Statistics and decision-making in modern business operations

¶ … Statistics Applied in Today's Businees Environment?

Statistics Applied in Today's Business Environment

Today's business environment is the result of numerous processes of change in both micro as well as macro environments. Some examples of forces which generated change include the political decisions to liberalize markets and support free trade, the growing forces of globalization or several socio-cultural changes in the attitudes and behaviors of customers. The results of the modifications are also numerous, to include, amongst other things, a rapid pace of technological development or an intensifying competition.

Economic agents responded to these growing challenges by developing and implementing wide sets of strategic courses of action. They for instance recognized the growing role of customers in the process of revenues registration and they as such invested large sums of money within marketing endeavors. Then, entrepreneurs recognized the position played by the staff members in satisfying the customers, and allocated incremental budgets to the human resource decisions. They also recognized the growing threat of environmental instability and as such focused their attention on developing environmentally friendly products and services, with the usage of greener technologies, recycling and so on. The list of such examples could go on for pages, but at this stage however, it is important to recognize the common element of each endeavor -- the fact that they all used statistical information.

Statistics is often perceived as difficult to comprehend and a seemingly useless field. The complex formulas and reduced perceived applicability of statistics are generally the ones to be blamed for this discernment. Yet, nothing could be further from the truth. Whether realizing it or not, statistics is part of the everyday life and its role within the modern day business community is intensifying.

2. Statistics Applied in Business

Statistics are virtually applied in all aspects of business operations, from the education and formation of a business man, to internal processes within the organization or to market research. Similar to the concepts it promotes, statistics is in itself a complex field. Various attempts have been made to offer a definition of the notion, but a generally accepted one has yet to be issued. The explanation for this relies primarily in the mixed perceptions of the means and quantities of data and theory used by statistical computations (Bartholomew, 1995).

Despite the academic debate on the accurate definition of statistics, it is useful at this stage to present one of the definitions which is most reliable and popular. It is a highly simple one, forwarded by Ron Larson and Elizabeth Farber and it states that statistics represents "the science of collecting, organizing, analyzing and interpreting data in order to make decisions" (Larson and Farber, 2004). The very simple definition of statistics reveals its tremendous role within the business community -- that of supporting an efficient decision making process.

The following pages detail several means in which statistics is being currently applied within the business community in terms of:

business education marketing

financial analysis business diversification business expansion, and product quality

2.1. Statistics Applied to Business Education

Each and every future economist is presented through college with the necessity of taking on at least one course in statistics. Most students are reticent to the subject and do not study it thoroughly, but only try as hard as they need to pass the exam. This is generally because they do not see the real applicability of the subject. As they move on to jobs however, they are presented with real life business situations, in which statistics easily find not only applicability, but in which they are absolutely necessary. Given this context, it becomes clear that the role of statistics in schools is that of preparing the future business man for his duties.

It is accepted that the average formed businessman will not possess sufficient knowledge to implement statistics the first day on the job. One might then wonder why university professors teach statistics if young graduates are not able to use it on the job. The answer is extremely simple and logical -- college education sets some ground rule and introduces the student to some basic knowledge of statistics. This means that at the end of the semester, he will be able to reflect at least some statistics rationale. When coming across a piece of information such as the results of a questionnaire, the student will be able to inquire on the size, structure and other features of the sample used in the analysis as well as the accuracy of the study, the accepted standard deviation from the results or other strictly statistical questions.

This step is a tremendous one for future employers as it offers them a basis on which to further build and add new statistics information, through training or through direct practice, and enjoy the result of a highly skilled and capable employee, who is able to implement statistics within the business decision making process. Otherwise put, the goal of statistics education in business schools is that of "teaching students to think statistically, to become educated consumers of statistical expertise and to communicate well with nonstatisticians" (Wild, 1994).

Given this great role of statistics within the educational process, it is no wonder that intense efforts are being made to enhance the effectiveness of statistics within not only the business community, but also within educational institutions. This task of enhancing the effectiveness of statistics falls in the hands of the MSMESB conferences, or Making Statistics More Effective in Schools of Business, launched as early as 1986 (Love and Hildebrand, 2002).

