21-12-2018

Introduction to Business
Analytics
PGP 09

Topics
• Data Analysis • Big Data
• Business Analytics • Steps In Making A Decision
• Descriptive Analytics • Types Of Decisions
• Predictive Analytics • Approaches To Decision Making
• Prescriptive Statistics

Introduction
• Living in the age of technology has implications for everyone entering the business
world.
• Technology has given more people the power and responsibility to analyze data and make
decisions.
• A large amount of data already exists and will only increase in the future.
• Technology makes it possible to collect huge amounts of data.
• One of the hottest topics in today’s business world is business analytics.
• By using quantitative methods to uncover the information in these data sets and then acting
on this information, companies are able to gain a competitive advantage.

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What will the Course cover

• This course combines topics from two separate fields: statistics and management science.
• Statistics is the study of data analysis.
• Management science is the study of model building, optimization, and decision making.
• Three important themes run through this course:
• Data analysis—includes data description, data inference, and the search for relationships in data.
• Decision making—includes optimization techniques for problems with no uncertainty, decision analysis for
problems with uncertainty, and structured sensitivity analysis.
• Dealing with uncertainty—includes measuring uncertainty and modeling uncertainty explicitly.

How to make use of Raw data?

• Data Conversion : • Analytics:
• Converting raw data into useful information • Information resulting from systematic
for decision makers
analysis of data or statistics
• Analysis :
• A careful study of something to learn about
• Business Analytics (Definition):
its parts, what they do and how they relate to • Scientific process of transforming
each other data into insight for better decisions
• Statistical Analysis is the art and science of
collecting, analyzing, presenting and
interpreting data to help make informed
decisions.

Why Analytics is important

• Three developments spurred recent explosive growth in the use of analytical
methods in business applications:
• First development:
• Technological advances, Internet social networks, and data generated from personal
electronic devices, produce incredible amounts of data for businesses.

• Businesses want to use these data to improve the efficiency and profitability of their
operations, better understand their customers, price their products more effectively,
and gain a competitive advantage.

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Contd.
• Three developments spurred recent explosive growth in the use of analytical
methods in business applications: (contd.)
• Second development:
• Ongoing research has resulted in numerous methodological developments, including:
• Advances in computational approaches to effectively handle and explore massive amounts of data
• Faster algorithms for optimization and simulation, and
• More effective approaches for visualizing data

Contd.
• Three developments spurred recent explosive growth in the use of analytical
methods in business applications:(contd.)
• Third development:
• The methodological developments were paired with an explosion in computing
power and storage capability.
• Better computing hardware, parallel computing, and cloud computing have enabled
businesses to solve big problems faster and more accurately than ever before.

Components of Business Analytics

Business
Context Data

Technology

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What is Business Analytics

Business Analytics is the use of:
• data,
• statistical analysis
• quantitative methods
• mathematical or computer-based models
• information technology
to help managers gain improved insight about their business operations and
make better, fact-based decisions

Role of a Manager
• Managers’ responsibility is to make decisions

• Type of Decisions:
• Operational decisions
• Tactical decisions:
• Strategic decisions:

Types of Decisions
High-level manager Mid-level manager Decisions concerning
Strategic Decisions

Tactical Decisions

Operational Decisions

decisions concerning decisions about how day to day operations

the overall direction, organization can such as number of
goals and objectives of achieve the goals and products to make or
the organization (3 - 5 objectives of the order, or how to
year time span) organization (1 year or 6 schedule events.
Examples: month time span)
• Does a local company try and Examples:
sell out of the state or • What states or cities or
internationally? locations to sell in?
• Should an online only
company open brick store

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Decision Making

• Decision making can be defined as the following process

• Identify and define the problem
• Determine the methodology to bring out solutions
• Determine the set of alternative solutions
• Evaluate the merits and demerits of the alternatives
• Choose an alternative as the feasible solution

Approaches to Decision Making

• Common approaches to
making decisions
• Tradition
• Intuition
• Rules of thumb
• Using the relevant data
available

Business Analytics (definition)

• Scientific process of transforming data into insight for better

decisions through
• Data driven decision making
• Fact-based decision making
• Quantitative techniques such as Central Tendency, Dispersion,
Correlation, Regression, etc.

