What are the six essential nutrients necessary for human health?

Carbohydrates, proteins, fats, vitamins, minerals, and water

Sugars, starches, fiber, antioxidants, enzymes, and oxygen

Lipids, nucleic acids, carbohydrates, vitamins, minerals, and fibers

Proteins, lipids, carbohydrates, starches, vitamins, and supplements

The Six Essential Nutrients

CARBOHYDRATES Carbohydrates are organic compounds composed of carbon, hydrogen, and oxygen in a ratio of about one carbon atom to two hydrogen atoms to one oxygen atom. The number of carbon atoms in a carbohydrate varies. Some carbohydrates serve as a source of energy. Other carbohydrates are used as structural materials. Carbohydrates can exist as monosaccharides, disaccharides, or polysaccharides. Monosaccharides A monomer of a carbohydrate is called a monosaccharide (MAHN-oh-SAK-uh-RIED). A monosaccharide—or simple sugar— contains carbon, hydrogen, and oxygen in a ratio of 1:2:1. The gen- eral formula for a monosaccharide is written as (CH2O)n, where n is any whole number from 3 to 8. For example, a six-carbon mono- saccharide, (CH2O)6, would have the formula C6H12O6. The most common monosaccharides are glucose, fructose, and galactose, as shown in Figure 3-6. Glucose is a main source of energy for cells. Fructose is found in fruits and is the sweetest of the monosaccharides. Galactose is found in milk. Notice in Figure 3-6 that glucose, fructose, and galactose have the same molecular formula, C6H12O6, but differing structures. The different structures determine the slightly different properties of the three compounds. Compounds like these sugars, with a single chemical formula but different structural forms, are called isomers (IE-soh-muhrz). SECTION 2 OBJECTIVES ● Distinguish between monosaccharides, disaccharides, and polysaccharides. ● Explain the relationship between amino acids and protein structure. ● Describe the induced fit model of enzyme action. ● Compare the structure and function of each of the different types of lipids. ● Compare the nucleic acids DNA and RNA. VOCABULARY carbohydrate monosaccharide disaccharide polysaccharide protein amino acid peptide bond polypeptide enzyme substrate active site lipid fatty acid phospholipid wax steroid nucleic acid deoxyribonucleic acid (DNA) ribonucleic acid (RNA) nucleotide C HO H C H OH C OH H C CH2OH H C H OH O Glucose C OH C O H OH C OH H CH2OH C H CH2OH Fructose C H HO C OH H C OH H C CH2OH H C H OH O Galactose Glucose, fructose, and galactose have the same chemical formula, but their structural differences result in different properties among the three compounds. FIGURE 3-6 Copyright © by Holt, Rinehart and Winston. All rights reserved. 56 CHAPTER 3 Disaccharides and Polysaccharides In living things, two monosaccharides can combine in a condensa- tion reaction to form a double sugar, or disaccharide (die-SAK-e-RIED). For example in Figure 3-4, the monosaccharides fructose and glu- cose can combine to form the disaccharide sucrose. A polysaccharide is a complex molecule composed of three or more monosaccharides. Animals store glucose in the form of the polysaccharide glycogen. Glycogen consists of hundreds of glucose molecules strung together in a highly branched chain. Much of the glucose that comes from food is ultimately stored in your liver and muscles as glycogen and is ready to be used for quick energy. Plants store glucose molecules in the form of the polysaccha- ride starch. Starch molecules have two basic forms—highly branched chains that are similar to glycogen and long, coiled, unbranched chains. Plants also make a large polysaccharide called cellulose. Cellulose, which gives strength and rigidity to plant cells, makes up about 50 percent of wood. In a single cellu- lose molecule, thousands of glucose monomers are linked in long, straight chains. These chains tend to form hydrogen bonds with each other. The resulting structure is strong and can be broken down by hydrolysis only under certain conditions. PROTEINS Proteins are organic compounds composed mainly of carbon, hydrogen, oxygen, and nitrogen. Like most of the other biological macromolecules, proteins are formed from the linkage of monomers called amino acids. Hair and horns, as shown in Figure 3-7a, are made mostly of proteins, as are skin, muscles and many biological catalysts (enzymes). Amino