Here's how you know analytics do not necessarily create a long-term competitive advantage: Look at the airline industry.
"There is strong evidence that American Airlines maintained a revenue advantage through its pricing analytics from 1985 to about 1995," observes Peter C. Bell, a professor of management science at Ivey Business School, in the MIT Sloan Management Review. But today "almost every airline employs the same basic methodology to maximize revenue per seat mile flown."
The bottom line: "Airlines still spend massive amounts on pricing analytics, but all they get for it is survival," notes Bell. "There is little evidence that today's analytics have given one airline or another a revenue advantage."
The good news is, Bell identifies several companies that have maintained their analytics advantages through the years--and the strategies they've used to do it. Here's a summary of his list:
1. Keep your analytics secret. To do this, you need to focus on engaging (and thereby retaining) your in-house analytics team. That isn't easy. Top analytics talent usually have opportunities galore to jump ship.
Another key is for management to decide which analytics strategies need to be kept under lock and key. That, too, is not an easy decision, given that some analytics strategies can generate revenue or positive publicity if they're sold or marketed.
Bell cites Walmart as a company that excelled with these methods in the 1990s. At the time, Walmart was collecting excellent data and developing advanced, sophisticated algorithms for its supply-chain management (including inventory sizing, order fulfillment, warehouse management, and shipping).
Through the years, however, Walmart has not revealed much about its supply-chain analytics. Nor have the secrets really gotten out. "Competitors," Bell notes, "cannot buy off-the-shelf Walmart supply-chain analytics."
Bell believes all of this may be the result of a conscious effort by Walmart, since the company is open about other analytics. For example, Walmart uses offshore analytic business process outsourcing in India for some of its reporting analytics. That would not normally be an airtight strategy for maintaining confidentiality.
Likewise, Walmart hosts conferences where the company shares and encourages discussion of consumer choice and human resources analytics.
2. Implement the analytics fast and defeat your competitors before they can react. In the 1970s, the industrial transformer market experienced a dramatic downturn. The crisis compelled ABB, a young engineering company at the time, to develop sophisticated customer-choice analytics in the 1970s and 1980s.
Those analytics helped the company better understand customers' needs and identify "switchable" customers--current customers who might leave and others whom ABB might attract.
"The results were so successful," Bell writes, "that in the years following implementation, six transformer companies exited the category. In addition, competitors such as Westinghouse and GE closed major manufacturing plants."
3. Apply your analytics to the right problems. One popular analytics tip is to start with easily identifiable problems whose solutions can produce quick savings or gains.
But "the downside of this 'low-hanging fruit' strategy," notes Bell, "is that the analytics for these small problems are easily replicated. Consequently, if competitors notice any impact, your advantage will erode once they replicate your methods. Companies that have sustained an advantage from analytics have often taken a different approach, focusing on a large, critical problem rather than a low-hanging one."
As an example, Bell cites Procter & Gamble, which uses advanced analytics to measure and optimize global supply chains. Thanks to the work of P&G's analytics group, the company has reworked many of its shipping patterns, and closed or relocated several manufacturing plants, production facilities, and warehouses, generating more than $1 billion in savings.
4. Recognize that sometimes control of the data is more important than control of the analytics. To illustrate this strategy, Bell returns to the airline industry. American Airlines, he observes, "was the master of air-crew scheduling in the 1990s, when it was widely recognized that AA had lower crew costs than its competitors."
But at the same time, AA marketed its crew-scheduling software to competing airlines. How did the company maintain its advantage while selling the ostensible solution? "The answer is that AA sold its algorithms--which were pretty basic--but kept a grasp on the data needed to use the algorithms most effectively," he writes.
In other words, AA recognized its advantage came from its vast library of crew tours--and not from the selection algorithm that automated the assigning of crew members to tours.
As a result, AA sustained its advantage after selling the algorithm by working for more than 10 years on improving its library--"including developing computer codes that could generate millions of new potential tours every week," Bell notes.
5. Become a truly data-driven corporation. There are a few companies which, by applying analytics to countless small projects over decades, have emerged as companies that bring a legitimately data-driven approach to everything they do.
"FedEx and IBM are well-known examples of companies where numerous early analytics successes produced a senior management culture where analytics was regularly used to inform important decisions," Bell writes.
Of course, contemporary discussions of the data-driven company invariably evoke Amazon--and for good reason. Bell points out that Amazon is one of only a very few companies whose annual report regularly includes a host of terms from analytics.
"We use high-performance transactions systems, complex rendering and object caching, workflow and queuing systems, business intelligence and data analytics, machine learning and pattern recognition, neural networks and probabilistic decision making, and a wide variety of other techniques," founder and CEO Jeff Bezos famously noted in a 2010 letter to shareholders.
Bezos's strategy, concludes Bell, is "one of constant innovation supported through experimentation, data collection, and analytics. While Amazon’s storied warehouses and supplier list garner many headlines, Amazon's analytics algorithms and capabilities are arguably its most important strategic asset."