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Example of Analytics
• Pricing
• setting prices for consumer and industrial goods, government contracts, and maintenance contracts
• Customer segmentation
• identifying and targeting key customer groups in retail, insurance, and credit card industries
• Merchandising
• determining brands to buy, quantities, and allocations
• Location
• finding the best location for bank branches and ATMs, or where to service industrial equipment
• Social Media
• understand trends and customer perceptions; assist marketing managers and product designers

Scope of Business Analytics

 Descriptive analytics: the use of data to understand past and current
business performance and make informed decisions
 Predictive analytics: predict the future by examining historical data,
detecting patterns or relationships in these data, and then extrapolating these
relationships forward in time.
 Prescriptive analytics: identify the best alternatives to minimize or
maximize some objective

Descriptive Analytics
• Descriptive analytics: It encompasses the set of techniques that describes
what has happened in the past

• Examples - data queries, reports, descriptive statistics, data visualization (data

dashboards) and basic what-if spreadsheet models

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Descriptive – Data Dashboards

• Data dashboards - Collections of tables, charts, maps, and summary statistics that are
updated as new data become available.
• Uses of dashboards
• To help management monitor specific aspects of the company’s performance related to their decision-
making responsibilities.
• For corporate-level managers, daily data dashboards might summarize sales by region, current inventory
levels, and other company-wide metrics.
• Front-line managers may view dashboards that contain metrics related to staffing levels, local inventory
levels, and short-term sales forecasts.

Diagnostic Analytics
• Descriptive analytics: It encompasses the set of techniques mainly through
queries and visualizations that tries to discover why something happened

• Data query - It is a request for information with certain characteristics from

a database.

Predictive Analytics
• Predictive analytics: It consists of techniques that use models constructed
from past data to predict the future or discover the causal relations like the
impact of one variable on another.
• Survey data and past purchase behavior may be used to help predict the market share
of a new product.

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Techniques for Predictive Analytics

Data Mining

Simulation

Optimization Models

Prescriptive Analytics

Spectrum of Business Analytics

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Link between the Analytics Capabilities

Diagnostic Prescriptive
• What happened Analytics • What will Analytics
in the past? • Why did it happen in the • What is the best
happen future? action
• What-if
Descriptive Predictive
Analytics Analytics

Business Analytics in Domains

• Marketing analytics
• Marketing is one of the fastest growing areas for the
application of analytics.
• A better understanding of consumer behavior through the
use of scanner data and data generated from social media has
led to an increased interest in marketing analytics.

Business Analytics in Domains

• Marketing analytics (contd.)
• A better understanding of consumer behavior through marketing
analytics leads to:
• The better use of advertising budgets
• More effective pricing strategies
• Improved forecasting of demand
• Improved product line management, and
• Increased customer satisfaction and loyalty

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Business Analytics in Domains

• Financial analytics
• Use of predictive models
• To forecast future financial performance
• To assess the risk of investment portfolios and projects
• To construct financial instruments such as derivatives

Business Analytics in Domains

• Financial analytics (contd.)

• Use of prescriptive models
• To construct optimal portfolios of investments
• To allocate assets, and
• To create optimal capital budgeting plans.
• Simulation is also often used to assess risk in the financial sector

Business Analytics in Domains

• Human resource (HR) analytics
• New area of application for analytics
• The HR function is charged with ensuring that the organization
• Has the mix of skill sets necessary to meet its needs
• Is hiring the highest-quality talent and providing an environment that
retains it, and
• Achieves its organizational diversity goals.

