Key Questions addressed by Analytics:

The matrix in figure 1-1 identifies the six key questions that data and analytics can address in organizations.
The first set of challenges is using information more effectively. The past information cell is the realm of
traditional business reporting, rather than analytics. By applying rules of thumb, you can generate alerts
about the presentwhats happening right now (like whenever an activity strays outside of its normal
performance pattern). Using simple extrapolation of past patterns creates information about the future, such
as forecasts. All of these questions are useful to answer, but they dont tell you why something happens or
how likely it is to recur.
The second set of questions requires different tools to dig deeper and produce new insights. Insight into the
past is gained by statistical modeling activities, which explain how and why things happened. Insight into
the present takes the form of recommendations about what to do right nowfor example, what additional
product offering might interest a customer. Insight into the future comes from prediction, optimization, and
simulation techniques to create the best possible future results.
Together these questions encompass much of what an organization needs to know about itself. The matrix
can also be used to challenge existing uses of information. You may find, for example, that many of your
business intelligence activities are in the top row. Moving from purely information-oriented questions to
those involving insights is likely to give you a much better understanding of the dynamics of your business
operations.
Most companies today have massive amounts of data at their disposal. The data may come from
transaction-oriented applications such as ERP (enterprise resource planning) systems from software vendors
such as SAP and Oracle, scanner data in retail environments, customer loyalty programs, financial

transactions, or clickstream data from customer Web activity. But what do they do with all this information?
Not nearly enough.

Where Do Analytics Apply?

Analytics can help to transform just about any part of your business or organization. Many organizations
start where they make their moneyin customer relationships. They use analytics to segment their
customers and identify their best ones. They analyze data to understand customer behaviors, predict their
customers wants and needs, and offer fitting products and promotions. They ensure that the money and
resources devoted to marketing focus on the most effective campaigns and channels. They price products
for maximum profitability at levels that they know their customers will pay. Finally, they identify the
customers at greatest risk of attrition, and intervene to try to keep them.
Supply chain and operations is also an area where analytics are commonly put to work. The most effective
supply chain organizations optimize inventory levels and delivery routes, for example. They also segment
their inventory items by cost and velocity, build key facilities in the best locations, and ensure that the right
products are available in the right quantities. If theyre in service businesses, they measure and fine-tune
service operations.
Human resources, a traditionally intuitive domain, increasingly uses analytics in hiring and employee
retention. Just as sports teams analyze data to pick and keep the best players, firms are using analytical
criteria to select valuable employees and identify those who are most likely to depart. Theyre also
identifying which operational employees should work at which times to maximize sales and profits.
Not surprisingly, analytics can also be applied to the most numerical of business areas: finance and
accounting. Instead of just putting financial and nonfinancial metrics on scorecards, leading firms are using
analytics to determine which factors truly drive financial performance. In this era of instability, financial and
other firms are using analytics to monitor and reduce risk. And a recent problem in the investment industry
notwithstanding, no one really believes that the serious business of investment can proceed without
analytics. In banking and insurance, the use of analytics to issue credit and underwrite insurance policies
grows ever more common and sophisticated.
We have little doubt that the use of analytics will continue to growin businesses, nonprofits, and
governmentsin part because the volume and variety of available data will continue to grow. As more
processes are automated and instrumented with sensors, the only way to control them efficiently is to
analyze the vast volumes of data they produce. Today, smart grids use analytics to optimize and reduce
energy usage for sustainability. Someday, we may live on a smart planet, with the ability to monitor and
analyze all aspects of the environment. Its already an analytical world, and it will only become more so
There are several levels of unique data: one is simply to be the first company in your industry to use
commercially available data. Progressive Insurance did this in 1996 when it began to use consumers credit
scores as an input to its automobile insurance underwriting. Whether you pay your bills turned out to be a
surprisingly good predictor of whether you will crash your carno one knows exactly whybut it took other
firms in the industry at least four years to start using this data (and some still havent caught on).
It was inevitable that competitors would catch up to Progressive, because anybody can buy a credit score
and competitive secrets dont stay secret for longparticularly in the insurance industry, which has to
publish underwriting approaches in regulatory filings. Nevertheless, Progressive kept innovating in other
areas, as we describe in chapter 9, proving that even if youre using industry-standard data and your
competitors have glommed onto the idea, its still possible to differentiate your company with that data.
Capital One, for example, made extensive use of consumer credit scores for extending credit and pricing in
its credit card business, but soon most of its competitors followed suit. So it started to fool around with the
credit score data, determining through detailed analysis that some low-score applicants might be more likely
to pay back their loans than the score would predict. By identifying some data that differentiates customers,
it was able to differentiate its own serviceseven though the initial input was a widely employed data
source.