Acids There are 20 different amino acids, and all share a basic structure. As Figure 3-7b shows, each amino acid contains a central carbon atom covalently bonded to four other atoms or functional groups. A single hydrogen atom, highlighted in blue in the illustration, bonds at one site. A carboxyl group, —COOH, highlighted in green, bonds at a second site. An amino group, —NH2, highlighted in yel- low, bonds at a third site. A side chain called the R group, high- lighted in red, bonds at the fourth site. The main difference among the different amino acids is in their R groups. The R group can be complex or it can be simple, such as the CH3 group shown in the amino acid alanine in Figure 3-7b. The differences among the amino acid R groups gives different proteins very different shapes. The different shapes allow pro- teins to carry out many different activities in living things. Amino acids are commonly shown in a simplified way such as balls, as shown in Figure 3-7c. (a) Many structures, such as hair and horns are made of proteins. (b) Proteins are made up of amino acids. Amino acids differ only in the type of R group (shown in red) they carry. Polar R groups can dissolve in water, but nonpolar R groups cannot. (c) Amino acids have complex structures, so, in this and other textbooks, they are often simplified into balls. FIGURE 3-7 (b) Alanine (an amino acid) (c) Simplified version of amino acid CH3 H N OH C C H O H (a) Copyright © by Holt, Rinehart and Winston. All rights reserved. BIOCHEMISTRY 57 H H N C C OH H O H CH3 H2O Glycine Alanine H N OH C C H O H H H N C C H O H CH3 N OH C C H O H (a) (b) (a) The peptide bond (shaded blue) that binds amino acids together to form a polypeptide results from a condensation reaction that produces water. (b) Poly- peptides are commonly shown as a string of balls in this textbook and elsewhere. Each ball represents an amino acid. FIGURE 3-8 Substrate Products Enzyme 1 2 3 In the induced fit model of enzyme action, the enzyme can attach only to a substrate (reactant) with a specific shape. The enzyme then changes and reduces the activation energy of the reaction so reactants can become products. The enzyme is unchanged and is available to be used again. 3 2 1 FIGURE 3-9 Dipeptides and Polypeptides Figure 3-8a shows how two amino acids bond to form a dipeptide (die-PEP-TIED). In this condensation reaction, the two amino acids form a covalent bond, called a peptide bond (shaded in blue in Figure 3-8a) and release a water molecule. Amino acids often form very long chains called polypeptides (PAHL-i-PEP-TIEDZ). Proteins are composed of one or more polypep- tides. Some proteins are very large molecules, containing hun- dreds of amino acids. Often, these long proteins are bent and folded upon themselves as a result of interactions—such as hydrogen bonding—between individual amino acids. Protein shape can also be influenced by conditions such as temperature and the type of solvent in which a protein is dissolved. For exam- ple, cooking an egg changes the shape of proteins in the egg white. The firm, opaque result is very different from the initial clear, runny material. Enzymes Enzymes—RNA or protein molecules that act as biological catalysts—are essential for the functioning of any cell. Many enzymes are proteins. Figure 3-9 shows an induced fit model of enzyme action. Enzyme reactions depend on a physical fit between the enzyme molecule and its specific substrate, the reactant being catalyzed. Notice that the enzyme has folds, or an active site, with a shape that allows the substrate to fit into the active site. An enzyme acts only on a specific substrate because only that substrate fits into its active site. The linkage of the enzyme and substrate causes a slight change in the enzyme’s shape. The change in the enzyme’s shape weakens some chemical bonds in the substrate, which is one way that enzymes reduce activation energy, the energy needed to start the reaction. After the reaction, the enzyme releases the products. Like any catalyst, the enzyme itself is unchanged, so it can be used many times. An enzyme may not work if its environment is changed. For example, change in temperature or pH can cause a change in the shape of the enzyme or the substrate. If such a change happens, the reaction that the enzyme would have catalyzed cannot occur.

