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How does a business make decisions? How should a business make decisions?
We'll give you a clue: it rhymes with shmevidence
As a business owner, I want to believe that I have what it takes to lead. I'm charismatic enough that I can usually convince people to do what I want them to do. I am good enough with Google that I can find out many things and I have the ability to learn a great deal about complex topics quickly. Surely I will thusly make good decisions and be a great CEO!
Wrong. Like any other person, the scope of my experience is limited. My understanding of the world, of what is "normal" and not, is entirely coloured by my experiences, my culture and the group of individuals, organisations and events with which I choose to associate.
Not so very long ago, none of this would have prevented me from running a business. All but a few businesses were limited in both scope and reach. You worked with locals to provide products and services to locals and the competition you had to deal with was also local. This just isn't true in the western world anymore, even for the smallest businesses.
Real world problems
Demand for photo lab products is a great example to explore. I've spent much of my career watching the sausage being made here and so I have something of an understanding of the pressures and responses.
A modern photo lab doesn't just make photos. They put those photos on things: wood, leather, canvas, coffee cups, key chains, you name it. They sell logo-emblazoned tchotchkes and memorabilia for the priceless moments of life. And yes, they sell photos. For some customers, they sell them by the pound.
There isn't a whole lot of margin in running a photo lab. All of them, all over the world seem to perpetually operate on the razor's edge all of the time.
Capital investments are usually pretty high. If you want to get into a new product line you had best be prepared to pony up some serious cash. Even then, it will take time to run through the initial tests, design useful workflows and then engineer the IT and reporting so that the bits can move smoothly through the various stages of manufacturing and end up getting shipped where they need to go.
Your competition is constantly adding new items to their product list. You need to keep up with them and develop unique offerings as well. And customers are fickle.
With this in mind, how does the CEO of a photo lab choose which product lines to invest in? There is no way they can invest in all the new toys and technologies that come out each year, and making guesses at random would have a high enough failure rate to likely prove disastrous.
Data driven decision-making
One source of information for the CEO is his sales staff. Assuming sales are doing their jobs, they are interacting with their customers and getting an idea of what their customers want. It's an important data point but it's hardly the only one that matters.
Far more important than what customers want is why they want it. If customers want you to offer widget X only because they are hoping competition for widget X sales between you and a competitor will drive down prices for widget X then it's probably not a great investment.
If, however, customers are generally wanting you to sell widget X because they find having to re-order hundreds of images every week with a competitor just to get widget X is frustrating, you might have a winner. Here you could get sales based on convenience without getting dragged into a price war.
Does someone want you to make a widget because they think it is cool? Or do they have evidence of demand from their customers which indicates they could actually sell it? Is demand isolated, or aggregate across the client base?
How big is demand? If it's low volume but strategically valuable, it might be worth entering into a reselling agreement with a partner. If it is high volume, is it high enough margin to be worth it? Or strategically important enough that you need to bite the bullet and bring it in-house?
Data is the key. In a perfect world, sales and marketing would work together through customer engagement, surveys and so forth to collect enough data to make decisions. In reality, this is no longer enough for many businesses to make investment choices on.
Tracking social media accounts of customers, scouting industry forums, and even looking at hit rates on search engines for various keywords are also becoming important data sources. Looking at the number of competitors who sell given products, when they were introduced, when they were discontinued and what customers are saying about competitors on social media are also worth considering.
Thousands, sometimes millions of data points exist to be mined, and the ability to do so actually matters, even for small businesses trying to decide which set of tchotchkes to make next year, because the wrong decision could prove fatal.
You're only going to get so far staring at Excel spreadsheets of sales numbers and listening to customer demands filtered through sales. Big data analytics and machine learning are examples of technologies that are transforming decision-making, and are probably the most important business-visible IT developments since modern CRM packages.
However, running a business still requires common sense. Today's CEOs still need to filter what the computer says against what the people say. If you rely only on machine-provided data, you end up building Windows 8.
At the end of the day, however, evidence-based decision making is crucial for businesses that want to survive. And evidence-based decision making requires both having the right data and the right tools to provide appropriate evidence. Does your business have those tools? ®