Strategy by the Numbers


Mrs. Businesspundit likes to tell people what a geek I am. We were out for drinks the other night when she told everyone that on Thanksgiving morning, when she got up and came into the kitchen to make coffee I was reading an annual report and my first words to her were some question about accretion expenses (she's a CPA so I'm always picking her brain). It's a story that I don't mind repeating on this blog but one that, in most normal social settings, makes people think "what the hell is wrong with him?"

I really like reading annual reports because I like numbers. Numbers tell you lots of things, or, at least the changes in the numbers do. But at the top levels of corporations, the levels at which strategic planning takes place, numbers play a less important role. It's a "softer" discipline and strategists usually rely more on game theory, psychology, and macroeconomics.

Some new research examines the power of numbers in strategizing.

Because of their association with precision and accuracy, numbers may seem at first sight to be unlikely tools for decision making in contexts characterized by ambiguous goals and diffuse authority.Yet in the case described in this article, managers successfully mobilized a system of numbers to make an extremely controversial strategic decision.The empirical study examines in depth the micro-practices and processes by which the objectivity and legitimacy of a transparently contestable system of numbers were socially constructed in a public forum.

There is a scene in "You've Got Mail" where Joe Fox is talking to Kathleen Kelly and says "you must do, what, $300,000 a year?" "How did you know that?" she gasps. He responds with "I'm in the book business."

And that is the power of numbers. Remarkably, industries tend to perform in similar ways. Bookstores have similar values of sales per square foot for areas with similar demographics. So do restaurants, health clubs, and most other consumer driven businesses. It's really surprising the first time you realize that. For all the work people put into innovation, marketing, branding, training, customer service, etc., the financial results for all companies in their industry usually fall into a fairly narrow range that is driven by the fundamental economic characteristics of their business. That is why I like to use numbers in strategic planning.

People think numbers don't matter because they look at them and say "well that doesn't tell me anything." Of course it doesn't, because the numbers are static. The power of numbers is in what they represent dynamically. You have to watch numbers over time. You have to see how they change. When you look at them regularly, you begin to "feel" them. You reach a point where it doesn't matter to you that your average customer acquisition cost is $40, because what you are really looking at is whether that number went up or down, and how it compares to the industry average. The specific value is really just a point on a trendline. You develop a feel for how external conditions and internal decisions affect the slope and direction of the trendlines that matter to you.

Numbers matter for strategy because they give you insight that helps explain the softer things. They can provide you with good information about your industry and your customers, and that can be valuable for your strategic decision making process.

Thanks to Organizations and Markets for the heads up.