Introduction to Hedging Instruments: Forwards, Futures, Options, and Swaps Hedging instruments are financial tools used by businesses and investors to mitigate risk. These instruments help protect against adverse price movements in assets such as commodities, currencies, interest rates, or securities. The four main hedging instruments are forwards, futures, options, and swaps. 1. Forwards A forward contract is a customised agreement between two parties to buy or sell an asset at a predetermined price on a specified future date. Key Characteristics: Over-the-counter (OTC): Traded directly between parties, not on an exchange. Customisation: Can be tailored to suit the needs of the parties involved. Settlement: Occurs at the end of the contract, which may involve physical delivery or cash settlement. Risk: Forwards carry counter-party risk, as there is a possibility one party may default. Example: A company that needs to import raw materials in six months may enter into a forward contract to lock in the current price, avoiding the risk of price increases. 2. Futures A futures contract is similar to a forward, but it is standardised and traded on an exchange. This standardisation eliminates counter-party risk. Key Characteristics: Standardised: Contract size, expiration, and other terms are fixed by the exchange. Mark-to-market: Gains and losses are settled daily. Liquidity: Futures are highly liquid because they are traded on exchanges. Regulation: As they are traded on formal exchanges, they are more regulated than forwards. Example: A wheat farmer may sell futures contracts to hedge against a possible decline in wheat prices before harvest. 3. Options Options provide the right, but not the obligation, to buy or sell an asset at a specified price on or before a certain date. There are two types of options: call options and put options. Call Option: Gives the holder the right to buy an asset at a predetermined price. Put Option: Gives the holder the right to sell an asset at a predetermined price. Key Characteristics: Premium: The buyer pays a premium upfront to obtain the option. Limited Risk: The maximum loss is limited to the premium paid. Flexibility: Options can be used for speculative or hedging purposes. Example: An investor holding stocks may buy a put option to protect against potential declines in the stock's price. 4. Swaps A swap is a contract in which two parties agree to exchange cash flows or liabilities over a specific period. The most common types are interest rate swaps and currency swaps. Key Characteristics: Customizable: Like forwards, swaps are often tailored to meet the needs of the parties involved. Counterparty Risk: Swaps are typically OTC instruments, exposing parties to default risk. Common Uses: Used to manage interest rate risk or currency risk. Example: A company with a variablerate loan may enter into an interest rate swap to exchange its variable payments for fixedrate payments, thus locking in stable costs. Hedging instruments are essential for managing financial risk in volatile markets. Each instrument serves different purposes, with varying levels of complexity, risk, and customization. Whether through forwards, futures, options, or swaps, businesses can better plan for the future by reducing exposure to uncertain price fluctuations. Hedging Strategies for Market Risk, Credit Risk, and Currency Risk 1. Hedging Strategies for Market Risk Market risk (also known as systematic risk) arises from fluctuations in asset prices, such as stocks, bonds, commodities, and interest rates, due to economic factors or market volatility. Key Hedging Instruments for Market Risk: Derivatives (Options, Futures, and Forwards): These instruments allow investors to hedge against unfavorable price movements in stocks, commodities, or interest rates. Example: An investor holding a large stock portfolio might buy a put option to protect against a potential market downturn. If the market declines, the put option increases in value, offsetting losses in the portfolio. Short Selling: Investors can sell borrowed assets with the expectation of buying them back at a lower price, profiting from the decline. Example: A fund manager expecting a market decline may short sell stocks to hedge a portfolio against losses. Common Hedging Strategies: Portfolio Diversification: Reducing market risk by spreading investments across various asset classes (stocks, bonds, commodities) and sectors. Using Index Futures: Large portfolios can be hedged using index futures that track the performance of the overall market. If the market declines, profits from the short position in the futures contract will offset losses in the portfolio. Risk Parity: Allocating assets based on the level of risk rather than the dollar amount invested, balancing risk exposure across asset classes. 