Fundamentals

of Predictive
Analytics
PART ONE
“WHY”

BUMA 30073
Course Syllabus
Course Syllabus
Course Syllabus
 A N A LY T I C S
PREDICTIVE
of
WHY ANALYTICS BE GUIDING PRINCIPLES
01 03
Fundamentals

THE NEXT IN DEVELOPING

COMPETITIVE EDGE? PREDICTIVE
BUSINESS ANALYTICS

THE PREDICTIVE Developing A

02 ANALYTICS 04 Predictive Business
BUSINESS MODEL
Analytics Function

A G E N D A
 Learning Outcomes
At the end of this lesson, you will be able to:

Establish a set of guiding

Understand the importance of
principles that a reader can use to
analytics as a skill and a
frame the design and deployment of
profession
a PBA function.

Describe the predictive Identify the key elements of

business analytics model and change management and
the organization function and meaningful organizational design of
capability the PBA function
Business
Analytics
A Review
HR possesses large quantities of people data, usually managed
in a Human Resources Information System.

By applying predictive analysis to this data, HR is able to become a

strategic partner that relies on proven and data-driven predictive
models, instead of relying on gut feeling and soft science.

HR predictive analytics enable HR to forecast the impact of people

policies on well-being, happiness, and bottom-line performance. An
example is the role it can play in preventing expensive employee
turnover.
Decision Making
It is the responsibility of managers to plan, coordinate,
organize, and lead their organizations to better performance.

Strategic decisions involve higher-level

issues concerned with the overall direction
The Process: of the organization; these decisions define
the organization’s overall goals and
1 Identify and define the problem. aspirations for the future.

Tactical decisions concern how the

2 Determine the criteria that will
be used to evaluate alternative organization should achieve the goals and
solutions. objectives set by its strategy, and they are
usually the responsibility of midlevel
3 Determine the set of alternative
solutions.
management.

4 Evaluate the alternatives.

Operational decisions affect how the firm
is run from day to day; they are the domain
of operations managers, who are the closest
5 Choose an alternative. to the customer
 The scientific process of transforming data into
insight for making better decisions (source: INFORMS)
BUSINESS Business analytics is used for data-driven or fact-based
decision making, which is often seen as more objective
ANALYTICS Definition than other alternatives for decision making.
 Categories of Techniques
Descriptive Analytics

encompasses the set of techniques that

Analytics
describes what has happened in
the past.

Predictive Analytics

Consists of techniques that use

models constructed from past
data to
predict the future or ascertain
the impact of one variable on
another.

A Categorization of Analytical
Prescriptive Analytics Methods and Models
Indicates a course of action to take; that is, the
output of a prescriptive model is a decision.
Predictive models provide a forecast or prediction,
but do not provide a decision.
 Tools and Techniques
Descriptive Predictive Prescriptive
Descriptive Statistics ● ● ●
Data Visualization ●
Descriptive Data Mining ●
Probability ●
Statistical Inference ●
Linear Regression ●
Time Series & Forecasting ●
Predictive Data Mining ●
Spreadsheet Models ● ● ●
Monte Carlo Simulation ● ●
Linear Optimization Models ●
Integer Linear Optimization Models ●
Nonlinear Optimization Models ●
Decision Analysis ●
 Big Data
Big Data
➢ any set of data that is too large or too complex to be handled by standard data-
processing techniques and typical desktop software.

❖ Data security - the protection of stored data from destructive forces or

unauthorized users, is of critical importance to companies.
❖ Data scientists - who know how to effectively process and analyze massive
amounts of data because they are well trained in both computer science and
statistics.

IBM describes the phenomenon of big data through the four Vs:

Volume Velocity Variety Veracity

Because data are collected
electronically, we are able to collect
more of it. To be useful, these data
must be stored, and this storage
has led to vast quantities of data.
Real-time capture and analysis of data
present unique challenges both in how
data are stored and the speed with
which those data can be analyzed for
decision making.
More complicated types of data
Veracity has to do with how much
are now available and are
uncertainty is in the data.
proving to be of great value to
businesses.
 Business Analytics in Practice
The planning,
The activities a
organizing, directing
company undertakes and controlling the
to promote the financial activities such
buying or selling of a as procurement and
product or service. utilization of funds of
the enterprise.

Responsible for The policies, practices, and

producing goods or systems that influence
employees‘ behavior, attitudes,
services
and performance.

