Big Data: When Can You Act on Correlation?

The key is to know when correlation is enough, and what to do when it is not

David Ritter, director at BCG, has explored the world of big data and when companies should take action based on observed correlations in the data.

His ideas have big implications for business because, if correlation is enough, then instead of having to know what causes customers to act, it may be enough just to know what things tend to happen together.

For example, many large supermarkets already understand that women who buy certain kinds of food may tend to be pregnant. Digital Life reported that in 2012:

… news broke of how data analytics by Target in the US enabled it to identify which customers were pregnant – and even what trimester they were in. It famously sent coupons for baby products to a teenage girl whose father, unaware she was expecting, angrily confronted a Minneapolis store manager.

Ritter notes that the key question when looking at correlation in the data is “Can I take action on the basis of a correlation finding?”

And his answer:

The answer to that question is “It depends”—primarily on two factors:

  1. Confidence That the Correlation Will Reliably Recur in the Future. The higher that confidence level, the more reasonable it is to take action in response.
  2. The Tradeoff Between the Risk and Reward of Acting. If the risk of acting and being wrong is extremely high, [then] … acting on even a strong correlation may be a mistake.

The first factor—the confidence that the correlation will recur—is in turn a function of two things: the frequency with which the correlation has historically occurred (the more often events occur together in real life, the more likely it is that they are connected) and the understanding around what is causing that statistical finding. This second element—what we call “clarity of causality”—stems from the fact that the fewer possible explanations there are for a correlation, the higher the likelihood that the two events are in fact linked. Considering frequency and clarity together yields a more reliable gauge of the overall confidence in the finding than evaluating only one or the other in isolation.

When working with big data, sometimes correlation is enough. But other times, understanding the cause is vital. The key is to know when correlation is enough—and what to do when it is not.

To read the full article by David Ritter, visit the BCG website.

Pushing The Boundary

Are you excited, nervous or a little bit scared?

Your comfort zone, as the name suggests, is a comfortable place.

It feels safe and secure to be there, because you’ve been there many times before.

Nothing unexpected is likely to happen. Nothing you haven’t seen before. And certainly nothing out of the ordinary.

But ordinary is not what you’re aiming for, is it?

Pushing the boundary is exciting and scary because the outcome depends on your thoughts and your actions right now.

Lead the way, and others will follow.

You could change everything.

Hitting Singles

Selling is a process, not an event

Large consulting firms like McKinsey, Bain and BCG have huge marketing budgets and strong alumni networks that they can tap into to ensure a steady stream of work.

This is not a reality for most people.

If you are a small firm or a solo consultant then you might just need to pick up the phone and make a few calls.

The problem is that for most people selling is stressful, and it’s hard to perform well when your stress levels are sky high.

The good news is that you can combat the stress by understanding where it comes from. A lot of it derives from a misguided belief that you need to be hitting home runs.

Cold calling a potential client and expecting them to thank you and then buy your product is unrealistic (read: wildly optimistic). It is the equivalent of cold calling the girl (or guy) you like and expecting her to accept your proposal of marriage.

Miracles do happen, but they are the exception not the rule.

You can reduce your stress levels by lowering your expectations to a realistic level.

You want to sell the project, but what is the realistic next step?

If you’re on the initial sales call, you might hope for an initial meeting where you can break the ice. If you’re in that meeting, you might hope for a second meeting where you can reach conceptual agreement on a project. And if you get conceptual agreement, then send a proposal.

Keep a lot of balls in play. Keep hitting singles.

PEST Analysis

Understanding the big picture can help reveal hidden opportunities and threats

PEST Analysis

1. Background

In 1967, Harvard Professor Francis Aguilar wrote a book entitled “Scanning the Business Environment” in which he identified four important factors – Economic, Technical, Political, and Social – that a business can use to better understand the big picture.

While the ordering of the letters may have changed, the four factors that Aguilar identified 47 years ago have not, and they form the basis of PEST Analysis.

2. Relevance

If you are thinking about producing a strategic plan, developing a new product, entering a new market, engaging in a new venture, or financing a project then it probably makes sense to understand the big picture issues that could affect your success.

Conducting a PEST Analysis can reveal hidden opportunities and threats, and allow you to adapt your approach to achieve a more favourable result.

3. Importance

There is something inherently appealing about a four-part model, and its simplicity makes PEST Analysis a convenient and practical tool for understanding the macro environment.

Conducting a PEST Analysis can be helpful for three reasons:

  1. Seeing Clearly: Understanding the big picture can help a business make informed decisions, and avoid making incorrect assumptions based on past experience with other projects.
  2. Anticipating Change: Understanding the macro environment can help a business anticipate change, take advantage of opportunities and manage potential threats.
  3. Rejecting Projects: Understanding the macro environment can help a business (and its financiers) identify projects that are likely to fail due to unfavourable conditions. Knowing which battles not to fight can be half the battle.

