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Introduction To Descriptive Analytics
Introduction To Descriptive Analytics
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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
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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
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
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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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