Is Cost of Accurate Knowledge Worth It?

Most EDO's have followed suit with the "data-mining" movement that has taken the business world by storm. The 'drill down' mantra is the buzz among those targeting industries and industry clusters for development. Is the cost of this information worth it? A recent Harvard Business Review (HBR) article may shed some light on this question.

Two University of Michigan researchers, Kathleen Sutcliffe and Klaus Weber, published an article entitled "The High Cost of Accurate Knowledge" in the May 2003 issue of HBR. The article says that while detailed information and knowledge are deemed to be valuable and useful in making better business decisions, the data alone is insufficient in revealing what decision a business executive should make. Businesses are spending more on data and information. These activities now constitute a more significant part of the annual budget. They should question whether the investment in more data is worth it.

What do the researchers suggest? They say that the way in which senior managers interpret their business environment is more important for performance than how accurately they know their environment. The authors suggest that business executives should focus more on "managing meaning" than "managing information."

The researchers recommend that business managers be more clear on what they are trying to perceive about their business environment. For example, what should the environmental scan undertaken in the strategic planning process focus on and why?

Typically, business managers assess their environment in three dimensions:

1. Volatility: Measures the reliability of forecasts and the risks associated with strategic investments. (This is a key issue for economic developers to understand about business decision-making.)

2. Growth Trends: Which reveals the quantity of resources available to companies in an industry.

3. Complexity: Relates to an industry's resources and how they are distributed.

The researchers found that perceptual accuracy related to assessing the magnitude of change in an industry paid off in the early stages and steadily dropped off over time, creating a U-shaped statistical curve. Perceptual accuracy's relationship to perfromance was found to be a straight downward line, suggesting that its value was wasted beyond the initial phase.

So, if accuracy is not the answer, then what is? The authors say it's the rules that executives use to intrepret their business environment. In other words, it's the assumptions, ideas, concepts, common wisdom, and basic attitude toward their business and its future. They say it boils down to "mind-set." Does the executive feel or believe the business can control those factors essential to success? Does the executive hold positive or negative expectations about future success?

Here is how I size up this interesting piece of research. Does this mean that companies should be run on hunches and intuition alone? No, but executives should carefully tune into their mind-set about their business and where it's headed. Is this an agrument for "emotional intelligence?" Yes, it could be to the extent emotions affect our ability to perceive reality. Does this suggest that companies should abandon business intelligence? No, but they should balance their intensive data efforts with the intrepretive frameworks they use.

What does this have to say about economic development? I think it reminds us that economic developers, their leaders, and their advisors should work harder at understanding the intrepretive frameworks and concepts used in judging area economic competitiveness, how businesses make investment decisions, what consumer and industrial markets want and a variety of other issues. This research suggests that we need to revisit the "world-view" of the economic developer before jumping into major data and information exercises. And that is logical advice. Moreover, it suggests that economic developers should have a better understanding of the intrepretive frameworks used by business executives. Maybe it is a good idea to read more business biographies to learn how business leaders think and make decisions.

For more information, go to HBR Online. (If you subscribe.)