 1 2 3 4 5 Enterprise Performance Range E0 0<E 4 4<E 7 7<E 11 Score 0 1 2 3 4 5

0-4 Permanent Capital to Fixed Assets Ratio

11<E 14 14<E 18

7<A 13

0-4

13<A 20 Profitability Range P0 0<P 2 2<P 4 4<P 6 6<P 8 8<P 10 10<P 12

0-4

Score 0 1 2 3 4 5 6

Return on Assets

0-4

Return on Equity Net Profit Ratio

0-4

0-4

Fig. 4. Forward chaining reasoning.

L1: the Score of Current Ratio

L: Liquidity/DebtPaying Ability

Enterprise Performance

L2: the Score of Quick Ratio (%)

Fig. 5. The liquidity/debt-paying ability for measuring enterprise performance.

For example, if the scores of Phase 1 is L1 = 3 and L2 = 2, respectively, then the corresponding result is P2 L = 5 (e.g., 4 < L i1 Li 2 3 5 6 6). Hence, the score of liquidity/debt-paying ability for this phase is 3 points based on the following judgment of liquidity/ debt-paying ability: (1) Very unsatised (The total score in Phase 2 6 0): The liquidity/debt-paying ability is very bad. The score of L is 0 points. (2) Unsatised (0 < The total score in Phase 2 6 2): The liquidity/debt-paying ability is bad. The score of L is 1 point. (3) Passable (2 < The total score in Phase 2 6 4): The liquidity/debt-paying ability is normal.

The score of L is 2 points. (4) Satised (4 < The total score in Phase 2 6 6): The liquidity/debt-paying ability is good. The score of L is 3 points. (5) Very satised (6 < The total score in Phase 2 6 8): The liquidity/debt-paying ability is very good. The score of L is 4 points. 3.3.3. Phase 3: knowledge reasoning Phase 3 is an integrative calculation of these 4 portions (i.e., dimensions) involving nancial structure, liquidity/ debt-paying ability, protability, and activity/eciency ability, which indicate the actual business performance. In phase 3, the system classies business performance, E, which presents the total score, into 5 catalogues including

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very unsatised, unsatised, normal, satised, and very satised as follows: (6) Very unsatised (The total score: E 6 0): The enterprise performance is very bad. The total score is 0 points and the system shows a crying face (e.g., .). (7) Unsatised (0 < E 6 4): The enterprise performance is bad. The total score is 1 point and the system shows an upset face (e.g., ). (8) Normal (4 < E 6 7): The enterprise performance is normal. The total score is 2 points and the system shows a star (e.g. w). (9) Satised (7 < E 6 11): The enterprise performance is good. The total score is 3 points and the system shows two stars (e.g., ww). (10) Very satised (11 < E 6 14): The enterprise performance is very good. The total score is 4 points and the system shows three stars (e.g., www). (11) Very satised (14 < E 6 18): The enterprise performance is extremely good. The total score is 5 points and the system shows four stars (e.g., wwww). For instance, if L = 3, F = 3, A = 4, and P = 2, then the corresponding result is 11 < (L + F + A + P) <= 14 ) (11 < (3+3+4+2) <= 14).1 Hence, the enterprise performance of the company is very good. The system shows three stars (e.g., www). To summarize the above 3 phases, we list the algorithm of rule reasoning as follows: Phase 1: Rule 1: IF Q2 < V L1 6 Q3 THEN L1 = 3 L1 L1 Rule 2: IF Q1 < V L2 6 Q2 THEN L2 = 2 L2 L2 Phase 2: Rule 3: IF L1 = 3 AND L2 = 2 THEN L = 3 Phase 3: Rule 4: IF L = 3 AND F = 3 AND A = 4 AND P = 2 THEN E = www

