Hidden trends in business and research
By Roger Parker
One of the ways you pick up what’s important over time is by looking at how much other people refer back to something or keep discussing it. This is how Google initially burst onto the scene as the top search engine in the world.
They used an idea which initially came from academics. Academics measure the numbers of “citations” of articles. That is, the number of times people mention another article as part of the building blocks of their work. The articles with the most citations by others are generally judged the most important and influential.
Google initially did its rankings of top sites by automatically calculating how many other sites posted a link to another site or talked about it. The more others linked or talked about a site on a particular topic, the higher it ranked when people searched it.
I want to point out a result from my favourite citations lists to show two hidden trends in business and research over the last decade. The citations list I’m referring to is one compiled by the American Marketing Association.
They measure the number of citations over time for the Journal of Marketing and Journal of Market Research, among others. These are reported in different time scales. Some are the most cited articles in the last three years; others are the most cited in the last 10 years.
If you have a look at the Journal of Market Research, the most cited paper in the last decade is forebodingly titled – “Index Construction with Formative Indicators: An Alternative to Scale Development” and it is by Adamantios Diamantopoulos and Heidi M. Winklhofer. Despite the highly technical sounding title people just keeping referring back to and citing this paper, which was written way back in 1999 and published in 2001.
In plain language this important paper has a pretty simple message. What it refers to is methods to accurately build new meaning. Scale or multi-item scales are the traditional way of measuring in social or market research. What these measures do is reflect an issue.
For example you can have a satisfaction scale. How satisfied are you with a product (rating out of 10 from highly dissatisfied at 1 to highly satisfied 10)? This reflects how satisfied people feel. Or say, you can have a series of scales and calculations to measure how customers recommend your products or services. You get my drift. Scale measurement techniques are “reflective” of an issue that you’re aware of by attaching measures to them.
An index on the other hand is designed to measure a number of things combined to form a new or more complex meaning. Let’s say for example I want to have a new measure of what is good weather, medium or bad weather. Roger’s weather index.
Within my new meaning of good to bad weather, my weather index would have a combination of things that cause good to bad weather such as rain, temperature, wind, sunshine and so on. All combined would tell people more simply if the weather is going to be good or bad, and have the causation within it if people want details.
If it’s raining there may be a negative score go into the index, sunny a positive score, windy a negative, warm a positive and so on. All combined would give the overall score. So an index measures a number of things to build a new or more complex meaning than we had before (rather than reflect something with a scale).
In practice, around the world indexes have been popping up everywhere in the last decade across many fields. Let me give you a few well known examples.
One of the most famous you might of heard of is the Case-Shiller Index. This is now the standard way to measure property price changes in the United States.
Most share markets around the world now have index funds which are a combination of all the shares of the market, which cause overall market performance.
Another well known one is the VIX Index. This is a Future’s Market index measuring volatility in financial markets. It’s now often quoted around the world in the media as the “fear index” when markets are disrupted.
Whole countries are now looking at changing from reporting a reflection of economic performance, like GDP, to developing new things or meanings, like a Happiness Index. The United Kingdom is looking at just such a measurement system.
Why is all this happening, what’s driving this move to create new or more complex meanings? This is all part of the way business, research and the world work. Over time we get smarter, developing new knowledge and meanings all that time that are better than the ones we had before.
Most businesses today, for instance, see their performance as more multifaceted than 20 years ago. They see a new combination of things as important. For most executives now profitability is important, so are likely growth prospects over time, so is environmental performance, so is the treatment of staff long term, returns to shareholders and so on.
The second trend related to this knowledge building is an opposite. It is the use of new techniques to make these more complex meanings simpler and clearer to understand. This is what indexes do and is I think the reason why people can’t stop citing this paper.
Now with these indexes, a single number can give new and better meaning than before, but at the same time it can be easier for everyone to grasp. Hence the growth and importance in use globally.
This is just one example of a broader issue. Growing simplicity intersects growing complexity over time. If it does not, and things keep getting more complex alone, people just can't cope. The world becomes too complicated for our capabilities. Like if gravity increased its force on us to hold us to the ground, we would need a compensating force to make us lighter or we couldn't move.
Taking the wider trend of higher simplfication combined with more complex technologies, the champions of this way of doing business in the last decade are the likes of Google and Apple. They have made this into an art form.
Roger Parker is a Director of New River Limited