MARKETING OPERATIONS FINANCE HUMAN RESOURCE

Basic Functions
 Business Analytics in Practice
Financial Analytics
Predictive models are used to forecast
01 financial performance, to assess the risk of
investment portfolios and projects, and to
Marketing Analytics
construct financial instruments such as
derivatives. A better understanding of consumer
02 behavior through the use of scanner data
and data generated from social media has
led to an increased interest in marketing
analytics

Human Resource (HR) Analytics

The HR function is charged with ensuring that the
03 organization (1) has the mix of skill sets necessary
to meet its needs, (2) is hiring the highest quality
talent and providing an environment that retains it,
and (3) achieves its organizational diversity goals.
04
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 and FedEx
Lesson 1
WHY ANALYTICS BE THE NEXT
COMPETITIVE EDGE?
 WHY ANALYTICS BE THE NEXT COMPETITIVE EDGE?
BUSINESS INTELLIGENCE vs ANALYTICS vs DECISIONS
ANALYTICS: JUST A SKILL OR A PROFESSION?
The use of analytics that includes statistics is a
skill that is gaining mainstream value due to the
increasingly thinner margin for decision error.
FILL IN THE BLANKS: WHICH X IS MOST LIKELY TO Y?
Predictive business analytics (PBA) allows organizations
to make decisions and take actions they could not do (or
do well) without analytics capabilities.
1. Increased employee retention.
2. Increased customer profitability.
3. Increased product shelf opportunity.
BUSINESS INTELLIGENCE
▪ Summarizes historical data, typically in table
reports and graphs, as a means for queries
and drill downs.
▪ Consumes stored information
▪ Creates questions
ANALYTICS
• Analytics simplify data to amplify its value
• Turn huge volumes of data into a much
smaller amount of information and insight
• Produces new information
• then stimulates more questions, more complex
questions, and more interesting questions.
DECISIONS
▪ Provide context for what to analyze.
▪ If the type of decision needed is understood,
then the type of analysis and its required
source data can be defined.
PREDICTIVE Predictive analytics is a branch of advanced analytics that makes
predictions about future outcomes using historical data combined with
statistical modeling, data mining techniques and machine learning.
ANALYTICS Companies employ predictive analytics to find patterns in this data to identify risks
and opportunities.

Modern predictive analytics is about

using machine-generated predictions
with human insight to drive business
forward.

Predictive analytics is a key milestone on the

analytics journey— a point of confluence, where
classical statistical analysis techniques meet
the new world of artificial intelligence (AI).
Lesson 2
THE PREDICTIVE ANALYTICS
BUSINESS MODEL
Predictive analytics models are designed
to assess historical data, discover
patterns, observe trends, and use that
information to predict future trends.
 Predictive Business Analytics (PBA) is forward-looking in nature and based on analysis of
relevant business data and drivers that have a strong and traceable linkage to financial results and
operational performance.

Examples:
✓ financial or
❑ reflect changes over time: operational
new home sales, new product sales, mortgage Business
delinquencies, and foreclosures
drivers can
❑ reflect changes in a given period: be:
✓ external or
new births, new car sales, and new hirings internal

❑ reflect changes at a point in time:

changes in interest rates, fuel prices, tax rates,
and sales commissions

PBA should enable management to identify new opportunities for growth and
improvement, as well as to highlight areas for corrective actions and possibly
strategy adaptations.
A Flexible Platform For Building Predictive Models
Source: IBM
TYPES OF PREDICTIVE MODELING

Source: IBM
 Popular Predictive Analytics Models

Time-series models
employ a sequence of
Outliers models deal with
data points using time as
anomalous data entries
the input parameter. It
in a dataset.
can take the last year of
data, calculate a
numerical metric, and
use that metric to predict
Classification models are the three to six weeks of
categorized under data.
supervised machine
learning models. They
Clustering models are
place data into
categorized under
categories based on
unsupervised learning.
conclusions from the
They sort data into
historical data. Forecast models use
groups based on similar
metric value prediction,
attributes.
estimating numeric value
for new data based on
trends from historical
data.
 Popular Predictive Analytics Models
Examples
Classification
models
This model is commonly
used for answering
questions with binary
outputs, such answering
yes or no or true and false
logistic regression, decision
trees, random forest, neural
networks, and Naïve Bayes
Clustering
models
an e-commerce site can
use the model to separate
a call center can use the
customers into similar
groups based on common
many calls it will receive per
features and develop
marketing strategies for
each group
k-means clustering, mean-shift
clustering, density-based
spatial clustering of
applications with noise
(DBSCAN), expectation-
maximization (EM) clustering
using Gaussian Mixture Models
(GMM), and hierarchical
clustering
Forecast Outliers Time-series
models models models
the model can be used by a
hospital to make predictions
insurance companies can
about emergency room
model to forecast how use it for fraud detection to
capacity based on the
flag anomalous data within
number of patients who
hour a list of transactions
showed up in the past six
weeks
extreme value analysis,
probabilistic and statistical
Time series and modeling, linear regression,
econometric models proximity-based modeling,
and information theory
modeling
Break
10 minutes
Lesson 3
GUIDING PRINCIPLES IN DEVELOPING
PREDICTIVE
BUSINESS ANALYTICS
 Guiding Principles
The International Federation of Accountants (IFAC) has published a set of guiding principles for PBA that are intended to be globally adopted.