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What Google trends shows

Business Analytics in Practice

• Health care analytics
• Descriptive, predictive, and prescriptive analytics are used:
• To improve patient, staff, and facility scheduling
• Patient flow
• Purchasing
• Inventory control
• Use of prescriptive analytics for diagnosis and treatment

Business Analytics in Domains

• Supply chain analytics
• The core service of companies such as UPS and FedEx is the efficient
delivery of goods, and analytics has long been used to achieve efficiency
• The optimal sorting of goods, vehicle and staff scheduling, and vehicle
routing are all key to profitability for logistics companies such as UPS, FedEx,
and others like them
• Companies can benefit from better inventory and processing control and
more efficient supply chains

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Business Analytics in Domains

• Analytics for government and nonprofits

• To drive out inefficiencies
• To increase the effectiveness and accountability of programs
• Analytics for nonprofit agencies
• To ensure their effectiveness and accountability to their
donors and clients.

Business Analytics in Domains

• Sports analytics
• Used for player evaluation and on-field strategy in professional
sports.
• The use of analytics for off-the-field business decisions is also
increasing rapidly.
• Using prescriptive analytics, franchises across several major sports
dynamically adjust ticket prices throughout the season to reflect the
relative attractiveness and potential demand for each game.

Business Analytics in Practice

• Web analytics - It is the analysis of online activity, which includes, but is not
limited to, visits to Web sites and social media sites such as Facebook and
LinkedIn.
• Leading companies apply descriptive and advanced analytics for online experiments:
• Determine the best way to configure Web sites
• Understand who their customers are
• Position ads
• Utilize social networks for the promotion of products and services

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Descriptive Analytics Applications

• Most shoppers turn towards right when they enter the a retail store.

• Conversion rate of women shoppers is higher than male shoppers among electronic gadgets
purchasers (Radio Shack).

• Strawberry pop-tarts sell 7 times more during hurricane compared to regular period (Wal
Mart).

• Women car buyers prefer women sales person.

Prescriptive Analytics Applications

• Which product the customer is likely to buy in his next purchase
(recommender system).

• Which customer is likely to default in his/her loan payment.

• Who is likely to cancel the product that was ordered through e-commerce
portal.

Prescriptive Analytics Applications

• What is the optimal product mix?

• What is the optimal route for a delivery truck.

• Best markdown pricing for fashion products.

• Optimal assignment of aircraft to flight.

• How to manage the fleet of vehicles owned by a company for employee drop and pick up?

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Example: Retail Markdown Decisions

 Most department stores clear seasonal inventory by reducing prices.

 Key question: When to reduce the price and by how much to maximize
revenue?
 Potential applications of analytics:
 Descriptive analytics: examine historical data for similar products (prices, units sold,
advertising, …)
 Predictive analytics: predict sales based on price
 Prescriptive analytics: find the best sets of pricing and advertising to maximize sales
revenue

Impacts and Challenges

• Benefits
Reduced costs, better risk management, faster decisions, better productivity and enhanced
bottom-line performance such as profitability and customer satisfaction.
• Challenges
Lack of understanding of how to use analytics, competing business priorities, insufficient
analytical skills, difficulty in getting good data and sharing information, and not
understanding the benefits versus perceived costs of analytics studies.

A Visual Perspective of Business Analytics

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Framework of Data Driven decisions

Problem or Opportunity • Domain knowledge is very important at this stage of the analytics project.
Identification • This will be a major challenge for many companies who do not know the capabilities of analytics.
• Once the problem is defined clearly, the project team should identify and collect the relevant
data.
Collection of relevant data
• Interactive process since "relevant data" may not be known in advance in many analytics projects.
• The existence of ERP systems will be very useful at this stage.

• Data preparation and data processing forms a significant proportion of any analytics project. T
Data Pre-processing • his would include data imputation and the creation of additional variables such as interaction
variables and dummy variables in the case of predictive analytics projects.
• Analytics model building is an iterative process that aims to find the best model.
Model Building
• Several analytical tools and solution will be used to find the best analytical model in this stage.

Communication and deployment • Communication of the analytics output to the top management and clients plays a crucial role.
of the data analysis • Deploy the solution

Tools of Business Analytics

• Tools of business analytics can aid decision making by:

• Creating insights from data
• Improving our ability to more accurately forecast for planning
• Helping us quantify risk
• Yielding better alternatives through analysis and optimization

Tools
• Database queries and analysis • Scenario and “what-if ” analyses
• Dashboards to report key • Simulation
performance measures • Forecasting
• Data visualization • Data and text mining
• Statistical methods • Optimization
• Spreadsheets and predictive • Social media, web, and text analytics
models

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Software Support
• MS Excel
• R
• SPSS
• SAS
• Python
• Tableau

Models for Business Analytics

• A model is an abstraction or representation of a real system, idea or object that tries to capture
the essence and key features of the problem.