Articial Neural networks are a useful approach to predict future nancial indexes for helping managerial decision-making. There are 11 common uses of neural networks. The most common one is the back-propagation neural network. It belongs to supervised learning, and is the most representative and widely used pattern of neural networks today. It has a good performance for non-linear problems. Therefore, the back-propagation neural network is used in many dierent domains. Its advantages are listed below: 1. The output is continuous value, good for identication, classication, function synthesizing and prediction. 2. The learning is accurate. It can deal with complicated and highly non-linear problems of function synthesizing. 3. Rapid recollection, its prediction is better than the prediction by traditional patterns. The back-propagation neural network consists of an input, a hidden and an output layer, as shown in Fig. 6. The process of training is carried out by samples. These trainings are repeated until convergence occurs. Input layer: The input variables to the network. The number of neurons is decided by the problem you face. In our research, we adopt total sales, Year1, Year2, . . . , Yeart-1 as the input values. Hidden layer: The number of neurons is not xed. It is decided by trail and error in the training stage. In this study, we use 2 neurons in the hidden layer. Output layer: The output of the neural network is Yeart. P Output Function: X W i X i hi Y, Output; Wi, Weight; hi, Deviation. 1 Activation Function: Y 1eX The weights of connections among neurons can be calculated by using the back-propagation (BP) approach for future predictions. The purpose of neural network training is to make the output closer to the target value. In other words, same input should get same output. The output is disordered for an untrained neural network. With an increase in the number of training times, the weights of connections in the network will be adjusted to make their deviation smaller. When the deviation is small enough, the network is convergent. All the samples are numerical

3.4. Neural network forecasting The main purposes of the KDSS system are not only to provide a better suggestion based on enterprise performance evaluation but also hope to manage future nancial status by using ANN forecasting. Although we can evaluate enterprise performance by using our three-phase reasoning model, predicting future nancial status is also very important. ANN models are well used for future nancial measures forecasting. Also, using these models, a user is easily able to retrain the ANN models in the future when he needs to carry on nancial forecasting. Meanwhile, the KDSS system may directly link some commercial tools such as, NeurShell or JavaNNS, for any future training, testing, and forecasting. Therefore, we discuss and analyze ANN models in the following.

Input layer

Hidden layer

Output layer
Fig. 6. A 3-layer articial neural network.

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points in the prediction based on the neural network. Training is required when an ANN model can be used in forecasting problems. After repeating learning, these data are put into a network structure like a black box for learning. Tests are continued to see whether the expected goal is reached before we nish the training. The training procedures of neural networks are shown in Fig. 7. The training is based on the samples from the problems, including input values and target outputs. The internal rules obtained by the training are weights among nerve cells. If we apply these rules to the new cases, prediction output can be generated immediately after we input the values. To be ordinary, it generates an internal black box function. The training is nished. In our research, we adopt the pattern of a 3-layer back-propagation neural network. The samples in the training are annual nancial data such as total sales from 1994 to 2005. The network is convergent when the deviation reaches the minimal. Then we use this trained pattern to predict the future nancial data, and help the decision maker in decision-making. We integrate a powerful free tool, JavaNNS, with the KDSS. Once the nancial data in the database are accessed, we are able to use JavaNNS to execute the training process and when the value of mean standard error is less than 0.01 then we test the trained ANN model by using the total sales in 2005. The model that has the smallest test error will be employed as the ANN model to predict future nancial data (e.g., net prot, return on sales, market share, etc.). Furthermore, an ANN model using the BP algorithm is a nonlinear activation function. It typically has a squashing method in squashing the possible output from a node to (0, 1). Hence, data normalization is often executed before a training process begins. The following equations are commonly used [22,25,30]:
x0 xmin (1) Linear transformation: xn xmax xmin , xn 2 [0,1]; xmin (2) Linear transformation: xn bax0min a ; xn 2 a; b; xmax x x (3) Statistical normalization: xn x0s ; x0 (4) Simple normalization: xn xmax , where xn and x0 refer to the normalized and original data; xmin, xmax, x and s represent the minimum, maximum, mean, and deviation, respectively.

