Session 1

Information is Power

Business Research Why?
• The key to business success is making the correct decisions • Correct decisions are becoming more difficult to make • The costs of making the wrong decision are increasing • Decision makers use all methods to reduce risk.

But why do you need to make decisions?
• “If you do nothing you will die” • Decisions are a reaction to a changed scenario • Business aims to achieve objectives which require decisions to be taken to give direction to the business • A business cannot function without decisions being taken!

So what are decisions trying to do?
• Business Decision Making seeks to achieve two outcomes: Attain objectives efficiently and

Cope with change (Change in corporate objectives/targets) (Changes in the environment) (Changes in consumers/segments)

CHANGE
• Change has TWO dimensions: • IMPACT • PREDICTABILITY

Impact
• Impact is the perceptually weighted aggregate of four dimensions: • Magnitude • Direction • Speed • Ubiquity

Predictability
• Predictability is a collective perceptual measure of how accurate managers can be in determining the likelihood that an event or series of events will or will not occur. • It ranges from total predictability (seasons, ageing, time and mortality) to total unpredictability (natural disasters, artistic success, conflicts)

Why is Predictability important?
Predictability is the degree to which one can accurately forecast the future. Probability is the likelihood of an event occurring in the future. “I know that over the next year 1 in 100,000 airline flights will end in disaster, but I cannot predict which one it will be”

Predictability=Planning=Manipulation=Control

Impact. Predictability and Strategy
Predictability
High Low

Impact

Proactive contingency planning (Hurricane Katrina)
Policy Development (Returns policy at M&S)

Emergency Planning (Major Incidents)
Reactivity (when event occurs)

High Low

Decision Making
“Business strategy is ultimately based on a series of informed decisions, chosen from a range of alternatives ”

Any decision (D) has a series of alternatives (A1…..An) which have outcomes (O1…..On), each of which have benefits (B1…..Bn) and risks (R1….Rn). The objective is to maximise B and minimise R.

Anatomy of a decision
• It is based on information available at the time the decision is taken • It is based on an individual or group perception of that information • It is based on the quantity and accuracy of that information • The actualisation of the decision may be a long time removed from the decision • Future decisions based on past historical data are hard to react against (extrapolation) • May be individualistic or group based

Individual vs Group Decisions
• Individual: Based on one person’s view of the world. May be inspired, may be very wrong! Tend to be more risk taking.

• Group: Based on a collective view of the world. Tend toward the average, and also risk averse

The role of information in decision making
• Information reduces risk, improves the quality of decision making • The more information available at the time the decision is taken the better • Information quality is key • Information may be time dependent or an immutable truth • Information has a value (but only if it can be capitalised upon)

Information: Desirable and Obtainable
• Most decisions are made under conditions of sub optimal information acquisition • The information you might like to have may not be available due to time limits, cost limits, or simple inability to acquire it. • The information you have may be limited by methodology, cost, time, or simple availability

Analysis versus Creativity
• Analysis is the “logical” interpretation of collected data. There is one “correct” analytical answer to a data matrix. It is the “HBS answer” to a problem. There can normally only be only one logical interpretation of a data matrix. Analysis is based on objectivity – a single perceptual way of viewing data

Immutable and changing truths
• An immutable truth is one which has been established over time to be true. It is a FACT • Facts may have caveats (except when…., assuming that……, given that………) • Changing truths are “facts” which are correct only at the time of their creation. They will constantly change – therefore are not facts over time (patterns of voting)

Creativity
• This is the interpretation of data which is objectively “incorrect”. • Normally creativity is associated with actions which are post analysis, and are based on a different perceptions of the assembled data. • An “objective” perceptual analysis might lead to several alternative creative interpretations and subsequent strategies.

Credibility, Perception & Experience
• Information has two components: content (what it says) and credibility (how far we believe what it says) • Perception is how we interpret the information, and is based in part on our experience and training • Experience is how often we have been exposed to identical or similar situations and the lessons we have learnt from these past exposures

Transposition of experience
• By training (across the age / experience barriers) • Through individual learning (via mistakes!) • Through peer learning (watching others)

Risk
Risk is compounded of THREE quantities:

R = f (N,C,I)
Where: N = Need to take a decision C = Level and type of commitment I = Indeterminacy (Uncertainty) The objective is to reduce one or all of the above components in order that the aggregate risk falls to an “acceptable” level. What is an “acceptable” level of risk will vary dependent on personal, industrial and cultural variables. It will vary between “risk takers” and “risk avoiders”

Risk Taking and Risk Avoidance
• All decisions carry an element of risk – the “inherent” risk component, which you can never remove • Total risk is made up of the inherent component and an uncertainty element. • Risk takers make decisions under higher levels of uncertainty than do risk avoiders. • Risk takers may be more successful if they make the correct decisions earlier

Risk taker or Risk Avoider
• Culturally: Certain cultures (Chinese, Jewish, American) are far more risk taking than others (British) • Industrially: Certain industries / professions are more risk taking (traders, clothing, restaurants) than risk averse (banking, medicine, airline pilots) • Personally: Your individual make up and related risk taking

To Summarise
• • • • • Business Research provides Information Information reduces Uncertainty Uncertainty reduction reduces Risk Reducing risk improves Decision Making Better decision making leads to Increased Profitability • Increased profitability leads to Growth and Survival!

Research is Information
• Research information is a tool to assist in decision making • Business research is NOT about making strategic decisions based on the research. • Research should not be held accountable for bad decisions unless it can be shown the research was flawed, and the decision was made on incorrect information

The value of information
• Immutable truths (facts which are constant over time) have little value • Information which is constantly changing is potentially of high value • Its value is related to the consequences of making an incorrect decision • The costs of information acquisition should never exceed the cost of the consequences of an incorrect decision

Pure or Applied Research
• PURE RESEARCH (also known as “blue sky” research). It is research to “discover” information which may not have an immediate usefulness. • APPLIED RESEARCH (also known as “problem based” research) seeks to answer specific questions as an aid to decision making

Principles of the Scientific Method
• Systematic Analysis and Logical Interpretation • Empiricism (facts from observation and experimentation) • Confirmation / disproving of prior conceptions or hypotheses • Establishment of general laws for future reference

The Alternatives to Undertaking Research
No decisions! (Therefore no need for research) (Go forth blindly with a belief in constancy) Anything can happen (It is impossible to make decisions) Decision Making based on our Glorious past (We have prospered so far without research!) Decision Making by Extrapolation (Everything can only get better, faster, higher or bigger) Crisis Management (Be reactive, and only plan after a significant change has occurred) Genius decision making (Rely on the words of an expert as to what is to occur)

Common errors in using business research
Conservatism (Failure to personally adapt to new information / evidence) Recentcy (Lack of perspective in which more recent events are over emphasised) Cyclicality (A belief that all form variations re-appear as a modification over time) Optimism / Wishful thinking (The “rose tinted glasses” syndrome, where there is a vested interest in the outcome) Illusory correlations (A belief that correlation = causation) Underestimating Uncertainty (Belief in the “will occur” not “might occur”) Multiplication of “guesstimates” (Over optimism in research responses and scaling up of results)

Methods of Business Research
• The choice of method used depends on a trade off between FIVE criteria: Accuracy required Resources available / Decision Value Time constraints Data availability Nature of the decision Methods available can be defined along TWO dimensions: Subjective / Objective Analytic / Experiential

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