• There are several types of models, and each can be a valuable aid in solving a real problem:
• Verbal Description
• Visual or Graphical models
• Mathematical models
• Spreadsheet models

Verbal Description
• The sales of a new product, such as a first-generation iPad or 3D television,
often follow a common pattern.

Verbal description: The rate of sales starts small as early adopters begin to
evaluate a new product and then begins to grow at an increasing rate over time
as positive customer feedback spreads. Eventually, the market begins to become
saturated and the rate of sales begins to decrease.

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Visual Description

Graphical Models
• Graphical models attempt to
portray graphically how different
elements of a problem are
related—what effects what.
• A very simple graphical model that
represents the descriptive model to
determine how the elements of the
model relate to each other called an
influence diagram, is shown

Mathematical Model
• Mathematical models use algebraic
equations and inequalities to specify
a set of relationships in a very
precise way.
• Typical example is product mix

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Example: Building a Mathematical Model

• total cost = fixed cost + variable cost Mathematical model:

• TC = Total Cost
• variable cost = unit variable cost × quantity
produced • F = Fixed cost
• V = Variable unit cost
• total cost = fixed cost + variable cost • Q = Quantity produced
• total cost = fixed cost + unit variable cost ×
quantity produced • TC = F +VQ

Example: An Influence Diagram for Total Cost

Basic Expanded

Spreadsheet Model
• Spreadsheet modeling is an alternative to algebraic modeling that relates
various quantities in a spreadsheet with cell formulas.
• Instant feedback is available from spreadsheets, so if a formula is entered incorrectly, it
is often immediately obvious.
• Developing good spreadsheet models is not easy.
• They must be correct, well designed and well documented.

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Example: A Sales-Promotion Decision Model

In the grocery industry, managers typically need to know how best to use
pricing, coupons and advertising strategies to influence sales. Grocers often
study the relationship of sales volume to these strategies by conducting
controlled experiments to identify the relationship between them and sales
volumes. That is, they implement different combinations of pricing, coupons,
and advertising, observe the sales that result, and use analytics to develop a
predictive model of sales as a function of these decision strategies.

Example Model
• Sales = 500 – 0.05(price) +
30(coupons) + 0.08(advertising) +
0.25(price)(advertising)

• If the price is $6.99, no coupons are

offered, and no advertising is done
(the experiment corresponding to
week 1), the model estimates sales as

• Sales = 500 - 0.05 × $6.99 + 30 × 0

+ 0.08 × 0 + 0.25 × $6.99 × 0 =
500 units

Decision Models
• Decision model - a logical or mathematical representation of a problem or
business situation that can be used to understand, analyze, or facilitate making a
decision.
• Inputs:
• Data, which are assumed to be constant for purposes of the model.
• Uncontrollable variables, which are quantities that can change but cannot be directly controlled
by the decision maker.
• Decision variables, which are controllable and can be selected at the discretion of the decision
maker.

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Nature of Decision Models

Example: A Break-Even Decision Model

TC(manufacturing) = $50,000 + $125*Q
TC(outsourcing) = $175*Q

Breakeven Point:

TC(manufacturing) = TC(outsourcing)
$50,000 + $125 × Q = $175 × Q
$50,000 = 50 × Q
Q = 1,000

General Formula
F + VQ = CQ
Q = F/(C - V)

Uncertainty and Risk

• Uncertainty is imperfect knowledge of what will happen in the future.