4. PEST Analysis Explained

“PEST” is an acronym that stands for “Political, Economic, Social and Technological” – four important factors for a business to consider when scanning the macro environment.

PEST Analysis is a simple framework that uses these four factors to examine the macro environment and identify potential implications for a business unit, product or project. Insights gained from the analysis can then be used to develop a strategic plan of action.

PEST Analysis is often used as part of a broader situation analysis.

PEST Analysis

There is a long list of alternative frameworks that you could use to scan the macro environment. However, they generally complicate the analysis by adding factors that could have been dealt with more simply using PEST Analysis.

That being said, feel free to use any framework that best suits your purpose. Some of the other variations include:

  • SLEPT: Social, Legal, Economic, Political, and Technological
  • PESTEL: Political, Economic, Social, Technological, Environmental, and Legal
  • PESTELI: Political, Economic, Social, Technological, Environmental, Legal, and Industry Analysis
  • STEEPLED: Social, Technological, Economic, Environmental, Political, Legal, Ethical, and Demographic
  • PESTLIED: Political, Economic, Social, Technological, Legal, International, Environmental, Demographic
  • LONGPESTLE: Local, National, and Global versions of PESTLE (might be useful for multinational organisations)

5. Conducting a PEST Analysis

Conducting a PEST Analysis involves considering issues relating to the four key factors: Political, Economic, Social, and Technological.

The four factors will vary in significance depending on the nature of the business. For example, social factors might be quite relevant for a retail business, but political factors will be more relevant for a global munitions dealer.

The purpose of a PEST Analysis is to identify potential implications for a specific business unit, product or project. Make sure you are clear on the central purpose of your analysis before commencing.

Insights gained from the analysis can then be used to develop a strategic plan of action.

Below we set out a list of issues that you might want to consider when conducting a PEST Analysis.

5.1 Political

Potential political issues include:

  • Laws and regulations that a company may need to comply with (tax, competition, consumer protection, employment law, environmental regulations, anti-discrimination, corporate social responsibility, international law)
  • Property rights, including protection of intellectual property (trade marks, copyright, patents, registered designs, trade secrets, software and circuit layouts)
  • Industry regulation. How is the industry regulated? Are there planned changes? Is there a trend towards regulation or deregulation?
  • Government policy, trade unions, lobby groups, and the electoral cycle. Who holds the power? How might this change at the next election?
  • Rule of law, bureaucracy and corruption
  • Political stability, war and conflict

5.2 Economic

Potential economic issues include:

  • GDP, and economic growth rates
  • Inflation, interest rates, and monetary policy
  • Exchange rates (consider exchange rate volatility and the need for a swap agreement)
  • Availability of credit (consider also the liquidity and depth of the credit markets)
  • Labour costs and the unemployment rate. Will it be affordable/easy to hire skilled workers?
  • Government support (e.g. infrastructure investment, grants, subsidies, tax breaks)
  • Tax issues (corporate, employee, and value added taxes)
  • Trade restrictions (tariffs and quotas)
  • Business cycle, stock market trends, market prices, and seasonality issues
  • Consumer confidence
  • Industry specific factors

5.3 Social

Potential social issues include:

  • Population growth
  • Age distribution and life expectancy. Are generational shifts in attitude likely to affect what you’re doing?
  • Income distribution, average disposable income, and social mobility
  • Attitudes towards work
  • Family size and structure
  • Health levels, and health consciousness (e.g. attitudes towards smoking)
  • Education levels
  • Emphasis on safety
  • Social norms (e.g. people tend to take holidays in summer)
  • Fashions, fads, trends, role models, and influential personalities
  • Buying patterns and consumer preferences (e.g. brand preferences, and attitudes toward product quality, customer service, fair trade, green, and organic)
  • Ethnic and religious factors
  • Cultural and sporting events
  • Prohibitions, taboos, and ethical issues

5.4 Technological

Technological issues relate to the state of technology and the rate of innovation and may have implications for the competitive intensity of an industry (e.g. new technologies can reduce barriers to entry), and may result in disruptive innovation (e.g. online education).

