Operations & Digital Business

Nicolas van Zeebroeck

Master in Business Engineering 2014-2015
Nicolas.van.Zeebroeck@ulb.ac.be

Competing on Analytics
The idea here, that there are some companies who dont just compete with regular sources of advantages! Some big companies can be better because they
manage their analytical data! They found a way to extract insights from data and adjust a business model so that it benefits from this analytical capabilities!
The starting point is about a book talking about baseball! It talks about oakland team in US who used to be a very average team with low budget compared to
others teams! So they cant really buy best players, ANd in baseball there a correlation between $ and performance! The book start with this ex: how can a
team with average income ressources be a good one? An we shoulf know that baseball it is a sport that can be based on figures! We use hard data in order to
try understand who are the best players at the market with the highest value that we can hire! In addition, figures can tells us, at every time of the game, who
is performing better, so we know wich player to put on the pitch! So figures can tell us easily which player is better to be on the pitch at what time of the game!
In the beginning at 2000, the team realised that they needed stat about the players in the game!

Competing on Analytics
How a below average baseball team can make
it several years in a row into the playoffs

GESTS482 Operations and Digital Business N. van Zeebroeck 2014 2015

How Oakland As competed on analytics

Oakland A's took advantage of analysis of player performance to
field a team that could better compete against richer
competitors in Major League Baseball (MLB)
Came up with new (easy to obtain) measures of player
performance: on base percentage and slugging percentage
Statistics used in 2 ways:
For recruitment: identify undervalued players on the market
On the field: to select the best players to play at any point in a game
Lewis (2003)
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How Boston Red Sox competed on analytics

Boston Red Sox invested in analytics after Oakland As
In 5th game v. NY Yankees (ALCS 2003), something happened

Pedro Martinez was pitching

Analytics had shown Martinez much easier to hit after 7 innings
Coach Grady Little refused to hear about the statistics
After 7th inning, Martinez got shelled by the Yankees
Yankees won the game and the series
Little lost his job

Davenport & Harris (2007)

GESTS482 Operations and Digital Business N. van Zeebroeck 2014 2015

Two key lessons

Analytics can be a powerful way to outperform the competition
We dont need to play on ly with gut feelings! But we need to check the analytics, it can help within the organization!

But need to spread everywhere within an organisation

But in the ex of the red sox, even if we have the best stats, if the guy who makes decisions dont buy the insights that come from the
analytics it will serve no purpose! So we need to think about how ccould we extract info that make scence! But also how to make sure that
these insights perculate throughout the organization.

GESTS482 Operations and Digital Business N. van Zeebroeck 2014 2015

Competing on Analytics
What does it mean?

Take some stat and try to check how do you perform looking at diff periods! We have a
graduation / ranking scale of levels of analysis that try to understand from what happen? to
predicting what will happen at the end? and tell us what is the decision that we need to take ! The
bottom part we call it the access and reporting: we access info, we describe it and we try to repport
it! We dont really do analytics here. As soon as we start with statistical analytics and forecastings,

Analytics defined

Davenport & Harris (2007)

GESTS482 Operations and Digital Business N. van Zeebroeck 2014 2015

Why competing on analytics?

A necessity

An opportunity

Classical sources of differenciation are

more difficult to sustain:

Granular (transaction) data, available in quasi

real time from ERP, PoS and Web systems
Algorithms to extract insights from data
Computing power to run them

Product and service differenciation vanishes

Technology is commoditizedeverybody can buy SAP and have

the same tech..

Protective regulation is gone

So this say that we have an opp! We have the data and we know how to analyze it! So why
Geographical advantage is irrelevant with
dont we take a look on it?
But at the other side, this is cause a lot of firms are doing this! So they change the rules of
Internet
the game, and we dont have other choices. We need to do it in order to stay in the market!

Whats left to compete on?

Technology is now there to provide

before it
would be
impossible
cause we
didnt have
the right
tech

Business process performance:

Think of amazon: the key of amazon is not being the biggest e-comm on earth the main
advantage of amazon is that they know their customer very well! And they know exactly
what their customers are going to buy > key advantage, you can propose smth to your
customer! SO anticipating the needs of you customer, it is smth very important!
What is ledt to compete? having the most efficient BP, if we have the most efficient we can
efficiencystill have a decisive competetve advantage! And to do that we need smart IT to invent the
processes but we also need our business to run with max efficiency by takinf best decisoins

Execute your business with maximum

Make smartest business decisions possible

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Davenport & Harris (2007)9

We talk about (c) who decided that they should compete on analytics! But what does it take? Firstly it needs to
support smth that is really strategic!

