Executive Summary

This report describes the emergence of

a new form of competition based on the
extensive use of analytics, data, and
fact-based decision making. The analytics
quantitative or statistical models to analyze
business problemsmay be applied to a
variety of business problems, including cus-
tomer management, supply chains, and
financial performance. The research assessed
32 firms with regard to their orientation to
analytics; about one-third were classified as
fully engaged in analytically oriented strate-
gies. Both demand and supply factors for
analytical competition are described. Of the
two, demand factors are the more difficult
to create. The presence of one or more
committed senior executives is a primary
driver of analytical competition.
On What Basis Do
Companies Compete Today?
I n vi r tual l y every i ndustry, many former
strategi c al ternati ves are no l onger vi abl e
or l i kel y to be successful . Today, there
are few regul ated monopol i es, or compa-
ni es wi th uni que geographi cal access.
Propri etary technol ogi es are rapi dl y copi ed
by compet i t or s, and br eakt hr ough i nno-
vat i on i n ei t her pr oduct s or ser vi ces i s
r ar e. Most of t he compet i t i ve st r at e-
gi es or gani zat i ons ar e empl oyi ng t oday
i nvol ve opt i mi zat i on of key busi ness
processes. Instead of serving all customers,
t hey want t o ser ve opt i mal cust omer s
t hose wi t h t he hi ghest l evel of pr of -
i t abi l i t y and l i f et i me val ue. I nst ead of
r ecei vi ng goods and ser vi ces whenever
t hey happen t o ar r i ve, t hey at t empt t o
opt i mi ze suppl y chai ns t o mi ni mi ze
di sr upt i ons and i n- pr ocess i nvent or y.
I nst ead of l ooki ng backwar d at t hei r
busi ness per f or mance and maki ng
ex post f act o adj ust ment s, t hey seek t o
under st and how opt i mum nonf i nanci al
per f or mance dr i ves opt i mum f i nanci al
per f or mance, and t o make accur at e
f or ecast s of f ut ur e per f or mance so t hey
can r eact i n advance of si t uat i ons.
I nst ead of t hr owi ng money at busi ness
pr obl ems, t hey seek t o opt i mi ze t hei r
use of capi t al .
But st r at egi es i nvol vi ng opt i mi zat i on
r equi r e somet hi ng di f f er ent t han t hose
based on t aki ng busi ness as i t comes.
Above al l , t hey r equi r e ext ensi ve dat a
on t he st at e of t he busi ness envi r on-
ment and t he company s pl ace wi t hi n i t ,
and ext ensi ve anal ysi s of t he dat a t o
model t hat envi r onment , pr edi ct t he
consequences of al t er nat i ve act i ons,
and gui de execut i ve deci si on maki ng.
Mor eover, t hey r equi r e anal yst s and
deci si on maker s who bot h under st and
t he val ue of anal yt i cs
and know how best t o
appl y t hese f or dr i vi ng
enhanced per f or m-
ance. Compani es t hat
st r i ve t o opt i mi ze
t hei r busi ness per -
f or mance usi ng
t hi s dat a- i nt ensi ve
appr oach ar e compet -
i ng on anal yt i cs and
anal yt i cal capabi l i ti es.
Many compani es are
pursui ng opti mi zati on-
WORKI NG KNOWLEDGE RESEARCH REPORT
Competing on Analytics
THOMAS H. DAVENPORT, DON COHEN, AND AL JACOBSON MAY 2005
About This Research
Thi s research repor t i s based on anal ysi s of
32 organi zati ons from a vari ety of i ndustri es
(Fi gure 1) that are successful both i n terms
of thei r overal l per formance and i n thei r
use of busi ness anal yti cs. The research was
under taken to i nvesti gate and document
how and why these compani es not onl y use
sophi sti cated anal yti cs, but al so make them
the basi s of thei r competi ti ve strategi es,
and adopt or move toward an enterpri se-
l evel approach to busi ness i ntel l i gence.
Tel ephone or i n-person i ntervi ews were
conducted wi th ei ther I T or busi ness execu-
ti ves at 30 fi rms; three fi rms were anal yzed
sol el y on the basi s of secondary research.
I NDUSTRI ES REPRESENTED NUMBER
Fi nanci al Servi ces 10
Consumer Products and Retai l 6
Travel , Transport, and Entertai nment 5
Pharmaceuti cal and Chemi cal 4
Informati on Technol ogy and Communi cati ons 3
Heal th Care 2
Engi neeri ng 1
Government 1
Figure 1:
Industries of Companies Surveyed
COMPETI NG ON ANALYTI CS
BA B SON E X ECUT I V E E DUC AT I ON WOR K I NG K NOWL E DGE R E S E A R CH CE NT E R 2
based strategi es, but most have fai l ed to
devel op the anal yti cal capabi l i ti es neces-
sary to make them succeed.
The i dea of competi ng on anal yti cs i s not
enti rel y new. A few organi zati onsmost
wi thi n fi nanci al servi ces and par ti cul arl y i n
financial investment and trading businesses
have competed on thi s basi s for decades.
The tradi ng of stocks, bonds, currenci es,
and commodi ti es has l ong been dri ven
by anal yti cs. What i s new i s the spreadi ng
of anal yti cal competi ti on to a vari ety of
other i ndustri esfrom consumer fi nance
to retai l i ng to travel and enter tai nment
to consumer goodsand wi thi n compa-
ni es f r om i ndi vi dual busi ness uni t s t o
an enterpri se-wi de perspecti ve. Even the
most tradi ti onal l y i ntui ti ve i ndustri es are
movi ng i n thi s di recti onprofessi onal
spor ts teams, for exampl e.
Two of Boston s sports teams have had
some envi abl e success of l ate, at l east i n
part because of thei r anal yti cal capabi l i ti es.
The New Engl and Patri ots footbal l team,
for exampl e, won i ts thi rd Super Bowl i n
four years. The team uses data and anal yt-
i cal model s extensi vel y, both on and off
the fi el d. In-depth anal yti cs hel p the team
sel ect i ts pl ayers, stay bel ow the sal ary
cap, deci de whether to punt or go for i t
on fourth down, and try for one poi nt or
two after a touchdown. Both i ts coaches
and pl ayers are renowned for thei r exten-
si ve study of game fi l ms and stati sti cs, and
Head Coach Bi l l Bel i chi ck peruses arti cl es
by academi c economi sts on stati sti cal
probabi l i ti es of footbal l outcomes. Off the
fi el d, the team uses detai l ed anal yti cs to
assess and i mprove the total fan experi -
ence. At every home game, for exampl e,
20 to 25 peopl e have speci fi c assi gn-
ments to make quanti tati ve measurements
of the stadi um food, parki ng, personnel ,
bathroom cl eanl i ness, and other factors.
External vendors of servi ces are moni tored
for contract renewal and have i ncenti ves
to i mprove thei r performance.
The Boston Red Sox basebal l team i s al so
a conver t to anal yti cs (fol l owi ng, i n many
ways, the l ead of the pi oneeri ng but l ess
wel l -fi nanced Oakl and A s). The abi l i ty
to extract knowl edge from data presum-
abl y hel ped the Sox wi n the Worl d Seri es
i n 2004 for the fi rst ti me i n 86 years.
Boston has begun to sel ect pl ayers l ess
on tradi ti onal cri teri a such as batti ng aver-
age, but rather on newer, more subtl e
factors such as on-base percentage. Bi l l
James, consi dered the godfather of base-
bal l stati sti cs or sabermetri cs, was hi red
by the Red Sox as an advi ser. The Sox
al so have become more anal yti cal off the
fi el d. Li ke the Patri ots, they map and
moni tor key aspects of the fan experi -
encefrom the deci si on to go to a game,
to the routes taken by fans to the game,
to the effecti veness of the cl eani ng crew.
