The best approach in developing an analytics value framework is to gain visibility into business processes and resources across the supply chain that drive business value. Using performance metrics which align business processes to activities that enhance a company’s sustainable competitive advantage create business value. Analytical capabilities can improve business value from both operational effectiveness and strategic positioning by gaining insight and identifying new approaches to innovation and differentiation.
Michael Porter, a renowned Harvard professor, suggests operational effectiveness is temporary in driving business value because activities can be emulated, whereas, strategic positioning seeks to identify processes that achieve sustainable competitive advantage. In other words, how does a company preserve its differentiation and innovate.
Analytics provides the tools that can improve operational effectiveness and business strategy. Business intelligence (BI) systems and analytics provide the framework to manage operational effectiveness. Analytics helps business strategy by enabling faster time to insight and better understanding of factors that contribute to differentiation. Analytics also serves to identify activities that lower customer acquisition costs and methods to improve customer lifetime value. In essence, analytics can enable processes to drive innovation and operational effectiveness.
Operational effectiveness is important in realizing the competitive landscape. Analytical competencies provide a framework to benchmark performance along dimensions valued by the customer and the shareholders.
One of the best tools for embracing analytics is the framework expounded by Kaplan and Norton in their Harvard Business Review article “Using the Balanced Scorecard as a Strategic Management System,” that captured the essence of applying analytics to business processes. The balanced scorecard framework defined how KPIs for customers, internal business processes, financial, and learning and innovation enable businesses to better articulate vision and strategy.
The Balanced Scorecard below provides examples of metrics that can be used in a balanced scorecard. In this example, we find metrics associated with finance, business process, learning and innovation, customer, CRM and web analytics.
The Balanced Scorecard in Figure 1 contains the four traditional quadrants: finance, marketing, operations and innovation. Visibility into the business processes and competencies in aggregating and managing data collected across the supply chain needs to be combined with statistical analysis and visualization to gain faster insight. Data must be pulled from across supply as well as customer interactions. The linking of analytics to business processes provides capabilities that drive a systematic approach to optimizing execution and new avenues of innovation.
After considerable research, it has become clear that the balanced scorecard approach improves corporate strategy and management focus. By combing the balanced scorecard with metrics that focus on innovation, a more comprehensive approach to building business value is established. The analytics roadmap should follow both objectives. It is imperative to employ analytics across business units using a balanced scorecard and benchmark performance relative to peers while engendering tools and processes to enhance strategic positioning.
The following figure 2 shows an analytics framework that is designed to measure activities that align business objectives to strategy. The analytics process is full cycle meaning, determine if what was learned is in fact correct. The focus is how analytics enhances capability and enables the business strategy to incorporate vision, direction and procedures for measurement.
Source: Analytics 2 Insight
The concept is that IT infrastructure and competencies that support analytics enable firms to access resources more efficiently and respond quicker. In order to apply analytics successfully, it helps to have the right domain expertise ranging from IT, coding, and database management to statistics, financial analysis, visualization, and business acumen. The analytics value framework is not just deriving meaning and insight from data. The analytics framework includes operational effectiveness and processes to differentiate itself and competencies to become proactive and predictive with analytics.
Analytics can serve as the tool to evaluate how a company can benchmark its operational effectiveness to its peers. As a firm’s strategy is transformed into an ongoing business model, analytics can serve as the framework to evaluate how the business model translates into shareholder value.
The value of the business model can be measured by analyzing processes and activities that create economic and financial value for the firm. Those activities that contribute to revenue growth, margin expansion, or risk mitigation have a direct impact on value. Analytics can be applied to draw better insight into to what activities contribute most to business value and allow the firm to build competencies around analytical processes.
By isolating the business model components, your firm can better focus on the metrics that matter most. In the following example, Figure 3 Value of Business Model, based on the book, The Profit Zone by Slywotzky and Morrison, we compare the financial performance of Apple and Google to identify what metrics have greater bearing on market valuation as measured by the ratio of Market Capitalization to Sales. The interesting aspect of this valuation framework is that it includes metrics on execution performance and strategic positioning by using an index based on intellectual property (IP). Control of technology or better yet, the sustainability of your proprietary capabilities as measured by the Strategic Control Index is a major factor influencing stock price and business value.
Source: derived from The Profit Zone. A. Slywotzky, D. Morrison
The take-away is: revenue growth and control of IP are the most important factors in garnering a disproportionate share of value. Relative market value is established by benchmarking financial performance against the competition. These graphics serve as the architecture in applying analytics to improve business performance and thereby, business value.
Superior capabilities enable a firm to strategically position itself in the market by operating at a lower cost, offering enhanced product differentiation, gaining access to better resources, and ultimately sustaining long term advantage. The key point is that performance metrics can allow a firm to measure its performance relative to factors that matter most in achieving value. An analytical framework that embraces both the strategic positioning such as innovation and differentiation and the balanced scorecard, is designed to enhance value.
To better understand what factors drive business value, a brief review of financial performance drivers and factors contributing to shareholder value are shown in Figure 4 Drivers of Financial Performance. The two fundamental pillars of analytics are to improve operational effectiveness by benchmarking financial performance and to engender innovation and processes that sustain competitive position.
Source: derived from the DuPont Formula
To develop financial reporting metrics for your business, it is imperative to tie the data to financial statements so that the impact of metrics in improving operating performance can be measured. The second pillar of analytics to assure the business is also creating value for shareholders and/or business owners. The theme in this approach is to separate the metrics into individual elements.
There are BI and analytics applications such as MicroStrategy, Tableau, and IVEDIX, that provide an excellent means of capturing key reporting metrics around sales, marketing, and financial reporting data. Our emphasis in analytics is to combine both the internal business data together with external data including sensor data and social media to provide a mosaic approach to pattern recognition and insight.
The analytics value framework enables visibility into business processes across the supply chain as well as customer interactions. The take-away is to use performance metrics that align business processes to activities that create a sustainable competitive advantage through capabilities that improve business value from operational effectiveness and strategic positioning.
Michael S. Davies, CFA
Mike is the Chief Strategy Office for Arkados, an Integrated Software and Technology Solutions Provider for Internet of Things (IoT) Applications and Analytics for intelligent devices. Mike is developing strategies and analytics to create value for energy and resource conservation through context aware connected devices, data analysis, visual analytics and renewable energy solutions.
Mike began his career selling software into vertical markets leading to marketing strategy consulting engagements. After business school he advanced to Wall Street as a financial analyst providing research and analysis on technology including semiconductors, data and wireless communication companies. Mr. Davies has provided business strategy and technology consulting to Apple, IBM, the Port Authority of NY & NJ, and NJ Dept. of Transportation. Analytics is a common thread throughout his career and his book Analytics 2 Insight on Amazon is featured in Data Science Association bookstore. Mike has been featured on CNBC, CNN, and Bloomberg with citations in the Wall Street Journal and Investor’s Business Daily. Mike graduated from Columbia University with BA in Economics and a MBA from University of California, Los Angeles.