2. Hedging Strategies for Credit Risk Credit risk refers to the possibility that a borrower will default on a debt obligation. This is especially important for banks, lenders, and institutions dealing with bonds and loans. Key Hedging Instruments for Credit Risk: Credit Default Swaps (CDS): A financial derivative where the buyer of a CDS pays a premium to the seller in exchange for protection against a default on a loan or bond. Example: A bank holding corporate bonds can buy a CDS to ensure they are compensated if the issuing company defaults. Collateralised Debt Obligations (CDOs): These instruments pool together various debt instruments and allow risk to be distributed among multiple investors. Credit Insurance: Companies may use insurance to protect against the risk of a customer defaulting on payments. Common Hedging Strategies: Diversification of Loan Portfolio: Spreading out credit exposures across various industries, geographies, and borrower profiles reduces the overall risk of default. Tightening Lending Standards: Limiting exposure to highrisk borrowers by implementing stringent credit assessments. AssetBacked Securities: Banks can sell loans or bonds packaged as assetbacked securities to reduce their exposure to credit risk. 3. Hedging Strategies for Currency Risk Currency risk (or exchange rate risk) arises from fluctuations in foreign exchange rates, which can affect companies involved in international trade or with investments in foreign countries. Key Hedging Instruments for Currency Risk: Forward Contracts: A firm agrees to exchange a specified amount of currency at a predetermined exchange rate on a future date. Example: A U.S. exporter expecting payment in euros might enter into a forward contract to sell euros and lock in a favorable exchange rate. Currency Options: These give the right, but not the obligation, to buy or sell currency at a specific price. Example: A U.S.based company buying goods from Japan might buy a call option on the yen to hedge against the risk of yen appreciation. Currency Swaps: Two parties exchange interest payments and principal in different currencies to hedge against exchange rate fluctuations. Common Hedging Strategies: Natural Hedging: Companies can offset currency risk by balancing foreign revenue with costs in the same currency. For example, if a company generates revenue in euros, it can also incur expenses in euros, reducing exposure to exchange rate fluctuations. Multi-Currency Invoicing: Firms can invoice in their home currency, shifting the currency risk to the buyer. Currency Diversification: Holding a diversified basket of currencies can reduce exposure to large fluctuations in any one currency. Effective hedging strategies are crucial for managing various types of risks in financial markets. Market risk can be managed using instruments like futures and options, while credit risk can be mitigated through diversification and credit derivatives. Currency risk, often faced by multinational firms, can be hedged using forward contracts, options, or swaps. Each strategy helps firms and investors protect their portfolios, ensure financial stability, and reduce the impact of adverse movements in the financial markets. Portfolio Risk Management Techniques: Diversification, Asset Allocation, and Risk Budgeting Managing risk is a fundamental aspect of portfolio management. Investors use various techniques to control and reduce the risks inherent in investing. Three key techniques used in portfolio risk management are diversification, asset allocation, and risk budgeting. Each of these techniques helps in mitigating potential losses while aiming to achieve the desired return. 1. Diversification Diversification is a risk management strategy that involves spreading investments across different assets, sectors, or geographic regions to reduce exposure to any single risk. The idea is that different assets perform differently under various market conditions, so losses in one investment can be offset by gains in others. Key Benefits of Diversification: Reduction of Unsystematic Risk: Unsystematic risk, which is unique to a specific company or industry, can be reduced by holding a variety of investments that respond differently to market conditions. Improved Stability: A diversified portfolio is less volatile, as the negative performance of one asset can be balanced by the positive performance of others. Methods of Diversification: Across Asset Classes: Investing in a mix of asset classes such as stocks, bonds, commodities, and real estate. Example: A portfolio with 60% equities, 30% bonds, and 10% commodities is more diversified than one solely consisting of stocks. Within Asset Classes: Diversifying within a single asset class (e.g., holding stocks from different sectors like technology, healthcare, and energy). Geographic Diversification: Investing in assets across various countries or regions to mitigate country-specific risks. Example: Holding U.S. stocks along with emerging market equities can reduce risks related to a downturn in one country's economy. 