SEPTEMBER 22, 2008
Innovation
Staring You in the Face
The path to new products might start with the customer data you've already collected. You just don't realize it.
By RANJAY GULATI, JAMES OLDROYD and PHANISH PURANAM
Sometimes the answer to the innovation challenge lies not in collecting new customer data but rather in finding creative ways to share and repurpose customer information that's already in-house.
Second, Royal Bank of Canada uncovered a new innovation engine, and gave its consumer-credit business a boost, by looking again at old rejected loan applications. The idea was to see whether any of those applicants had improved their credit ratings in the meantime, and then offer credit cards to those who had.
None of this is as obvious -- or as easy -- as it may seem. The transition to greater sharing of and finding new uses for existing information can be difficult when each department is used to collecting and analyzing its own data, often with a kind of tunnel vision that excludes the possibility of unexpected uses and discoveries. At Royal Bank of Canada, the decision to look again at rejected loan applications was a dramatic switch for the risk-management department, says Cathy S. Burrows, director of client strategy at RBC Insurance, Toronto. Says Ms. Burrows: "To have a risk group saying, 'Let's go out and go after customers we have turned down and offer them money' -- that is a huge change."
We studied companies that successfully share and repurpose data in ways that lead to improved operations, new products and greater revenue. Information cross-leverage can produce a fountain of new ideas across disparate domains within a firm. Indeed, our research revealed there is a strong correlation between a company's ability to share and find new uses for information and its capacity for innovation. Firms with these skills are also more likely to complete information-intensive projects less expensively, more quickly and with greater success.
The Power of Standardization:
Everyone Must Speak the Same Language
A lot of valuable information is wasted in companies because employees don't describe or understand information in the same way across the organization. Different measures may be used to tackle the same assignment, leading to invalid comparisons. Even such words as "profit," "overhead" and "attrition" can mean different things in different departments, units and regions. There is also a tendency for groups to customize data gathering and reporting methods for their own needs and interests, without regard for whether their results would be useful elsewhere in the company.
Standardizing language and reporting data so that it's not only accessible but comprehensible to diverse groups within a company can help reduce misunderstandings, eliminate duplicative research efforts, and increase innovative ideas by constantly bringing in fresh perspectives.
Best Buy Co., Harrah's and Royal Bank of Canada all make a systematic effort to share information across departments and functions and to standardize terms. At Best Buy, standardizing certain customer information led to a host of marketing, merchandising and operational improvements. Transaction data originally collected to learn how much Best Buy customers typically spend went on to help determine what products to stock, and at what prices. The data were even shared with suppliers to build higher-value products and services customized for Best Buy.
Creating -- and enforcing -- standardized language and measures requires the significant involvement of top management. Robert Willett, chief executive of Best Buy International and enterprise chief information officer of Best Buy, says the effort of standardization at Best Buy was "ginormous and not for the faint-hearted." When he joined the company nearly four years ago, it had "400 or 500 different ways of measuring things.... I said, 'I will not develop another piece of technology until there is common agreement and we do not have every part of the organization wanting a different measure.' "
The company had to arrive at a single interpretation on a host of terms, measures and definitions used across the organization, Mr. Willet says. "I brought together folks from all parts of the organization, drove it like mad for 10 months, and then we began to realize value from it," Mr. Willet says.
Royal Bank of Canada, for its part, invested heavily in developing an online, wiki-style dictionary that allows its workers not only to find definitions of terms used in their business, but to modify those definitions if they are unclear, and to provide additional knowledge about the terms and contexts for their use.
Research Revisited
- Typical Approach: A lot of businesses think they have to gather new customer data in order to inspire innovative ideas. This is often costly, time-consuming -- and unnecessary.
- A Better Way: Many businesses are sitting on huge amounts of customer data that can yield new insights and fatten profits. The data just have to be shared and understood by more people; fresh eyes can discover new purposes.
- How to Get There: Three practices can help companies get more out of data they already have: standardize all language and formats to increase clarity; if another department asks to see certain data, give them more information than they asked for, including explanations; when asking for data, state the purpose in broad terms to help others see how they can help.
