Complicated or Complex - Analytics Treats Them Differently

Complicated or Complex - Analytics Treats Them Differently

In a recent issue of the Harvard Business Review included an interesting article titled “Learning to Live with Complexity.” Its authors, Gokce Sargut and Rita Gunther McGrath, describe the difference between something being merely complicated and genuinely complex.

Think in terms of systems. Complicated systems have many moving parts like a wrist watch with gears, but they operate in patterned ways. In contrast, complex systems have patterned ways, but the interactions (think variables) are continually changing. In the former, one can usually predict outcomes. The math may be easy with linear relationships. In the latter, certain factors cause changes in the constant interactions with numerous variables and nonlinear relationships. For example, an air traffic controller must adjust for delays caused by weather and aircraft maintenance.

To make better decisions, one’s modeling and analytics need to be adaptive and flexible. They need to have self-learning capabilities to get increasingly smarter. They need powerful, high-performance analytics that can process the Big Data.

Being proactive, not reactive

With today’s recovery from the global recession, the stakes have never been higher for managers to make better decisions with analyzable information. Companies that successfully use their information will outthink, outsmart and out-execute their competitors. Superior enterprises are building their strategies around information-driven insights that generate results from the power of analytics of all flavors, such as segmentation and regression analysis and especially predictive analytics. They are proactive, not reactive.

Executives are human and can make mistakes, but when entire companies fail, these are not simply due to minor misjudgments. In many cases, their errors are enormous miscalculations which can be explained by problems in leadership. Regardless of how decentralized some businesses might claim to be in their decision making, corporations can be rapidly brought to the brink of failure by executives whose personal qualities create risks rather than mitigate them. These flaws can be honorable – such as with the sad decline of Kodak or Radio Shack due to weak strategies – or less than honorable, as was the case with rogue CEOs such as Dennis Kozlowski of Tyco, Ken Lay of Enron, John Rigas of Adelphia and Steve Hilbert of Conseco.

Mental shortcuts work until problems get complex

Franck Schuurmans, a guest lecturer at the Wharton Business School at the University of Pennsylvania, has captivated audiences with explanations of why people make irrational business decisions. A simple exercise he uses in his lectures is to provide a list of 10 questions such as, “In what year was Mozart born?” The task is to select a range of possible answers so that you have 90 percent confidence that the correct answer falls in your chosen range. Mozart was born in 1756, so for example, you could narrowly select 1730 to 1770, or you could more broadly select 1600 to 1900. The range is your choice. Surprisingly, the vast majority choose correctly for no more than five of the 10 questions. Why score so poorly? Most choose too narrow bounds. The lesson is that people have an innate desire to be correct despite having no penalty for being wrong.

Schuurmans’ research goes deeply into the nuances of cognitive psychology and the theories of bounded rationality that earned Herbert Simon the Nobel Prize in economics in 1978. A key observation is that humans have limited rationality between our ears – our brains were designed to hunt prey.

Typically, people defer to mental shortcuts from learning by discovery. The academic term is heuristics. For example, a man decides to bring an umbrella with him if the sky has dark clouds, but not if it is sunny. The clouds are probably enough of a clue for this minor decision – but is he 100 percent sure it will rain?

Do you know with precise accuracy or do you just think you know with latent doubt? This is an example of the limits of decision making. Schuurmans observed that mental shortcuts, gut feelings, intuition and so on typically work – until problems get complex.

When problems do get complex then a new set of issues arise. Systematic thinking is required. What often trips people up is that they do not start by framing a problem before they begin collecting information that will lead to their conclusions. There is often a bias or preconception. One seeks data that will validate one’s bias. The adverse effect as Schuurmans describes it is: “We prepare ourselves for X, and Y happens.” By framing a problem, one widens the options to formulate hypotheses.

Business intelligence and drill-down queries are insufficient

How is this relevant for applying business analytics (the emerging field of interest) to improve organizational performance? A misconception of information technology specialists is that they equate applying business intelligence (BI) technologies with drill-down query and reporting techniques such as data mining and stop there. Business analytics takes BI to a higher level by producing new information from the BI information.

In practice, experienced analysts don’t use BI as if they were searching for a diamond in a coal mine. They don’t flog the data until it confesses with the truth. Instead, they first speculate that two or more things are related or that some underlying behavior is driving a pattern seen in various data. They apply business analytics more for confirmation than for random exploration. This requires analysts to have easy and flexible access to data, the ability to manipulate the data and the software to support their investigative process.

Delegate more decisions to employees

Without initial problem framing and a confirmatory approach, mistakes are inevitable. Sadly, as Schuurmans observed, many do not learn from their mistakes, but repeat them with more gusto.

To sustain long-term success, companies need leaders with vision and inspiration to answer, “Where do we want to go?” Then by communicating their strategy to managers and employees, they can empower their workforce with analytical tools to correctly answer, “How will we get there?” This goes to the heart of analytics.

Executives and managers at the top of an organization’s hierarchy need to become more comfortable with delegating decisions to their employees. Employees make hundreds, possibly thousands, of decisions every day such as pricing, customer targeting, risk mitigation and freight distribution routing. Incrementally, better small decisions add up and may contribute more to the financial bottom line impact than the few big decisions made by executives. Today’s problems and opportunities are increasingly more complex than they are just complicated. Applying analytics will be essential to sustain a competitive edge.

Article written by Gary Cokins
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