How Are Correlations Used in Business?

Drawing correlations in data, activities, performance and functions helps businesses leverage existing resources to make better profits. Sometimes the results identify efficiencies or areas where coordination can occur, resulting in the removal of duplication. Other times correlations can identify a pattern that provides a sense of prediction or probability decision-makers can rely on for going forward. Whatever the case, correlations are used regularly in business to make processes perform better.

Correlation Defined

A correlation is fundamentally a comparison between two or more things. If you compare the performance of two employees, you may find a correlation in that their performance increases when both are working on the same shift. In a simplistic form, a correlation identifies a connection between two elements when they change status. Correlations are scored in a three-number format with -1 as no correlation, 0 for some kind of influence and 1 for a true, strong correlation.

Projection Tool

The most valuable use of a correlation is in predicting the future of a business direction. If marketers and salespeople can identify a correlation between the behavior of consumers and events and a particular type of product or service, they can take advantage of the relationship to boost business and ultimately profits.

Direction Change

Just because a correlation is found does not mean it’s always a good thing for a business. Sometimes correlations work inversely. For instance, if inflation rises and job losses go up in a market, a business can see fewer sales on their product because of lower consumer purchasing. This shrinkage or opposite direction from the first factor is an inverse correlation, which a business would want to anticipate and avoid.

Performance Measure

Correlations in how production processes in a business currently operate can also lead to identifying efficiencies that save money. If patterns show that use of a particular material drives up costs of production, the correlation can lead managers to try and identify substitute supplies that lower manufacturing cost. The same goes for employee behavior. If a business finds that employee performance picks up with the implementation of a bonus-pay-for-improvement system, the correlation of behavior can signal that a small bonus expense can make serious production improvement.

Data Mining and Patterns

With the widespread use of computers in modern business, significant amounts of data and files exist in many businesses. Companies have found that sorting this information can identify patterns otherwise not visible in folders or isolated in operational silos of business functions. By looking for data relationships and correlations or “data-mining,” businesses have found they can leverage existing information for better management, customer retention and improved operations.

References

About the Author

Since 2009 Tom Lutzenberger has written for various websites, covering topics ranging from finance to automotive history. Lutzenberger works in public finance and policy and consults on a variety of analytical services. His education includes a Bachelor of Arts in English and political science from Saint Mary's College and a Master of Business Administration in finance and marketing from California State University, Sacramento.