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Analyze This

Analyze This

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OCTOBER 1, 2005|
www.cio.com
Tom Davenport
COMPETITIVE ADVANTAGE
Analyze This
More and more companies are using analytics to drive their decision-making processes.But there’s a right and a wrong way to do it.
T
he world is becoming more analytical. EvenLawrence Summers, the president of Harvard,who got into suchbig trouble recently for makingsweeping statements about women in science, gotthis one right. At a Harvard School of Public Health confer-ence,Summers said, “I suspect thatwhen the historyis written200 years from now,it will emergethat something very impor-tanthappened in human thinking during the time when wewere alive,and thatis thatweare becoming rational, analyticaland data-driven in a far wider range of activity than we ever havebeen before.”Ah yes, you say. You may not have thought about it this way,but, in fact, you know something of this territory. Businessintelligence. Statistics, decision support and all that. It maystrike you as a little nerdy, but you’d undoubtedly grant busi-ness analytics a place in the pantheon of IT applications.But in some organizations, analytics are in first place.They’re actually becoming the primary driver of strategy andcompetitive advantage. Analytics and quantitative decisionsare being used to optimize business processes—to identifythe best customers, select the ideal price, calculate the bestsupply chain routing or pick the best person to hire. Somecompanies, organizations and sports teams are clearly com-peting on analytics.In his conference speech, Summers mentioned baseballand in particular the Oakland A’s as examples of creepinganalytical orientation. In Boston, we’re more excited about theRed Sox and the Patriots, both of which have done prettywell of late. The Red Sox, in case you need reminding, won theWorld Series last year for the first time in 86 years. They
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OCTOBER 1, 2005|
www.cio.com
borrowed some ideas from the A’s about analytical playerselection and on-field decision making, and combined themwith a good deal of money.The Patriots have managed to win the Super Bowl threetimes in the past four years—also with an analyticalapproach. The team uses data and analytical models exten-sively, both on and off the field. In-depth analytics help theteam select players and stay below the NFL salary cap. Patri-ots coaches and players are renowned for their extensivestudy of game film and statistics, and Head Coach BillBelichick reads articles by academic economists on statisticalprobabilities of football outcomes. Off the field, the team usesdetailed analytics to assess and improve the “total fan expe-rience.” At every home game, for example, 20 to 25 peoplehave specific assignments to make quantitative measure-ments of the stadium food, parking, personnel, bathroomcleanliness and other factors.
Success Through Analytics
More important, there are many companies competing on thebasis of data, models and prediction, and many have been fan-tastically successful with this strategy. Wal-Mart, of course,uses vast amounts of data and category analysis to dominateretail. Harrah’s has changed the basis of competition in thegaming industryfrom building megacasinos to analyticsaround customer loyalty and service.Amazon and Yahoo aren’t juste-commerce sites; they are extremely analytical and followa“testand learn”approachto business changes. Capital Oneruns more than 30,000 experiments a year to identify desirablecustomers and price credit card offers.Inarecentstudysponsored bySAS and Intel, a couple of col-leagues (Don Cohen and Al Jacobson) and I contacted 32 organ-izations that were pursuing some analytical activity. Some wereusing analytics in the time-honored fashion—that is, spottilyand in pockets. They had an actuary here, a supply chain simu-lator there. As one manager of an analytics group put it, “In thepast we were like the Aleutian Islands—our analytical activitiescovered a lot of territory, but they didn’t attract much notice.”Athird of them, however, were competing on analytics at thehighest level. They captured and managed lots of transactiondata and had a culture of fact-based decision making. Theywere using analytics in multiple functional areas; they wereusing sophisticated statistical analysis and predictive model-ing, and managing business intelligence at the enterprise level.But there was one more attribute of analytical competition thattruly set these organizations apart.
Buy-In from the Boss
The key factor in successfully competing on analytics in ourstudy was a strong pull from senior executives. Analyticalresources such as business intelligence software won’t changeanything within an organization unless executives insist thatanalytics drive business strategy. Decision making based ondata, facts and complex statistics doesn’t just evolve. It requiressubstantial changes in culture and behavior that must be drivenfrom the top.Inthe companies we found that were competing on analyt-ics, the CEO was not only a supporter, he was a cheerleader. Jeff Bezos at Amazon, for example, states publicly that he and hisexecutives frequently pursue analysis and fact-based deci-sions. Amazon does detailed empirical analysis on such ques-tions as whether it should advertise on TV (no), or whether itcan sell commodities at closeout prices at the bottom of its web-page (yes). Gary Loveman at Harrah’s has written articles aboutthe virtues of evidence over intuition. As Malcolm Gladwellpoints out in
 Blink
,intuition can be valuable—but not whendeciding the ideal price to offer on a hotel room to a frequentgambler on NewYear’sEvein Las Vegas.Inaddition to setting the analytical tone,the CEO alsoestablishes the focus. Several executives told us that it’simportantto maintain a strategic focus for analytical activity.Capital One flirted briefly with the idea of selling flowersand cell phones, but using analytics, the bank decided torestrict itself to consumer financial services suchas car loansand CDs. Perhaps not coincidentally, it has become the sixth-largest credit card provider in terms of loans, and has grownearnings per share by over 20 percent in each of its 10 yearsas a public company.
How to Build Demand and Supply
If you believe in the power of analytics but your CEO and exec-utive team just don’t get it, there are some ways you can beginto build demand. One is to simply familiarize the organiza-tion with the data available. Shaygan Kheradpir, CIO of Veri-zon, is attempting to increase executive demand in this fashion.He created a scorecard in which hundreds of performance met-rics of various types are broadcast to PCs around the com-pany, each occupying the screen for 15 seconds. The idea is toget everyone—not just senior executives—focused on infor-mation and what it means to Verizon’s performance, and toencourage employees at all levels to address any issues thatappear in the data.Another IT organization in a pharmaceutical company westudied doesn’t have much demand yet, but is trying to stimu-late it by following up after any hint of interest from execu-
While analysts from Indiaand China are increasinglyavailable,it’s unlikely thatthey will know your businessas well as local talent.Tom Davenport
COMPETITIVE ADVANTAGE
 
