How to Become a Data-Driven Decision Maker
September 4, 2020
Becoming a data-driven decision maker is important, but often easier said than done. Catch our newest TrendsTalk episode with ITR Senior Business Advisor Alex Chausovsky for tips on how to improve your strategic decision making.
Transcript by Rev
Hello everyone. My name is Alex Chausovsky. I'm a senior business advisor at ITR Economics, and I'm welcoming you to another episode of Trends Talk with ITR. Today, I wanted to talk to you about a very important notion, and that is data. We've long advised many of our customers to become data driven decision makers, but I think it's easier said than done sometimes, because the sheer volume of data that we're inundated with on a daily basis can be overwhelming. So today I wanted to break it down for you a little bit, look at the different types of data available, and give you some specific tips and advice about how you can leverage this data to really become that data driven decision maker and make both better quality and better time decisions in terms of the future outlook and really the path forward for your business.
So let's start with the macroeconomic environment. There are multiple ways to look at macroeconomic data, ranging from GDP, whether you're a consumer leaning business or industrial production, which is our favorite benchmark for the industrial side of the economy. You can also break it down a little bit and look at the specific measurements of that type of activity. So for consumer activity, one of our favorites is retail sales, whereas for business investment, which is a much bigger component for the industrial side of the economy, and much more influential in terms of determining the direction of that particular part of the economy, we like to use a series called non-defense capital goods new orders, which is really a fancy name for business to business activity or capital investment. If you're a distributor, you can also look at series called wholesale trade. That's a really good benchmark or representation of activity in the distribution space.
So the key thing to using macroeconomic data is a lot of times companies tend to say, "Well, if the economy is doing X, then I should be doing Y." But it's more complex than that, because first you really need to understand what is your timing relationship to the economy. Some companies actually lead the economy. So for example, if you're in residential construction and making single family homes, typically you would lead the economy by about a year. In other cases, some businesses may lag the economy. So non-residential construction typically lags the overall economic landscape by about a year. So it's really important to get a sense of how does your business react or perhaps lead the economy. And that's going to be a big factor in your decision making process.
Once you've got a sense of what that timing relationship between you and the macroeconomy and the specific components of the economic landscape that you're going to track, then you can dig a little bit deeper and you can look at different things that are on the micro level. So if you are a manufacturing company, there are new orders and production series tracking everything from all sorts of different kinds of machinery, to automotive, to medical equipment and even aerospace and defense products. If you are in the construction space, you can certainly look at data series related to single family or multi family housing. You can look at non-residential construction data. And the nice part about the construction data is a lot of times we have that broken down at the state and even at the city level. So you can really hone in on the markets in which you're participating.
And then there are the types of companies, whether you're in services or software, there are lots and lots of series. In fact, we track thousands of series here at ITR Economics, and if you need some help identifying that vertical market or the microeconomic series that is going to be a good barometer for your business, we can certainly help you out with that. Then you also have to pay attention to other series that are not part of the macro and micro landscape. Here I'm talking about things like commodity prices. Those a lot of times help explain the deviation or the movement in your revenues, because obviously your selling prices are impacted by input cost changes. If you are doing a lot of business abroad or actually have some impact on the global scale, then you should be looking at things like exchange rates, because that's going to be influencing your top line and your bottom line as well, changes in currency and valuations of that type.
So you want to incorporate those types of datasets as well. But really, at the end of the day, the real key to being a data driven decision maker is all about your individual company data. That could be your orders, your sales or revenue, it could be your volume or unit shipments, if you're trying to extract that price discussion from the picture. But the key thing is you've got to be paying attention to what your own data is telling you. You've got to understand where in your own business cycle you are at any given point in time. I should be able to ask you as the CEO or a big decision maker in your business, what phase are you currently in? And you should be able to immediately respond, "I'm in phase B or in phase C or in phase D," because it is that phase that's going to determine the kind of actions that you should be implementing at the company level.
We can also look at leveraging the different metrics for evaluating your own performance. So not only do we track the top line sales, let's say on a monthly and an annualized basis, we can look at the rates of change. And this is really where the insight becomes very powerful. We look at the 1-12, which is your month over month rate of change. We look at the 3-12, your quarter over quarter rate of change, and the 12-12 to determine the likeliest direction for your business both in the near term and in the medium to longer term as well. We marry the input from what your own data is telling us to the signals coming from those various indicators, both macroeconomic, microeconomic, and the other indicators that are pertinent to your business. And at that point, we can together come up with a storyline, with a picture that not only helps to explain what's going on in your business right now, but most importantly, it helps you predict and see around the corner and go forward with confidence that you know what's going to happen in your business in the future as well.
That is a very powerful thing. And all of the things that I've discussed today really need more detailed conversations, more discussion to really leverage that information to its full potential impact, so I certainly hope if you're interested in learning more about this, you will reach out to us and we can have that deep discussion and we can really set you on your way to being that data driven decision maker. Thank you so much for joining me today. I hope you have a great day, and I hope to see you again on the next edition of TrendsTalk with ITR Economics. Take care.