The Executive Edge Newsletter March/April 2008
Analytics as a Source of Competitive Advantage
Dos and Don'ts of Making Better Decisions
Exclusive White Paper: Clearing the Way for Faster, Smarter Decisions
Entrepreneurs: Where Our Economy Gets Its Strength
QuickStat: Software-as-a-Service Gains Among SMBs
Analytics as a Source of Competitive Advantage
By Thomas J. Davenport and Jeanne G. Harri
Skeptics may scoff that analytics can’t provide a sustainable competitive advantage, because any single insight or analysis eventually can be adopted by competitors. And it is true that an individual insight may provide only transient benefits. Yield management provided a big boost to American Airlines for a time, for example, but using that process is now just a cost of doing business in the airline industry.
Organizations can take several approaches to gain a competitive advantage with data. Some can collect unique data over time about their customers and prospects that competitors cannot match. Others can organize, standardize, and manipulate data that is available to others in a unique fashion. Still others might develop a proprietary algorithm that leads to better, more insightful analyses upon which to make decisions. And some differentiate themselves by embedding analytics into a distinctive business process.
Regardless of the approach, for companies to sustain a competitive advantage, analytics must be applied judiciously, executed well, and continually renewed. Companies that successfully compete on analytics have analytical capabilities that are:
Hard to duplicate
It is one thing to copy another company’s IT applications or its products and their related attributes (such as price, placement or promotion); quite another to replicate processes and culture. For example, other banks have tried to copy Capital One’s strategy of experimentation and testing, but they haven’t been as successful. Banks that have been successful with a similar strategy, such as Barclays in the United Kingdom, have figured out their own route to analytical competition. While Capital One relentlessly seeks new customers, Barclays leverages analytics to increase “share of wallet” by cross-selling to its large customer base.
Unique
There is no single correct path to follow to become an analytical competitor, and the way every company uses analytics is unique to its strategy and market positions. For example, in the gaming industry, Harrah’s uses analytics to encourage customers to play in a variety of its locations. This makes sense for Harrah’s, because it has long had its casinos scattered around the United States. But that approach clearly would not be the right one for a single casino, such as Foxwoods Resort Casino in Connecticut. It’s also less appealing for casino impresario Steve Wynn, who has translated his intuitive sense of style and luxury into the destination resorts Bellagio and the Wynn.
Adaptable to many situations
An analytical organization can cross internal boundaries and apply analytical capabilities in innovative ways. Sprint, for example, easily adapted its analytical expertise in marketing to improve its human capital processes. The company applied its “customer experience life cycle” model to create and analogous “employee experience life cycle” model that helped it optimize employee acquisition and retention.
Better than the competition
Even in industries where analytical expertise and consistent data are prevalent, some organizations are just better at exploiting information than others. While every financial services firm has access to consumer risk information from FICO, for example, Capital One has analytical skills and knowledge that enables it to outperform the market by making smarter decisions about potentially risky credit customers. The company’s managers refer to the concept of “de-averaging” – how can they break apart a category or a metric to get more analytical advantage?
Renewable
Any competitive advantage needs to be a moving target, with continued improvement and reinvestment. Analytics are particularly well suited to continuous innovation and renewal. Progressive Insurance, for example, describes its competitive advantage in terms of the agility it gains through a disciplined analytical approach. By the time competitors notice that Progressive has targeted a new segment – such as older motorcycle drivers – it has captured the market and moved on to the next opportunity. In its 2005 annual report, the company described its ongoing commitment to develop and exploir new insights in understated fashion: “Our knowledge of the calculus combining price, growth and profit, while increasing, remains a challenge and something we want to be smart about.”
One caveat: companies in heavily regulated industries, or in those for which the availability of data is limited, will be constrained from exploiting analytics to the fullest. For example, outside the United States, pharmaceutical firms are prevented from obtaining data about prescriptions from individual physicians. As a result, pharmaceutical marketing activities in other parts of the world are generally much less analytical than those of companies selling in the U.S. market. But in other cases, analytics can permanently transform an industry or process. As Moneyball and Liar’s Poker author Michael Lewis points out in talking about investment banking, “The introduction of derivatives and other new financial instruments brought unprecedented levels of complexity and variation to investment firms. The old-school, instinct guys who knew when to buy and when to sell were watching young MBAs – or worse, PhDs from MIT – bring an unprecedented level of analysis and brain power to trading. Within 10 years, the old guard was gone.”
Thomas H. Davenport and Jeanne G. Harris are the authors of Competing on Analytics: The New Science of Winning, published by Harvard Business School Press. Davenport is the President’s Distinguished Professor of Information Technology and Management at Babson College. Harris is Executive Research Fellow and Director of Research for the Accenture Institute for High Performance Business.
Dos and Don’ts of Making Better Decisions
Every day brings new decision-making challenges in running a business: who to hire, what vendors to select, the best pricing for your product or service, what kind of marketing message your company should use – just to name a few.
The repercussions of each of these decisions can be significant. That’s why the ability to make timely and well-considered decisions is an essential trait of a successful business owner.
Use these tips as you think about the important decisions you need to make for your business:
DO take your time
The fast pace of our world can lead us to believe that successful people can make reasoned decisions quickly. While quick turn-around decisions are sometimes the only option, the reality is that even decisive, successful people with stellar judgment usually benefit from taking some time to fully understand the decision required, review available options, and think through outcomes before arriving at a good decision.