Walmart: supply chain for retail it is really important

Harrahs: customer loyalty and service market leader thanks to stat

Oakland As: human resources

Netflix & Amazon: customer preferences
Marriott: optimal room pricing for the rooms

Support of strategic,
distinctive capability
Explore & exploit new measures

Royal Bank of Canada: customer data centralized

70 they decided that each subisdiary will have the
in the 1970sIn
same database
Harrahs: CEO first had all property managers
report directly to him

Enterprise level approach

Data management & analytics
managed at organisation level
HQ

ANALYTICAL
COMPETITION

Senior Management
Commitment

CEO,.. must be committed!

Organisational change is huge

Davenport & Harris (2007)

Large scale ambition

Aspiration to achieve large scale
results
Beracha (CEO Sara Lee): In God we trust, all others bring data
Loveman (CEO Harrahs): Do we think or do we know?
Barclays: 5 years to put information based customer strategy in place
Adjust every aspect of consumer business:
Clean and integrate data on 13 million customers, How to charge
interest rates, How to underwrite risk and set credit limits, How to 10
control fraud, How to cross sell other products

Importance of analytical orientation

How low and high performers within any indus will make a deposition in different criteria!

Davenport & Harris (2007)

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Where to competing on analytics?

Internal
analytics

Human resources
Financial management
Research & Development
Manufacturing & logistics

External
analytics
Customers
Suppliers

Of course we can do analytic in 2 ways, optimize internal and external processes!

Davenport & Harris (2007)

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Competing on Analytics
Internal processes

Financial analytics: revenue forecasting

Prediction of future sales based on

sales in previous (most recent)
periods
System yielded optimistic sales
2001: Sales down by 32%
They didnt anticipate the dot com buble! But Dell was smart enough
to anticipate that, because their were basing their revenues
forecasting with internal data they have! And they correctly
anticipated the dramatic drop in sales! What can we do? we can ut
prices, adjust our marketing, adjust our product by producing
cheaper product,.. that is exactly what they did! It is here an ex
where a company uses analytics while competitors dont!

Predictive models anticipated

slowdown in sales
Preemptive actions on prices and
products: cut costs, slash prices
2001: Sales down only 2.3%
Boost in market share after
downturn

Davenport & Harris (2007)

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Manufacturing analytics: quality control

Early warning system
Honda dealers record any warranty service request in central
database with categorized quality problem and free text
Additional textual data is recorded from calls of mechanics
to HQ experts and customer call centers
Text mining algorithms analyze data to identify potential quality issues
Potentially serious problems are flagged for human investigation
Reports are sent to HQ
Honda used analytics in the same way to anticipate security/ qty issues with their cars! Data was coming from the maintainers,.. The data
was also coming from the call services,.. and they anticipted problem before it becomes huge! This is another ex that we can do internally,
just try to collect info and try to act in a most systematic way rather than expecting a drama!

Davenport & Harris (2007)

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Manufacturing analytics: quality control

Human quality control (post production) binary
If not perfect, glass is destroyed

When glass is ready, people look at it and if they see that there is smth wrong with the glass, they cant sell it to
customer, so they crash it.. Huge waste in industry, because they can be various diffect in the glass, it can be
serious as it can be minor.. If serious ok crash, but if minor may be use it for another purpose..

New analytics system (classification based)

So they installed a digital cam at the end of

Digital camera over end of production line

production line, picture will be send in data
mining system in order to classify glass by type
Each product is captured by camera
of defect, and according to the defect, the
system despaches the glass..
Image is analysed automatically by AI software
Potential defects are analyzed and categorized
According to severity of imperfection, glass is dispatched to alternative uses

Results:
Considerable drop in wasted glass

It is just a way to use analytics in order to diminish waste, ..

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Competing on Analytics
External processes

There are many things company wich they know but they dont! Such as who is my most profitable
client; so we will serve him in priority,..

Competing on analytics with external processes

Identify most profitable customers and most at risk of switching

to competition using predictive modeling
Improve customer understanding by integrating data in house
with external data
Optimize supply chains
Establish prices in real time to get highest yield per transaction
Ex of mariott

Optimize advertizing and marketing strategies

Davenport & Harris (2007)

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Customer analytics: real time marketing

Customers use loyalty card
Capture data on their behaviour
Data is used in real time by marketing & operations
Optimize yield
Set prices for slots and hotel rooms
Design optimal traffic flow within casino

If customer loses too much money too fast

If he loses to much money, they will never come back! So

in order to get him lucky we can give him a presnt

Problem identified in real time

Message is sent (electronically or through local service representative)
Looks like you are having a tough day at the slots. It might be a good time to visit the
buffet. Heres a $20 coupon you can use in the next hour.

Davenport & Harris (2007)

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Customer analytics: personalized marketing

Clubcard (loyalty card)
Every online or offline purchase is recorded in client
history
Data is used to profile customers and target promotions
Results
7 million variations of product coupons issued per year
Redemption rate highest in the retail industry worldwide: 20 50%
Average in EU/US retail industry: 2% redemption rate
Cross selling on Tesco online
Tesco now largest retailer in the UK

Here coupons are not sent to

everyone like we get them in Be,
they are personal.. It gives
customer exactly what they want!