The team s management has maxi mi zed
revenues from Fenway Park, the smal l est
basebal l park i n the maj or l eagues, by cal -
cul ati ng ti cket pri ce el asti ci ti es, establ i sh-
i ng an onl i ne market for season ti cket
resal es, and model i ng revenue i ncreases
from addi ng seats i n unused l ocati ons
(i ncl udi ng on top of the Green Monster,
the toweri ng l eft fi el d wal l ).
Anal yti cal competi ti on i s not onl y taki ng
root i n U. S. spor ts. Some soccer teams i n
Europe al so have begun to empl oy si mi l ar
techni ques. AC Mi l an, one of the l eadi ng
teams i n Europe, uses predi cti ve model s
to prevent pl ayer i nj uri es by anal yzi ng
physi ol ogi cal , or thopedi c, and mechani cal
data from a vari ety of sources. Bol ton, a
fast-ri si ng Engl i sh soccer team, i s known
for i ts manager s use of extensi ve data to
eval uate pl ayer per formance and team
strategi es.
Anal yti cal cul tures and processes are
appeari ng not onl y i n professi onal spor ts
teams, but i n any busi ness that can har-
ness extensi ve data, compl ex stati sti cal
processi ng, and fact-based deci si on mak-
i ng. Anal yti cs i s becomi ng a pri mary basi s
for competi ti on for these fi rms. They use
anal yti cal tool s to change the way they
compete or to per form substanti al l y better
i n the exi sti ng busi ness model . The gam-
i ng fi rm Harrah s, for exampl e, has chosen
to compete on anal yti cs for customer l oy-
al ty and servi ce, rather than on bui l di ng
the mega-casi nos i n whi ch i ts competi tors
have i nvested. I ts CEO, Gary Loveman,
has commented, We use database mar-
keti ng and deci si on-sci ence-based anal yti -
cal tool s to wi den the gap between us
and casi no operators who base thei r cus-
tomer i ncenti ves more on i ntui ti on than
evi dence. Amazon. com uses extensi ve
anal yti cs to predi ct what products wi l l be
successful , and to wri ng every bi t of effi -
ci ency out of i ts suppl y chai n. Amazon
CEO Jeff Bezos notes, For every l eader
i n the company, not j ust for me, there
are deci si ons that can be made by anal y-
si s. These are the best ki nds of deci si ons.
They re fact-based deci si ons. At the
mutual fund company Dreyfus, anal ysi s of
customer i nformati on defi ned segmenta-
ti on that hel ped reduce fund attri ti on from
22 to 7 percent a year. These compani es,
and a vari ety of others, are cl earl y com-
peti ng on anal yti cs.
Analytical cultures and
processes are appearing
not only in professional
sports teams, but in any
business that can harness
extensive data, complex
statistical processing, and
fact-based decision making.
Attributes of Analytically
Oriented Companies
Vi r tual l y every maj or company uses some
form of stati sti cal or mathemati cal anal y-
si s, but some take anal yti cs much fur ther
than others. I n our research on the topi c,
we have i denti fi ed several key attri butes
of fi rms that compete on anal yti cs:
One or more seni or executi ves who
are strongl y advocati ng anal yti cs and
fact-based deci si on maki ng;
Wi despread use of not j ust descri pti ve
stati sti cs, but predi cti ve model i ng and
compl ex opti mi zati on techni ques;
Substanti al use of anal yti cs approaches
across mul ti pl e busi ness functi ons or
processes;
Movement toward an enterpri se-l evel
approach to managi ng anal yti cal tool s,
data, and organi zati onal ski l l s and
capabi l i ti es.
Each of these attri butes i s descri bed
bri efl y bel ow:
One or More Senior Executives
as Advocates
The adopti on of a broad anal yti cal
approach to busi ness requi res changes i n
cul ture, process, behavi or, and ski l l s for
mul ti pl e empl oyees. Such changes don t
happen by acci dent; they must be l ed by
seni or executi ves wi th a passi on for ana-
l yti cs and fact-based deci si on maki ng.
I deal l y, the pri mary advocate shoul d be
the CEO, and i ndeed we found several
chi ef executi ves who were dri vi ng the
shi ft to anal yti cs at thei r fi rms. These
i ncl uded Gary Loveman, CEO of Harrah s;
Jeff Bezos, the founder and CEO of
Amazon; Ri ch Fai rbank, the founder and
CEO of Capi tal One; and Barry Beracha,
formerl y CEO of Sara Lee Bakery Group.
Each of these executi ves has stated both
i nternal l y and publ i cl y that thei r compa-
ni es are engaged i n some form of anal yti -
cal competi ti on. For exampl e, Fai rbank
commented:
Its all about collecting information
on 200 million people youd never
meet, and on the basis of that infor-
mation, making a series of very
critical long-term decisions about
lending them money and hoping
they would pay you back.
Fai rbank summari zes thi s approach as
I nformati on-Based Strategy. Beracha,
before he reti red as CEO of Sara Lee
Bakery, si mpl y kept a si gn on hi s desk
sayi ng, I n God we trust; al l others
bri ng data.
Wi thout the push from the top, i t s rare
to fi nd a fi rm maki ng the cul tural changes
necessary to become an anal yti cal com-
peti tor. We found some fi rms, for exampl e,
i n whi ch si ngl e functi onal or busi ness uni t
l eaders were tryi ng to engi neer an anal yt-
i cal l y ori ented shi ft i n thei r fi rms, but
weren t abl e to suffi ci entl y change the
cul ture by themsel ves. Thi s doesn t mean,
of course, that such an executi ve coul dn t
l ead such a change under other ci rcum-
stances, and we di d fi nd organi zati ons i n
whi ch l ower-l evel advocates were maki ng
progress on changi ng the cul ture. Any
cross-functi onal or cross-depar tmental
change, and cer tai nl y any enterpri se-wi de
effor t, cl earl y requi res the suppor t and
attenti on of executi ves seni or enough to
di rect and coordi nate effor ts i n those
separate uni ts.
Widespread Use of Predictive Modeling
and Optimization Techniques
Every fi rm can cal cul ate si mpl e descri pti ve
stati sti cs about aspects of i ts busi ness
(the average revenue per empl oyee, or
average order si ze), but the most aggres-
si ve anal yti cal competi tors go wel l beyond
basi c stati sti cs. They are usi ng predi cti ve
model i ng, for exampl e, to i denti fy not onl y
the most profi tabl e customers, but those
wi th the most profi t potenti al , or those
most l i kel y to stop bei ng customers. They
are combi ni ng and pool i ng both i nternal
and external data i n such a way as to gai n
a more comprehensi ve pi cture and under-
standi ng of thei r customers than was ever
thought possi bl e. They are opti mi zi ng
thei r suppl y chai ns, so they can determi ne
the i mpact of an unexpected constrai nt,
si mul ate al ternati ve suppl y chai ns, and
route shi pments around probl ems. They
are establ i shi ng pri ces i n real ti me so as
to provi de the hi ghest yi el d possi bl e from
a customer transacti on. I n fi nanci al per-
formance anal ysi s, they create compl ex
model s of how thei r operati onal and cost
measures rel ate to thei r fi nanci al per form-
ance. No matter what the busi ness func-
ti on, i t s possi bl e to i mprove per formance
through the use of sophi sti cated anal yti cal
techni ques.