DO use analytics to identify problems
Consider what you need to know to help you make smarter decisions – data and metrics can inform decision making and give you a clearer picture of the landscape in which you are operating. It can also round out your understanding of potential outcomes and possible solutions.
DO identify your best decision making approach
Some business owners benefit from writing a pro and con list, others like to think quietly, some like to talk decisions through as a means of clarifying the core issue and the available options. Once you have identified the style that leads to your best decision making, make the time and stick to that style to enhance the likelihood that your decisions will be sound.
DO focus on goals
Company goals should always be a filter for decisions. Remind yourself, or your decision making team, of company goals to be sure that the pressures of the moment, the analytics and other factors do not take the decision in the wrong direction.
DON’T let data paralyze your decision making
Using data to drive your decisions doesn’t mean you have to forsake intuition. Ideally, you want to use data to develop educated intuition – that is, intuition informed by solid, reliable and timely information. But be careful not to let data paralyze you – try to avoid putting off an important business decision because you don’t have all the data you would like to have.
DON’T shoot from the hip
It is likely that you have strong feelings about many aspects of the business about which you are making decisions. While this passion is a great engine for driving your energy to learn the details of the issues, the interdependencies, and the options, try not to use it to actually make the decision. Your strong bias toward or against something can easily sway a decision when your make it emotionally instead of critically. While prior experience and preferences can be used to inform future choices, try to avoid letting them cloud your view of the broader picture.
DON’T make decisions in a vacuum
Though you may be responsible for the outcome of a decision, other people are likely to be affected by the choices you make. Consider who in your organization has a vested interest and discuss you choices with them, both to gather relevant input and to be sure that others are not caught off-guard by the conclusions you reach.
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Entrepreneurs: Where Our Economy Gets Its Strength
By Steve Ernst
I live in a town that actually has a “Main Street.” It has family-owned restaurants, auto dealerships, small law and accounting firms, a community bank, and a flower shop and jewelry store. What do all of these small businesses have in common? They represent ideas, a penchant for risk-taking, fortitude and, to top off even those attributes, they employee people who are earning a living, supporting families and probably formulating ideas of their own. In short, these are entrepreneurs.
When I see this street and the lives and efforts of people that make it what it is, I think of my father. My dad was a strong but quiet man with closely held dreams. A World War II veteran who returned from the war and went to work in a factory, he was there until, over 30 years later, he was the last one to leave the plant, walk out of the gate and literally turn off the lights. By day, he built huge earth movers, but at night he was an artist whose medium was wood. He created beautiful, long-lasting pieces of furniture that people would wait months for until he said it was ready. He could not hide his passion to create these masterpieces and his dream was to have his own business. It was not to be, but whenever I think about entrepreneurial spirit, I think of him.
I had the above thoughts in mind when I was fortunate enough to attend the 21st Annual Ernst & Young Entrepreneur of the Year Awards late last year. The EOY Awards gala is the culmination of a year-long search for – and celebration of – the entrepreneurial spirit. Along with the other national sponsors Bank of America and The Kauffman Foundation, SAP proudly sponsored the 2007 EOY Program. At the event, from over 1,600 nominees in the U.S., a distinguished panel of judges selected Entrepreneurs of the Year in 10 separate categories and, from that group, an overall Entrepreneur of the Year.
The 2007 Ernst & Young Entrepreneur of the Year in the U.S. is Isaac Larian, President and CEO of MGA Entertainment, Van Nuys, CA. Earlier in the evening, Mr. Larian had been named the winner in the Retail & Consumer Product category. To say that his acceptance speech was tremendously moving and an example of a modest person appreciative of the country and people who made his and his family’s success possible would be an understatement.
When Mr. Larian left Iran at the age of 17, his destination was America and, as he said, a place where, if you worked hard, you could pursue your dreams. When he arrived in Los Angeles, he had $750 in his pocket and a heart full of determination. At the end of his first month in the U.S. and with his funds dwindling, he eventually found a job as a dishwasher at $1.65 an hour, along with the willpower to save and persevere to the extent that he eventually earned a degree in civil engineering. He never lost sight of his dream, never gave up on himself and continued to be bolstered by the fact he was in the U.S. Step after step, decision after decision, idea after idea, he progressed from a licensing agreement, to a line of toys and products which children had to have, to acquiring Little Tykes and then to the acquisition and rescue of Smoby, France’s largest and Europe’s second largest toy company. Today, MGA Entertainment is the largest privately-owned toy company in the world. His advice when looking back? “Trust your instincts, stay humble, and be true to your roots.” As he tells his children, “I came here with little, started as a dishwasher, and got the chance to live the American dream.”
Entrepreneurs, the engines of our economy: we at SAP salute you.
Steve Ernst, CPA, leads the SAP CPA Advisor and other influencer programs for SAP America, Inc. Prior to joining SAP, Steve provided consulting services to boards and executive staff on accounting, auditing, business processes, and internal control systems, as well as sales, marketing, and business development initiatives. He has more than 30 years of experience, including 10 years with PricewaterhouseCoopers LLP and more than 20 years in international finance and operations in the consumer product and technology markets. You can contact him at steve.ernst@sap.com.
QuickStat: Software-as-a-Service Gains Among SMBs
Spurred by a need for IT solutions that are easy to implement, use and maintain, small and medium businesses are increasingly embracing software-as-a-service (SaaS) solutions, according to AMI-Partners. Twenty-one percent of small businesses and 31% of medium businesses now use SaaS - double the 2004 adoption percentage.
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