tion as data normalization. Therefore, annual actual sales and maximum actual sales are used to transform the actual sales into the range between [0, 1] by using the following equation: x0 ; xn 2 0; 1: xn xmax The ANN models proposed for the sales forecasting problem are a 3-layered feed-forward back-propagation network. In our training process, we assume that there are three ANN models: case I, case II, and case III. The number of neurons in the hidden layer for the three cases is xed as 2 neurons and the number of the input layer is 2, 3, and 4 respectively. Case I has two inputs and an output. Case II has three inputs and an output. Case III has four inputs and an output. Table 3 shows the total sales (in thousand NT dollars) in Taiwan from 1994 to 2005. In order to correctly compute the ANN models, all total sales are transferred by using simple normalization (i.e., x0 xn xmax ). After calculating ANN forecasting, the results need to be de-normalized (i.e., x0 = xn xmax). From the experimental result (see Table 4), we nd that the values of MSE for cases I and III are 0.00277 and 0, which are smaller than the value of case II, 0.00412. Next, comparing case I with case III, we select case I as the most suitable ANN model for sales forecasting because its test error is the smallest. Therefore, case I is used for sales forecasts for the next year, 2006. As the sales forecasts for the future are computed, we can propose the future production capability. 4. System implementation and discussion This is a 2-year research program. Two Masters students are involved in the study. We rst collect the actual nancial data of the 237 companies in the electronics industry in Taiwan from 1999 to 2003 and classify them into four classes based on the quartiles (see Table 2). Then, according to the framework for measuring enterprise performance, we have implemented the knowledge-based decision support system for measuring enterprise performance (KDSS). It has four major functions: nancial measure query, knowledge reasoning and updating, neural network forecasting, and enterprise performance evaluation. Financial measure query: The query of nancial data is the basis of the decision support system. Therefore, this function is for the basic querying, appending and updating of nancial data. Knowledge reasoning and update: Knowledge reasoning is the core of the system. The KDSS system supports real time updates of knowledge reasoning rules so that the user can adjust the rules in the knowledge base according to the reality of the industry and enterprise, making the reasoning accurate and rational. Neural network forecasting: The samples for neural network forecasting in the training are the total sales from 1994 to 2005. Using neural network technology, the

In our paper, we adopt mean squared error (MSE) as the forecasting error. Meanwhile, we use simple normalizaCompute output

Adjust weights values

no

Is desire output achieved?

Yes Stop

Fig. 7. A basic concept of learning process for neural network forecasting.

158 6,178,380,64 0.98380962

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enterprise can manage and control both the present and the future. It helps the eciency of decision-making greatly and it deals with future uncertainty and helps mangers make decisions more precisely. Enterprise performance evaluation: The core of this system is the evaluation of business performance. From the nancial data and knowledge reasoning, we can know the current organizational performance. This can provide decision makers with optimal advices along with the results of evaluation. Fig. 8 shows the home page of the system. It has four major functions, including nancial factor query, knowledge reasoning and updating, neural network forecasting, and enterprise performance evaluation. The user can choose a corresponding item to get a specic function depending on the users requirement. Fig. 9 shows the results of nancial measure query. It supports the query of nancial data of listed electronics companies. It demonstrates the query results of ABC Companys nancial data of 2001. This function can also maintain the enterprises nancial data and the comparison with the standard of the electronics industry. Here, we take the ABC Company as an example. Its 12 nancial indicates, debt to total assets ratio, permanent capital to xed assets ratio, current ratio, quick ratio, accounts receivable turnover, average accounts receivable collection, inventory turnover ratio, xed asset turnover ratio, total asset turnover ratio, return on assets, return on equity, and net prot ratio, are 31.16, 926.35, 249.46, 227.07, 4.18, 87.32, 12.84, 24.01, 1.78, 10.72, 16.74, and 6.06, respectively. First, in Phase I, these data are compared to their quartiles shown as in Table 4 and awarded scores between 0 and 4. It is worth to mention that only the values of debt to total assets ratio and average accounts receivable collection are the smaller the better. The rest of the 12 items are the larger the better. For example, the value of debt to total assets ratio is 31.16. The value is between its rst quartile and second quartile so F1 is awarded 3. Similarly, the system can get the rest of scores. In Phase II, the scores will be summed based on the number of each dimension and compared to the range, 4n, in m accordance with the group assessment. Finally, after three-phase reasoning, the system will generate an evaluation report, which shows the results and suggestions of the enterprise performance as shown in Fig. 13. In addition, we make use of JSP, JavaNNS, and MySQL to develop all functions so that it is platform independent. As we know, the rules in the knowledge base sometimes need to be updated, deleted, or increased in order to be suitable for a quick changing environment. Therefore, in order to allow users to easily manage the knowledge base, we have designed a user transparency approach to modify all vital information, if necessary, without revising program source codes. Users can modify, add or drop their latest rules from the system. When new knowledge is introduced, the system is able to automatically evaluate accurate alternatives for measuring enterprise performance. So, as shown in Fig. 10, the functions

2005 2004 2003 2002 2001 2000 Table 3 ABC Companys total sales in Taiwan from 1994 to 2005 (Unit: thousand new Taiwan dollars) 1999 1998 1997 1996 1995 1994 Year