Potential technological issues include:

  • Emerging technologies and trends (e.g. 3D printing, collaborative consumption, and wearable technology)
  • Technology level and rate of change in an industry
  • Technology lifecycle
  • Location of technology hubs or clusters; university and business partnerships
  • Supporting infrastructure (e.g. high speed internet)
  • R&D spending
  • Availability of financing (investment and grant funding)
  • Automation
  • Legal frameworks, for example, protection of intellectual property (patents, registered designs, software and circuit layouts), and support for crowd funding

6. Template

Please download our PEST Analysis Template.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

Corporation Oxford

The illusion of permanence, and the persistence of innovation

Corporation Oxford

(Source: Tom Spencer)

IN a recent FT article, Chairman of Risk Capital Partners Luke Johnson made some interesting comments about his alma mater, Oxford University:

Oxford University, my alma mater, is a classic case of a complacent establishment that is refusing to reinvent itself. It will consequently find life much harder in the 21st century. Britain’s finest educational name … ignores the explosion in online learning and fails dismally to exploit its intellectual property commercially … It lives off past glories, and is doomed to fade unless it reforms vigorously.

Johnson is arguing that Oxford needs to reinvent itself, and refuses to do so. After 800 years as one of the world’s leading educational institutions, Oxford has lost its way.

The Case for Reinvention

Universities are not normally candidates for “reinvention”, and so in making his claim Johnson appears to be likening Oxford to a company, “Corporation Oxford”. We take it that Johnson’s position as the partner of a private equity firm makes him well qualified to comment on the business of education.

The language of capitalism focuses on efficiency and optimisation, and if these are the measures of success for a university then Oxford is failing badly. Oxford’s tutorial system, collegiate model and arcane administrative processes are expensive, and if Johnson were in charge we imagine he would dispense with them directly.

Oxford has often been accused of ivory tower elitism and of being resistant to change, and there is more than an element of truth in these claims. 

Oxford’s long history and strong reputation mean that top down organisational changes happen slowly. After all, the Oxford dons have more to lose than to gain by making hasty changes to a system that has stood the test of time.

But while the sandstone buildings may give the illusion of permanence, under the surface Oxford is a hive of activity and continuous change.

The Persistence of Innovation

In recent years, Oxford has been drawn into the heart of the business, technology, and entrepreneurship world by a small and committed band of innovators.

They include a few well known faces and more than a few unsung heroes.

Here are just three examples of the steps that the trailblazers have taken so far:

  1. Said Business School: Established in 1996, Oxford’s Said Business School is one of the newest and most entrepreneurial business schools in the world. Dean Tufano, former HBS Professor, reinvented the traditional MBA program by introducing Oxford’s 1+1 MBA, a course that allows high potential leaders to combine the depth of study of a traditional MSc degree with the breadth of an MBA. Dean Tufano also hosts an annual event known as “Silicon Valley Comes to Oxford” – a unique forum that brings the world’s leading tech entrepreneurs to Oxford, and gives the next generation of business leaders an insider’s view on how to start, scale and run high-growth companies.
  2. Oxford Entrepreneurs: Founded in 2002 by British entrepreneur Alex Hearn, Oxford Entrepreneurs is now the largest student entrepreneurship body in the world. The society encourages innovation, and helps its members build the kind of social capital that cash strapped entrepreneurs need to bootstrap their businesses. The society is currently run by a new generation of innovators (John Stringfellow, Ridhi Kantelal and others) who last weekend hosted Oxford Inspires, an entrepreneurial conference designed to inspire innovation. Luke Johnson himself was a guest speaker at the event.
  3. Oxford Launchpad: Opened only a fortnight ago on February 17th, the Oxford Launchpad is a new breeding ground for entrepreneurs that has already spawned a number of start ups including The Renegade Times (a grass-roots publication for tech entrepreneurs spearheaded by Srin Madipalli), and a yet-to-be-named educational gaming platform (led by Charlton MakVictor Repetsky, and Shubham Anand).

But while the bottom up innovation continues, that doesn’t mean Oxford can rest on its laurels any time soon.

Room for Improvement

There is a lot of room for improvement at Oxford, and in your author’s view this would include a more ambitious adoption of online learning.

Johnson claims that Oxford is “doomed to fade unless it reforms vigorously”. And while his prediction may be a bit half baked, Oxford does need to understand and respond to a quickly changing educational landscape.

With the rise of online learning, it may soon be possible to buy good quality degrees online for a modest fee.

The question is, will this threaten Oxford’s business model?

Online learning presents big opportunities and threats for the established players, and here are two thoughts for Oxford to bear in mind.

1. Substitute for Bricks and Mortar

The way things are heading, it will soon be possible to undertake an entire degree online composed of courses from top universities. It is already possible to get a Certificate for an individual course.

For many young people, especially in America where the cost of tertiary education is highest, this will provide a compelling alternative to attending a bricks-and-mortar university.

With lower cost structures, online players will be able to undercut traditional universities on price. A scary prospect for second and third tier universities that may be unable to offer their students a strong enough community or a strong enough brand name to justify their higher fees.