Compani es that are recogni zed l eaders i n
usi ng anal yti cal techni ques for per form-
ance i mprovements al so are usi ng sophi s-
ti cated experi mental desi gns to measure
the overal l i mpact or l i ft of i nterventi on
strategi es and usi ng these resul ts to con-
ti nuousl y i mprove subsequent anal yses.
Capi tal One, for exampl e, conducts more
than 30, 000 experi ments a year wi th
di fferent credi t card i nterest rates, i ncen-
ti ves, di rect mai l packagi ng, and other
parameters to maxi mi ze both the l i kel i -
hood that a potenti al customer wi l l si gn
up for a credi t card, and that they wi l l pay
Capi tal One back. Progressi ve I nsurance
employs similar experiments. The company
defi nes narrow groups of customers
(or cel l s)for exampl e, motorcycl e
ri ders ol der than 30 wi th no previ ous
acci dents, a col l ege educati on, and a
credi t score hi gher than a cer tai n l evel .
For each cel l , the company per forms
regressi on anal ysi s to i denti fy the factors
that most cl osel y correl ate wi th i ts l oss
experi ence. They set pri ces for each cel l
they bel i eve wi l l enabl e them to earn
a profi t across a por tfol i o of customer
groups. They use si mul ati on software to
COMPETI NG ON ANALYTI CS
BA B SON E X ECUT I V E E DUC AT I ON WOR K I NG K NOWL E DGE R E S E A R CH CE NT E R 3
test the fi nanci al i mpl i cati ons of these
hypotheses. Through thi s anal yti cal
approach, Progressi ve can profi tabl y
i nsure customers i n tradi ti onal l y hi gh-ri sk
categori es, such as motorcycl i sts.
Use of Analytics across Multiple
Functions and Business Units
One of the hal l marks of an anal yti cal l y
ori ented fi rm i s the use of sophi sti cated
anal yti cs not j ust i n one busi ness functi on
or process, but across mul ti pl e aspects
of the busi ness. Successful anal yti cal
competi tors have real i zed the power of
these tool s and approaches, and are
adopti ng them across thei r busi nesses.
UPS, for exampl e, has tradi ti onal l y
focused on anal yti cs for operati ons and
l ogi sti cs. More recentl y, i t has devel oped
a strong anal yti cal focus on customers,
assessi ng the l i kel i hood of customer attri -
ti on, or i denti fyi ng sources of probl ems
for customers. Several fi rms, descri bed
bel ow, are even extendi ng thei r anal yti cal
ori entati ons to di rect use by customers.
As we will argue later, however, there
is a balance to be maintained in terms of
broadening the focus on analytics, and
employing them to address a specific busi-
ness domain. Executives at several analytical
competitors warned against losing a clear
business purpose for analytics. Harrahs, for
example, has targeted much of its analysis
on increasing customer loyalty, although it
has extended it into such related areas as
pricing and promotions as well. Analytical
competitors can broaden their focus beyond
a narrow function, but they are careful not
to become too diffuse in their analytical
targeting so that they continue to support
their primary strategies.
An Enterprise-Level
Management Approach
Business intelligence applications often have
been managed at the departmental level,
with analytically oriented business functions
selecting their own tools, managing their
own data warehouses, and training their
own people. However, if analytics are to be
a companys basis for competition, and
i f they are to be broadl y adopted across
the fi rm, i t makes more sense to manage
them at an enterpri se l evel . Thi s ensures
that there i s a cri ti cal mass of ski l l s, that
cri ti cal data and other resources are
protected, and that data from mul ti pl e
busi ness functi ons can be correl ated.
The enterpri se approach may i ncl ude both
organi zati onal and techni cal capabi l i ti es
for busi ness i ntel l i gence. At the organi za-
ti onal l evel , for exampl e, Procter &
Gambl e recentl y consol i dated i ts anal yti cal
organi zati ons for operati ons and suppl y
chai n, marketi ng, and other functi ons. Thi s
wi l l al l ow a cri ti cal mass of anal yti cal
exper ti se to be depl oyed to address P&G s
most cri ti cal busi ness i ssues.
From a technol ogy standpoi nt, many
fi rms have had hi ghl y di spersed anal yti cal
technol ogy i n the form of many spread-
sheets. However, one researcher suggests
that between 20 and 40 percent of
spreadsheets contai n errors. Fur thermore,
the prol i ferati on of user-devel oped
spreadsheets and databases i nevi tabl y
l eads to mul ti pl e versi ons of key i ndi ca-
tors wi thi n an organi zati on.
Because of these probl ems, many fi rms
are attempti ng to consol i date and i nte-
grate thei r technol ogi es for busi ness ana-
l yti cs. Adopti ng such an approach means
I T organi zati ons must devel op new and
broader capabi l i ti es for extracti ng and
cl eani ng data, l oadi ng and mai ntai ni ng
data warehouses, data mi ni ng, and query
and repor ti ng. These tool s hi stori cal l y
have come from separate vendors and
have been di ffi cul t to i ntegrate. However,
the l eadi ng vendors of busi ness i ntel l i -
gence tools and applications are beginning
to broaden and i ntegrate thei r offeri ngs
themsel ves, and to market and sel l them
at the enterpri se l evel .
Stages of Analytical
Competition
Anal yti cal competi ti on i s not a bi nary
attri bute, whi ch an organi zati on ei ther has
or l acks. There are several stages of ana-
l yti cal ori entati on that we observed i n the
compani es we i ntervi ewed (Fi gure 2).
The percentages of organi zati ons at these
stages are by no means representati ve
of any l arger popul ati on; we i ntenti onal l y
sought out compani es at the hi gher end of
the anal yti cal spectrum. A random sampl e
of organi zati ons woul d probabl y l ook l i ke
an i nverted versi on of Fi gure 2, wi th the
hi ghest frequenci es at the l ower stages.
Stage 1 (Maj or Barri ers) organi zati ons
have some desi re to become more anal yt-
i cal , but thus far they l ack the wi l l and
COMPETI NG ON ANALYTI CS
BA B SON E X ECUT I V E E DUC AT I ON WOR K I NG K NOWL E DGE R E S E A R CH CE NT E R 4
Stage 3 Vision Not Yet Realized
Stage 5
Stage 4 Almost There
Stage 2 Local Activity
Stage 1 Major Barriers
Analytical
Competitors
0 2 4 6 8 10 12
11/32
F I R M S
6/32
F I R M S
7/32
F I R M S
6/32
F I R M S
2/32
F I R M S
Figure 2:
Stages of Analytical Competition among Study Organizations
ski l l to do so. They face some substanti al
barri ersboth organi zati onal and techni -
cal to anal yti cal competi ti on, and are sti l l
focused on putti ng basi c, i ntegrated trans-
acti on functi onal i ty i n pl ace. As a resul t
they are not yet on the path to becomi ng
analytical competitors. Because we attempted
to interview only organizations that compete
on analytics, we encountered onl y two
Stage 1 organi zati onsa state government
agency and an engi neeri ng fi rm (and even
that fi rm i s becomi ng more anal yti cal
about i ts human resources). However,
Stage 1 organizations probably constitute
the majority of all large organizations.
Stage 2 (Local Acti vi ty) organi zati ons
have made substanti al progress i n becom-
i ng more anal yti cal , but i t i s pri mari l y
l ocal , wi thi n par ti cul ar functi ons or uni ts.
