Using Statistics for decision-making- 1st step to innovation

I must say that “Innovation” is the one of the most misused word. CVs of management professionals talk big of about how innovative they are, and how innovative have they been in their current roles. Innovation is a crucial word in any minutes of board and management meetings. Without use of “Innovation” in your business plan you may never be funded by a VC and PE investor.

By focusing on “Innovation” more objective and measurable variables that impact/drives a business is/are often ignored. For instance, industry specific variables, target customer, demand for product/service, country the business is located, country the business sells, state of economy, company specific variables like management team, years since operation, market share, business model, financial strength/financial slack, free cash and no end to the list. I am sure it’s not an alien thought that we expect to land on earth.

One of the most crucial variables that keep a company ahead of its competition is its ability to foresee/forecast “Demand” better than its competitors. Just like what our equity players (FIIs, MFs, Investment bankers, PEs) try to do in equity markets- to predict the probabilities of a rise or a fall ‘better’ over competitors.

While all of them are now being criticized for being overtly mathematical without due giving due consideration of economic fundamentals (Variable X increases when Variable Y increases assuming all other variables remaining constant), ability to quantify your beliefs and possibilities is one of the most important attribute to have and hence key to be innovative.

In my limited work experience, I have seen decisions being made backed purely by hunches/beliefs and so called back-of-the envelope calculations. If science of “Demand forecasting” had been used, probability weightages for “BEST” scenarios would have been higher, for sure. Further, communicating failure or a success of a product/service would have far easier and clear to say the least.

I recall words of Prof. Tapan P. Bagchi (Adjunct Professor Industrial Engineering & Operations Research, IIT Bombay) when he taught us statistics as part of Fellow Program curriculum at NITIE Mumbai. He said, “If you know even the basics of statistics, you can be a consultant to companies and help them make decisions.” So there is money being left on the table by all those aspiring “Consultants” who are only working on their power point skills.

Statistics provides key inputs to the decision-maker, that if understood and interpreted better can help drive decisions that are later interpreted to be “Innovative”. Ability to interpret data, not just restricted to interpreting trends (curve is raising) is important. We need to know what does mean, range, standard deviation, r2, common distributions like uniform, binomial, normal, poison, correlation coefficient, coefficient of variation etc. speak about the data. This is for sure expected to make decision-making more informative and verifiable.

Let’s all try to take decisions and not just deliberate about them. We are left with less than 40 years of working life (assuming we retire at age of 60) and many of us are planning early retirements with large bank balances too.

Let’s learn and grow old. I am already reading “Basics of econometrics”.

So smart of me- first preach and then practise.