Top performing firms operate in a data driven culture. But making data analysis central to business decisions disrupts the traditional practice of basing actions on intuition, opinion or hunches. Adopting data-driven decision practices takes deliberate effort, and can be a simple step-by-step process. Successful adopters have found these processes improve profitability and help them make better strategy decisions.
Growing numbers of business leaders are convinced -- or are ready to be -- that they can analyze and use data to their advantage. For instance, the number of US manufacturers adopting data-driven decision making nearly tripled from 2005-2010, according to US Census Bureau surveys. But not all firms are equally equipped to implement these processes.
This overview of research and opinions describes the growing reliance on data driven decision making -- or DDD -- in business today.
4 Traits that Aid Adoption of Data Driven Decision Making
Many managers are eager to wield data analysis tools, but certain business conditions can either smooth the way, or throw a wrench in management's plans to rely more on objective information.
Some businesses have traits that allow them to implement data driven decision making more readily, say MIT scholars Kristina McElheran and Erik Brynjolfsson. Their large-scale survey of US manufacturers found the practice of DDD is rising, but used unevenly across the manufacturing sector.
They identified 4 factors that allowed some manufacturing firms to adopt DDD more easily than others. While these traits are discussed in the context of manufacturing there are lessons here that can be applied to companies in other verticals.
1. Higher IT Investment
Factories that had already invested in IT for data tracking, processing and communication were better able to implement DDD. They also saw higher returns from their IT investment when management used the information to guide actions.
2. More Employees with College Degrees
Firms adopted DDD more easily when greater numbers of employees had Bachelor's degrees. It didn't matter whether degree earners were management or staff. The researchers suggested formal education helped people take a data-centric view of their world.
3. Multi-Plant Size
Managers of both stand-alone factories and multi-plant firms used data in making decisions. But larger firms with multiple plants had the advantage of shared infrastructure, and opportunities to learn from each other. About twice the number of multi-plant firms had adopted DDD than single-plant firms.
4. Awareness of DDD Practices
Knowing the benefits of data-driven decision making increases its use. Some firms had more opportunity to learn from other business units, partners, consultants, associations or employees. People interacting with others using or exploring DDD were more likely to actually adopt some of the ideas.
DDD Is a Stepwise Process -- Which Any Business Manager Can Use
Author and data analytics expert Bernard Marr provides another perspective on this process, urging all business owners and managers to put data "at the heart of strategic decision making." He believes data analysis delivers insights with the power to actually improve the business. A consultant to Microsoft, Oracle, T-Mobile and others, he describes his 10-step process for answering key business questions using data, for companies of any size.
Surprisingly, the first step is not about the data -- it's about strategy. A focus on what to improve should frame the approach. Having clear goals keeps your decision-making on track, because the data themselves offer endless possible applications, and it's easy to get lost in all they can do for you. The priority is what you want to accomplish.
The next few steps address:
- Targeting the key business areas to impact
- Identifying the business questions to answer
- Determining what data sets you need to find the answers
- Finding the data sets you have and what you need to collect
- Checking whether the costs justify the value to your strategy
Data collection doesn't even begin until step seven of Marr's process.
In the end, data-driven decision making occurs by asking key strategic questions, and taking intentional steps to answer them with data.
Decision Makers See Better Profits, Strategies with Reliance on Data
These examples show that successful managers see how using data gives them strategic advantages.
Research indicates that firms that outperform their competitors do so because they value reliance on data. An Economist Intelligence Unit study found that "76 percent of executives in top-performing companies cited data collection as very important/essential, compared with only 42 percent from companies that lag their peers in performance."
Additional studies show that decisions based on data analysis makes firms more profitable. MIT's Erik Brynjolfsson analyzed 179 publicly traded companies and found that firms that adopted data-driven decision making methods "are about 5% more productive and profitable than their competitors."Why? When managers use data to predict what is going to happen, they can understand what conditions will impact their market and decide what to do ahead of time.
Wal-Mart executives trusted data analysis to predict what to stock in stores for customers about to be hit by hurricane Frances. Strawberry pop-tarts sold at seven times the everyday rate ahead of similar storms. Beer was another big seller. They jumped to stock stores in the hurricane's path accordingly, where the increased stock sold well.
Companies do not need to own the data resource to benefit. Brynjolfsson calls web search data "the world's biggest focus group." People enter about 167 billion Google per month, estimates SearchEngineLand. Each search reflects an interest or demand, Brynjolfsson reminds us. Using Google search data has enabled MIT to predict housing sales 3 months ahead for each of the 50 states.
Not every decision will be as simple as what to load onto shelves for customers ahead of a big storm. Executives may need to experiment based on insights from their data. Brynjolfsson notes that companies that benefit from data resources don't passively collect; they use it to test new products. For example, Amazon, eBay, and Google "rely heavily on field experiments as part of a system of rapid innovation.... That culture has spread to other information-intensive industries like retail, financial services, and food services."
Summary: Factors that Help Business Decision Makers Use Data to Their Advantage
The opinions compiled here show that several factors drive people in business to embrace data driven decision making. Key traits such as company size and structure, workforce education and IT investment can help or limit efforts to implement DDD practices. Using data to answer strategic questions is not necessarily an overwhelming process, and can be a matter of adopting a series of steps. Decisions based on data analysis have driven up profits and enabled better strategies for successful adopters.