2. Asset Allocation Asset allocation refers to the process of dividing investments among different asset classes (such as stocks, bonds, and cash) to align with an investor's risk tolerance, time horizon, and financial goals. Asset allocation plays a crucial role in portfolio risk management by determining the overall risk-return profile of the portfolio. Key Elements of Asset Allocation: Strategic Asset Allocation: A longterm approach that involves setting target allocations for different asset classes based on financial goals and risk tolerance. Example: A young investor with a longterm horizon might allocate 70% to stocks, 20% to bonds, and 10% to cash. Tactical Asset Allocation: A more active approach that involves adjusting the asset mix in response to short-term market conditions. Example: If the investor expects an economic downturn, they might temporarily reduce exposure to equities and increase exposure to bonds. Types of Asset Allocation Models: Conservative: Focuses on preserving capital with a larger allocation to bonds and cash (e.g., 20% stocks, 80% bonds). Balanced: A moderate risk approach with an equal focus on growth and income (e.g., 50% stocks, 50% bonds). Aggressive: Targets higher returns by investing predominantly in equities, accepting higher risk (e.g., 80% stocks, 20% bonds). Example of Asset Allocation: A 40 year old investor with moderate risk tolerance may allocate their portfolio as follows: 50% equities, 40% bonds, and 10% in alternative investments such as real estate or commodities. The equities provide growth potential, while the bonds and alternative assets offer stability and income. 3. Risk Budgeting Risk budgeting is a method of allocating risk across different components of a portfolio, rather than focusing solely on returns. The goal is to optimise the portfolio’s risk-return profile by distributing risk in a way that aligns with the investor’s objectives and risk tolerance. Key Concepts of Risk Budgeting: Risk Contribution: Each asset class or investment in the portfolio contributes a certain amount of risk (measured by metrics such as volatility or Value at Risk). Risk budgeting ensures that no single asset class dominates the overall risk of the portfolio. Example: A portfolio may contain 60% stocks and 40% bonds, but if the stocks are highly volatile, they may contribute 90% of the portfolio's risk. Target Risk: Investors set a maximum acceptable level of risk (e.g., a portfolio volatility of 10%) and allocate investments so that the total risk remains within this target. Techniques in Risk Budgeting: Risk Parity: Allocates risk evenly across asset classes, rather than allocating capital based solely on return expectations. Example: In a risk-parity portfolio, both bonds and stocks might be balanced in such a way that they contribute equally to the overall portfolio risk, even though the dollar investment in bonds may be larger due to their lower volatility. Value at Risk (VaR): This technique measures the potential loss in a portfolio over a specific time period, under normal market conditions, at a given confidence level. The risk budget ensures that the potential loss stays within acceptable limits. Example of Risk Budgeting: An investor targets an overall portfolio risk of 8% volatility. After analyzing the risk contribution of each asset class, they determine that equities, which currently make up 60% of the portfolio, contribute 70% of the risk. To adhere to the risk budget, the investor may reduce their equity exposure and increase their allocation to bonds or other less volatile assets. Diversification, asset allocation, and risk budgeting are complementary techniques used in portfolio risk management. Diversification reduces unsystematic risk by spreading investments across various assets. Asset allocation ensures that investments align with an investor's goals and risk tolerance. Risk budgeting focuses on managing the contribution of risk from each asset class to create a balanced and efficient portfolio. Together, these strategies help investors achieve a balance between risk and return, ensuring longterm portfolio stability. Risk Mitigation Through Insurance, Securitisation, and Other Financial Engineering Techniques Risk mitigation is a core objective in financial management, and various strategies can be employed to reduce or manage risks. Three major approaches are insurance, securitisation, and financial engineering techniques. Each of these methods helps firms and individuals transfer, reduce, or eliminate certain financial risks. 