So what do you expect from a guy who worked at D.E. Shaw in the early 90s as they were pioneering their use of quantitative methods applied to the practice of portfolio management? You can expect that he figured out how to build algorithms, based on a ton of fluctuating inputs, which produced the optimal output. You can expect he figured out the impact of all those individual inputs, the interplay between them, and the tell signals on which direction the output was likely to lean towards. The financial data was available. It was just a matter of figuring out how to apply the math. Of course, the guy is Jeff Bezos. And you can expect that when he started Amazon, he brought the same tool set with him.
Entrepreneur magazine recently ran an article profiling Boomerang Commerce and their Dynamic Price Optimizer product. It was founded in 2012 by Guru Hariharan, an ex-Amazon employee, and sheds a small amount of insight into the extent to which Amazon invests in algorithms. The part that is noteworthy is the gap which Guru sees between Amazon’s tools and its competitors. It was “mind-boggling” as he says. Advantage: Amazon.
The crux of it is based on both portfolio theory and game theory. Complete analyses are done first on historical data sets in order to construct a model. And then the fun begins. It is all about finding the levers and how they will impact the output. Although this is a retail industry example, the same concepts apply to any competitive industry, where customers have choice and aren’t completely constrained. The handiwork certainly sounds no different than D.E. Shaw. It’s just a different data tap.
It really is all about the more free flowing information available to any customer, and the ratcheting up of competition. Customers hear about something new and they go to the internet. And Google allows them to piece together the information pretty quickly. So if the customer is able to “know all”, it naturally turns up the need for suppliers to be gathering the same market intelligence, and figure out how their portfolio as a whole is responding to the aggregate of customer buying decisions.
At one time, I remember needing to complete field reports to document win/loss scenarios and send them off to marketing. Never to see them again. And at times, I used to wonder: how long are we going to be pummeled before someone at the factory connects all the dots. In today’s markets, lagging in your analysis and competitive decision making, will penalize you harder. Whatever market you are in, you have to know whether your whole “portfolio” (i.e. your messaging, positioning, business model, and compete tactics) is game worthy.
The heart of business today is information. More specifically current information. Certainly there are a lot of business process automation projects driving productivity upward. But there must be an equal emphasis on using data to drive your compete level. With an ever increasing use of the internet, by both man and machine, the data is breeding. It increases the need to collect that market data, find out how to sift through it, and determine which levers will enable you to compete effectively.