Of course, its easier to get proprietary advantage when the data is sourced from internal operations or
customer relationships. Lets look at some examples of the latter:

Olive Garden, an Italian restaurant chain owned by Darden Restaurants, uses data on store
operations to forecast almost every aspect of its restaurants. The guest forecasting application
produces forecasts for staffing and food preparation down to the individual menu item and
component. Over the past two years, Darden has reduced unplanned staff hours by more than 40
percent and cut food waste by 10 percent.[2]

The Nike+ program uses sensors in running shoes to collect data on how far and fast its customers
run. The data is uploaded to the runners iPod, and then to the Nike Web site. Through analysis of
this data, Nike has learned that the most popular day for running is Sunday, that wearers of Nike+
shoes tend to work out after 5 p.m., and that many runners set new goals as part of their New
Years resolutions. Nike has also learned that after five uploads, a runner is likely to be hooked on
the shoe and the program.[3]

Best Buy was able to determine through analysis of its Reward-Zone loyalty program member data
that its best customers represented only 7 percent of total customers, but were responsible for 43
percent of its sales. It then segmented its stores to focus on the needs of these customers in an
extensive customer centricity initiative.

In the United Kingdom, the Royal Shakespeare Company carefully examined ticket sales data that it
had accumulated over seven years to grow its share of wallet of existing customersand to identify
new audiences. Using audience analytics to look at names, addresses, shows attended, and prices
paid for tickets, the RSC developed a targeted marketing program that increased the number of
regulars by more than 70 percent.[4]

Consumer packaged goods companies often dont know their customers, but Coca-Cola has
developed a relationship with (mostly young) customers through the MyCokeRewards.com Web site,
which the company believes has increased its sales and allowed it to market to consumers as
individuals. The site attracts almost three hundred thousand visitors a dayup 13,000 percent from
2007 to 2008.[5]

A top ten U.S. bank with over three thousand branches found it nearly doubled the balance per
customer interaction by using collaboration-based analytic technology when dealing with customers.
First-year profitability per interaction increased by 75 percent after taking into account the
additional value provided to the customers by the bank. Sales productivity of front-line bank staff
also increased by almost 100 percent in terms of balances sold per hour.

Of course, data that was once unique and proprietary can become commoditized too. For example, every
airline has a loyalty program, but these programs all offer similar benefits, and the data from them is not
generally used to create and maintain strong relationships with customers. At one point these programs
were great, but now they are simply a me-too capability. There is probably some potential for an airline to
break out from the pack and do something distinctive with its loyalty data, but most airlines are perhaps too
preoccupied with fuel costs and mergers to seize this opportunity.
Data gold mines can also potentially come from basic company operations, if the company realizes their
value. For example, Cisco Systems has been maintaining the data (and increasingly voice) networks of its
customers for years. Recently, the company realized that it could analyze the data on network configurations
to identify which customers were mostly likely to be facing a network failure and would need to upgrade
equipment. Cisco can benchmark and analyze a customers network and all its component products across
multiple dimensionsthe networks configuration, its use, the position of devices in the network, and so

forth. It can predict the networks stability and anticipate pending problems like toxic combinations of
network equipment. Cisco analysts can also compare a networks likely stability to that of others in the same
industry or of similar size. The ability to do such diagnoses differentiates Ciscos services and improves sales
of its products.