tives. For example, a marketing manager discovered softwaretools that showed how sales data could be displayed graphicallyin terms of geography on an interactive map. The company’s ITexecutives seized upon his interest and offered him some relatedgeographically oriented analytical capabilities so that he couldidentify underserved territories and plan the geographicalspread of new hires. These IT managers wisely refuse to waituntil more analytically oriented senior executives happen toarrive at the company.
The Right Talent Makes a Difference
Supplying the right kind of hardware environment and ana-lytical software is typically easier to address than creatingdemand, but just as important. While good data from trans-actional systems is increasingly available and analytical tech-nology has become easier to use,companies that compete onanalytics still require people with substantial quantitativeskills—either in-house or contracted from outside. The sta-tistical expert, in order to be useful, will also need to be famil-iar with the business problems in the function and industry;the quantitative skills of a good analyst are rarely equallyapplicable across diverse businesses. One pharmaceuticalcompany,for example,attempted to use several bioinformat-ics experts to pursue analysis of commercial problems in mar-keting and operations, and found thatthey were neithermotivated nor expert at the applications. Similarly, while sta-tistical analysts from India and China are increasingly avail-able from offshore outsourcing vendors, it’s unlikely that theywill know your business well.Indeed, several companieswe interviewed stressed the impor-tance of a close and trusting relationship between quantitativeanalysts and decision-makers. The need is for statistical expertswho also understand the busi-ness in general, and the partic-ular business need of a specificdecision-maker. As one man-ager at Wachovia Bank put it,“We are trying to build our peo-ple as part of the business team;wewant them sitting at thebusiness table, participating inadiscussion of what the key issues are, determining what infor-mation needs the business people have and recommendingactions to the business partners.”Aconsumer products company we interviewed hires whatit calls “PhDs with personality” for its analytical group—indi-viduals with not only heavy quantitative skills but also theability to speak the language of the business and market theirwork to internal customers. This company believed that therelational aspect of the job made it difficult to outsource ortake offshore. To find these people and develop these types of relationships would surely be much more difficult in an out-sourcing situation, and virtually impossible with analysts half aworld away from the decision-makers.
How Do You Know When You’re There?
There are several indications that a company is competing onanalytics:
n
THE CEOHAS AN ANALYTICAL BACKGROUND.
Harrah’sLoveman was a business school professor and has an MITPhD. Amazon’s Bezos was an A-plus student in electrical engi-neering and computer science at Princeton. When the CEO orvice chair of a company is arocket scientist, it’s a good bet thatthere will be other scientists on the payroll.
n
NOBODY’SASKING ABOUT THE ROI FOR EACH LITTLEINITIATIVE.
What’satstakein analytical competition is not anapplication, but a corporate strategy. If the analytical activitiesare succeeding,they will be manifested not in ROI calcula-tions, but in revenue and profits.
n
THE COMPANY IS VERY SUCCESSFUL.
Certainly there areindustries (for example,U.S.domestic airlines) where a lot of analytics don’tseem to be the critical success factor. It isn’t withSouthwest. But the great majority of highly analytical compa-nies that we studied are leaders in their industries and makinglots of money.As more analytically trained managers enter the work-force, it’s likely that analytical competition will become morecommon and intense. However, this capability can’t be devel-oped overnight. Most of the companies we interviewed tookat least five years to develop their analytical capabilities suf-ficiently to compete on that basis, and a couple of very suc-cessful companies (including Procter & Gamble and Mars)had been pursuing analytics for several decades. Assemblingthe right data, finding and using the right tools, and devel-oping the right relationships between analysts and decision-makers all take time. Therefore, it makes sense to start pullingthem together now. History seems to be onthe side of the numbers.
Tom Davenport is professor of IT and management atBabson College and an Accenture Fellow. He can bereached at
tdavenport@babson.edu
.
Most of the companies we interviewed took at least five years todevelop their analytical capabilitiessufficiently to competeon that basis.
CIO
Add a Comment
Restaurants,particularly the bigchains,havealsomade analyticsworktotheir advantage.Toread about
“TheBrain Behind the Big, Bad Burger andOther TalesOfBusinessIntelligence,”
goto
www.cio.com/031505
.
cıo.com
Adapted from the October 1, 2005 issue of CIO magazine. Copyright © CXO Media Inc. All rights reserved.

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