Information technology has created a data explosion. We now record virtually every click of every visitor to every website, every search on Google or Bing, every transaction at every cash register, every call or text on cellphones, every inventory change in our supply chains and petabytes of other data on what we buy, sell, or even consider. This creates a level of visibility that managers and economists have never had before. And it creates enormous opportunities to use data to change the way decisions are made.
There have been some great case studies of how analytics have affected specific companies, but ironically, there has been relatively little systematic data on this question. Working with Heekyung Kim and Lorin Hitt, we sought to help address this gap in a research paper. We found that publicly-traded companies that were more data-driven were about 5% more productive than their competitors, a statistically significant difference.
I talk a bit about “big data” and how it can change decision-making in this short video that McKinsey recorded when the visited me a couple of months ago.
Is your organization using data more aggressively for decision-making? If not, what’s holding you back? If so, what have been the results?
3 Replies to “Data-driven Decision-making”
Interesting study, Erik. I am surprised to note that the impact is as high as 5%. The reason for the surprise is that I’d have thought that the vast majority of firms that use data to drive decisions may be using data poorly and thus may see no benefit from it (there are few best practices on business analytics). The DDD measure focuses on use of data and not the effectiveness of the ways in which data are used. So I was expecting a much smaller lift.
I am really curious about the variance in the returns from DDD and what factors might explain why some firm gets a much bigger lift than another firm.
Thanks for starting this critical conversation.
Regarding your questions, please see the recent Corporate Executive Board Company study on the Insight Deficit:
“Information volume continues to grow 60% a year, yet 62% of workers lack the ability to apply judgment to the information they use to make decisions every day”
Thanks for sharing this. If we believe in a kind of DDD revolution inside IT-using firms, we can also hypothesize some sort of skilled-biased managerial change, I guess. Companies, more than ever, will need managers who feel comfortable analyzing and/or using numbers and rely on data (rather than their gut feeling) for making informed decisions. Another hypothesis may relate to a shift in the skill composition of firms towards hiring more data scientists/analysts and statisticians/econometricians. As a result, are we going to observe a big boost in the demand for these skills and, accordingly, related fields of study in universities in the near future (if we believe university intakes follow the industry demand with a time-lag of a few years)?
What do you think?