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Last week I spoke with Analytics at Work co-author and Babson College professor Thomas Davenport about the ways in which analytics can benefit organizations. This week, the conversation turns to why it’s imperative to use analytics responsibly.

BNET: The book briefly discusses the financial crisis, saying that a good portion of the financial services industry used analytics in the wrong way.

Davenport: It’s a very critical issue for business education. We basically have created two classes of people: quants and non-quants. They didn’t communicate very well in a number of companies during the financial crisis. The quants could develop these financial algorithms that made it look highly desirable to enter into a series of complicated derivatives and things like that. The non-quants — who tend to be senior managers — didn’t understand that, didn’t understand the assumptions behind them and didn’t know when the world was changing, so as to make those algorithms invalid. The quants haven’t been good at explaining what they’re doing in simple terms. Non-quants haven’t been diligent enough to delve into the assumptions behind the models and to know when they work and when they don’t. As a result, we have a really severe recession and a number of firms went out of business. So the stakes are high.

BNET: What are the keys, then, for using analytics more responsibly?

Davenport: One thing is for every manager to know something about quantitative analysis, so they can at least raise reasonable questions. The other thing is to realize that every model is a representation of reality. You need to know what are the assumptions behind the model. You need to know that this particular model only makes sense to base our operations on if housing prices are rising, which was the assumption behind a lot of the mortgage derivatives and so on.

Another common assumption that wasn’t widely known was that if you’re doing risk analytics, the most commonly used assumption is called value-at-risk. For different investments, their values are independent of each other. We found out in the financial crisis that if one class of investments fall, the others are likely to fall as well. So you need to state clearly what those assumptions are, and then managers can decide in straightforward terms, am I willing to take this risk?

BNET: What role does b-school play in analytics training?

Davenport: We have these quantitative courses in business school, but they haven’t really succeeded in creating a generation of well-equipped managers for this analytical world. There are some requirements now for business schools to do a better job of making the non-quantitative managers that they graduate more quantitative and making quantitative people better communicators and better at engaging in dialogue with decision makers about what the data and analyses really say. But I don’t think we’ve done a good job of preparing either group.

While a good deal of the water cooler talk today will be about the historic first Super Bowl win by the New Orleans Saints on Sunday, many of us will also be talking about the Super Bowl ads: which ones we liked, which ones we didn’t get or which ones simply left us cold.

The ads were an especially important part of the game for about 40 Kellogg School of Management students who participated in the 6th annual Kellogg Super Bowl Advertising Review.

According to the students, the best three ads belonged to Google, Audi and Denny’s. In the bottom three were ads by the U.S. Census, Focus on the Family and Honda.

I spoke briefly Sunday evening with Kellogg professor Derek D. Rucker, who said that the common factors shared by the best commercials were superior branding and positioning, as well as linking the ads to the product. The Denny’s chicken ads also stood out because of their thematic grouping.

“The second one reinforced the first, and by the last one you knew immediately that you were watching a Denny’s ad,” Rucker says.

The ads that ranked the poorest were not attention grabbers, nor did they present a strong position. Despite the controversy surrounding the Focus on the Family spot, Rucker said the ad actually played it very safe.

“The message was so soft and subtle. There wasn’t a strong call to action,” Rucker said of the ad’s invitation to go online and learn more about Tim Tebow’s story. “They didn’t really show a plan or give direction.”

Rucker said that using the strategic academic framework called ADPLAN (attention, distinction, positioning, linkage, amplification and net equity) allowed students to come to a consensus on the top and bottom ads fairly easy. Did their top three make your list of favorites? And which spots did you think were the biggest disappointments?

Image courtesy of Google.

Super Bowl parties can be fun for sports and non-sports fans alike: even if you have no interest in the big game, there’s the chili, the guacamole, the beer and the commercials.

In fact, for the Kellogg School of Management students taking part in the Kellogg Super Bowl Advertising Review, the commercials are the main attraction.