1. Insurance as a Risk Mitigation Tool Insurance is a traditional risk transfer method that protects against financial losses by shifting the risk to an insurance company in exchange for premium payments. It is widely used to mitigate various forms of risk, such as operational, liability, and property risks. Key Aspects of Insurance for Risk Mitigation: Risk Transfer: The insurer takes on the risk in exchange for a premium, thus protecting the insured party from unexpected financial losses. Indemnity: In the event of a loss, the insurance policy compensates the insured based on the terms of the contract. Customisable Coverage: Insurance policies can be tailored to address specific risks, such as property damage, business interruption, liability, or cyber risks. Types of Insurance for Businesses: Property and Casualty Insurance: Covers physical assets like buildings, machinery, and inventory from risks like fire, theft, or natural disasters. Liability Insurance: Protects businesses against legal liabilities arising from accidents, negligence, or professional errors. Business Interruption Insurance: Compensates for lost income if a business has to halt operations due to unforeseen events. Credit Insurance: Shields companies from losses due to the nonpayment of trade receivables. 2. Securitisation as a Risk Mitigation Technique Securitisation is a financial engineering process that involves pooling various financial assets (such as loans, mortgages, or receivables) and converting them into marketable securities. This process allows firms to transfer risk to investors, thereby reducing their exposure. Key Elements of Securitisation: Risk Transfer: By securitising assets, companies can transfer the risk of default or nonpayment to investors who purchase the securities. Liquidity Creation: Securitisation converts illiquid assets (like mortgages or loans) into liquid, tradeable securities, improving cash flow for the originating firm. Diversification of Risk: Pooling assets with different risk profiles reduces the impact of individual defaults, spreading the risk across multiple investors. Common Forms of Securitisation: MortgageBacked Securities (MBS): Pools of mortgages are bundled and sold as securities to investors, transferring the risk of mortgage defaults. Example: A bank that issues home loans can bundle those loans into MBS and sell them to investors, transferring the credit risk of potential defaults. Asset-Backed Securities (ABS): Similar to MBS, but backed by other types of assets like credit card receivables, auto loans, or student loans. Collateralised Debt Obligations (CDOs): Structured financial products that pool different types of debt, such as loans and bonds, and sell them as securities with varying risk levels. Example: A bank may issue a portfolio of auto loans and then pool these loans into an assetbacked security (ABS). The ABS is sold to investors, who take on the risk of loan defaults. By securitising the loans, the bank reduces its exposure to credit risk and generates immediate cash flow. 3. Financial Engineering Techniques for Risk Mitigation Financial engineering involves the use of complex financial instruments, derivatives, and structured products to manage or mitigate financial risks. These techniques allow firms to hedge against specific risks, optimize capital structure, and improve financial stability. Common Financial Engineering Techniques: Derivatives: Financial instruments like futures, forwards, options, and swaps are used to hedge against price fluctuations, interest rate changes, or currency movements. Example: A company with significant foreign exchange exposure may use currency forwards or options to hedge against exchange rate fluctuations, ensuring predictable cash flows. Options and Futures: Options: Provides the right (but not the obligation) to buy or sell an asset at a predetermined price, allowing firms to hedge against unfavorable price movements. Example: An airline company can buy options on jet fuel to hedge against rising fuel prices. Futures: Standardized contracts to buy or sell an asset at a set price on a future date, commonly used to hedge commodities or financial assets. Example: A wheat producer may use futures contracts to lock in a favorable price for its crop, hedging against a potential price drop. Swaps: These involve the exchange of cash flows between two parties, often used to manage interest rate risk or currency risk. Interest Rate Swaps: Firms can exchange floatingrate interest payments for fixedrate payments to hedge against rising interest rates. Currency Swaps: Used to hedge exchange rate risk in crossborder transactions by exchanging principal and interest payments in different currencies. Example: A company with a variablerate loan may enter into an interest rate swap to exchange its variable payments for fixedrate payments, locking in stable costs. Structured Products: These are customised financial instruments designed to achieve specific riskreturn objectives. They often combine derivatives