Business Analytics: Methods, Models,

and Decisions, 1st edition

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 What is Business Analytics?
 Evolution of Business Analytics
 Scope of Business Analytics
 Data for Business Analytics
 Decision Models
 Problem Solving and Decision Making
 Fun with Analytics

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

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Business Analytics Applications
 Management of customer relationships
 Financial and marketing activities
 Supply chain management
 Human resource planning
 Pricing decisions
 Sport team game strategies

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Importance of Business Analytics
 There is a strong relationship of BA with:
- profitability of businesses
- revenue of businesses
- shareholder return
 BA enhances understanding of data
 BA is vital for businesses to remain competitive
 BA enables creation of informative reports

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 Statistics
 Operations Research
 Management Science
 Business Intelligence
 Decision Support Systems
 Personal Computer Software

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 Descriptive analytics
- uses data to understand past and present
 Predictive analytics
- analyzes past performance, and using it to
predict/forecast the future
 Prescriptive analytics
- uses optimization techniques

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 first stage of business analytics is descriptive
analytics
 still accounts for the majority of all business
analytics today
 looks at past performance and understands that
performance by mining historical data to look for
the reasons behind past success or failure
 most management reporting - such as sales,
marketing, operations, and finance - uses this type
of post-mortem analysis.
 next phase is predictive analytics
 answers the question what is likely to happen
 historical data is combined with rules, algorithms,
and occasionally external data to determine the
probable future outcome of an event or the
likelihood of a situation occurring
 final phase is prescriptive analytics
 goes beyond predicting future outcomes by also
suggesting actions to benefit from the predictions and
showing the implications of each decision option
 "final frontier of analytic capabilities“
 suggests decision options to take advantage of the
results of descriptive and predictive analytics through
the application of mathematical and computational
sciences
 prescriptive analytics not only anticipates what will
happen and when it will happen, but also why it will
happen
 also suggests decision options on how to take advantage
of a future opportunity or mitigate a future risk and shows
the implication of each decision option
 continually takes in new data to re-predict and re-prescribe,
thus automatically improving prediction accuracy and
prescribing better decision options
 hybrid data, a combination of structured (numbers,
categories) and unstructured data (videos, images, sounds,
texts), and business rules to predict what lies ahead and to
prescribe how to take advantage of this predicted future
without compromising other priorities
 in order to scale, prescriptive analytics technologies need
to be adaptive to take into account the growing volume,
velocity, and variety of data that most mission critical
processes and their environments may produce
Example 1.1 Retail Markdown Decisions
 Most department stores clear seasonal inventory
by reducing prices.
 The question is:
When to reduce the price and by how much?
 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

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Analytics in Practice:
Harrah’s Entertainment
Harrah’s owns numerous hotels and casinos
Uses analytics to:
- forecast demand for rooms
- segment customers by gaming activities
Uses prescriptive models to:
- set room rates
- allocate rooms
- offer perks and rewards to customers

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 DATA
- collected facts and figures
 DATABASE
- collection of computer files containing data
 INFORMATION
- comes from analyzing data

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Examples of using DATA in business:
 Annual reports
 Accounting audits
 Financial profitability analysis
 Economic trends
 Marketing research
 Operations management performance
 Human resource measurements

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 Metrics are used to quantify performance.
 Measures are numerical values of metrics.
 Discrete metrics involve counting
- on time or not on time
- number of on time deliveries
 Continuous metrics are measured on a continuum
- delivery time
- package weight
- purchase price

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Example 1.2 A Sales Transaction Database File

Records

Figure 1.1

Entities Fields or Attributes

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Four Types Data Based on Measurement Scale:
 Categorical (nominal) data
 Ordinal data
 Interval data
 Ratio data

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Scale
Nominal Symbols
Finish
Assigned
B S G
to Runners o a e
b m n
e
Ordinal Rank Order Finish
of Winners
3rd place 2nd place1st place

Interval Performance
Rating on a 3 7 9
0 to 10 Scale

Ratio Time to
Finish, in
15.2 14.1 13.4
Seconds
Example 1.3
Classifying Data Elements in a Purchasing Database

Figure 1.2

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 Example 1.3 (continued)
Classifying Data Elements in a Purchasing Database

Figure 1.2

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Categorical (nominal) Data
 Data placed in categories according to a specified
characteristic
 Categories bear no quantitative relationship to one
another
 Examples:
- customer’s location (America, Europe, Asia)
- employee classification (manager, supervisor,
associate)

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Ordinal Data
 Data that is ranked or ordered according to some
relationship with one another
 No fixed units of measurement
 Examples:
- college football rankings
- survey responses
(poor, average, good, very good, excellent)

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Interval Data
 Ordinal data but with constant differences
between observations
 No true zero point
 Ratios are not meaningful
 Examples:
- temperature readings
- SAT scores