PRINCIPLE 3: BE RELEVANT, RELIABLE,

AND TIMELY FOR DECISION MAKERS PRINCIPLE 7: DRIVE BEHAVIORS
AND RESULTS

PRINCIPLE 2: INCORPORATE A BALANCED SET OF

FINANCIAL AND NONFINANCIAL, INTERNAL AND
EXTERNAL MEASURES
PRINCIPLE 6: INTEGRATE INTO THE
MANAGEMENT PROCESS

PRINCIPLE 1: DEMONSTRATE A STRONG

CAUSE-AND-EFFECT RELATIONSHIP
PRINCIPLE 5: BE ACCESSIBLE,
UNDERSTANDABLE, AND WELL ORGANIZED

PRINCIPLE 4: ENSURE DATA INTEGRITY

Lesson 4
DEVELOPING A PREDICTIVE
BUSINESS ANALYTICS FUNCTION
 Maturity Capability Map
In predictive business analytics (PBA),
the decision-making process is rooted
in a structured, continuous, and
data-driven process that enables an
organization to select actions with a
fair degree of understanding of how
these decisions and actions were
determined and to have a reasonable
level of confidence regarding
outcomes and impacts.

An effective way to determine

the need and potential
benefits for developing a PBA
capability is to assess the
need according to your
organization’s level of
maturity and capabilities. .
Developing a Predictive Business Analytics Function

T h i n g s
T o c o n s i d e r
GETTING STARTED
The art of starting a PBA process can leverage from John Kotter’s Eight-Stage
Process of Creating Major Change

SELECTING A DESIRED TARGET STATE

Once the change management process is recognized and being applied, the guiding
coalition team should size up an area to examine where improvement opportunities exist
for predictive business analytics.

ADOPTING A PBA FRAMEWORK

An effective approach to developing and sustaining an integrated and continuous PBA
process is best accomplished by deploying a framework that is continual, coherent, and
collaborative throughout the organization.

DEVELOPING THE FRAMEWORK

Step 1: Process design.
Step 2: Model development.
Step 3: Data capture.
Developing a Framework
Step 1: Process Design
The objective is to develop a process that enables the organization to predict a
future outcome based on expected cause-and-effect relationships.
(1) a cause-and-effect relationship;
(2) a balance of financial and nonfinancial, internal and external measures;
(3) relevance, reliability, and timeliness;
(4) integrity;
(5) accessibility; and
(6) the potential to drive desired behaviors.

Step 2: Model Development

The initial step in model development is to determine the relevant relationship(s)
between an input and its outcome.

Regression Analysis Delphi Method

Nonlinear Systems Experiential Insight
Monte Carlo Simulation Scenario Analysis and Planning Scenarios
Resource Capacity and Activity-Based Analysis

Step 3: Data Capture

In determining the better option for data capture, it is important to consider the
context and relevance of how the predictive business analytics will be used, and the
impact of actions being considered by management.
Sample Framework
You are now able to: Understand the importance of analytics
as a skill and a profession

Describe the predictive business

analytics model and the organization
function and capability

Establish a set of guiding principles that a

reader can use to frame the design and
deployment of a PBA function.

Identify the key elements of change

management and meaningful
organizational design of the PBA
function

Summary
 Action Plan

TO DO
1. Save a copy of the class materials
2. Watch the Online Videos

READ WATCH
Lesson 1 - 4 Predictive Data Analytics
https://www.youtube.com/watch?v=eCUzF9mYVBw

Data Analytics Part 1 - from descriptive to prescriptive

https://www.youtube.com/watch?v=vax2bgG8hu8
THANK YOU
Prepared by: Prof. Michelle S. Lasundin