How to use big data to make better business decisions
- December 7, 2012
Business leaders often rely on intuition when making critical decisions, but according to The Economist Intelligence Unit, executives dramatically increase their chances of success when they incorporate facts and data into the decision-making process.
Global companies experienced a 26 percent improvement in performance over the last three years when big data analytics were applied to the decision-making process. And now, those data-savvy executives are forecasting a 41 percent improvement over the next three years.
“Although beliefs and instincts help executives make expedient decisions, they aren’t always good decisions,” says Dr. Chongqi Wu, assistant professor of management for the College of Business & Economics at California State University, East Bay. “Business leaders become better decision makers when they take advantage of data and the facts derived from data analysis.”
Smart Business spoke with Wu about the benefits of incorporating big data and analytics into the decision-making process.
Why is fact-based decision making superior?
Although intuitive decision making is simplistic and quick, a lack of underlying data makes it hard for executives to diagnose and correct problems when something goes wrong. Instead of compounding the problem by making another bad decision, executives can drill down into the data to determine the cause of misfires and use factual analysis to set a new course. Actually, studies show that cumulative improvement is hard to obtain when executives react to problems instead of using facts to make prudent business decisions. And since most of your competitors are probably using data, companies that base decisions on gut feel or instinct are at a competitive disadvantage.
What types of decisions or problems are best solved by big data?
In general, data-driven decision making works better at an operational or tactical level since there are relatively fewer risks involved. In fact, when aided by technology, data makes it easy to automate rudimentary tasks and decisions. For example, it’s hard to imagine how Amazon or Wal-Mart would fare if they relied on managers’ instincts to replenish stock levels, when a computer can synthesize inventory changes and sales trends and place orders automatically. On the other hand, strategic decisions still require intuition and judgment, but injecting data analysis and modeling into the process can significantly improve the odds of success. Don’t think of gut-based and fact-based decision making as competing concepts because they actually complement each other. For instance, cross-functional teams often use data to project outcomes and validate the return on proposed programs or new products. It also helps diverse teams build consensus by using facts instead of politics and personal preferences to reach conclusions. Remember, strategic decision making still requires risk taking and gambling, and success may hinge on market timing, execution and luck, but data not only makes executives better decision makers, it makes them better gamblers.
What’s the best way to incorporate data into the decision-making process and corporate culture?
First, executives need to lead the way in supporting cultural change by acknowledging the importance of data in the decision-making process. Next, use data modeling to project probable outcomes and evaluate ideas, since facts and knowledge generated from analyzing big data provide a common ground on which we can better debate our ideas. Start with something simple like a marketing program or packaging change, since you usually have ample data to identify untapped opportunities and customer behaviors. In fact, the process of collecting and analyzing data and generating knowledge gives you a better feel about customers, markets and risks.
Finally, force your team to analyze data by asking questions during the evaluation process so they learn how to marry facts and instincts.
Do executives need copious amounts of data to conduct modeling and analysis?
It’s hard to estimate how much data executives need, but simply put, we need as much relevant data as possible. However, there’s no reason to wait; my advice is to start small and start immediately because there’s no need to invest in expensive systems or software. Purchase information from third parties or tap free sources to validate ideas and use economical cloud services and SaaS programs to analyze the information and begin collecting in-house data. Finally, run an experiment or test to see how much data you actually need to project the return on a small marketing project or idea.
How can executives gain the confidence to make data-backed decisions?
You’ll gain the confidence you need to make data-backed decisions by realizing that great decisions don’t always produce great outcomes. For example, it’s a great decision to have Kobe Bryant take the final shot when the Lakers are behind, because his field goal percentage is 45.4 percent. But, even though Kobe gives the Lakers the best chance to win, data shows that he’ll miss about 55 percent of the time. No matter how much data we have collected and how capable of analyzing the data we have become, we will never fully understand all the risks or be able to predict the future because luck and timing still play a role in determining the success of an idea. Don’t forsake your instincts or completely change course; just recognize that incorporating data and facts whenever possible will absolutely make you a better decision maker.
Dr. Chongqi Wu is an assistant professor of management for the College of Business & Economics at California State University, East Bay. Reach him at (510) 885-3568 or firstname.lastname@example.org.