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30 Jan 2017

Make Better Decisions by Spotting Role of Correlation in Business

The role of correlation in business in decision making is everywhere. People just don’t see it. That’s because they often see it as something else. That’s leads to poor decisions.

The role of correlation in business dominates decision making.

Misunderstanding the role of correlation in business can lead to many costly mistakes.

Example of Correlation

As a simple example of correlation, consider one morning we find wet spots all over our driveway. During the day, we also notice our grass grew faster. We now have to mow it.

Let’s say this happens four or five times. We can then say there is a correlation between finding wet spots on the driveway and the grass growing faster.

Of course, it’s absurd to think that wetting the driveway would cause the grass to grow. We know rain likely caused both. Yet, it’s mistaking correlation for cause that yields poor decisions.

Example of the Role of Correlation in Business

For example, this happens often. A salesperson has a strong history of sales growth. The company buys a firm in another state. They relocate the salesperson to that state. He bombs.

He bombed because the company thought he caused that sales growth. It forgot that only a correlation exists between sales and sales talent. Talent does not cause growth. Customers cause growth.

As another example, a company thought good service caused growth. Yet, even though it scored consistently high in customer service, it was losing customers. It forgot that there is only a correlation between service and growth. Again, customers cause growth.

How Mistaking Correlation for Cause Wastes Resources

It’s also easy for people to see this as “many factors cause growth.” That means they must work on all of these (i.e. service, sales talent) to cause growth.

It’s like a recipe. Leave out something and they won’t get growth. So, companies blindly spend thinking they need all the ingredients.

Avoiding the Mistake

Yet, companies can grow without sales talent if they have something highly desirable. They can grow without great service if they have cornered their market.

What causes growth are customers buying their products and services. How one causes that depends on the relationship between the product and the customer.

One cannot just assume low cost, great service or anything else will cause more customers. That’s because only a correlation exists. The true cause lies the relationship between product and customer.

On the other hand, it’s so much easier to keep things simple . . . simple problems with simple causes. That’s human nature. The challenge is rising above that nature.

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