Economists “more important” than analysts, suggests McKinsey
With businesses increasingly turning to economists when it comes to decision making, we explore the ins and outs of economics and analytics.
“Ignore economists at your peril” are the words of a McKinsey report that highlights the growing importance of seeking advice from economists. The use of economics has widened from being a tool to determine governmental and political policies, to something highly relevant to businesses.
With modern technology, companies can easily draw upon a wealth of data when making critical business decisions. It’s testament to the fact that information is fast becoming of the utmost importance to firms, which is where economists come into their own.
An economist is an expert that studies relationships within a system, through the use of data. These experts can then use their findings to shape a firm’s strategy and aid in making crucial decisions. On the other hand, a business analyst is becoming a catch-all term for those that work within a business or organisation with the aim of implementing changes that help the firm achieve its goals.
They sound fairly alike, but why are economists infiltrating the domain where the business analyst once reigned supreme?
Economics in businesses
Instead of studying the ebb and flow of a macro economy, economists have been able to turn their tools to the task of studying the financial issues and challenges faced by corporations. It’s always been important for businesses to base their decisions on facts, but the wealth and complexity of data that companies command means they need to consult experts who are capable of drawing out the facts that the information holds.
The fields that business economics cover include organisation, management, expansion and strategy - looking at how and why to expand - and impacts from other businesses or entrepreneurs. The principles of economics are harnessed and applied to the real world of business.
Within economics in business, there’s also the narrower field of managerial economics. This applies economic methods to the process of managerial decision-making in order to manage costs and, in turn, maximising profits.
There are three main branches: competitive markets, market power, and imperfect markets. Although it sounds complex, the basic rules of economics still apply here. Within a market there are buyers and sellers that interact with each other on a global or local scale. Supply and demand, with some price interactions, will rule here and economics can be applied to influence managerial decisions.
However, economics can get even more in-depth than what we see here.
The study of microeconomics is limited to a much smaller area than the economics that governs national policies. It includes the actions of both the individual consumers and businesses, weighing these up against the overarching national or global economy.
Microeconomics can determine the ways in which both consumers and businesses make their economic decisions, which includes factors such as pricing and utility - the classic economic idea of a consumer’s post-purchase satisfaction levels.
The benefit of microeconomics is that all data a business gathers can be reduced to mathematical equations and statistical studies, from which logical decisions can be made. It can get incredibly complex, such as evaluating the benefits of reducing price or implementing a marketing campaign to boost business, all while factoring in such things as opportunity costs.
Decision-making processes will be determined by lengthy analysis of all the information at hand, which will then influence the best scenario to go with. It can often help avoid cascades of bad decisions that end up fatal for a company, but will also aid in predicting - with reasonable accuracy - the individual choices of both consumers and businesses, which create the economy that everyone operates in.
Based on facts, mathematical formulae and statistical analysis, economists are most certainly gaining ground as an alternative to business analysts.