• Risk is associated with the consequences of what actually happens.
• “To try to eliminate risk in business enterprise is futile. Risk is inherent in the
commitment of present resources to future expectations. Indeed, economic progress can be
defined as the ability to take greater risks. The attempt to eliminate risks, even the attempt
to minimize them, can only make them irrational and unbearable. It can only result in the
greatest risk of all: rigidity.”
– Peter Drucker

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Prescriptive Decision Models

• Prescriptive decision models help decision makers identify the best

solution.
 Optimization - finding values of decision variables that minimize (or
maximize) something such as cost (or profit).
 Objective function - the equation that minimizes (or maximizes) the quantity of
interest.
 Constraints - limitations or restrictions.
 Optimal solution - values of the decision variables at the minimum (or maximum)
point.

Example: A Prescriptive Pricing Model

 A firm wishes to determine the best pricing for one of its products in order to maximize
revenue.
 Analysts determined the following model:
Sales = -2.9485(price) + 3240.9
Total revenue = (price)(sales)
= price × (-2.9485 × price + 3240.9)
= -2.9485 × price2 + 3240.9 × price

 Identify the price that maximizes total revenue, subject to any constraints that might exist.

Types of Prescriptive Models

• Deterministic model – all model input information is known with certainty.

• Stochastic model – some model input information is uncertain.
• For instance, suppose that customer demand is an important element of some model.
We can make the assumption that the demand is known with certainty; say, 5,000 units
per month (deterministic). On the other hand, suppose we have evidence to indicate
that demand is uncertain, with an average value of 5,000 units per month, but which
typically varies between 3,200 and 6,800 units (stochastic).

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7-step Modeling process

• Literature portrays modeling as a seven-step process, but not all problems require all
seven steps.
• Recognize that problem exists
• Define the problem.
• Collect and summarize relevant data for the problem
• Structure the problem & develop a model.
• Verify the model with one or more decisions suitable to the context
• Present the results to the organization.
• Implement the model and update it over time

Recognizing a Problem

Problems exist when there is a gap between what is happening and what we
think should be happening.
 For example, costs are too high compared with competitors.

Defining the Problem

 Clearly defining the problem is not a trivial task.

 Complexity increases when the following occur:
- large number of courses of action
- the problem belongs to a group and not an individual
- competing objectives
- external groups are affected
- problem owner and problem solver are not the
same person
- time limitations exist

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Structuring the Problem

 Stating goals and objectives

 Characterizing the possible decisions
 Identifying any constraints or restrictions

Analyzing the Problem with Data

 Analytics plays a major role.

 Analysis involves some sort of experimentation or solution process, such as
evaluating different scenarios, analyzing risks associated with various
decision alternatives, finding a solution that meets certain goals, or
determining an optimal solution.

Interpreting Results and Making a Decision

 Models cannot capture every detail of the real problem

 Managers must understand the limitations of models and their underlying
assumptions and often incorporate judgment into making a decision.

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Implementing the Solution

 Translate the results of the model back to the real world.

 Requires providing adequate resources, motivating employees, eliminating
resistance to change, modifying organizational policies, and developing trust.

Model Assumptions
• Assumptions are made to
• simplify a model and make it more tractable; that is, able to be easily analyzed or solved.
• better characterize historical data or past observations.
• The task of the modeler is to select or build an appropriate model that best
represents the behavior of the real situation.
• Example: economic theory tells us that demand for a product is negatively related to
its price. Thus, as prices increase, demand falls, and vice versa (modeled by price
elasticity — the ratio of the percentage change in demand to the percentage
change in price).

Understanding Data

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Agenda
• Data
• Scales of measurement
• Types of data
• Organising data
• Presenting data

Data for Business Analytics

• Data: numerical or textual facts and figures that are collected, organized and
analyzed through some type of measurement process.

• Information: result of analyzing data; that is, extracting meaning from data
to support evaluation, interpretation and presented for decision making.

Overview of Data
• Data: The facts and figures collected, analyzed, and summarized for presentation
and interpretation.

• Variable: A characteristic or a quantity of interest that can take on different values.

• Observation: Set of values corresponding to a set of variables.
• Variation: The difference in a variable measured over observations.
• Random variable/uncertain variable: A quantity whose values are not known
with certainty.

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Types of Data
• Qualitative data: Data on which arithmetic operations cannot be
performed.

• Quantitative data: Data on which numeric and arithmetic operations, such

as addition, subtraction, multiplication, and division, can be performed.