2.3. Statistics Applied to Financial Analysis

There are two primary means in which statistics apply to financial analysis. First of all, there is the assessment of the company's financial performances relative to itself. This assessment is generally conducted throughout the duration of several years, at least three, sometimes seven, but generally four or five. The results are included in documents for internal circulation or within annual reports, and then assessed. Statistics are used to compute various entries in financial statements, such as income from a specific type of operation and its change throughout the years. Based on the statistical information retrieved, organizational leaders will be able to develop and implement the most adequate future decisions.

Take for instance Red Hat, a leading provider of open source software applications. Its annual report for 2009 reveals an increase in its training and services revenues from $45 million in 2005 to $47 million in 2006, to $59 million in 2007, to $73 million in 2008 to $111 million in 2009. From this assessment, the leaders of the organization could come to the conclusion that it would be wise to further invest in the business division of training and services offered to customers.

The second most important means in which statistical information is useful to financial analysis reveals the assessment of a company's financial ratios in light of the ratios of its competitors, or the average ratios of the industry. Statistics helps organizational leaders compute financial ratios such as earnings per share, gross margin, current ratio or others. Following the previous example, Red Hat's current ratio is of 1.90 in a context in which the industry average is of 2.11 (Reuters, 2009). These figures tell the manager that his company is less able to pay its short-term obligations than are other players within the industry. Future decisions could refer to an increase in the volume of liquid assets.

2.4. Statistics Applied to Business Diversification

The concept of diversification is generally pegged to portfolios. Statistics play the most crucial part for investors who cannot randomly select which titles to invest in, but need to clearly assess the risks pegged to them, as well as the chances they stand for generating a satisfactory return on investment. Statistics support investors in measuring the risk of an investment. In most cases, investors will desire to minimize the risk of their investment while in the same time maximizing its profitability -- this is achieved through the process called portfolio diversification, by which the investor selects new titles and invests in them. However, for the practice to be successful, the investor must be able to identify the shares which meet his required characteristics. This is where statistics steps in and allows him to calculate the risk of each individual stock, as well as the overall risk of the entire portfolio. The risk of the portfolio can be reduced through diversification, in the meaning of investing in more stocks of diverse natures.

Having understood the applicability of statistics within individual investment projects, the findings are extrapolated to the organizational level. Most company boards decide to diversify their operations in order to reduce risks and maximize profits. It is as such not strange when one company purchases shares from another company. Until recently, Ford owned 30% of the Mazda shares, but was forced however to sell its interest due to an impending necessity of liquidities. Statistics then help board members decide in which company should they invest, and ultimately, allows them to maximize their revenues. All in all, statistics support an efficient process of diversification (Doukas and Kan, 2006).

2.5. Statistics Applied to Expansion of Business Operations

This application is somehow derived from the previous one, that of diversification, yet it has the distinct feature of sustaining the company when it wants to territorially expand its operations. Due to the growing forces of market liberalization and globalization, economic agents are now able to cross boundaries into foreign regions and benefit from their comparative advantage. Some countries offer corporations the benefit of their cost effective labor force, others reveal technological superiority, whilst others reveal an abundance of natural resources. Corporations are also presented with the opportunity of selling their products and services onto new global markets, action which would significantly enhance their financial results.

Yet, business owners often find it extremely challenging to select the country which would best serve the company's needs. This is where statistics comes through. Take the example of Home Depot considering an expansion of their business operations within Egypt. Before making the final decision, they should assess numerous statistics. For instance, they would become aware of the fact that the annual income per capita is of $5,400 -- this information would help budget personnel expenditure. They would also become aware that the risk of contracting infectious diseases is intermediate. In terms of actual elements that would directly impact the business, statistics could tell the managerial team at Home Depot that Egypt has a well developed infrastructure -- with 85 airports, 6 heliports, 5,063 kilometers of runways and 92,370 kilometers of roadways -- but also a highly developed telecommunication system with more than 177,000 internet hosts, 93 television broadcast stations, 12,011,000 main lines and 41,272,000 mobile telephones (Central Intelligence Agency, 2009). The managers at Home Depot would understand that Egypt is well developed and prepared to welcome their business, but they should also assess statistics relative to the demand for their home improvement products and services.