For the sixth year, marketing professors will lead the Kellogg Marketing Club in ranking the most and least successful ads, based on the academic criteria called ADPLAN: attention, distinction, positioning, linkage, amplification and net equity. Read the rest of this entry »

Almost two weeks ago, I asked readers to weigh in on a subject broached recently in a New York Times’ Room for Debate feature: Should MBA programs treat their students like customers? The majority of voters, about 65 percent, said yes, seemingly agreeing with the idea that MBAs deserve to play an active role in shaping their education and that programs should put a high priority on catering to their desires. A closer look at a few reader comments, however, makes clear that the solution isn’t so simple:

• dennis@: The best approach is to treat the student like a product.  This is because the student is buying the opportunity to be molded into the ‘product’ of…
• jtpickering: No, MBA students should not be treated like customers by MBA schools. The role of customer has too much of a ‘passive’ and deferential connotation … I prefer to think of my MBA school as a partner in my journey.
• M782427: Treat the learners as professionals - period! In my recent MBA class in statistics, there were MDs, CPAs, RNs, CFEs, etc. Many of these professionals have over 25 years of experience that the educational facilitator can and should use to instructional advantage.
• Al Plastow: Maybe we need to divide the collective MBA “student” into two distinct groups: The non-traditional student, one who has already been out functioning in the real world and the more traditional student who has moved from high school, to college, and is now in grad school … I believe it’s the attitude and flexibility of the individual at the front of the room that can make an enormous difference. If they are there to deliver useful knowledge and help student improve, that shows in the results.

It seems that neither student nor customer quite sums up the interactive, collaborative nature of the role MBAs play in the classroom. Perhaps treating them as a blend of student, customer and - most definitely - professional will help MBAs get what they need out of the program while ensuring that b-schools keep their high educational standards. Thanks to everyone who voted and shared their thoughts on this issue.

Image courtesy of Flickr user shlomif, CC 2.0.

John Mullins is a professor at the London Business School, where he focuses on entrepreneurship and marketing.  In 2003, he released the bestseller The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan. Mullins and co-author Randy Komisar of venture capital firm Kleiner Perkins build on those ideas in their new book Getting to Plan B: Breaking Through to a Better Business Model. Today, we wrap up our discussion with Professor Mullins (to see the first part of our interview, where Mullins discusses why most successful startups find themselves significantly altering their original business plans, click here).

BNET: So, when it comes time to plan for a new venture, how should an entrepreneur approach developing his or her first crack at a business model?

Mullins: The business modeling process today goes something like this.  Step one, you turn on Excel.  Step two, you make a large number of naïve assumptions in order to fill in all of the cells.  Step three, you tweak the value of those cells, because you don’t like the answer the first time, until you get a beautiful “hockey stick” projection.  The problem is almost all of those assumptions are pulled out of thin air.

Rather than do that, we suggest people think about the five key elements of the business model and not focus on building spreadsheets with a P&L and a balance sheet and so on.

The five elements of the business model are:

1.     Revenue Model

2.     Gross margin Model

3.     Operating Model

4.     Working Capital Model

5.     Investment Model

By applying targeted data from the analogs and antilogs to each of those parts of the business model, you can much more quickly get to a sense conceptually if this idea you have is really going to work.

BNET: Do new business concepts need to radically change several of these elements, or can they innovate on just one or two?

Mullins: Maybe the most interesting thing about this framework is that virtually every company we studied in the book made their success by doing something radical on really just one of those elements of the business model.  For example, with Apple when it revolutionized the music industry, it was the Revenue Model.  For eBay, it was all about the Gross Margin model; figuring out how to enable people to trade things from their attic to another guy’s attic.  eBay did it at essentially 100% gross margins.  An Operating Model embodies all of the costs of selling and providing services other than the direct cost of the goods you sell to your customer.  We see compelling Operating Models in the airline industry with Ryan Air in Europe and Southwest in the US.  They have figured out how to take all kinds out of the cost structure.  Ryan Air is now the largest carrier in Europe in terms of passengers served and they’ve done this all through their focus on the Operating Model.  Costco has gotten it right on the Working Capital Model.  They charge us for the privilege of shopping in the store.  If you add up all of the $50 fees that people pay, that amounts to two-thirds of their annual operating profit.  They don’t tie up capital because they function on their customers’ money.  On the Investment Model, we compare the strategies and business models of Skype and Vonage.  Vonage had to buy switches and all kinds of other equipment because in its view, you needed a telephone to make a telephone call.  Skype decided to do it PC to PC, so the Investment Model required very little capital.  Skype got to almost 7 million users in year one with almost no marketing investment; Vonage got its first 1.4 million with almost $200 in marketing.