Category of Data
• Cross-sectional data: Data collected from several entities or variables of interest at the same,
or approximately the same, point in time.
• Time series data: Data collected over several time periods or intervals (like weekly, monthly,
etc)
• Generally collected for a single variable say demand for cotton casuals in Bangalore
• Graphs of time series data are frequently found in business and economic publications
• Help analysts understand what happened in the past, identify trends over time, and project future levels
for the time series
• Panel Data: Data collected on several variables (multiple dimensions) over several time
intervals is called panel data (also known as longitudinal data)

Sources of Data
• Experimental study - A variable of interest is first identified.
• Then one or more other variables are identified and controlled or manipulated so that
data can be obtained about how they influence the variable of interest.

• Nonexperimental study or observational study - Make no attempt to

control the variables of interest.

• A survey is perhaps the most common type of observational study.

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Examples of Data Sources and Uses

• Annual reports
• Accounting audits
• Financial profitability analysis
• Economic trends
• Marketing research
• Operations management performance
• Human resource measurements
• Web behavior

Data Sets and Databases

• Data set - a collection of data.
• Examples: Marketing survey responses, a table of historical stock prices, and a
collection of measurements of dimensions of a manufactured item.
• Database - a collection of related files containing records on people, places,
or things.
• A database file is usually organized in a two-dimensional table, where the columns
correspond to each individual element of data (called fields, or attributes), and the rows
represent records of related data elements.

Example : A Sales Transaction Database File

Records

Entities Fields or Attributes

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Metrics and Data Classification

• Metric - a unit of measurement that provides a way to objectively quantify

performance

• Measurement - the act of obtaining data associated with a metric

• Measures - numerical values associated with a metric.

Types of Metrics
• Discrete metric - one that is derived from counting something.
• For example, a delivery is either on time or not; an order is complete or incomplete; or
an invoice can have one, two, three, or any number of errors. Some discrete metrics
would be the proportion of on-time deliveries; the number of incomplete orders each
day, and the number of errors per invoice.
• Continuous metrics are based on a continuous scale of measurement.
• Any metrics involving currency, length, temperature, time, volume, or weight, for
example, are continuous.

Measurement Scales
• Categorical (or nominal) data - sorted into categories according to
specified characteristics.
• Ordinal data – data value captured from an ordered set, which is recorded
in order of magnitude according to some relationship to one another
• Interval data - ordinal but have constant differences or interval between
observations and have arbitrary zero points.
• Continuous data - also called Ratio data. Can have any value on a scale
and have a natural zero.

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Example : Classifying Data Elements

Data Reliability and Validity

• Reliability - data are accurate and consistent.
• Validity - data correctly measures what it is supposed to measure.
• Examples:
• A tire pressure gage that consistently reads several pounds of pressure below the true value is not
reliable, although it is valid because it does measure tire pressure.
• The number of calls to a customer service desk might be counted correctly each day (and thus is a
reliable measure) but not valid if it is used to assess customer dissatisfaction, as many calls may be
simple queries.
• A survey question that asks a customer to rate the quality of the food in a restaurant may be neither
reliable (because different customers may have conflicting perceptions) nor valid (if the intent is to
measure customer satisfaction, as satisfaction generally includes other elements of service besides
food).

Population & Sample

• Population is the set of all possible observations (often called cases, records,
subjects or data points) for a given context of the problem.

• Sample is the subset taken from a population.

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Big Data
• Big data to refer to massive amounts of business data from a wide variety
of sources, much of which is available in real time, and much of which is
uncertain or unpredictable. IBM calls these characteristics volume, variety,
velocity, and veracity.
• “The effective use of big data has the potential to transform economies, delivering a new
wave of productivity growth and consumer surplus. Using big data will become a key
basis of competition for existing companies, and will create new competitors who are able to
attract employees that have the critical skills for a big data world.” - McKinsey Global
Institute, 2011

Pyramid of Analytics
Analytics for Competitive
Strategy

Analytics for Decision

Making

Analytics for Problem

Solving

Analytics for Process

Improvement

The End

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