Sunday, 11 July 2010

Operations Research; key factor in competing for the future

Prahalad’s message in Competing For The Future is clear. Identify, create and then dominate emerging market opportunities before your competitors have the opportunity to exploit them. Applying analytics is suggested to be the best way to achieve that. Many books have been written on how analytics will bring advantages to companies in beating their competition to market dominance. Davenport’s new book Analytics at Work (I wonder where he got the title ;-) ) is another one, it will probably sell big. These books hook up on the global trend that more and more reliable data is becoming available through the use of IT systems. Companies keep track of their business in much more detail, from order to delivery, leading to ever growing piles of data. Mining these mountains of data with computerized analysis, creates new information and insights leading to more fact based decision making. To my opinion these “analytics” books have too much focus on data analysis alone. They focus too little on actually using analytics to learn from past experiences, identify new relationships and push the innovative power of companies to reinvent their business time and time again. Helping them stay ahead of competition. To accomplish that, more is required than just a few data dashboards or regression lines. It’s mathematics or in its applied form Operations Research and the way of thinking that goes with it.

The added value of mathematics is no longer, as the famous mathematician G.H. Hardy in his essay A Mathematician’s Apology, its lack of applications in the outside world. Mathematics has proven to add value over and over again and is not something that came to rise in the past few years with the Analytics trend. Hardy wrote the essay in the same period as Operations Research came into existence at the Bawdsey Research Station in the UK where mathematics were used as a means to analyse and improve the working of the UK's early warning radar system, Chain Home. With Operations Research the limitations of the Chain Home network were exposed and improved allowing for accurate early warning and remedial actions; a turning point in the battle for Britain.

When we look at recent successes in business, we time and time again conclude that the driving power behind these successes is applied mathematics and optimisation. Take Google for example, its key asset is a mathematical algorithm. Another example is Tesco which is the first non American based retailer to be successful in the States. Key in the success is their ability to analyse the buying habits of their customers and to apply this knowledge in targeting customer with specific special offers. Likewise, Albert Hein uses information from buying habits to manage its complete supply chain from sourcing decisions all the way down to managing the stock levels in the shops. These examples show that the gathering of data is not enough to create value from it. Success comes when a company is capable of analysing the acquired data, learns from it, optimises its current operation and ultimately reinvents its business. This can only be achieved when a company makes mathematics and optimisation a core competence. In a recent publication Alexander Rinnooy Kan, chairman of the Social and Economic Council of the Netherlands and well-known mathematician and operations researcher, even goes a little bit further. He signals that not that many (applied) mathematicians are present in the boardrooms of companies in the Netherlands. I expect that to be the case elsewhere. However the ability that applied mathematicians have to structure and solve complex problems could provide the companies the key to competing for the future, he states.

I totally agree. Many companies have invested in IT systems to capture and generate more and more data on their operational processes. These investments lead to vast amounts of data but to their disappointment didn’t improve decision making. The available data, the numerous ways to display and analyse it and the many mistakes that be can made doing this leave the decision makers in the dark. The additional information doesn’t make life easier for them; it creates an ever growing chaos of reports and opinions. It is the capability of applied mathematicians (Operations Researchers or Econometricians which ever term you like better) to create order in this chaos; applying logic and optimisation techniques to guide the decision maker to make the best decision and stay ahead of the competition. Not only should these capabilities be present in the support units of a company, they should be present in the boardroom as well.