Marketi ng, for exampl e, may be i denti fyi ng
opti mal customers or model i ng demand,
but the exampl e has not spread to other
par ts of the company. Thei r busi ness
i ntel l i gence acti vi ti es produced economi c
benefi ts, but not enough to affect the
company s competi ti ve strategy. We found
si x of these fi rms. What they pri mari l y
l acked was a vi si on of anal yti cal competi -
ti on that came from seni or executi ves.
Several of the fi rms had some of the
same technol ogy as fi rms at hi gher stages
of anal yti cal acti vi ty, but they had not put
i t to strategi c use.
The organi zati ons i n Stage 3 (Vi si on Not
Yet Real i zed) do grasp the val ue and the
promi se of anal yti cal competi ti on, but
they are a l ong way from actual l y suc-
ceedi ng wi th i t. We found seven organi za-
ti ons i n thi s posi ti on. Some onl y recentl y
have ar ti cul ated the vi si on, and have not
begun i mpl ementi ng i t. Others have very
hi gh l evel s of functi onal or busi ness uni t
autonomy, and are havi ng di ffi cul ty
mounti ng a cohesi ve approach to anal yti cs
across the enterpri se. One mul ti l i ne i nsur-
ance company, for exampl e, had a CEO
wi th the vi si on of usi ng data, anal yti cs,
and a strong customer ori entati on i n the
fashi on of Progressi ve, an auto i nsurance
company wi th a hi story of technol ogi cal
and analytical innovation. But the company
onl y recentl y had begun to expand i ts
anal yti cal ori entati on beyond the tradi ti on-
al l y quanti tati ve actuari al functi on, and
there was l i ttl e cooperati on across the l i fe
and proper ty and casual ty busi ness uni ts.
Stage 4 (Al most There) organi zati ons
have the vi si on, and are cl ose to achi evi ng
i t. Si x organi zati ons fel l i nto thi s category.
Some only recently had adopted an enterprise-
wi de approach to anal yti cal competi ti on,
and had yet to ful l y real i ze i t i n terms of
marshal i ng the necessary resources.
Others were competi ng on the basi s of
anal yti cs, but al so were competi ng on the
basi s of other factors, such as mai ntai ni ng
strong personal rel ati onshi ps wi th cus-
tomers. Onl y a smal l degree of added
emphasi s on anal yti cal capabi l i ty woul d
pl ace these compani es i n the top rank.
The top rank i s Stage 5 (Anal yti cal
Competi tors), whi ch descri bes organi za-
ti ons that have embarked upon anal yti cal
competi ti on as a pri mary di mensi on of
strategy. These are the organi zati ons we
pri mari l y sought to uncover i n our
research, and therefore we i denti fi ed 11 of
them. They i ncl ude such l arge and smal l
organi zati ons as Apex Management Group
(a heal th care actuari al fi rm), Barcl ays
Consumer Fi nance, Capi tal One, Harrah s,
Marri ott, Owens & Mi nor, Progressi ve, Wal -
Mar t, a consumer products fi rm, and the
spor ts teams, the New Engl and Patri ots
and the Boston Red Sox. These fi rms
exhi bi ted each of the attri butes descri bed
above as the components of anal yti cal
competi ti on. They are al so al l hi ghl y suc-
cessful wi thi n thei r i ndustri es, and attri b-
ute thei r success at l east i n par t to thei r
anal yti cal strategi es. Barcl ays, for exampl e,
i ncreased i ts revenue per acti ve account
by 25 percent, whi l e reduci ng del i nquent
accounts by 23 percent, by fol l owi ng i ts
anal yti cal l y ori ented I nformati on Based
Customer Management strategy.
Whats the Business Value
of Analytics?
Anal yti cs can be used to pul l al most every
l ever of organi zati onal per formance.
However, we found several busi ness
obj ecti ves and i ssues that were dri vi ng
most of the anal yti cal acti vi ty i n the fi rms
we studi ed. They i ncl ude the fol l owi ng:
Customers or consumerSeveral organi -
zations were focused on customer or consumer
analytics, whi ch encompass a vari ety of
speci fi c obj ecti ves. They mi ght i ncl ude,
for exampl e, i denti fyi ng the most prof-
i tabl e or desi rabl e customers, or those
wi th the l owest ri sk of nonpayment.
Customer analytics also include identifying
the current customers who are most l i ke-
l y to stop bei ng customers. They al so
mi ght i ncl ude customer-speci fi c pri ci ng
or product/ servi ce offeri ngs based on
the customer s past or predi cted future
buyi ng frequency and habi ts. Compani es
that pursued thi s set of anal yti cs among
our study respondents i ncl uded Harrah s,
Procter & Gambl e, Progressi ve I nsurance,
Barcl ays, and Capi tal One.
Supply chainAnal yti cs for l ogi sti cs and
the suppl y chai n are wel l -establ i shed
i n many l arge fi rms, wi th the pri mary
ori entati on usual l y bei ng reducti on of
in-process inventory. Supply chain analysis
al so mi ght encompass matchi ng demand
and suppl y, routi ng shi pments around
l ogi sti cal probl ems, reduci ng stockouts
and overstocks, al ternati ve suppl y si mu-
l ati ons, pl ant and di stri buti on center
si ti ng deci si ons, and pri ce opti mi zati on.
Among the compani es i n our study,
Wal -Mar t i s the l eadi ng exponent of
suppl y chai n anal yti cs.
Financial performance and cost
managementOne domai n of busi ness
val ue for anal yti cs can revol ve around
per formance management. Moni tori ng
and deci si on maki ng on fi nanci al i nfor-
mati on i s not often thought of as a
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BA B SON E X ECUT I V E E DUC AT I ON WOR K I NG K NOWL E DGE R E S E A R CH CE NT E R 5
competi ti ve strategy, but i t can be. At
MCI , (the company once known as
Worl dCom whi ch recentl y emerged
from bankruptcy and was acqui red by
Veri zon), managi ng the busi ness wi th
accurate i nformati on on costs and their
allocations is crucial to the companys
strategy. CEO Mi chael Capel l as and the
management team reasoned that the
company coul dn t restore i nvestor confi -
dence or make good deci si ons on prod-
ucts and servi ces wi thout a better noti on
of the company s costs. Most of MCI s
servi ces run over the same network, so
al l ocati ng costs to servi ce offeri ngs i s
difficult. MCI embarked on a major activity-
based costi ng i ni ti ati ve, and devel oped
al gori thms for al l ocati ng al l costs. The
company needed to repor t segment
profi tabi l i ty anyway, and wi th accurate
cost al l ocati ons, managers can make
effecti ve deci si ons about what servi ces
to launch and what resources are needed
to suppor t them.
Research and new product/service
developmentPerhaps the most acti ve
use of anal yti cs i n research and product
devel opment i s i n the pharmaceuti cal
i ndustry. We i ntervi ewed three pharma-
ceuti cal fi rms (Mi l l enni um, Novar ti s, and
Ver tex), each of whi ch was attempti ng to
conquer the overwhel mi ng compl exi ty of
rel ati ng chemi cal , cl i ni cal , and genomi c
data. Many pharmaceuti cal fi rms have
embarked upon di scovery techni ques
i nvol vi ng hi gh-throughput screeni ng,
whi ch yi el ds an enormous amount of
data and a need to anal yze and make
sense of al l of the experi mental resul ts.
