Algorithmic business is the industrialized use of complex mathematical algorithms pivotal to driving improved business decisions or process automation for competitive differentiation. Algorithmic business provides the speed and scale to accelerate digital business to deliver even greater impact.
Application of Algorithmic Business
There are several potential applications for algorithms in a business. Here are some possibilities:
- Customer Interaction: The most obvious use of algorithms in business is in defining what the vast amounts of data collected by businesses actually mean. Algorithms can be used to make business processes clear and more unique – and also to ensure that you’re providing the right solutions for individual customers based on the experiences they want. There are already many examples of this in business – with one of the most obvious being from Amazon. Visit an Amazon home page and you’ll find it’s filled with items you might want to put into your shopping cart based on your purchases and other variables. These “suggestions” are, of course, based on algorithms driven from your customer behavior.
- Slim-line a Workforce: It’s a controversial issue to suggest it’s a good thing for a business to operate with fewer staff – but the reality is that for most organisations one of the biggest expenses is their employees. However, this massive overhead can be reduced with algorithms able to take on many of the tasks typically assigned to workers. Gartner research suggests that 20 per cent of all business content will be generated by machines by 2018 – the idea is that companies can become smaller and also more profitable.
- Real-time Accuracy: Recognizing patterns and trends and being able to react and adjust to them is vital for a business’s success. Waiting for weeks to run through this data can see others steal a march and get ahead of your company – whereas being able to operate in real-time can give a business a massive competitive advantage. For example, imagine you’re in a business that relies on the fluctuations of the stock market – being able to react quickly to the market’s movements is vital – when you see a certain stock falling you can seek alternative revenue streams quickly and this can boost cash flow.Processing data | It’s not just customer data for which algorithms are proving vital. They play a role in almost every fast and efficient data process. Look no further than the vehicles we drive as an example. Telematics is being used to share information about road conditions and when applied to businesses with large fleets it could allow truck drivers to avoid certain routes and keep drivers safe.
- Processing Data: It’s not just customer data for which algorithms are proving vital. They play a role in almost every fast and efficient data process. Look no further than the vehicles we drive as an example. Telematics is being used to share information about road conditions and when applied to businesses with large fleets it could allow truck drivers to avoid certain routes and keep drivers safe.
Business Model Using Algorithm
The following infographic shows the steps to automate a business model and use algorithms to increase revenues.
source: Naveen Joshi
Benefits' of Smart Business Algorithms
Transforming big data into unique and proprietary business algorithms translates into transforming the entire enterprise. The only way to process data into actionable insight is to create an algorithm-based software. Making sense of large amounts of data via algorithms will improve business decision-making, which translates into significant improvements to business performance.
- Netflix is a classic example of an algorithmic business model. In fact, the success of their streaming video service is owed almost entirely to algorithms. How does Netflix learn your preferences and make quality viewing recommendations? Algorithms. How does viewer behavior inform Netflix on the shows to make and the viewing demographics to cater their content toward? Once again, algorithms. Netflix as we know it would not exist but for sophisticated algorithms that allow Netflix executives to take meaningful action based on an algorithm’s ability to provide clear insight into the big picture of big data.
- To use another example, consider a shipping company such as UPS. Dropping off packages efficiently is a critical component of their business model, but there are a number of variables to consider. Truck maintenance, employee work hours, traffic and more all impact the ability to follow through on delivery times. A quality algorithm could sift through vast amounts of applicable data to determine the best route and delivery strategies for all the packages on each truck.
- Companies cannot afford to ignore this level of advanced efficiency. Before business algorithms transformed enterprise, companies were forced to rely on teams of analysts to find patterns that were used to create data trends to use for better decision-making. This advanced work may take weeks to complete and calculate, whereas business algorithms are equipped to perform those same calculations in mere seconds.
- These potential enterprise-changing benefits all hinge on how an algorithm is applied, however. This should not be a problem for enterprises with sufficient data sources since there will be enough data to ensure algorithms are capable of offering real-time and actionable results that benefit the enterprise.
Challenges with Algorithmic Business
Algorithmic business offers a large advantage to an organization’s operations, but there are still some challenges that will need to be addressed in the future, especially when it comes to demand manipulation.
- Algorithms are not always sensitive to context. A customer’s response to a product or service is impacted on how well they slept the night before or their current mood. Until devices are created that are able to paint an entire picture, the use of an algorithm may backfire for an organization that is trying to provide a better customer experience.
Problem with the human element in algorithms is often difficult to account for. The procurement of supplies is not always as straight-forward as evaluating a supplier and ordering. Sometimes deals that are not optimal financially are optimal for strategic alliances. Also, unless computers can find a way to negotiate with suppliers, it may not be able to achieve the lowest rate that would have been possible otherwise.
- ↑ Definition - What is Algorithmic Business? Gartner
- ↑ How you can apply algorithms in your business Arrk Group
- ↑ Business Model Using Algorithm Joshi
- ↑ Transforming Enterprise Via Smart Business Algorithms CIOPages
- ↑ The Challenges with Algorithms in Business River Logic
- The rise of algorithmic business Information Age
- Five Keys to Understanding Algorithmic Business Gartner
- 7 Reasons why the Algorithmic Business will Change Society DataFloq
- Algorithms are changing business: here’s how to leverage them The Conversation
- Algorithmic Foundations for Business Strategy HBS