Competing on Analytics

The smart use of business intelligence tools and algorithms can help your company leapfrog its rivals.

Reprinted by permission of Harvard Business School Press. Adapted from Competing on Analytics: The New Science of Winning, by Thomas H. Davenport and Jeanne G. Harris. Copyright 2007 Harvard Business School Publishing Corp. All rights reserved.

In Competing on Analytics, Thomas Davenport and Jeanne Harris assert that competitive advantage can come from sophisticated exploitation of business intelligence and predictive analytics. Its already happening at companies such as Netflix Inc., Inc., Harrahs Entertainment Inc. and Capital One Financial Corp. Online video rental company Netflix, for example, has used its algorithm-driven movie recommendation engine to blossom into a $1 billion business that competes with brick-and-mortar operations like Blockbuster Inc.

Today, most large organizations have some sort of analytical applications in place and some business intelligence tools installed. But theyre typically marginal to the success of the business and are managed at the departmental level. An insurance company, for example, may have some analytical tools in the actuarial department, where pricing for policies is determined. A manufacturing company may use such tools for quality management. Marketing may have some capabilities for lifetime value analysis of customers. However valuable these activities are, theyre invisible to senior executives, customers and shareholders and they cant be said to drive the companys competitive strategy.

Competing on Analytics

Our focus is on companies that have elevated data management, quantitative analysis and fact-based decision-making to a high art. Rather than being in the backroom, analytics in these companies are found in the annual report.

Organizations that want to be competitive must have some attribute at which they are better than anyone else in their industry a distinctive capability. Maybe you strive to make money by being better at identifying profitable and loyal customers than your competition, and charge them the optimal price. If so, analytics are probably the answer to being the best at it. Perhaps you sell commodity products and need to have the lowest possible level of inventory while keeping shelves stocked for customers. If so, analytics are often the key to supply chain optimization.

Analytical competitors are organizations that have selected one or a few distinctive capabilities on which to base their strategies and then have applied extensive quantitative analysis and fact-based decision-making to support the selected capabilities. Whatever the capabilities are, analytics can propel them to a higher level. Capital One, for example, calls its approach an information-based strategy. Harrahs distinctive capabilities are customer loyalty and service, and it has certainly optimized them with its analytics-driven strategy.

Skeptics may scoff that analytics cant provide sustainable competitive advantage, because any single insight or analysis eventually can be adopted by competitors. And its true that any individual insight may provide only transient benefits. Yield management provided a big boost to American Airlines for a time, for example, but 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 cant 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 approach, companies that successfully compete on analytics have analytical capabilities that are:

• Hard to duplicate. It is one thing to duplicate another companys IT applications or its products; its quite another to replicate processes and culture.

• Unique. In the gaming industry, Harrahs uses analytics to encourage customers to play in a variety of its locations scattered around the U.S., but that wouldnt be the right strategy for a single casino, such as Foxwoods Resort Casino in Connecticut.

• Adaptable to many situations.Sprint Nextel Corp., for example, easily adapted its analytical expertise in customer marketing to human capital processes such as employee acquisition and retention.

• Better than the competition. Some organizations are just better at exploiting information than others. While every financial services firm has access to consumer credit information, Capital One has analytical skills that enable it to outperform the market by making smarter decisions about potentially risky credit customers.

• Renewable. Any competitive advantage needs to be a moving target, with continued improvement and reinvestment. By the time competitors notice that insurer The Progressive Corp. has targeted a new segment such as older motorcycle drivers it has captured the market and moved on to the next opportunity.

Role of the CIO

The CEO will have the primary responsibility for changing the culture and the analytical behaviors of employees. But CIOs can help in this regard, too. For example, Irving Tyler, formerly CIO of Quaker Chemical Corp. (now at IMS Health Inc.), provided the results of data analysis and reporting through e-mail alerts to Quaker employees. He believed that the more information was delivered to users, the more it began to shape their ability to solve problems and make decisions based on information rather than intuition.

The CIO may also provide a home and a reporting relationship for specialized analytical experts. Analytical groups report to the CIO at The Procter & Gamble Co., trucking company Schneider National Inc. and Marriott International Inc. Procter & Gamble recently consolidated various analytical organizations into one group that reports to the CIO; in fact, the IT function has been renamed information and decision solutions.

Of course, the most traditional CIO approach to analytics is through technology. This is certainly necessary, but not sufficient. CIOs who want to play an even more valuable analytical role will focus on the I in their titles the information. Analytical competition is all about information do we have the right information, is it truly reflective of our performance, and how do we get people to make decisions based on information? These issues are more complex than buying and managing the right technology, but organizations wishing to compete on analytics will need to master them. Its a pretty safe bet that information orientation is highly correlated with analytical success.

Copyright © 2007 IDG Communications, Inc.

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