No fi rm has yet mastered al l of these
compl exi ti es, but stati sti cal model i ng
and anal ysi s i s a focus for anyone who
hopes to compete i n the i ndustry. We
al so found evi dence of anal yti cs i n new
product devel opment i n the fi nanci al
servi ces i ndustry. Brown Brothers
Harri man, for exampl e, i s empl oyi ng
anal yti cal model s for i ts i nsurance
i ndustry cl i ents to model ri sk-adj usted
opti ons for asset al l ocati on. Thi s servi ce
had not previ ousl y been avai l abl e i n
the i ndustry, and i t has brought BBH a
consi derabl e amount of new busi ness
among i nsurance fi rms. Si mi l arl y, The
Har tford was the fi rst to market an
opti ons-based annui ty product that
accounted for a si gni fi cant i ncrease
i n year-to-year revenues.
Strategic planningSeveral of the fi rms
we i ntervi ewed are usi ng stati sti cal
anal ysi s for the fi rst ti me i n strategi c
pl anni ng. Thei r obj ecti ve i s to determi ne
what markets and customer types to
address wi th what products and servi ces.
I n the i nsurance i ndustry, for exampl e,
whi l e pri ci ng deci si ons are made on
detai l ed anal ysi s of actuari al ri sk and
l oss patterns, strategi c pl anni ng often
has been purel y i ntui ti ve. One i nsurance
fi rm we i ntervi ewed (The Har tford),
however, i s usi ng anal yti cs to assess
new busi ness oppor tuni ti es, consi deri ng
market segmentati on, economi cs, ri sk-
adj usted returns, and the cost of capi tal
for the oppor tuni ty. Capi tal One i s usi ng
detai l ed anal yti cs to assess what fi nan-
ci al products to offer customers i n addi -
ti on to credi t cards; auto l oans are one
exampl e of a product that was tested
extensi vel y before a broad rol l out, and
i t has become a profi tabl e busi ness for
the company.
Human resourcesSeveral fi rms men-
ti oned they were begi nni ng to do human
resource pl anni ng wi th anal yti cs, but the
most aggressi ve users today seem to be
professi onal spor ts teams. Both the
Boston Red Sox and the New Engl and
Patri ots, for exampl e, use stati sti cal
anal ysi s to i denti fy the most promi si ng
pl ayers to draft. The Patri ots have been
par ti cul arl y successful i n thi s regard,
usi ng anal yti cs to stay bel ow the stri n-
gent sal ary cap i n the Nati onal Footbal l
League. I n fact, the Patri ots have won
three of the l ast four Super Bowl s wi th a
rel ati vel y l ow-cost payrol l , the 19th hi gh-
est i n the l eague i n the 2004-5 season.
The team ranks potenti al recrui ts on the
basi s of i ntangi bl e attri butes that other
teams don t assess, i ncl udi ng i ntel l i -
gence, commi tment, coachabi l i ty, and a
wi l l i ngness to subordi nate i ndi vi dual ego
to the goal s of the team. I n Maj or
League Basebal l , the Red Sox and a few
other teams have adopted the anal yti cal
approaches pi oneered by Bi l l y Beane,
the general manager of the Oakl and A s
(descri bed by Mi chael Lewi s i n the book
Moneyball). These approaches i nvol ve
sel ecti ng pl ayers on such factors as on-
base percentage (the percent of the
ti me a batter reaches base) and sl uggi ng
percentage (the number of bases
achi eved per ti me at bat), rather than
more tradi ti onal cri teri a such as batti ng
average and runni ng speed.
There are undoubtedl y other busi ness
areas i n whi ch anal yti cs woul d prove to
be of value, but the ones above were the
most common in our study. It is likely, how-
ever, that many decisions previously made
on intuition and hope will soon be
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BA B SON E X ECUT I V E E DUC AT I ON WOR K I NG K NOWL E DGE R E S E A R CH CE NT E R 6
The most i mportant factor i n bei ng prepared for sophi sti cated
analytics is the availability of sufficient volumes of high-quality data.
addressed with detailed analysis. Procter
& Gamble, for example, pulls together
an analytical team whenever it considers
the supply chain opportunities an acquisi-
tion might offer to drive synergy savings.
One might hope that more analytical
approaches will improve the dismal record of
success many companies have experienced
in mergers and acquisitions.
How Do Firms Become
Analytical Competitors?
I n order for a fi rm to become an anal yti cal
competi tor, the suppl y of and demand for
data and anal ysi s must be i n al i gnment.
The suppl y i ssues are much easi er to deal
wi th and are general l y avai l abl e i n the
marketpl ace, al though thei r absence i n a
fi rm i s cer tai nl y probl emati c. The suppl y
factors for anal yti cal competi ti on i ncl ude
the fol l owi ng:
High- Quality Data
The most i mpor tant factor i n bei ng
prepared for sophi sti cated anal yti cs i s
the avai l abi l i ty of suffi ci ent vol umes of
hi gh-qual i ty data. Thi s i s l ess of a prob-
l em today than i t was previ ousl y for many
organi zati ons, whi ch have made substan-
ti al progress i n accumul ati ng transacti on
data the past several years. Whether the
data come from ERP systems, point-of-sale
systems, or I nternet transacti ons, many
organi zati ons have a greater vol ume of
data than ever before. The di ffi cul ty i s pri -
mari l y i n ensuri ng data qual i ty, i ntegrati ng
and reconci l i ng i t across di fferent systems,
and deci di ng what subsets of data to
make easi l y avai l abl e i n data warehouses
(i . e. , havi ng a cl ear strategy for data
access). Many organi zati ons remai n hi ghl y
fragmented, and have i ssues i nvol vi ng
i ntegrati on across thei r di verse busi ness
functi ons and uni ts. Even such basi c
poi nts as agreei ng on the defi ni ti on of
who i s a customer can be probl emati cal
across l i nes of busi ness. As we noted
above, the l owest-ranki ng fi rms i n our
scal e of anal yti cal competi ti on sti l l face
si gni fi cant di ffi cul ti es wi th these basi c
data i ssues. The l eadi ng fi rms, however,
have l argel y overcome them.
Previ ous studi es of fi rms anal yti cal capa-
bi l i ti es have found even l eadi ng-edge
compani es tend to be good at ei ther
qual i tati ve knowl edge management or
quanti tati ve data management, but rarel y
both. Compani es sti l l wrestl e wi th thi s
combi nati on, but we found a few more
exampl es of fi rms that do both wel l
par ti cul arl y i n the real m of consumer
i nformati on. Procter & Gambl e hi stori cal l y
has been an i ndustry l eader i n customer
anal yti cs, but i t al so tri es to devel op
a detai l ed understandi ng of consumer
behavi ors through ethnographi c (cl ose
observati on) and psychographi c anal ysi s.
Wachovi a Bank combi nes knowl edge from
customer rel ati onshi ps and quanti tati ve
data anal ysi s of customers (pri mari l y cus-
tomer segmentati on anal ysi s and market-
i ng campai gn targeti ng) to determi ne what
servi ces to offer a par ti cul ar customer,
what markets to target, and what new i ni -
ti ati ves to under take at par ti cul ar fi nanci al
centers. The i mpor tance of personal busi -
ness rel ati onshi ps i s deepl y embedded
i n the Wachovi a cul ture, and CEO Ken
Thompson i nsi sts i t remai ns there even
as the cul ture al so embraces anal yti cs.
Par ti cul arl y where customers are con-
cerned, i t s i mpor tant to remember that
marketi ng and servi ce processes i nvol ve
more than the appl i cati on of stati sti cs.
A Capable Technology Environment
I n order to take advantage of good data,
an organi zati on al so needs a capabl e
hardware and software envi ronment.
