Competing on Analytics: The New Science of Winning

270 Pages·2007·1.45 MB·English

by  Thomas H. Davenport

Copyright
Copyright 2007 Harvard Business School Publishing Corporation
All rights reserved
No part of this publication may be reproduced, stored in or introduced into a
retrieval system, or transmitted, in any form, or by any means (electronic,
mechanical, photocopying, recording, or otherwise), without the prior
permission of the publisher. Requests for permission should be directed to
[email protected], or mailed to Permissions, Harvard Business
School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.
First eBook Edition: August 2006
ISBN: 978-1-422-10332-6
To Helen, with thanks for Jodi and much more
—Tom
To Carl and Lauren
—Jeanne
Contents

Copyright
Foreword by Gary Loveman
Acknowledgments
Part One
The Nature of Analytical Competition

1 The Nature of Analytical Competition
Using Analytics to Build a Distinctive Capability
2 What Makes an Analytical Competitor?
Defining the Common Key Attributes of Such Companies
3 Analytics and Business Performance
Transforming the Ability to Compete on Analytics into a Lasting Competitive
Advantage
4 Competing on Analytics with Internal Processes
Financial, Manufacturing, R&D, and Human Resource Applications
5 Competing on Analytics with External Processes
Customer and Supplier Applications
Part Two
Building an Analytical Capability
6 A Road Map to Enhanced Analytical Capabilities
Progressing Through the Five Stages of Development
7 Managing Analytical People
Cultivating the Scarce Ingredient That Makes Analytics Work
8 The Architecture of Business Intelligence
Aligning a Robust Technical Environment with Business Strategies
9 The Future of Analytical Competition
Approaches Driven by Technology, Human Factors, and Business Strategy
Notes
About the Authors

Foreword

WHEN I WAS A DOCTORAL student in economics at the Massachusetts Institute of
Technology, a powerful theory known as rational expectations suggested that it
was difficult to profit from widely anticipated, or predictable, events, since
rational actors would already have taken the action necessary to arbitrage any
such opportunities. When I became a student of management, I assumed that an
extension of rational expectations would apply in business; that is, any
straightforward profit-enhancing opportunity in competitive markets would
already be exploited and hence unavailable at the margin.
Well, thank goodness for me and the shareholders of Harrah’s Entertainment,
Inc. that rational expectations is a far from complete characterization of
managerial behavior. In short, opportunities abound to employ simple analytic
methods to marginally or substantially increase profitability, especially in large
businesses such as mine where a single insight can ring the cash register literally
thousands or millions of times. Examples abound in casino resort entertainment,
including yield management, game pricing, customer relationship management,
loyalty programs, and procurement. To take perhaps the easiest and biggest
opportunity in my tenure, we found that a ten-basis-point movement of slot
pricing toward the estimated demand curve for a given game could enhance our
profitability by an eight-figure amount and be unobservable to the guest.
The fact that this slot-pricing opportunity was available for someone as
simple minded as myself to find and exploit illustrates several of the common
impediments to analytic management that have absolutely nothing to do with
either analytic methods, data availability, or technology.
As Davenport and Harris demonstrate elegantly in this important and
unprecedented deep dive on the subject, analytic management is impeded by
common organizational pathologies:

A powerful conventional wisdom, often associated with powerful people, is
allowed to sustain itself absent critical testing.
Decision making, especially at high levels, not only fails to demand rigor
and dispassionate analysis, but often champions the opposite as the scarce
talent that identifies CEOs and visionaries from otherwise smart but less
inspired people.
The organization lacks people who get up in the morning eager to do
analytic empirical work and are really good at it. Instead, analytic work is
seen as the last resort, undertaken by those unfamiliar with proper methods.
People tend to win over ideas rather than the reverse.

Indulge me a few words about each of these culprits, beginning with the
last. The owners of any company, especially mine, deserve the very best ideas to
be put into practice. While I hope Harrah’s Entertainment shareholders have
some confidence in me, they are far better served to have confidence in the
capability of my team to gather and test the best ideas available within and
outside of Harrah’s Entertainment and use only those that lead to sustained
superior performance and growth. Although God has graced me with one or two
respectable ideas, she has also saddled me with some real losers and a frequent
state of ignorance and confusion. It is not my job to have all the answers, but it is
my job to ask lots of penetrating, disturbing and occasionally almost offensive
questions as part of the analytic process that leads to insight and refinement.
My journey is complicated by the fact that all organizations seek to please the
leader, so there is constant pressure to give my otherwise lame and ill-considered
views far more gravitas than they deserve. Beware, as this process can feel good
and be dangerously addictive. Indeed, conventional wisdoms are often birthed in
just this way. Hence, it is critical to create and constantly cultivate an
environment that views ideas as separable from people, insists on the use of
rigorous evidence to distinguish among ideas, and includes a healthy dose of
people both sufficiently dedicated and skillful to do the heavy lifting. Davenport
and Harris have provided the guide for creating such an environment, informed
by best practice from a heterogeneous group of innovative organizations.
One last thing. When it comes to visionary leadership as compared to
analytic management, you can lose weight without diet or exercise. Or to put it
differently, vision and analytics need not be seen as mutually exclusive
paradigms. In my industry, Steve Wynn and Jack Binion have both been
visionary leaders of great accomplishment. Neither were students of traditional
analytic methods, but both were innovators whose ideas were entirely consistent
with analytic methods. The challenge for those of us who attempt to employ
analytic capabilities is to ensure that they are oriented forward, where the
problems are least well defined and the data is scarce, rather than backward,
where the work is easy and the risk is low. Read ahead. There is much to learn.
Gary Loveman
Chairman of the Board, President,
and Chief Executive Officer
Harrah’s Entertainment, Inc.