Before normalization After normalization

46,171,238 0.07352

67,377,284 0.10729

102,184,872 0.162713

97,030,830 0.15451

131,905,725 0.21004

164,804,886 0.26243

343,550,612 0.54705

323,985,631 0.51590

396,530,399 0.63141

474,601,855 0.75573

628,005,561 1

W. Wen et al. / Knowledge-Based Systems 21 (2008) 148163 Table 4 Validation of the ANN models Type Case I Case II Case III Input no 2 3 4 Output no 1 1 1 Training no 226440 226440 226440 Learning rate 0.2 0.2 0.2 MSE 0.00277 0.00412 0.0 Desired value 0.98381 0.98381 0.98381 Test value 0.98399 0.9636 0.90996 Test error 0.000183 0.02054 0.07507 Forecast 0.99237 0.98007 0.92064

159

Denormalization 623213878.6 615489410.2 578167039.7

Fig. 8. The home page of the knowledge-based decision support system.

Fig. 9. Results of ABC corporations nancial data.

of updating, deletion, and appending are provided. In Fig. 10, the variables, DA and F, represent debt to total assets ratio and its score. Finally, we can make use of the ANN model with historical nancial data to predict future prots or sales for helping managerial decision-making. In Fig. 11, a group assessment for each dimension is shown.

Fig. 12 presents the trained ANN forecasting models of total sales for cases I, II, and III. According to the total sales for the last year, the system is able to compare its value with the standard value of the electronics industry. Hence, the top-level manager can change his strategies, directions or methods to face the future challenges.

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Fig. 10. Rule insertion, deletion, and updating.

Fig. 11. The group assessment for each dimension.

Although the system helps decision makers easily measure business performance and is easy to use, friendly, and exible, some drawbacks need to be further revised for improving its functions. We summarize some advantages and attention as follows:

Advantages: 1. The system provides an eective computer-based evaluation mechanism for measuring business performance. It also has easy-to-use functions, friendly interface, and exibility.

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Fig. 12. Trained neural network models case I, case II, and case III.

Fig. 13. Results of the enterprise performance.

2. Using knowledge reasoning and neural network forecasting results in more eectively monitoring performance and conducting managerial work. 3. Although the system only employs nancial data to assess business performance, it is easy to extend its measures to non-nancial data. 4. Based on managerial skills and experiences, managers can use a friendly group assessment to judge the importance of each dimension during the measuring process. Attention:

a few large companies, which concentrate on manufacturing same products, can survive in the competitive market. Thus, all competitors producing same products but the whole electronics industry should be considered when we compare business performance. 2. Openly and truly nancial statements such as the income statement and the balance sheet statement should be built for every company; otherwise the accuracy of the KDSS system will be doubtful.

5. Conclusions and future work 1. For performing more cost eectively, nowadays most companies focus on producing protable products and cutting the products that result in a loss. Therefore, only The evaluation of enterprise performance is an important tool for managers to achieve their companys goals.

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If enterprise performance can be eectively evaluated, the enterprises can understand and manage themselves more precisely, and their future plans can be accurately formulated. With the development of information technology, decision support systems not only provide knowledge reasoning and detailed nancial information, but also support the prediction of future nancial measures. Moreover, neural network models can also be used to help the analysis of decision-making and improve the eciency of the KDSS. The major contributions of this research are listed below: 1. The decision support system for measuring enterprise performance is completely constructed. Decision makers can query, maintain, and manage their nancial data in order to solve managerial problems. 2. According to enterprises current nancial situation and external industry nancial standard, the result of knowledge reasoning helps managers make decisions faster during the evaluation of enterprise performance. 3. The future nancial situation can be predicted by using articial neural network models based on a satised result in the training and test phases. Together with the knowledge reasoning, the KDSS helps managers understand current and future nancial situations. 4. To erase managers subjective judgment, a friendly group assessment is used to judge the importance of each dimension during the measuring process. Although we have developed the decision support system for measuring enterprise performance, there are still several ways in which we can further improve its functions. The following are some future directions for reference: 1. Our research only adopts nancial data in knowledge reasoning, but there are still some other non-nancial aspects and dimensions can be considered. If more adequate dimensions for assessing business performance can be included, the evaluation can be more practical. 2. If more measures are added into consideration, a research on the impacts among variables becomes necessary to optimize systems eciency. 3. The enterprise performance should not be weighted only by certain conditions, but also with uncertain conditions. So we also suggest that future research can consider developing a fuzzy-based assessment model to deal with uncertain conditions.

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