Big data meets small data

Short Takes...on Analytics

A blog by Michael Raynor, director, Deloitte Services LP​

Enabled by the constant march of technological progress, we are now able to collect and analyze once overwhelming quantities of data and so discern melodies of meaning amid cacophonous noise.

Trading on this defining feature of the analytics trend, we started what became our six-year investigation into the drivers of long-term, superior profitability by scooping up as much data as possible–more than 25,000 companies and up to 45 years of observations on each. We then applied cutting-edge statistical analysis to identify those companies that have been so good for so long that we can quantify the likelihood that they have been more than just lucky. These are our “exceptional performers.” (View What Is So Special About This Research? for more information on our approach.)

We then took apart the income statements and balance sheets of the entire population of exceptional companies and found the previously hidden but unmistakable financial structure of long-term superior performance. (View Pulling Ahead vs. Catching Up for an explanation of our analysis.)

This “big data” approach led us to the fundamental conclusions of our investigations, captured in “the three rules,” the decision-making criteria that capture–not how exceptional companies act, but how exceptional companies think. (View The Three Rules website for more details.)

  • Rule #1: Better before cheaper. Don’t compete on price, compete on value.
  • Rule #2: Revenue before cost: Drive profitability through higher price or higher revenue, not lower cost.
  • Rule #3: There are no other rules: Every other decision–M&A, innovation, international expansion, you name it–should be seen through the lens of the first two rules.

But what do these rules mean for individual companies wrestling with real problems today? Answering this question led us to the notion of “small data,” the other side of the “big data” coin. For where big data identifies the individuals that stand out in a population, small data is our term for how one can identify meaningful events and periods of time in the life of a single individual, or in our case, a single company, using rigorous quantitative analysis.

Insisting that a company’s full lifetime be analyzed for patterns and not just the recent past is a pretty radical departure for many managers. Think about your own experience: when was the last time you looked farther back than say, five years in response to any motive other than curiosity? How often has the ancient history of your company’s performance from ten or even twenty years ago actively informed your estimates of what the future might hold?

Rather than make assumptions about what time periods matter, we chose to let the data speak. Here’s what shocked us: when it comes to understanding the performance of individual companies, the relevant time period is often measured in decades. For all the turmoil and tumult that seems to define every company’s competitive odyssey, it is not uncommon for companies to generate profits in a surprisingly consistent manner. From retail to pharmaceuticals, from semi-conductors to household appliances, the relevant time horizon for understanding any company’s performance very often stretched over the horizon.

For example, Family Dollar is a largely unsung hero of the discount sector in general merchandise retail. It has bested the often much larger retail legends it competes with, yet of late it finds itself with a new level of competition on its hands. Historically highly differentiated with smaller stores and disproportionately higher selection, larger discounters are now imitating Family Dollar’s winning formula. What should the company do?

It is tempting to see the 1970s and 1980s as irrelevant to an examination of this question. Yet our “small data” approach reveals that for thirty years Family Dollar has generated its ROA advantage by relying on higher gross margin to offset higher SG&A and lower asset efficiency. What this means is that the company has delivered consistently exceptional performance through an ongoing series of tactical adjustments that have kept it consistent with our three rules.

This suggests strongly, to us at least, that whatever the nature of current competitive pressures and the however strong the temptation to begin focusing on cost, Family Dollar would do well to take its history seriously. It’s not as though the last three decades have been a walk in the park, yet the company has consistently found ways to emphasize better over cheaper and revenue over cost. The path forward is unlikely to be easy, either, but the careful application of small data points toward the most rewarding challenges.

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