"It is always a tough economic decision in the economic-planning process to point out what the value of information standardization is," says Amos Khim, managing director of corporate forecasting at UAL Corp.'s United Airlines. "But if it is done, it is a big benefit."
For example, at United, he says, standardized reporting of ticket sales has helped operations managers better plan staffing needs at airports not just according to seasons, but down to the busiest times of day. "If there are multiple sources of ticket booking information, then I will get conflicting information," Mr. Khim says. "Two people writing different reports may have a totally different view or outlook of what is happening...because they are looking at different [nonstandardized] information sources."
The Value of Abundance:
Give More Information Than Was Sought
While it's important for colleagues to be able to share what they know, it can be just as important to explain how they know.
People seeking information need not only answers to their questions, but knowledge that puts the answer in context and promotes a broader and deeper understanding of the subject. They should know how the information was collected, what its strengths and weaknesses are, and what its intrinsic value is.
Much of this doesn't happen in most organizations without a determined effort. Royal Bank of Canada, for one, makes a point of not only sharing information across departments but also providing clear and detailed documentation of data, explaining its relevance and providing supporting detail. To see how helpful this can be, consider the following:
Several years ago the bank created an automated system to determine which customers should receive a courtesy overdraft when they had just written a check for which they had insufficient funds. The system drew on the customers' history of overdrafts and repayments, their credit scores, an analysis of their value to the bank and risk factors. Afterward, an ATM product manager read the notes about the system, which included details about how it made decisions, and proposed something similar for ATM customers. Now, for a fee, Royal Bank of Canada offers credit to approved customers who wish to make an ATM withdrawal that exceeds their account balance. James Moore, director of client decision management, says the project "cost less than $100,000 to build and has earned millions for the bank."
A lot more sparks can occur "when you have that many more analysts who can access the information and apply it to the problems that they are experiencing," says RBC Insurance's Ms. Burrows. It allows potential reusers to spend most of their time looking for insights and new ways to leverage existing information, rather than gathering new data, trying to understand it and molding it into something useful.
The Virtues of Generality:
Don't Make Questions Too Specific
Sometimes it's not enough to change the way information is presented. Employees may have to change the way they ask for information, too.
Queries seeking data should pose general questions that reveal the broad goals of the undertaking. This helps other departments recognize when they have data relevant to the task. People who initially gathered data for a different purpose often aren't aware of how that information might help with a new project.
At Harrah's, for example, managers trying to figure out which hotels were in need of expansion posed their underlying question as "What is the demand for our hotel rooms?" The managers might have circulated a request for occupancy rates at the various hotels instead. That would have been simpler. But posing the more general question netted both occupancy rates and numbers of people unable to book a room, either because the hotel was full or because the customer was unwilling to pay the current rate. In the end, posing the question in a general fashion gave the managers an even richer field of data on which to base conclusions.
As Best Buy's Mr. Willett observes: "It is more important to understand the context of a problem and not just the answer. If you help me understand what you are trying to achieve, if I understand what you are trying to get to, then we are pretty smart about figuring out how to get there."
Broad questions speed up learning curves by exposing the researchers to more kinds of information. They also can turn up answers to problems that the researchers weren't even thinking about. Employees in the London office of Continental Airlines Inc., for example, asked the company's corporate IT staff to provide them with customer data that could be used to predict staffing needs based on ticket purchases. This broad request ultimately netted data that also helped the London group automate a task formerly performed by hand: determining which Continental passengers were required to pay a U.K. departure tax slapped on travelers last year, a tax charged to passengers who stay in Britain longer than 24 hours.
Getting employees to ask more general questions isn't easy. It requires a conscious abandonment of short-term efficiency in service of greater effectiveness. Indeed, many organizations take individuals to task for being "inefficient" when they ask general questions, which are exploratory and require more resources, even though the long-term benefits often outweigh the costs.
Some companies hold brainstorming sessions to get employees to make broader inquiries and increase their use of existing data. Attendees may be asked such simple, open-ended questions as, "What else could we do with this data?" Or, in even broader terms, "What is likely to be out there?" instead of, "What do I need?"
