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Closed-Loop Versus Open-Loop Architectures

  • June 01 2001, 1:00am EDT

For many years the computer profession and business have formed a partnership which operated under what can be termed an open-loop architecture. Advances in data warehouse technology and the Internet have enabled what can be termed a closed-loop architecture for the marriage of business and computers. With a closed-loop business/computer architecture, new business opportunities arise that were never before possible.

In an open-loop architecture, business decisions made by management have an impact in the marketplace, and the impact of that decision is measured only indirectly by the corporation's computer systems. For example, if a bank vice president decides to raise interest rates, the results of the decision impact the loan officers and those applying for loans. The results are measured indirectly as loan applications increase or decrease. As another example, suppose an insurance executive decides to offer a new kind of insurance. The market expresses its approval or disapproval by buying or not buying the new insurance offering. By measuring the response within the open-loop architecture, the marketplace response to the insurance executive's decision is quantified. In every case of an open-loop business/computer architecture, the impact of the corporate decision is felt indirectly through the actions taken by the marketplace and is measured indirectly by the computer systems that run the corporation.

Such interactions between the decision process and the measurement of the effectiveness of the decisions made can be called an open-loop decision environment. In an open-loop decision environment, there is no direct relationship between a corporate decision and a consequence, although there certainly is an indirect relationship.

Over the years, business has operated almost exclusively in an open-loop decision environment. Prior to data warehousing it had not been possible to employ closed-loop business/ computer architectures.

One of the challenges in an open-loop business/computer architecture is that of measuring the consequences of the decisions made in the corporation. One of the difficulties in measuring the results of an open-loop decision environment is that there is a lag of time between the time the corporate decision has been made and the time when the marketplace places its verdict on the decision. It may be a long time before the marketplace responds to the decisions made by management. Another difficulty is that in an open-loop environment, there may be factors other than the decision made by corporate management affecting the results achieved in the marketplace. Trying to measure precisely the effect of management's decisions is an imprecise science at best. Trying to quantify the impact of management's decisions in an open-loop environment is difficult in every case, much more an art than a science.

The advent of data warehouse technology coupled with the Internet makes it possible to start to measure the impact of corporate decisions in a very direct manner with what can be termed a closed-loop decision environment.

In a closed-loop decision environment, the impact of decisions can be measured very precisely. In a closed-loop decision environment, management makes a decision, the computer system singles out exactly to whom the decision applies and a direct action is taken as a result of the decision. The response to the action can then be measured on a case-by-case basis. The results of the management decision can be measured quickly and directly.

As an example of a closed- loop decision environment, suppose management selects all customers who have shown an interest in James Bond movies. The data about such an interest, based on information gleaned from clickstream analysis, is stored in a database. If those customers are offered a new James Bond t-shirt at a discount price, the results of the promotion can be accurately and quickly calculated.

As another example of a closed-loop business/computer architecture, suppose a department store can use its data warehouse to determine who has made a purchase of more than $500 in the past year. Once that information is collected, those customers can be offered a personalized credit card. In such a manner, management can measure the effect of the decision quickly and very accurately.

With a closed-loop decision environment, there is the possibility of having very quick and very accurate feedback on the decision process. The ability to make this assessment is very valuable.

There is another very important aspect to the closed-loop decision-making process. The customer can be approached directly. Unlike open-loop decision processes where the customer is approached indirectly, closed-loop decision-making customers are named and numbered.

The technology underlying closed-loop decision making requires that masses of data be handled in an organized manner and that there be a mechanism for directly interacting with the customer. Data warehousing satisfies the first requirement, and the Internet satisfies the second. It is only with the intersection of data warehousing and the Internet that closed-loop decision making can be accomplished.

The differences between closed-loop decision making and open-loop decision making open the door for an analysis of the sales being made. Open-loop decision making is for mass marketing companies. Companies that really don't know who their customers are employ open-loop decision making. As an example, consider a soft drink company such as Coca-Cola. Coca-Cola sells to distributors, and it is the distributors who know the customers. In the case of vending machines and fast food outlets, the distributors merely know where and when to find the consumers, not who they actually are. Coca-Cola engages in open-loop decision making and sales.

Now consider a very different kind of company ­ a bank or a telephone company. A bank or a telephone company must know its consumers. The bank or the telephone company may not know much about the consumer, but at least they know the name, address and some other basic information. Unlike Coca-Cola, the bank and the telephone company do know their customers and have a need for closed- loop marketing to directly measure the results of their decisions.

Today, the opportunity exists for a mass sales company to become an individual sales company. For example, ten years ago consumers visited a bookstore, looked at the books for sale, selected books and bought them. The store knew its customers through credit card information, but it didn't know much more than that. The bookstore had to use open-loop decision techniques. Then, along came which showed the world how to get to know customers. Does know who their customers are? Yes. Does know what their customers like? Yes. Can get to the marketplace quickly and with measurable results? You bet they can. How does accomplish this? Through closed-loop decision and sales systems, backed by a database or two and the Internet.

With closed-loop marketing systems there is a difference in emphasis; the competition is measured on the basis of competition for a consumer's dollar. With closed-loop decision systems, the salesperson is concerned with how much money a consumer spends on the goods offered by the closed-loop company. For example, from's perspective, they are concerned with dollar competition for each of their customers with money spent on entertainment, research, cars and even food. Every dollar spent elsewhere means fewer dollars for There-fore, is in competition with everyone. Open-loop decision-makers look at competition on a product basis. Closed-loop decision and sales companies look at the competition on a dollar basis.

One effect of the advances made in data warehousing and the Internet is that companies can now change from open-loop decision making to closed-loop. By engaging in both indirect and direct sales, companies can enjoy the best of both worlds.

There is a cost to a closed-loop architecture ­ the cost of infrastructure required for Web and data warehouse environments. In a way, the Web and the data warehouse become the admission ticket for entry into the world of closed-loop processing.

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