2.6. Statistics Applied to Product Quality

Internal processes and operations historically referred to manufacturing and production. Yet, the concept is gaining a wider understanding as the role of services increases. Regardless however of the nature of activities and offer of the firm, fact remains that statistics is applicable to mostly all internal operations. Probably the most relevant examples are offered by the engineering function, in its ability to improve product quality (Bendell, Disney and McCollin, 1999).

In this order of ideas, statistics helps designers create trustworthy prototypes. An increased applicability of this function is obvious within the automobile industry. Statistics can for instance be used to assess the past ability of the company's vehicles in satisfying customers' needs; the findings will be included in the design of the new vehicle. Say for instance that Ford wants to come up with a new concept for a car that would combine numerous benefits and reduce several limitations in order to promote this vehicle as the new American car. The company is currently facing severe challenges and the new car could help it regain its position as leader of the American automotive industry.

Through statistic processes of data gathering and assessment, the designers would be informed that the customers prefer the fuel efficient engine incorporated within the Ford Fiesta, but enjoy the space and security offered by the Ford Focus. The designers would interpret the findings and come up with a design of a size and capacity next to Focus', but with a level of consumption next to Fiesta's. Similar studies could be made relative to mechanical components in order to reveal which of them is better in absorbing the shock of an impact and as such better at protecting the lives of the passengers. All in all, statistics can successfully be used to enhance the quality of an existent product or to create a new design.

3. Conclusions

As the intensity of the competition within the business community threatens the well-being of economic agents, business owners rely more and more on statistical information to support their decision making processes. The means in which statistics is currently being applied within the business community are virtually endless. Yet, this report has focused on revealing six specific applications in education, marketing, financial analysis, business diversification, business expansion and product quality. The success of each and every one of these endeavors depends directly on how well organizational leaders are able to use statistics to gather, process and interpret the information within the micro and macro environments.

It must be noted that the growth of statistics within the contemporaneous business community was also supported by the technological revolution. Computers and specific software assist organizational staff members in gathering, assessing and communicating data. Even without IT&C, statistics would have played a sustained pivotal part within business life, but its ease of usage would have been reduced.

References:

Bartholomew, D.J., 1995, What Is Statistics? Journal of the Royal Statistical Society. Series A (Statistics in Society), Vol. 158, No. 1

Bendell, A., Disney, J., McCollin, C., 1999, The Future Role of Statistics in Quality Engineering and Management, Journal of the Royal Statistical Society, Series D (The Statistician), Vol. 48, No. 3

Doukar, J.A., Kan, O.B., 2006, Does Globalization Diversification Destroy Firm Value? Journal of International Business Studies

Larson, R., Farber, E., 2004, Elementary Statistics: Picturing the World, 2nd Edition,

Love, T.E., Hildebrand, D.K., 2002, Statistics Education and the Making Statistics More Effective in Schools of Business Conferences, The American Statistician, Vol. 56, No. 2

Rossi, P.E., Allenby, G.M., 2000, Statistics and Marketing, Journal of the American Statistical Association, Vol. 95

Wild, C.J., 1994, Embracing the "Wider View" of Statistics, The American Statistician, Vol. 48, No. 2

2009, The World Factbook -- Egypt, Central Intelligence Agency, https://www.cia.gov/library/publications/the-world-factbook/geos/eg.html last accessed on November 6, 2009

2009, Red Hat Inc., Reuters, http://www.reuters.com/finance/stocks/ratios?symbol=RHT.N last accessed on November 6, 2009

Red Hat 2009 Annual Report, http://files.shareholder.com/downloads/RHAT/763006950x0x304106/3145E646-AE56-4FE1-9C59-B79F4491C4C5/FY09_Annual_Report_on_Form_10-K.pdf last accessed on November 6, 2009