Compl ex anal yti cs chew up a good deal of
processi ng power, so the workstati ons and
servers used for thi s purpose need to be
substanti al l y more power ful than those
used for conventi onal offi ce tasks. Apex
Management Group, for exampl e, a heal th
care actuari al fi rm, i s transi ti oni ng to a
64-bi t computi ng envi ronment to deal
wi th the compl ex and data-i ntensi ve sta-
ti sti cal anal yses i t per forms for i ts cl i ents.
An anal yti cs group at a consumer prod-
ucts fi rm rented ti me on a supercomputer
to do some of i ts more compl ex anal yses.
From a software perspecti ve, busi ness
i ntel l i gence software offers a vari ety of
capabi l i ti es, i ncl udi ng data warehouse
management, query and repor ti ng, data
mi ni ng, and vari ous forms of stati sti cal
anal ysi s. I deal l y al l these capabi l i ti es
woul d be wel l -i ntegrated and easy to use.
From the end user perspecti ve, ease of
anal ysi s, repor ti ng, and data vi sual i zati on
were often menti oned as i mpor tant i n the
fi rms we i ntervi ewed. For some fi rms
focused on real -ti me anal yti cs (such as
real -ti me pri ci ng and yi el d management),
the speed of data management and
anal ysi s i s a cri ti cal factor for software
and hardware.
Quantitative Expertise
Whi l e anal yti cal software becomes
i ncreasi ngl y easy to use, fi rms that com-
pete on anal yti cs sti l l requi re substanti al
quanti tati ve ski l l sei ther i n-house or con-
tracted from outsi de. The stati sti cal exper t,
i n order to be useful , al so wi l l need to be
fami l i ar wi th the busi ness probl ems i n
the functi on and i ndustry; the quanti tati ve
ski l l s of a good anal yst are rarel y equal l y
appl i cabl e across di verse busi nesses. One
pharmaceuti cal company, for exampl e,
attempted to use several bi oi nformati cs
exper ts to pursue anal ysi s of commerci al
probl ems i n marketi ng and operati ons,
and found they were nei ther moti vated
nor exper t at the appl i cati ons. Whi l e sta-
ti sti cal anal ysts who al so understand busi -
ness i ssues al ways have been di ffi cul t
to fi nd, i t i s i ncreasi ngl y possi bl e to hi re
analytical expertise outside of a company
even from India or China in some cases.
However, some fi rms we i ntervi ewed
stressed the i mpor tance of a cl ose and
trusti ng rel ati onshi p between quanti tati ve
anal ysts and deci si on makers. The need i s
for stati sti cal exper ts who al so understand
the busi ness i n general , and the par ti cul ar
business need of a specific decision maker.
COMPETI NG ON ANALYTI CS
BA B SON E X ECUT I V E E DUC AT I ON WOR K I NG K NOWL E DGE R E S E A R CH CE NT E R 7
As one manager at Wachovia Bank put it
with regard to the relationships his analyti-
cal group tries to maintain:
We are trying to build our people as
part of the business team; we want
them sitting at the business table,
participating in a discussion of what
the key issues are, determining
what information needs the business
people have, and recommending
actions to the business partners.
We want this [analytical group]
to be more than a general utility,
but rather an active and critical
part of the business units success.
A consumer products fi rm we i ntervi ewed
hires what it calls PhDs with personality
for i ts anal yti cal groupi ndi vi dual s wi th
heavy quantitative skills, but also the ability
to speak the l anguage of the busi ness
and market thei r work to i nternal (and i n
some cases, external ) customers. To fi nd
these types of peopl e and devel op these
types of rel ati onshi ps woul d surel y be
much more di ffi cul t i n an outsourci ng si t-
uati on, and vi r tual l y i mpossi bl e wi th the
anal ysts hal f a worl d away from the deci -
si on makers.
DemandThe Critical Factor
in Analytical Competition
More di ffi cul t to create than suppl y i s the
demand for anal ysi s and fact-based deci -
si on maki ng wi thi n a company. I n the
earl i est stages of anal yti cal competi ti on
(Stage 1 and 2 organi zati ons), demand i s
created by par ti cul ar busi ness probl ems.
As anal yti cs becomes more central to the
competi ti ve strategy, demand becomes
more general i zed across an organi zati on.
Yet, unl i ke the suppl y factors descri bed
above, demandthe desi re to use anal yt-
i cs as a pri mary competi ti ve factorcannot
be bought i n the marketpl ace. The key
demand factors we i denti fi ed i ncl ude:
Willing Senior Executives
Several l ower-stage fi rms we i ntervi ewed
that made some use of busi ness i ntel l i -
gence sai d the l ack of demand from top-
l evel seni or executi ves was thei r si ngl e
most si gni fi cant barri er to engagi ng i n
anal yti cal competi ti on. These executi ves
were more comfor tabl e wi th i ntui ti ve deci -
si ons, or weren t aware of the possi bi l i ti es
for anal yti cal competi ti on wi thi n thei r
i ndustry. Some were not averse to anal yt-
i cs, but di dn t have enough personal ana-
l yti cal experi ence to base thei r strategi es
on anal yti cs and fact-based deci si ons.
Wi thout executi ves who want to use data
and anal ysi s to make deci si ons, even the
best busi ness i ntel l i gence appl i cati ons wi l l
not be used. We saw several patterns of
i nvol vement by seni or executi ves on the
demand si de, whi ch we descri be bel ow.
Some organi zati ons l eaders had the
desi re to compete anal yti cal l y from thei r
begi nni ng. Capi tal One, for exampl e, was
created i n a 1994 I PO i n order to appl y
the founders i nformati on-based strategy
to the credi t card busi ness. Amazon. com
was vi ewed by founder Jeff Bezos as
competi ng on anal yti cs from i ts star t. I ts
concept of personal i zati on was based on
stati sti cal al gori thms and Web transacti on
data, and i t qui ckl y moved i nto anal yti cs
on suppl y chai n and marketi ng i ssues as
wel l . Amazon recentl y used anal yti cs to
expl ore whether i t shoul d adver ti se on tel -
evi si on, and concl uded i t woul d not be a
successful use of i ts resources. The vi si on
of the founders of these startup businesses
l ed to anal yti cal competi ti on.
I n other cases, the demand for anal yti cal
competi ti on came from a new seni or exec-
utive arriving at an established company.
At Harrah s, for exampl e, the recrui tment
of Gary Loveman as chi ef operati ng offi cer,
and eventual l y CEO, greatl y accel erated
the companys analytical orientation and
l ed to a new basi s for competi ti on
competing on customer loyalty and service,
rather than bui l di ng the most expensi ve
casi no proper ti es. Someti mes the change
comes from a new generation of managers
i n a fami l y busi ness. At the wi nemaker
E&J Gal l o, when Joe Gal l o, the son of one
of the fi rm s foundi ng brothers, became
CEO, he i ntensi fi ed the fi rm s focus on
data and anal ysi sfi rst i n sal es, and l ater
i n other functi ons, i ncl udi ng the assess-
ment of consumer taste.
At the New Engl and Patri ots Nati onal
Footbal l League team, the i nvol vement i n
the team by Jonathan Kraft, the son of the
owner Bob Kraft and a former manage-
ment consul tant, hel ped move the team
i n a more anal yti cal di recti on both i n
terms of on-fi el d i ssues such as pl ay
sel ecti on and team composi ti on, and off-
fi el d i ssues affecti ng the fan experi ence.