How will these changes affect Oxford?

In the short run, we expect the effect to be negligible. The students likely to sign up for an online degree are not the same students who are applying to Oxford.

In the medium term, the availability of quality online education could even benefit Oxford. Increased competition at the bottom end of the market could help to destroy second and third tier universities, and thereby leave Oxford and other leading universities with the market for bricks-and-mortar tertiary education all to themselves.

Does this mean that Oxford is safe to sit by and watch the changes unfold around it?

Not quite.

2. Disruptive Innovation

Online learning is currently inferior when compared with the bricks-and-mortar alternative because it provides students with content without the community and without the established branding of a real world university.

But what would happen if Coursera created a bricks-and-mortar campus of its own? Or, perhaps, created small study hubs in every town where students could meet and collaborate?

HBS Professor Clay Christensen teaches about disruptive innovation, a process by which an inferior product can initially take root in simple applications at the bottom of the market (e.g. Coursera offering individual courses online) and then move up market to eventually displace established competitors (e.g. Oxford and Cambridge).

Disruptive innovations are typically inferior products when compared with the products offered by established players. But they are able to gain a foothold in the market because they are simpler, more convenient, more affordable, and for customers who can’t afford all the bells and whistles, they are better than nothing.

Christensen explains that in previous waves of disruptive innovation, the only companies that survived were the ones that created a new business unit that was free to operate under the new rules of engagement and free to compete with other business units of the existing parent company. For example, IBM was a mainframe manufacturer that was able to survive several waves of disruptive innovation by adopting this technique.

There is a lesson in this for Oxford. And we ask the Oxford dons directly, where is your online education business unit?

If it chooses to do so, Oxford still has time to compete with online upstarts like Coursera by creating an online education platform of its own. 

Since online education is an inferior product when compared with bricks-and-mortar education, it falls within Clay Christensen’s definition of a disruptive innovation. As such, Oxford would do well to heed Christensen’s advice by creating a new business unit which is free to compete even with the University itself.

From a branding perspective, we would also suggest that the platform be called something other than “Oxford” in order to preserve the brand of Oxford’s more premium bricks and mortar product.

Steve Ballmer’s 3 Tips for Start Ups

Ideas matter, stick with it, and figure out the right measure of success

Steve Ballmer

(Source: Youtube)

STEVE Ballmer spoke today at Oxford’s Said Business School, the world’s leading business community creating ideas with global impact.

A few hours later, he spoke at the Oxford Union, the world’s most prestigious debating society.

We were fortunate to attend the second talk, and wanted to communicate the three tips for start ups that Ballmer shared with the audience.

As you know, Ballmer is the recently retired CEO of Microsoft, which is not by any measure a start up. It turns over more than $70 billion in revenue and generates more than $20 billion in profit each year.

And so, you might be skeptical about what kind of advice Ballmer might have for start ups.

Ballmer preempted our doubts by explaining that things have not always been this way. When he dropped out of Stanford to join Microsoft 34 years ago, it had only 30 staff. And while this may be larger than most start ups, it was still early days. It was the beginning of a long road for Microsoft, which today has over 100,000 employees.

Ballmer is an energetic speaker, at the same time boisterous and self-effacing, charasmatic and plain-spoken. Under his reign as CEO, Microsoft’s revenues tripled, and its profits doubled. Ballmer admits to making his fair share of mistakes at Microsoft, but his business success is rivaled by few.

Here are Steve’s three tips for start ups:

1. Ideas Matter: Good ideas are hard to come by. Don’t pursue a lousy idea just because you’re desperate to do a start up right now. Try to find a good enough idea that it will be really worth pursuing. Steve’s advice may sound like common sense, but it flies in the face of the currently popular “lean start up methodology” that encourages entrepreneurs to just get started by building a minimum viable product. While it can be easy to get started, is the initial idea good enough?

2. Perseverance: Success is unlikely to come quickly. Ballmer directly challenges the rhetoric that start ups should succeed quickly and fail fast. He tells us that really great start ups don’t fail fast, they stick at it, and modify their ideas as necessary. If you have a great team, which is excited and working in a fertile area, then you need to be willing to keep going until you make it. It can often take more than a decade for a company to hit its straps.

3. Profitability: Will someone pay for it? Ballmer’s third piece of advice is particularly relevant in the context of Facebook’s recent $19 billion acquisition of Whatsapp. Whatsapp has around 470 million users but only earned around $20 million in revenues last year. Did Facebook pay too much? In today’s environment, Ballmer explains that there are lots of ways to measure success. Sometimes having a lot of users is a really good indicator, and sometimes it’s a false measure. You need to figure out the right measure of success.