—Dr. Gulati is a professor of business administration at Harvard Business School, Harvard University, Boston, Mass. Dr. Oldroyd is a professor at SKK Graduate School of Business in Seoul, Korea. Dr. Puranam is a professor at London Business School and co-director of the Aditya Burla India Center at the school. They can be reached at [email protected].Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
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For Further Reading
See these related articles from MIT Sloan Management Review
- Delight or Despair
By M. Eric Johnson (Summer 2007)
The ability to harness customer data is proving to be a significant source of competitive advantage for service industries.
http://sloanreview.mit.edu/smr/issue/2007/summer/20/
- How Do They Know Their Customers So Well?
By Thomas H. Davenport, Jeanne G. Harris and Ajay K. Kohli (Winter 2001)
Many firms know about their customers, but few know the customers themselves or how to get new ones
http://sloanreview.mit.edu/smr/issue/2001/winter/5/
- An Unfinished Revolution
By Adrian Slywotzky and Richard Wise (Spring 2003)
The explosion of digital information makes available a new array of strategic options, bringing within reach the Holy Grail of differentiation: the ability to offer all stakeholders a set of value propositions that no other company can match.
http://sloanreview.mit.edu/smr/issue/2003/spring/13/
- The New Frontier of Experience Innovation
By C.K. Prahalad and Venkatram Ramaswamy (Summer 2003)
By synthesizing societal trends and early experimentation in companies such as General Motors, LEGO and Medtronic, the authors paint a picture of the "next practices" of innovation in which the locus of value creation will inevitably shift from products and services to "experience environments."
http://sloanreview.mit.edu/smr/issue/2003/summer/2/
- How to Profit From a Better 'Virtual Customer Environment'
By Satish Nambisan and Priya Nambisan (Spring 2008)
Many companies have established technology-based platforms or virtual customer environments to partner with their customers in innovation and value creation.
http://sloanreview.mit.edu/smr/issue/2008/spring/13/
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My personal recommendation:
1) Super Crunchers: Why Thinking-by Numbers Is the New Way to be Smart - by Ian Ayres
http://www.amazon.com/Super-Crunchers-Thinking-Numbers-Smart/dp/0553805401
An introduction to econometrics may not seem like the stuff that would keep listeners riveted—much less awake—during a long car ride, but Ayres's provocative audio does just that. Ever wonder how an airline decides to lower its prices? Or why businesses have preferred shopper cards? The answer is data, gigabytes upon terabytes of data. Companies are increasingly relying on data and number-crunching statisticians to make decisions, like how much money they can extract from consumers while still retaining their loyalty. Ayres's exploration of super crunching and its influence makes up the bulk of the audio, but listeners needn't navigate a sea of numbers. The discussion is illustrated by eye-opening examples such as how Continental Airlines took customer service to a new, personalized level and how Mexico instituted an innovative pay-for-performance parenting program. The final chapter on standard deviations may have some longing for the printed page or a PDF file with a graph or two, but overall, Lurie's mellow reading will make listeners firm believers in Ayres's refrain: in a super crunching world, consumers can't afford to be asleep at the wheel. Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.
2) Competing on Analytics: The New Science of Winning - by Thomas H. Davenport & Jeanne G. Harris
http://www.amazon.com/Competing-Analytics-New-Science-Winning/dp/1422103323
Review
"...the traditional ways of seeking competitive advantage are redundant and...the future lies with the ability to analyse the very considerable volumes of data it amasses about itself." --The Financial Times, April 18, 2007
"Competing on Analytics" is hardly the last word on the matter, but it is a useful primer for a business field that seems likely only to grow in importance. --The Wall Street Journal, April 18, 2007
Intuition is useful in business. But...it isn't enough --The Wall Street Journal, October 23, 2007
Product Description
In today's world, you have more information at hand about your business than ever before. But are you using it to outthink your rivals? Certain high-performing enterprises are now building their strategies around data-driven insights gained from the use of analytics--sophisticated quantitative and statistical analysis and predictive modeling. In "Competing on Analytics," Thomas Davenport and Jeanne Harris show how exemplars are gaining a competitive edge by using these new tools to identify their most profitable customers and offer them the right price; accelerate product innovation; optimize supply chains; and identify the true drivers of financial performance
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