BNET: This framework sounds like it would also be a valuable tool for venture capitalists, helping them get out of the weeds in the business ideas they look at.

Mullins: It’s interesting you say that.  We’ve written this book for entrepreneurs and other innovators, whether they sit in start-ups or large organizations.  These are people who are trying to reinvent something.  But we’ve also written it with the investor in mind.  We sent this book to a number of VCs we know and they ended up buying a copy for every member of their firm because these are fundamental ideas the VCs need to wrestle with to truly understand the economics of a business.

In their new book Analytics at Work: Smarter Decisions, Better Results, authors Thomas H. Davenport, Jeanne G. Harris and Robert Morrison explain how to use analytics in terms that non-quant jocks can appreciate. “The book is a series of tools and frameworks and ideas for helping you make more analytical decisions. It has no equations, it’s not intimidating. It’s basically asking, how do you manage in a world that has gotten very quantitative?” said Davenport, a Babson College professor, during our recent conversation. Here are a few highlights.

BNET: In what key ways do analytics benefit organizations?

Davenport: We have a list of them in the book, but the primary benefit is that you make better decisions. It might be a big strategic decision, like whether to acquire another company. More frequently, it’s more tactical but still important decisions like what price should I charge for this particular item? What promotion should I offer this particular customer? What merchandise should I have available on the shelf? All of those decisions are well-suited to analytics because you can get data about the implications of your choices.

BNET: Some managers shun analytics, saying that they prefer to trust their instincts. What are some of the pitfalls of making a gut decision? Read the rest of this entry »

What do MBAs and NFL fans have in common? Optimism that persists, often in spite of facts, according to recent Yale research.

Cade Massey, an assistant professor of organizational behavior at Yale, conducted studies monitoring people’s optimism bias in “important domains” such as health, relationships and investments. Not surprisingly, when people care strongly about an outcome in one of these domains, they tend to be more optimistic that their desired result will be achieved.

To get an idea of how this optimism bias fares in the face of feedback, Massey studied incoming MBAs at a mid-Atlantic university, who predicted they would do very well in their classes. They stayed optimistic throughout the year, even in cases when their optimism was stronger than their performances.

Even in situations where people have no control over the outcome, the optimism bias persists. Massey studied NFL fans, who consistently predicted that their favorite team would perform better than they actually did, even well into the season. Read the rest of this entry »

If one of your new year’s resolutions is to read more books, you might be interested in checking out a few of the titles that Vanderbilt’s Owen Graduate School of Management dean Jim Bradford has read and discussed with MBA students in his Dean’s Book Club.

In an article published last month on Forbes.com, Bradford called his love of reading an attribute that has broadened his perspective and helped him make better decisions. He thought his Owen students could benefit from good books as well:

“The big question is how we prepare graduates for the complex, sometimes ambiguous environments they’ll encounter after their studies. It’s increasingly clear that graduates who have not only analytical ability but also perspective and wisdom will win the day,” Bradford writes.

Here are a few of the wisdom-building titles the book club has tackled: Read the rest of this entry »

While email and other technologies play an immense role in successfully working with a global team, live communication ensures better output, according to a new study from Duke’s Fuqua School of Business.

Fuqua professor Jonathon Cummings, along with J. Alberto Espinosa of American University and Cynthia Pickering of Intel, conducted a multi-year study of Intel’s global teams that spanned 22 countries and 53 locations. They found that group members who relied on non-live communication because their work hours did not overlap with their global associates suffered the most “coordination delay,” which refers to time lost waiting for responses and information from other group members.

Here are a few tips for managing productive global teams, based on their findings: Read the rest of this entry »

Sometimes I search online for healthy, low-fat recipes, and as a result, my computer thinks I’m overweight. At least advertisers must think I am, because the pages I visit often feature Google ads telling me that I can lose 32 pounds a month. Effortlessly!

While these ads do not appeals to me, they surely fit the need of some consumers searching for low-fat recipes. But just how effective are these targeted ads? A new study from MIT Sloan says that while effective, some targeted advertising strategies risk alienating consumers.

In “How Not to Market on the Web,” an article featured in this month’s MIT Sloan Management Review, author Alden M. Hayashi reports on research conducted by MIT Sloan assistant professor Catherine Tucker and Rotman School of Management associate professor Avi Goldfarb.

Here are a few of the takeaways: Read the rest of this entry »