with other securities to create tailored risk exposures. Example: A structured note that combines a bond with an embedded option, offering downside protection while allowing for potential upside linked to the performance of an equity index. Credit Derivatives: Tools like credit default swaps (CDS) allow investors to transfer credit risk to other parties. Example: A bondholder worried about a company’s potential default may purchase a CDS, which pays out in case of a default event. Example: A company may issue a bond with an embedded call option, allowing it to repurchase the bond if interest rates decline. This financial engineering tool enables the company to mitigate the risk of rising interest rates, reducing future borrowing costs. Risk mitigation through insurance, securitisation, and financial engineering offers businesses a variety of tools to manage and transfer risks. Insurance allows for the direct transfer of risk to an insurer, while securitisation helps companies offload risk by packaging and selling assets as securities. Financial engineering techniques, including derivatives, swaps, and structured products, provide sophisticated ways to hedge market, interest rate, and currency risks. Each approach helps organizations improve financial stability, enhance liquidity, and manage potential losses in a volatile market environment.

Create MCQs from this text "For as long as we can remember, innovation has been a top priority—and a top frustration—for leaders. In a recent McKinsey poll, 84% of global executives reported that innovation was extremely important to their growth strategies, but a staggering 94% were dissatisfied with their organizations’ innovation performance. Most people would agree that the vast majority of innovations fall far short of ambitions. On paper, this makes no sense. Never have businesses known more about their customers. Thanks to the big data revolution, companies now can collect an enormous variety and volume of customer information, at unprecedented speed, and perform sophisticated analyses of it. Many firms have established structured, disciplined innovation processes and brought in highly skilled talent to run them. Most firms carefully calculate and mitigate innovations’ risks. From the outside, it looks as if companies have mastered a precise, scientific process. But for most of them, innovation is still painfully hit-or-miss. What has gone so wrong? The fundamental problem is, most of the masses of customer data companies create is structured to show correlations: This customer looks like that one, or 68% of customers say they prefer version A to version B. While it’s exciting to find patterns in the numbers, they don’t mean that one thing actually caused another. And though it’s no surprise that correlation isn’t causality, we suspect that most managers have grown comfortable basing decisions on correlations. Why is this misguided? Consider the case of one of this article’s coauthors, Clayton Christensen. He’s 64 years old. He’s six feet eight inches tall. His shoe size is 16. He and his wife have sent all their children off to college. He drives a Honda minivan to work. He has a lot of characteristics, but none of them has caused him to go out and buy the New York Times. His reasons for buying the paper are much more specific. He might buy it because he needs something to read on a plane or because he’s a basketball fan and it’s March Madness time. Marketers who collect demographic or psychographic information about him—and look for correlations with other buyer segments—are not going to capture those reasons. After decades of watching great companies fail, we’ve come to the conclusion that the focus on correlation—and on knowing more and more about customers—is taking firms in the wrong direction. What they really need to home in on is the progress that the customer is trying to make in a given circumstance—what the customer hopes to accomplish. This is what we’ve come to call the job to be done. We all have many jobs to be done in our lives. Some are little (pass the time while waiting in line); some are big (find a more fulfilling career). Some surface unpredictably (dress for an out-of-town business meeting after the airline lost my suitcase); some regularly (pack a healthful lunch for my daughter to take to school). When we buy a product, we essentially “hire” it to help us do a job. If it does the job well, the next time we’re confronted with the same job, we tend to hire that product again. And if it does a crummy job, we “fire” it and look for an alternative. (We’re using the word “product” here as shorthand for any solution that companies can sell; of course, the full set of “candidates” we consider hiring can often go well beyond just offerings from companies.)"

The Six Critical Systems

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