Competing on

Analytics
The New Science of Winning

Tom Davenport
University of Houston ISRC
November 15, 2007
 The Planets Are Aligned for Analytics

 Powerful IT
 Data critical mass
 Skills sufficiency
 Business need

2 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 What Are Analytics?

Analytics
Decision Optimization What’s the best that can happen?
Competitive Advantage

Predictive Analytics What will happen next?

Forecasting What if these trends continue?
Statistical models Why is this happening?

Alerts What actions are needed?

Query/drill down Where exactly is the problem?
Ad hoc reports How many, how often, where?
Standard reports What happened? Reporting
Degree of Intelligence
3 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics
 What Should Organizations Do with
Analytics?

 Using analytics is good

 Finding the best customers, and charging them
the right price
 Minimizing inventory in supply chains
 Allocating costs accurately and understanding
how financial performance is driven
 Competing on analytics is better
 Making analytics and fact-based decisions a key
element of strategy and competition

4 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 What Is Analytical Competition About?

Dispassionate analysis Passionate advocacy

Data and statistics Intuition
Computers People
Discipline and rigor Creativity and insight

5 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 Analytical Competitors
Old Hands Polishing Their Edge

 Marriott — Revenue management

 Wal-Mart — Supply chain analytics
 RBC — Cost and customer profitability
 P&G — Supply chain
 Progressive — Pricing risk

6 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 Analytical Competitors
Major Turnaround in Strategy or Culture

 Harrah’s — Loyalty and service

 Tesco — Loyalty and Internet groceries
 MCI — Network pricing
 Rogers / Nextel / Verizon Wireless / Cablecom —
Customer relationship processes
 A’s / Red Sox / Patriots / Rockets — Players for price

7 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 Analytical Competitors
Number-Crunchers from Birth

 Capital One — “Information-based strategy”

 Amazon — Supply chain, advertising, page changes
 Yahoo — Pages as controlled experiments
 Netflix — Movie preference algorithms

8 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 Analytical Competitors
Cut Across Industries
Consumer Products Industrial Products
• Kraft • Deere
• Mars • Cemex
• E&J Gallo Retail
Financial Services • J.C. Penney
• Bank of America • Best Buy
• Barclay’s Transport / Travel and
• Humana
Entertainment
• FedEx
Government
• Schneider
• New York Police Dept.
• Hilton
• VA Hospitals
• Army Recruiting

9 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 Analytics in Professional Sports

 Identify undervalued attributes

 Develop new performance metrics
 Know when a player is ready to move up

 Use your own selection criteria

 Assess the ability to work as part of a team
 Understand risk better than your competitors

 Determine who gets hurt and who gets tired

 Who inspires others to play better?
 Who drags down the team?
10 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics
 The Analytical Delta

PROGRESS

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 The Analytical Performance Delta

STAGE 5: Analytical Competitors

11/32 firms
STAGE 4: Analytical Companies
More analytical =
6/32 higher performance
STAGE 3: Analytical Aspirations
7/32

STAGE 2: Localized Analytics

6/32

STAGE 1: Analytically Impaired

2/32

12 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 The Analytical Performance Delta (cont.)

15% of top performers versus 3% of low performers indicated

that analytical capabilities are a key element of their strategy. 47%
2002
2006
37%
33%
27%

19%

12% 10%
8% 9%

0%

No analytical Minimal analytical Some analytical Above average Analytic capability

capability capability capability analytical is a key element of
capability strategy

Source: Accenture Survey of 205/392 companies

13 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 High Performers Use Analytics
Top performers have a greater analytical orientation than low performers.

High Low
Performers Performers
65 % have significant decision-support/analytical capabilities 23%

36 value analytical insights to a very large extent 8

77 have above average analytical capability within industry 33

77 have BI/Data Warehouse modules installed 62

73 make decisions based on data and analysis 51

40 use analytics across their entire organization 23

14 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics
 How Analytical Competitors Make Money
 Optimize a distinctive capability or external relationship
 Customer relationships, supply chain, HR, R&D, etc.
 Harrah’s, Marriott, Amazon, etc.