The pri me mover for anal yti cal demand
doesn t al ways have to be the CEO. At
Procter & Gambl e, for exampl e, the pri -
mary i mpetus for more anal ysi s i s comi ng
from a vi ce chai rman. However, we di d
observe two cases i n whi ch a si ngl e func-
ti onal executi ve wi th a strong demand for
an anal yti cal ori entati on was unabl e to
change the cul ture i n that di recti on. At a
consumer products fi rm, an anal yti cal l y
focused marketi ng executi ve made hi s
own functi on more anal yti cal , but was
unsuccessful i n movi ng the enti re fi rm i n
that di recti on. Another anal yti cal market-
i ng and sal es executi ve at an i nformati on
technol ogy fi rm was si mi l arl y unabl e to
change hi s fi rm s enti re cul ture, al though
other executi ves were cer tai nl y aware of
hi s strongl y data-based management styl e.
I n both fi rms, busi ness i ntel l i gence i s al i ve
and wel l , but i t has not yet become a key
el ement of strategy.
Stimulating Demand
Even wi th wi l l i ng executi ves, there i s often
a need to sti mul ate demand on an ongo-
i ng basi s. Several fi rms have created
organi zati onal uni ts for thi s purpose. At
Quaker Chemi cal , each busi ness uni t has
a business adviseran analytical specialist
repor ti ng to the head of the busi ness uni t.
The rol e acts as an i ntermedi ary between
COMPETI NG ON ANALYTI CS
BA B SON E X ECUT I V E E DUC AT I ON WOR K I NG K NOWL E DGE R E S E A R CH CE NT E R 8
the suppl i ers (normal l y the I T organi za-
ti on) and users (executi ves) of data and
anal yses. The advi sers not onl y sti mul ate
demand by showi ng the busi ness uni t
how anal ysi s can be useful but, as i nter-
medi ari es, expl ai n busi ness needs to the
suppliers and ensure that business-relevant
data and analysis will be provided. Wachovi a
has a si mi l ar arrangement i n i ts Customer
Anal yti cs group, i n whi ch anal yti cal teams
are ti ed to par ti cul ar busi ness uni ts and
act as par tners i n creati ng and ful fi l l i ng
anal yti cal demand. Managers of these
groups commented frequentl y that a rel a-
ti onshi p of trust between the anal yst and
the executi ve deci si on maker i s cri ti cal to
the success of an anal yti cal strategy.
The enemi es of an anal yti cal ori entati on
are deci si ons based sol el y on i ntui ti on
and gut feel . Yet these have al ways been
popul ar approaches to deci si on maki ng
because of thei r ease and speed, and a
bel i ef that gut-feel deci si ons mi ght be
better. For those organi zati ons wi thout
suffi ci ent demand for data and anal ysi s i n
executi ve deci si on maki ng, the obvi ous
questi on i s whether such demand can be
sti mul ated. I f there i s no seni or executi ve
wi th a strong anal yti cal ori entati on, must
the organi zati on wai t for such a manager
to be appoi nted? One answer, of course,
i s for an anal yti cal group to bui l d a suc-
cessful track record of anal yti cal deci si ons
that have pai d offa set of success stori es.
However, i t can take several years to build
this type of reputation.
We di d fi nd some more speci fi c exampl es
of attempts to sti mul ate demand. Whether
they wi l l ul ti matel y prove successful i s as
yet uncl ear. One reasonabl e and l ogi cal
approach i s si mpl y to provi de seni or exec-
uti ves wi th accurate and ti mel y i nforma-
ti on and per formance measures so the
facts wi l l be avai l abl e i f they choose to
make fact-based deci si ons.
At the tel ecommuni cati ons fi rm Veri zon,
for exampl e, one executi ve s goal i s not to
sti mul ate anal ysi s per se, but rather to
sti mul ate a di fferent ki nd of anal ysi s by
di fferent groups of peopl e. Veri zon and
other fi rms ari si ng out of the Bel l
System have l ong been anal yti cal l y ori -
ented, but deci si ons were general l y made
sl owl y and were pushed up the organi za-
ti onal hi erarchy. Shaygan Kheradpi r,
Veri zon s chi ef i nformati on offi cer, i s
attempti ng to change thi s cul ture through
conti nual exposure to i nformati on. He
created a form of conti nuous scorecard i n
whi ch hundreds of per formance metri cs of
vari ous types are broadcast to PCs around
the company, each occupyi ng the screen
for 15 seconds. The i dea i s to get every-
onenot j ust seni or executi vesfocused
on i nformati on and what i t means, and
to encourage empl oyees at al l l evel s to
address any i ssues that appear i n the
data. Kheradpi r feel s he i s begi nni ng to
see si gns of cul tural change from the
use of the scorecard.
At one pharmaceutical firm where we
interviewed several IT executives, there was
generally little demand from senior execu-
tives for analytical decision making, particu-
larly in marketing. IT managers didnt have
access to the decisions marketers were try-
ing to make, and the marketing executives
didnt know what data or analysis might be
available to support their decisions.
However, two external events offered
opportunities to build analytical demand.
One marketing manager discovered a ven-
dor who showed how sales data could be
displayed graphically in terms of geography
on an interactive map. The companys IT
executives felt the display technique was
relatively simple, and they offered similar
capabilities to the manager.
A second opportunity was offered by an
external study from a consulting firm. One
outcome of the study will be a new set of
performance indicators. The IT group plans
to seize upon the indicators and will offer
more analysis and related data to the man-
agement team. These IT managers refuse to
wait until more analytically oriented senior
executives happen to arrive at the company.
Several executives we interviewed com-
mented that analytics have to be continually
sold throughout an organization. Executives
change, new business issues emerge, and
those who need to use analytical approach-
es in their jobs are not always compliant. At
UPS, for example, the customer intelligence
group determined customer defections
could be accurately predicted based on cus-
tomer data patterns and complaints, but the
sales force needed to be sold on the new
approach. When a potential defector is iden-
tified through the use of the data, the sales-
person should contact the customer to
review and resolve the potential issue.
Despite a high record of success, only about
75 percent of the salespeople were willing
to act on the predictionsthough the per-
centage is increasing. Even without full com-
pliance, the analytical approach has reduced
the frequency of customer defections.
Harrahs has developed a centralized
real-time yield management system for all
of its hotels that needed to be sold to prop-
erty managers. The systems decisions are
based not only upon the usual room avail-
ability patterns, but also on the customers
loyalty level. When a customer calls for a
reservation, the systems algorithms weigh a
number of variables and data (including the
number of available rooms, the amount of
time before the planned stay, and the
amount of business the customer gives
Harrahs at this and other casinos) to calcu-
late a price to offer to the customer. The
system almost always produces higher rev-
enues for individual properties when it is
employed. Yet property managers usually
have to be convinced the system is more
effective than traditional approaches to yield
management and local decision making.
These examples are evidence that in order
to build demand for complex analytics, man-
agers and affected users need to be educated.
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Bank of America is facing this issue head-on
by incorporating models into its executive
development programs that encourage leaders
to look at the three Isinsight, intelligence,
and ideaswhen looking for opportunities to
grow their businesses. The program chal-
lenges leaders to look more broadly at the
data available to them, both data available
internally as well as external data related to
customers, competitors, and the broader
environment. This program builds on a solid
cultural and strategic foundation of using
data to drive the business.
Analytical Targets: The
Fine Line Between Spread
and Focus
One challenge in using analytical capabilities
to advance strategy is maintaining a balance
between depth and focus. Several execu-
tives commented in our interviews that a
focus on particular business problems and
outcomes is necessary if an analytical strategy
is to be successful. There is only so much
analytical expertise to go around, and only
so many business problems on which ana-
lytical supply and demand can be focused.
