I see the boffins at MIT and BCG have been hard at work getting AI to figure out “smart KPIs” and “align operations with strategy” – see MIT-Sloan Management Review “Strategic Alignment with AI and smart KPIs“
Really?!
Why on earth do we need AI for this, when the causal structure of the business system – and thus all of the required KPIs – is already crystal clear?
In a case quoted in the article, a global consumer brand company “… uses AI to deepen the connection between two of its most important KPIs: profit margins and market share. In the past, these KPIs were siloed and separated … (The finance function focused on profitability, while sales and marketing focused on market share.) “
If so, this is truly staggering!
We already know the system structure !
Here is the (trivial!) structure linking market share and operating profit for a consumer brand. Remember, arrows simply mean “If I know A and B I can calculate or estimate C”. So we can easily add calculations and quantified time-charts to all these elements to get a working digital-twin model for any of this company’s brands.
What the heck is AI (or data-mining or any other tech. wizardry) adding to what should already be rock-solid knowledge of how the business system actually works!? … knowledge that ought to be the basis of the company’s KPI system.
- how the number of retail outlets owned by those retailer customers that stock the brand is changing, and
- how consumer marketing and retail price drive the win-rate, loss-rate and purchase rate of consumers. (This is the detail behind the dashed-line causal link from consumer marketing to the sales per retailer-customer)
But those structures too are well known and amenable to modeling.
What am I missing here?
For more on how we can improve KPIs, see
This is what “strategic” management accounting should be doing!
The real mystery in this case is – what kind of finance function does not go back behind the income statement and track what is driving those financial numbers? … or at least have regular in-depth conversations with the marketing and sales team about that same question? This is just the tiniest little bit of the “strategic management accounting” that the professional bodies have been calling for for decades. And many accountants surely do address issues such as sales and staffing. But the strategy tools available to them for this challenge are simply not fit for purpose.
I will return to this topic in another post.
PS – I explain a digital twin model of exactly such a consumer brand in class 4 of my Core course on dynamic business modeling. I go on to show in extension-class 7 how to model competition in such cases – exactly what this global brand company seems to need!