 Understand and take action on the business better

 MCI, Sara Lee Bakeries, RBC

 Offer analytics to customers as the core offering

 Apex Management Group in insurance risk management
 Franklin Portfolio Associates in equity portfolio development

 Offer analytics to customers to augment existing product or service

 SmartSwing in golf clubs
 Nielsen/IRI in retail/consumer products

15 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 The Analytical Landscape Is Always Changing

 Airlines—letting a business model

become obsolete
 Baseball teams—on-base
percentage becomes over-valued
 Capital One—other banks catch up,
and they enter a new business

16 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 The Analytical DELTA — Pieces

Data . . . . . . . . breadth, integration, quality

Enterprise . . . . . . . .approach to managing analytics
Leadership . . . . . . . . . . . . passion and commitment
Targets . . . . . . . . . . . first deep, then broad
Analysts . . . . . professionals and amateurs

17 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 Data

 The prerequisite for everything analytical

 Clean, common, integrated
 Accessible in a warehouse
 Measuring something new and important

18 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 New Metrics / Data

Wine Chemistry Driving Data Run Production

19 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 Enterprise

 If you’re competing on analytics, it doesn’t make

sense to manage them locally
 No fiefdoms of data
 Avoiding the analytical equivalent of duct tape
 Some level of centralized expertise for hard-core
analytics
 Firms may also need to upgrade hardware and
infrastructure

20 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 Enterprise-Wide Customer View

Types of Processes in Which Data Used

Data Sales Marketing Logistics Service
Internal
Transaction

Web
Metrics

External
Geo-Demo

External
Attitudinal

21 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 Leadership

 Gary Loveman at Harrah’s

 “Do we think, or do we know?”
 “Three ways to get fired”

 Barry Beracha at Sara Lee

“Our CEO is a real  “In God we trust, all others bring data”
data dog”
Sara Lee  Jeff Bezos at Amazon
executive
 “We never throw away data”

22 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 The Great Divide

Full steam ahead!

• Hire the people
Is your senior • Build the systems
management • Create the processes
team
committed? Prove the value!
• Run a pilot
• Measure the benefit
• Try to spread it

23 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 Targets

With limited analytical resources, pick a major

strategic target, with a minor or two
Harrah’s = Loyalty + Service
Patriots = Player selection + TFE
Barclay’s = Asset analysis + Credit cards
UPS = Operations + Customer data

Can also have two primary user group targets

Wal-Mart = Category managers + Suppliers

Owens & Minor = Logistics + Hospitals

Progressive = Actuaries + Customers

24 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 Analysts

Analytical Professionals
5-10% — Can create algorithms
Analytical Semi-Professionals
15-20% — Can use visual tools, create
simple models
Analytical Amateurs
— Can use spreadsheets
70-80%

25 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 Taking Action

 Analytics need to be embedded

into the machinery of
organizational action
 Operational decision-making

 Business processes

 Manager and employee behavior

 Customer expectations

26 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 The Analytical DELTA — Progress
Moving to:

Stage 3 Stage 5
Stage 1 Stage 2 Analytical Stage 4 Analytical
Success Factor Analytically Impaired Localized Analytics Aspirations Analytical Companies Competitors

Data Inconsistent, poor

quality, poorly
Data useable, but in
functional or process
Organization
beginning to create
Integrated, accurate,
common data in central
Relentless search for
new data and metrics
organized silos centralized data warehouse
repository

Enterprise n/a Islands of data,

technology, and
Early stages of an
enterprise-wide
Key data, technology
and analysts are
All key analytical
resources centrally
expertise approach central-ized or managed
PROGRESS networked

Leadership No awareness or
interest
Only at the function or
process level
Leaders beginning to
recognize importance
Leadership support for
analytical competence
Strong leadership
passion for analytical
of analytics competition

Targets n/a Multiple disconnected

targets that may not be
Analytical efforts
coalescing behind a
Analytical activity
centered on a few key
Analytics support the
firm’s distinctive
strategically important small set of targets domains capability and strategy

Analysts Few skills, and these

attached to specific
Isolated pockets of
analysts with no
Influx of analysts in
key target areas
Highly capable analysts
in central or networked
World-class
professional analysts
functions communication organization and attention to
analytical amateurs

27 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 Next Steps for Analytics

 Continual pursuit of new data types

 Real-time action
 Content mining, intangibles analytics
 Engineering multi-modal decision-making
 Model management / analytical resource
management / knowledge management

28 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics

 It Doesn’t Happen Overnight — Start Now!

 Takes a while to put data and infrastructure foundation

in place, and even longer to develop human
capabilities, a fact-based culture, and “success
stories”
 Barclay’s five-year plan for “Information-Based
Customer Management”
 UPS — “We’ve 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 data.”

29 | 2007 © All Rights Reserved. Thomas H. Davenport – Competing on Analytics