It's in the numbers

When I first took an interest in business strategy, I shied away from getting too involved in the numbers.

I had a degree in accounting, and, later, an MBA. So I didn't have a problem dealing with numbers. But I didn't want to be seen as a 'bean counter'.

Bean counters, I reasoned, focus on efficiencies and cost cutting. Strategists focus on the big picture. Blue sky thinking. Frameworks and models. Inspiration couldn't be reduced to spreadsheets.

But I quickly realised how wrong I was.

Yes. Strategy is about the big picture, blue sky thinking, frameworks, models and inspiration. But behind all of those things lie the numbers. And until you can get to the numbers, the job isn't done.

Here are some tips for getting to grips with the numbers in business strategy.

1. Go wide

The numbers used in business strategy include but extend well beyond those typically found in financial statements and reports. 

They include demographics and economics; product and process performance. They include market research. They come from within the organisation, within the industry, and from without. They deal with durations and conversion rates, volumes and prices. They look behind hunches and anecdotes to spot trends and structures. They range from statistically valid samples to pure educated guesswork.

It requires imagination and insight to determine what numbers to look for, where to look for them, and how to interpret them.

Triangulating between more diverse source of information increases confidence. Understanding how to reconcile disparate and even contradictory information requires finesse and experience.

2. Examine the relationship between the numbers

The numbers themselves won't tell you much. It's the relationships between the numbers that matter.

I often joke that a lot of my work consists of dividing some numbers by other numbers, until and interesting relationship reveals itself!

Look at the relationships:

1. Between related numbers (ratio analysis). For example, between inputs and outputs of various kinds. Between revenues and costs; between volume produce and activity to produce it; between work done and people doing it; between market demand and product supplied, etc.
2. Between numbers (and ratios) over time (trend analysis). Are numbers going up or down or staying the same over time. Charts are helpful in revealing trends. But it is worth getting good at calculating Cumulative Annualised Growth Rates (or CAGR), and doing so across various time periods.

You don't have to be a statistical mastermind - although it almost certainly helps - but it is important to have a work knowledge of quantitative analysis techniques.

3. Ask the right questions

If you want to understand how a business works, and if you want to get good at doing your job, ask how, what, when, where and why.

But if you want to get good at business strategy, you need to go further. You need also to ask how much, how many, how often and how long.

4. Ask what else the data could mean

Don't assume the first 'obvious' answer is the right one. Always consider what other explanations could be leading to the effect you're seeing. And then dig deeper into the numbers in order to confirm which explanation is the more likely and relevant.

For example, I remember seeing some present data which showed that larger investment fund produced higher investment returns. The argument was that larger funds had access to better investment opportunities.

On deeper analysis, it turned out that this was probably not true. The seemingly higher returns were more likely to be driven by the lower operating costs these funds enjoyed through the advantage of economies of scale.

5. Learn to tell stories with numbers

Simply presenting lots of charts and tables and and ratios won't achieve much on its own.

It's important to use the numbers to tell a story. What is happening in this business and industry? What are the possible patterns of cause and effect which explain the data we're seeing? How can we use this understanding to make better decisions about what to do next?

At the end of the day, people won't remember most of the numbers. But they will remember the stories you tell with them as long as they are relevant and compelling.

See this in depth article about storytelling with numbers.

Book recommendation: How to make the world add up - Tim Harford

(The image at the top of this post is partly inspired by one of my favourite films, the Matrix, and in particular the scene in which Neo finally learns to see through the real world to the numbers and code it manifests.)