Monday, December 9, 2019

Using Regression Analysis to Make Better Strategic Decisions

Scientists researching insecticide use at Algonquin Provincial Park
Regression analysis is a process that evaluates the relationship between two or more variables. Companies sometimes desire to determine the strength of those relationships to better evaluate advantageous options. Executives may also utilize such statistical methods if they want to make a decision about future unknown events. Business wish they could look into a "crystal ball" but have a hard time doing so without good data to make the most logical decisions. The better a company is at managing data, the less hazy that ball will look.

Consider you are a company that desires to invest in Product Line A and Product Line B. The problem is that you have limited resources and must choose between the two. Ultimately you will want to measure the market (through some type of data extraction method) and plot your measurements on an XY axis scatter type chart.

When stepping back and taking a look you might start seeing some bunches, relationships and other "aha!" things coming to mind. To determine the strength of those relationships one might employ a Regression Analysis. Harvard Business Review has a solid description of one here

One of the best ways to see and understand regression analysis is by looking at companies that actually do this kind of work. They do it everyday trying to gain more information on the market in an effort to make better predictions. Read this blog post by SurveyGizmo.

Review the charts in the post and see how they draw a line right through the center of the data points. That line is the relationship between your dependent and independent variables. Everything else is measure off of that line to determine the degree of influence. Software can help you determine the precise line but for many of us "guestimating" works.

Strategic Decision Making?

You have limited resources and two strategic options that will expend those resources. Before deciding which one to choose you may want to take all the market data you have and create a regression analysis to review for trends. In essence, you want to run some software and determine the strength of certain relationships.

What some executives might do is review their internal resources, competencies, knowledge and abilities to see what strategy they are most likely able to fulfill given the resources they have available. Wise executives might also want to include external environmental information such as regulations, labor skill, etc... before coming to a final conclusion.

Data is increasingly important to decision makers as the market picks up more and more information through electronic commerce. This information will be organized and utilized in new ways to make better market decisions. At the end of the day, the ability to understand and use data is important to one's long-term career. Science and rational thinking abilities will not go away and knowing your customers through the data they leave behind is part of the next global innovation trends.

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