Algorithmic Business

No matter where you go, Uber is always an option. Of course, you can grab an Uber through the conventional method using the iPhone or Android apps, but you can also grab an Uber using lesser-known sources like Apple Watch and Facebook Messenger. Uber is also the largest taxi company in the world. Oh by the way, they don’t own any vehicles. Amazon and Alibaba, two of the most successful e-commerce websites, have radically changed the traditional relationship companies have with inventory. Airbnb is quickly becoming the go-to marketplace for people to list, discover, and book accommodations around the world, yet Airbnb owns no real estate. What do these companies have in common? Two things. First, they are all highly successful. Second, they are algorithmic businesses. Algorithmic business is the industrialized use of complex mathematical algorithms pivotal to driving improved business decisions or process automation for competitive differentiation.

Algorithm or BI

You might be thinking algorithmic business sounds similar to business intelligence but there are some key differentiations. Business intelligence analyzes data to understand prior events, with the ultimate intention of predicting future opportunities and challenges. However, algorithms can have an impact on everything—from airbags in a car to running an industrial complex. Algorithms influence processes, not just future decisions that need to be made.
For example, Amazon and Alibaba use algorithmic business for pricing, inventory, and seller matching. They use pricing strategies that allow retailers to automatically modify their prices according to changes the market experiences. Their algorithm takes into account customer demands and competitors’ prices, among other things. Additionally, they run large-scale pricing experiments, which enable them to make better business decisions. Another example of smart algorithms is Uber connecting passengers to drivers in their area according to their specified requirements.

Your Algorithm Implementation

Your business can benefit using algorithms, but first you need to identify the specific processes in your business that can be automated. Even financial reporting can be automated, so get creative when you’re thinking of what you can potentially automate. Next, you need to collect and store as much data as possible. Remember that the quality of data you use will have an effect on your algorithms. Obviously, you want to ensure that the data you collect is high quality. Lastly, develop your algorithms and then test, train, validate, and improve the algorithms in a continuous cycle. Your business needs the added benefits that algorithms provide.
Alan Duncan, research director at Gartner emphasized the importance of algorithms in business when he said, “Algorithmic business is pivotal to competitive advantage. By 2018, more than 50 percent of large organizations globally will compete using advanced analytics and proprietary algorithms, causing the disruption of entire industries.” He said that back in April of 2016. We’ve certainly seen the disruption of a few industries since then.

Four Things to Know About Algorithms

Alan also highlighted four other things that people need to know about algorithmic business. First, algorithms are not new. Algorithms have played a pivotal role in many different roles for the past few years. We are now seeing the usage of algorithms broaden as algorithms become smarter. Second, the advantages of algorithm are speed and scale. The speed and scale that algorithms work at can’t be easily matched by scaling the human workforce. Therefore, algorithms are a cost-effective way to handle a growing business. Third, the accelerating rate of technological change is driving the emergence of algorithmic business. The Internet of Things is a term for how extensive connectivity to the Internet is now. So many different things are connected to the Internet—phones, TVs, even refrigerators—the Internet of Things has developed a greater need for algorithms. Lastly, algorithmic business creates both opportunities and threats for employees. The threats associated with algorithmic business are primarily related to ethical considerations.
Basically, algorithms are becoming more useful and will continue to prove their worth. Uber, Airbnb, Amazon, and Alibaba are all using algorithms to improve their businesses. If algorithmic business is good enough for these gargantuan businesses, then surely it will be beneficial for you to use as well.