Harrahs, as mentioned above, focuses its
efforts on the management of customer loy-
alty, and its management team is reluctant
to venture very far outside of that orienta-
tion. Capital One briefly diversified its appli-
cation of analytics into such businesses as
cellular phones and flowers, but concluded
credit cards and other consumer financial
services should remain its focus.
Virtually every firm we interviewed that
had built up its analytical capabilities finds
demand for them exceeds the supply.
Therefore, the use of analytical resources
must be prioritized and allocated. Procter &
Gamble, for example, ensures that the
efforts of its Global Analytics group are
devoted to issues that are highly strategic
and worthy of the scarce talent. Although
Wachovia has invested significantly in ana-
lytical resources, it must still go through an
annual planning process (with quarterly
adjustments) to ensure that its initiatives are
well-targeted.
Customer and Supplier Use
As we noted above, analytical tools and
techniques are often used to enhance rela-
tions with customers. The most obvious
uses of customer analytics are internal, to
inform decisions about internal strategies
and operations. Quaker Chemical, for exam-
ple, uses detailed analysis of its product
performance with current customers to win
new ones by offering both documentary
proof of product quality and evidence of its
extensive, experience-based expertise.
Yet we found several of the more advanced
analytical competitors offer some elements
of their data and analytics directly to their
customers and suppliers. Perhaps the best-
known example is Wal-Mart, which uses its
voluminous data and product demand
analyses not only for internal purposes, but
also to share with its suppliers through its
Retail Link private exchange. All suppliers
are required to use the system.
Wal-Mart is not alone in sharing data.
Progressive Insurance, for example, shares
pricing dataits own and that of competi-
torswith customers. The company also
offers customers the possibility of lower
rates if they accept a device in their cars
that gathers data about driving activity.
Some firms share both data and analyses
with their customers. Procter & Gamble
offers data and analytics as a service to its
retail customers as part of a program it
calls Joint Value Creation, and to its sup-
pliers in order to help them improve their
responsiveness and costs. The hospital sup-
plier Owens & Minor provides data and
analyses for its customers and suppliers,
enabling them to access and analyze their
buying and selling data, track ordering pat-
terns to look for ways to consolidate orders,
and move off-contract product purchases to
a group contractfor products distributed
by Owens & Minor or its competitors. The
winemaker E&J Gallo provides its distribu-
tors with data and analytics that lets them
determine how best to convince retailers to
add shelf space for Gallo wines. Finally, the
Hong Kong-based Octopus Cards, a
provider of electronic stored value cards for
public transport, provides retailers with data
on the customers who pass nearby the
retailers facilities, and runs promotions
encouraging customers to use the Octopus
Cards for retail purchases.
How Long Does the
Change Take?
Firms desiring to compete on analytics will
naturally wonder how long it takes
to implement such a strategy. The best
advice is to begin working on it now,
because it typically requires several years
for analytical competitive strategies to come
to fruition. Barclays Consumer Finance, for
example, embarked upon a five-year plan to
apply analytical approaches to marketing
credit cards and other financial products to
its customers. It takes time to refine the
systems that produce transaction data, to
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Weve been collecting data for six or seven years,
but it's only become usable in the last two or
three, with enough time and experience to validate
conclusions based on the data.
Manager of Customer Data at UPS
make the data available in warehouses, to
select and implement analytical software,
and to build a robust hardware and com-
munications environment. Firms planning to
embark upon analytical competition should
have a hardware and software plan for how
they will achieve the needed capabilities.
It should address such issues as the amount of
data to be processed, the number of users
of the analytical systems, and the speed of
response necessary to meet the business need.
Even more time-consuming at most firms is
coming up to speed in human capabilities,
to optimize business processes based on
the outputs of analysis, and, in some cases,
to build a sufficient body of data to support
reliable predictive results. At UPS, one man-
ager of customer data analytics noted that:
Weve been collecting data for six
or seven years, but its only become
usable in the last two or three, with
enough time and experience to vali-
date conclusions based on data.
Several executives at other firms noted that
it takes time for managers to understand
data and be comfortable with the analytics
based on it. An analytical executive at
Procter & Gamble suggested firms might
begin to keep managers in their jobs for
longer periods because of the time required
to master analytical approaches to their
businesses.
One manager of an analytical group in a
consumer products firm pointed out that
the longevity of analytical capabilities is crit-
ical to their value; his firm has been pursuing
analytical capabilities for more than 50 years.
This executive pointed out that not all proj-
ects will be successful, so analytical groups
need to build up a broad portfolio of exec-
utive relationships, projects, and analytical
technologies. He also suggested that short-
term, project-based funding of analytical
resources is inconsistent with the long-term
nature of analytical competition.
However, despite the difficulty and expense
of establishing these capabilities, many
of the firms we have identified as early
adopters of analytical strategies are clear
leaders in their industries. This suggests the
time and trouble necessary to become ana-
lytical competitors are definitely worthwhile.
Summary
This study has provided a glimpse into a new
form of competition. Instead of competing on
traditional factors, companies are beginning to
employ statistical and quantitative analysis and
predictive modeling as primary elements of
competition. These firms have overcome the
historical barriers to gathering and managing
transaction data and some of the cultural
resistance in organizations accustomed to
gut-feel decision making, and are using com-
plex analysis and data-intensive decisions to
change the way they manage themselves and
compete in the marketplace. They have mar-
shaled both supply and demand factors for
analytical competition, and are employing their
capabilities across multiple functions.
Opportunities for analytical competition are
possible in every industry. Therefore, virtually
every firm should consider how it might adopt
analytical methods and capabilities. Figure 3
summarizes key action steps that firms should
consider in moving toward analytical competi-
tion. While not all of the steps will be applica-
ble to all organizations, its likely everyone
would find some of them appropriate.
There is every reason to believe this approach
will grow in acceptance. The necessary data
will become increasingly available, and the
analytical resources are increasingly accessible
to all. Yet the move to analytical competitive-
ness is typically a journey of several years.
Companies that do not rapidly embrace these
possibilities risk falling dramatically behind.
No business can afford to lose its best cus-
tomers, to spend more on logistics and inven-
tory, to miss out on opportunities for new
products and services, and to hire less capa-
ble employees than its more analytically
astute competitors.
Figure 3:
Action Steps for Analytical
Competition
1. Begin to build analytical skillsIts
often difficult to find individuals with
the requisite quantitative and business
skills. Organizations should start looking
for them as soon as possible, and hire
them in sufficient volume to create
critical mass.
2. Get your data in shapeAnalytical
environments require large amounts of
high-quality data. Figure out what data you
really need to advance your strategy, make
sure its being gathered, and clean it up.
3. Implement analytical technologyYoull
need heavy-duty hardware and software
to do serious analytical work. Start putting
it in place today.
4. Examine your business strategy
Analytical competition requires a clear
business strategy that is optimized with
data and analysis. Your executives should
begin to consider what key processes and
strategic initiatives would be advanced if
the right analytics were available.
5. Find an executive partnerSince the
most difficult factor to put in place in
analytical competition is demand from
senior executives, you should begin to
cultivate that demand by finding an exec-
utive partner and embarking with him or
her on some analytical initiatives.
This research report is part of an ongoing
research study at Babson on how compa-
nies compete with analytics. The research
was carried out independently, but was
sponsored by SAS and Intel. To learn more
about or participate in the research, contact
Tom Davenport at tdavenport@babson.edu.
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