AI-Enabled Analytics for Business by unknow

Author:unknow
Language: eng
Format: epub
ISBN: 9781119736097
Publisher: Wiley
Published: 2022-01-18T00:00:00+00:00

TACTICS THAT AFFECT STRATEGY

Most organizations struggle to keep operational tactics aligned to their strategy, as it is easy to lose sight of goals when in the weeds of everyday business. This is compounded by our biases, which infect our decisions. Let us explore two typical tactical activities that can have a material impact on corporate strategy—sandbagging and the big ego—and discuss the application of analytics to mitigate bias.

Sandbagging

Everyone has been in a situation where the sales forecast seems a bit off. The executive—say, the CFO—has a “feeling” that the Sales or Marketing organization is too conservative when forecasting revenue. But the feeling is not enough to reverse a forecast, especially when the CFO does not have sufficient knowledge to challenge any deal in the forecast. As such, the business is left over-performing in revenue.

While over-performing may sound good, especially when bonuses are based on performance, the consequence is potentially under-performing on revenue. Suppose 10% more revenue was possible with the existing resources. What about 20% with added headcount? This is exactly what happens in an international engineering company every year, as sales reps, once they meet their quota, hold back closing sales toward the end of the year (to drift to the next year) in an effort to get a jump on sales for the new year.

The remedy for quota setting and driving sales performance is an AI forecast with a Monte Carlo simulation. The AI will deliver an unbiased forecast based on past performance (managed by the sales reps); however, Monte Carlo will present a range of probable forecasts. Here, management can ask for a higher forecast to the top part of the first confidence interval (as discussed in Chapter 4). This target is higher than the sales sandbag forecast but statistically probable and, as such, reasonable. Over time, this will drive sales rep performance continuously higher, even with sales rep manipulations.

This also plays out the other way: that is, when more revenue is being demanded by management than can be reasonably provided. For example, a vice president of sales of the western region of a manufacturing company was asked for 5% more sales. The VP was distraught, as his region was struggling to meet the current target, let alone increase sales. Was the VP just sandbagging?

A statistical forecast of the region showed, with existing resources, a year-over-year decline. If new headcount was added, it would be insufficient to materially change the outcome for the balance of the year. The VP rejoiced in the analytics that confirmed his concern about the unreasonable demand to achieve a sales increase.

These examples, while tactical, have a significant strategic impact: in particular, on the company's valuation. For a public or private company that is contemplating a merger or acquisition, getting the forecast consistently right and driving steady growth is what drives valuation higher.

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