Davenport & Harris (2007)

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Customer analytics: revenue management

Revenue Management:
Predict highest price that would still
lead to full occupancy
System entirely automates the pricing optimization process
Rooms, restaurants, meeting spaces, etc.
Total hotel optimization

Results
2% increase in revenue
17% increase in operating income
Extra $86 millions in profit
This belong to PMPO!

Marriott; Ex of a big (c) that understood that each time they

tip the wrong price for a hotel room, they lose money.. If they
put it too high, then the hotel wont be filled! But if it is too
cheap they lose also money because they might charged it
more.. So in hotel, you need to optimize every reservation by
getting the max/client. They used the alaytics to understand
the customer behaviour and they conected data from market
sources..

Davenport & Harris (2007)

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Customer analytics: price optimization

Price Management & Price Optimization (PMPO) solutions
Retail industry:
5 10% increase in gross margin from PMPO

Downside: Amazons example

Loyal customers are ready to pay higher price than fickle customers by using algorithm
Smaller price elasticity
Amazon priced DVDs higher to people identified as more loyal
Public outcry forced Amazon to back off It was a chock! People were not happy.. so amazon back off!

Davenport & Harris (2007)

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Connecting suppliers & customers

What do you do with 583Tb of customer,
sales and inventory data?
17,400 suppliers from 80 countries use Retail Link system
Track their products at Walmarts
Get info on sales, shipments, purchase orders, invoices, claims, returns, forecasts, etc.

Walmart managers use the system to optimize product assortment

Ensure customers have the products they want
E.g. Kellogs strawberry pop tarts just before a hurricane hits a region

Davenport & Harris (2007)

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Supplier analytics
Business very sensitive to (volatile) cocoa prices
Prediction of price fluctuations a necessity to hedge risks
cocoa is very volatile because of weather conditions..

Mars invested in own earth observation satellite network

Satellites monitor weather conditions in main cocoa production regions
Data mining algorithms use current and historical data to predict production
levels per region and future prices
Mars optimizes its purchasing based on price expectations

Results:
Key competitive advantage from excellence in procurement and risk
management
Another ex; when people buy beer at saturday eve, retail people observed a little corelation between beer and diaper! So then managers
decided to put diapers at the same place that the beers! > huge correlation and boost in sales!

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Logistics analytics
Fedex and UPS are heavy analytical competitors
Route optimization
Its vital that we manage our networks around the world the best way we can. When
things dont go exactly the way we expected because volume changes or weather gets in
the way, we have to think of the best ways to recover and still keep our service levels.
Mike Eskew, CEO UPS

CEMEX optimizes routes of its delivery trucks in real time

GPS chips + traffic monitoring
Cut delivery time from 3 hours to 20 minutes in Mexico

Davenport & Harris (2007)

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Competing on Analytics
What does it take to become an analytical competitor?

Foundations for analytical competition

1 2 ALL
From the examples seen in class, what are, according to you, the
main elements needed for an organisation to take advantage of
analytics?
Think of different layers if it helps

Think alone, then in groups of 2 or 3

Write down your ideas on a piece of paper with your names

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Foundations for analytical competition

Strategy and focus to determine most relevant use of analytics
Transactional systems to generate accurate/relevant/granular data
Processes to get insights and act upon them

Not enough to do
advanced
analytics in a (c),
data need to be

People who embrace analytics

IT experts, business analysts & data scientists, decision makers, employees

Governance to share the data and foster fact based decision

Software technology to extract and analyze the data

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People: the beer and diaper legend

Analysts found interesting pattern in retail:
Men coming to buy beer for the weekend also tend to remember that their
wives had asked them to buy diapers
So they put both products in their carts

Retail store managers decide to place diapers next to beers

Sales explode

Davenport & Harris (2007)

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People: the beer and diaper legend

Data mining can identify patterns
Humans are still needed to interpret them

Analysts

Other humans are still needed to act upon them

Executives

Analytics based decisions can only be as good as the quality of

the data they rely on

Competing on Analytics
Key take aways

Competing on analytics: key take aways

Analytical competition can really change the rules of the game
No industry is safe The key thing is that this is one of the area where IT induces new rules of the games within an industry!

Competing on analytics requires

To support a strategic, distinctive capability

An enteprise wide approach
Senior management commitment
Large scale ambition (not local optimization)

Can serve both internal and external processes

Analytics infrastructure is made of

Data (transactional, granular, high quality)

Technology (never self sufficient)
Processes
People (to analyze and to decide)
Governance

Your assignments
Assignments on Analytics
Read the technical note on typical applications of analytics
Read the two reference articles
Davenport: Competing on Analytics
McAfee & Brynjolfsson: Big Data: the management revolution

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