Chapter 1: Introduction to Business Analytics

Objectives:

At the end of this Chapter, the students will be able:

1. to discuss the impact or importance of Analytics in Business

2. to identify the different tools used in Analytics
3. to discuss the scope of business Analytics
4. to use analytics to solve business problems

Introduction to Analytics

I. Business Analytics

Analytics is the use of:

 Data

 Information Technology

 Statistical Analysis

 Quantitative Methods

 Computer-based Methods

to help managers gain improved insight about their business operations and make better, fact-
based decisions.

Examples of Applications

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

A visual perspective of Business Analytics

Impacts and Challenges

 Benefits
o …reduced costs, better risk management, faster decisions, better productivity and
enhanced bottom-line performance such as profitability and customer
satisfaction.
 Challenges
o …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.
Scope of Business Analytics

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

Example1: 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:
o Descriptive analytics: examine historical data for similar products (prices, units
sold, advertising, …)
o Predictive analytics: predict sales based on price
o Prescriptive analytics: find the best sets of pricing and advertising to maximize
sales revenue

II. Tools
 database queries and analysis
 Spreadsheets
 Data Visualization
 Dashboards to report key performance measures
 data and statistical Methods
 data mining
 simulation
 forecasting
 scenario and what-if analysis
 optimization
 text mining
 social media, web and text analytics

Software Support

 SQL various databases

 Excel Spreadsheets
 Tableau Software
o Simple drag and drop tools for visualizing data from spreadsheets and other
databases.
 IBM Cognos Express
o An integrated business intelligence and planning solution designed to meet the
needs of midsize companies, provides reporting, analysis, dashboard, scorecard,
planning, budgeting and forecasting capabilities
 SAS / SPSS / Rapid Miner
o Predictive modeling and data mining, visualization, forecasting, optimization and
model management, statistical analysis, text analytics, and more using visual
workflows.
 R / Python
o Advanced programing-based data preparation, analytics and visualization.

III. Data

data for Business Analytics

 Data:
o Numerical or textual facts and figures that are collected through some type of
measurement process.
 Information
o Result of analyzing data; that is, extracting meaning from data to support
evaluation and decision making.

examples of Data Sources and Uses

 internal
o Annual reports
o Accounting audits
o Financial profitability analysis
o Operations management performance
o Human resource measurements
 external
o Economic trends
o Marketing research
 New developments: Web behavior – Social Media – Mobile - IOT
o Page views, visitor’s country, time of view, length of time, origin and destination
paths, products they searched for and viewed, products purchased, what reviews
they read, and many others.

Big Data

 Big data
o 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.
 Apache Hadoop Ecosystem for Big Data
Data sets and Databases

 Database
o a collection of related tables containing records on people, places, or things.
o In a database table the columns correspond to each individual element of data
(called fields, or attributes), and the rows represent records of related data
elements.
 Data set
o A collection of data (often a single “spread sheet” or data mining table).
o Examples: Marketing survey responses, a table of historical stock prices, and a
collection of measurements of dimensions of a manufactured item.

Types of Quantitative Data

 Discrete
o derived from counting something
o 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.
o example: number of pens in a box, number of pages in a book
 Continuous
o based on a continuous scale of measurement.
o Any metrics involving dollars, length, time, volume, or weight, for example, are
continuous.
o length of a pen, flow of ink in ml/sec

Measurement Scales

 Categorical (nominal) data

o Sorted into categories according to specified characteristics. example: gender,
race, color

 Ordinal data
o can be ordered or ranked according to some relationship to one another
 Interval data
o ordinal but have constant differences between observations and have arbitrary
zero points.

 Ratio data
o continuous and have a natural zero.

classifying Data Elements

data Reliability and Validity

 Reliability –
o Data are accurate and consistent.
 Validity –
o Data measures what it is supposed to measure
 Examples:
o 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.
o 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.
o 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).

IV. Models
 Model
o an abstraction or representation of a real system, idea, or object.
o Often a simplification of the real thing.
o Captures the most important features.
o Can be a written or verbal description, a visual representation, a mathematical
formula, or a spreadsheet.

example: three forms of a Model

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

 Verbal description
o 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.
 Visual model
o A sketch of sales as an S-shaped curve over time
 Mathematical model

S=
o where
ae be ct
• S is sales,
• t is time,
• e is the base of natural logarithms, and
a, b and c are constants that need to be estimated

from data to model

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

How do we find this model? In this case: linear regression

Model Assumptions

 Assumptions are made to:

o To simplify a model and make it more tractable; that is, able to be easily analyzed
or solved.
o To add prior knowledge about the relationship between variables.
 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.

A Linear Demand Prediction Model

As price increases, demand falls.

Issues: Demand can become negative + empirical data has a poor fit.
Nonlinear Demand Prediction Model

Assumes price elasticity is constant (constant ratio of % change in demand to % change in price)

uncertainty and Risk

 Uncertainty
o is imperfect knowledge (of what will happen in the future).
 Risk
o is the potential of (gaining or) losing something of value. It is the consequence of
actions taken under uncertainty.

Prescriptive Decision Models

 Prescriptive decision models

o help decision makers identify the best solution
 Optimization
o 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
profit.
 Analysts determined the following predictive model:
o Sales = -2.9485(price) + 3240.9
o Total revenue = (price)(sales)
o Cost = 10(Sales) + 5000
 Identify the price that maximizes profit, subject to any constraints that might exist.

Problem Solving with Analytics

1. recognize the problem

2. define the problem
3. structure the problem
4. analyze the problem
5. interpret the result and make a decision
6. implement the solution

 recognize the problem

o Problems exist when there is a gap between what is happening and what we
think should be happening.
o For example, costs are too high compared with competitors.
 define the problem
o Clearly defining the problem is not a trivial task.
o Complexity increases when the following occur:
 large number of courses of action
 the problem belongs to a group and not an
 competing objectives
 external groups are affected
 problem owner and problem solver are not the same person
 time limitations exist
o what is part of the problem? What not?
 structure the problem
o Stating goals and objectives
o Characterizing the possible decisions
o Identifying any constraints or restrictions
 analyze the problem
o Analytics plays a major role.
o 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.
 interpret the results and make decisions
o What do the results found by the model mean for the application?
o 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.
 implement the solution
o Translate the results of the model back to the real world.
o Requires providing adequate resources, motivating employees, eliminating
resistance to change, modifying organizational policies, and developing trust.

Exercises:

I. Data VS Information
 list specific data that the school collects about each student. what information could be
gathered using all the student data?
 give examples of how data becomes information for these two indusrties: film/movie and
hospital/healthcare
 using this lunch Room Data report, answer the questions that follow:


o what does this report mean?

o what data was collected?
o what information does this table provide?
o how do you think this information is used by those reading the report ?
o generate at least two conclusions based on the data provided
o generate at least two questions that would ask about the data provided.

II. Identify whether the given are Categorical or Quantitative, If Quantitative,

Continuous or Discrete?
1. Style of pants? Categorical
2. Color of pants? Categorical
3. Number of pairs of pants you own? Discrete
4. # of pockets on pants? Discrete
5. Size of pants? Continuous
6. Maker of the pants? Categorical
7. Length of inseam on the pants? Continuous
8. Color of pen’s ink? Categorical
9. type of ballpen? Categorical
10. subject of a book? Categorical