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Ratio Data
 Continuous values and have a natural zero point
 Ratios are meaningful
 Examples:
- monthly sales
- delivery times

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Model:
 An abstraction or representation of a real system,
idea, or object
 Captures the most important features
 Can be a written or verbal description, a visual
display, a mathematical formula, or a spreadsheet
representation

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Decision Models
Example 1.4 Three Forms of a Model
The sales of a new produce, such as a first-
generation iPad or 3D television, often follow a
common pattern.
• Sales might grow at an increasing rate over time
as positive customer feedback spreads.
(See the S-shaped curve on the following slide.)
• A mathematical model of the S-curve can be
identified; for example, S = aebect, where S is
sales, t is time, e is the base of natural logarithms,
and a, b and c are constants.

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Figure 1.3

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 A decision model is a model used to understand,
analyze, or facilitate decision making.
 Types of model input
- data
- uncontrollable variables
- decision variables (controllable)
 Types of model output
- performance measures
- behavioral measures

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Nature of Decision Models

Figure 1.4

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Example 1.5 A Sales-Promotion Model
In the grocery industry, managers typically need to
know how best to use pricing, coupons and
advertising strategies to influence sales.
Using Business Analytics, a grocer can develop a
model that predicts sales using price, coupons and
advertising.

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

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Descriptive Decision Models
 Simply tell “what is” and describe relationships
 Do not tell managers what to do

Example 1.6 An Influence Diagram for Total Cost

Influence Diagrams
visually show how
various model elements
relate to one another.

Figure 1.5

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Example 1.7 A Mathematical Model for Total Cost

TC = F +VQ

TC is Total Cost
F is Fixed cost
V is Variable unit cost
Q is Quantity produced
Figure 1.6

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Example 1.8 A Break-even Decision Model
TC(manufacturing) = $50,000 + $125*Q
TC(outsourcing) = $175*Q
Breakeven Point:
Set TC(manufacturing)
= TC(outsourcing)
Solve for Q = 1000 units

Figure 1.7

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Example 1.9 A Linear Demand Prediction Model
As price increases, demand falls.

Figure 1.8

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Example 1.10 A Nonlinear Demand Prediction Model
Assumes price elasticity (constant ratio of % change
in demand to % change in price)

Figure 1.9

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 Predictive Decision Models often incorporate
uncertainty to help managers analyze risk.
 Aim to predict what will happen in the future.
 Uncertainty is imperfect knowledge of what will
happen in the future.
 Risk is associated with the consequences of what
actually happens.

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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.

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Example 1.11 A 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)
 Identify the price that maximizes total revenue,
subject to any constraints that might exist.

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 Deterministic prescriptive models have inputs that
are known with certainty.
 Stochastic prescriptive models have one or more
inputs that are not known with certainty.
 Algorithms are systematic procedures used to find
optimal solutions to decision models.
 Search algorithms are used for complex problems
to find a good solution without guaranteeing an
optimal solution.

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 BA represents only a portion of the overall
problem solving and decision making process.
 Six steps in the problem solving process
1. Recognizing the problem
2. Defining the problem
3. Structuring the problem
4. Analyzing the problem
5. Interpreting results and making a decision
6. Implementing the solution

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1. Recognizing the 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.

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2. Defining the Problem
 Clearly defining the problem is not a trivial task.
 Complexity increases when the following occur:
- large number of courses of action
- several competing objectives
- external groups are affected
- problem owner and problem solver are not the
same person
- time constraints exist

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3. Structuring the Problem
 Stating goals and objectives
 Characterizing the possible decisions
 Identifying any constraints or restrictions

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4. Analyzing the Problem
 Identifying and applying appropriate Business
Analytics techniques
 Typically involves experimentation, statistical
analysis, or a solution process

Much of this course is devoted to learning BA

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5. Interpreting Results and Making a Decision
 Managers interpret the results from the analysis
phase.
 Incorporate subjective judgment as needed.
 Understand limitations and model assumptions.
 Make a decision utilizing the above information.

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6. Implementing the Solution
 Translate the results of the model back to the real
world.
 Make the solution work in the organization by
providing adequate training and resources.

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 Algorithm  Decision support
 Business analytics systems
 Business intelligence  Descriptive statistics
 Categorical (nominal)  Deterministic model
data  Discrete metric
 Constraint  Entities
 Continuous metric  Fields (attributes)
 Data set  Influence diagram
 Database  Interval data
 Decision model  Management science
(MS)
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 Measure  Predictive analytics
 Measurement  Prescriptive analytics
 Metric  Problem solving
 Model  Ratio data
 Objective function  Risk
 Operations research  Search Algorithm
(OR)  Stochastic model
 Optimal solution  Uncertainty
 Optimization
 Ordinal data

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 Please study…

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