Analytics as a Source of Competitive Advantage
By Thomas J. Davenport and Jeanne G. Harris
Skeptics may scoff that analytics can't provide a sustainable competitive advantage, because any single insight or analysis eventually can be adopted by competitors. And it is true that an individual insight may provide only transient benefits. Yield management provided a big boost to American Airlines for a time, for example, but using that process is now just a cost of doing business in the airline industry.
Organizations can take several approaches to gain a competitive advantage
with data. Some can collect unique data over time about their customers and
prospects that competitors cannot match. Others can organize, standardize and
manipulate data that is available to others in a unique fashion. Still others
might develop a proprietary algorithm that leads to better, more insightful
analyses upon which to make decisions. And some differentiate themselves by
embedding analytics into a distinctive business process.
Regardless of the approach, for companies to sustain a competitive advantage,
analytics must be applied judiciously, executed well and continually renewed.
Companies that successfully compete on analytics have analytical capabilities
that are:
Hard to duplicate
It is one thing to copy another company's IT applications or its products and their related attributes (such as price, placement or promotion); quite another to replicate processes and culture. For example, other banks have tried to copy Capital One's strategy of experimentation and testing, but they haven't been as successful. Banks that have been successful with a similar strategy, such as Barclays in the United Kingdom, have figured out their own route to analytical competition. While Capital One relentlessly seeks new customers, Barclays leverages analytics to increase "share of wallet" by cross-selling to its large customer base.
Unique
There is no single correct path to follow to become an analytical competitor,
and the way every company uses analytics is unique to its strategy and market
positions. For example, in the gaming industry, Harrah's uses analytics to
encourage customers to play in a variety of its locations. This makes sense
for Harrah's because it has long had its casinos scattered around the United
States. But that approach clearly would not be the right one for a single casino,
such as Foxwoods Resort Casino in Connecticut. It's also less appealing for
casino impresario Steve Wynn, who has translated his intuitive sense of style
and luxury into the destination resorts Bellagio and the Wynn.
Adaptable to many situations
An analytical organization can cross internal boundaries and apply analytical capabilities in innovative ways. Sprint, for example, easily adapted its analytical expertise in marketing to improve its human capital processes. The company applied its "customer experience life cycle" model to create and analogous "employee experience life cycle" model that helped it optimize employee acquisition and retention.
Better than the competition
Even in industries where analytical expertise and consistent data are prevalent, some organizations are just better at exploiting information than others. While every financial services firm has access to consumer risk information from FICO, for example, Capital One has analytical skills and knowledge that enables it to outperform the market by making smarter decisions about potentially risky credit customers. The company's managers refer to the concept of "de-averaging" – how can they break apart a category or a metric to get more analytical advantage?
Renewable
Any competitive advantage needs to be a moving target, with continued improvement
and reinvestment. Analytics are particularly well suited to continuous innovation
and renewal. Progressive Insurance, for example, describes its competitive
advantage in terms of the agility it gains through a disciplined analytical
approach. By the time competitors notice that Progressive has targeted a new
segment – such as older motorcycle drivers – it has captured the
market and moved on to the next opportunity. In its 2005 annual report, the
company described its ongoing commitment to develop and explore new insights
in understated fashion: "Our knowledge of the calculus combining price,
growth and profit, while increasing, remains a challenge and something we want
to be smart about."
One caveat: companies in heavily regulated industries, or in those for which the availability of data is limited, will be constrained from exploiting analytics to the fullest. For example, outside the United States, pharmaceutical firms are prevented from obtaining data about prescriptions from individual physicians. As a result, pharmaceutical marketing activities in other parts of the world are generally much less analytical than those of companies selling in the U.S. market. But in other cases, analytics can permanently transform an industry or process. As Moneyball
and Liar's Poker author Michael Lewis points out in talking
about investment banking, "The introduction of derivatives and other new financial instruments brought unprecedented levels of complexity and variation to investment firms. The old-school, instinct guys who knew when to buy and when to sell were watching young MBAs – or worse, PhDs from MIT – bring
an unprecedented level of analysis and brain power to trading.
Within 10 years, the old guard was gone."
