1

What Are Business Analytics?

Chapter objectives:

• Define business analytics.

• Explain the relationship of analytics and business intelligence to the subject of
business analytics.
• Describe the three steps of the business analytics process.
• Describe four data classification measurement scales.
• Explain the relationship of the business analytics process with the organization
decision-making process.

1.1 Terminology
Business analytics begins with a data set (a simple collection of data or a data file)
or commonly with a database (a collection of data files that contain information on
people, locations, and so on). As databases grow, they need to be stored somewhere.
Technologies such as computer clouds (hardware and software used for data remote
storage, retrieval, and computational functions) and data warehousing (a collection of
databases used for reporting and data analysis) store data. Database storage areas have
become so large that a new term was devised to describe them. Big data describes
the collection of data sets that are so large and complex that software systems are
hardly able to process them (Isson and Harriott, 2013, pp. 57–61). Isson and Harriott
(2013, p. 61) define little data as anything that is not big data. Little data describes the
smaller data segments or files that help individual businesses keep track of custom-
ers. As a means of sorting through data to find useful information, the application of
analytics has found new purpose.

3
4 BUSINESS ANALYTICS PRINCIPLES, CONCEPTS, AND APPLICATIONS

Three terms in business literature are often related to one another: analytics,
business analytics, and business intelligence. Analytics can be defined as a process
that involves the use of statistical techniques (measures of central tendency, graphs,
and so on), information system software (data mining, sorting routines), and opera-
tions research methodologies (linear programming) to explore, visualize, discover and
communicate patterns or trends in data. Simply, analytics convert data into useful
information. Analytics is an older term commonly applied to all disciplines, not just
business. A typical example of the use of analytics is the weather measurements col-
lected and converted into statistics, which in turn predict weather patterns.
There are many types of analytics, and there is a need to organize these types to
understand their uses. We will adopt the three categories (descriptive, predictive,
and prescriptive) that the Institute of Operations Research and Management Sci-
ences (INFORMS) organization (www.informs.org) suggests for grouping the types
of analytics (see Table 1.1). These types of analytics can be viewed independently.
For example, some firms may only use descriptive analytics to provide information on
decisions they face. Others may use a combination of analytic types to glean insightful
information needed to plan and make decisions.

Table 1.1 Types of Analytics

Type of Analytics Definition
Descriptive The application of simple statistical techniques that describes what is
contained in a data set or database. Example: An age bar chart is used to
depict retail shoppers for a department store that wants to target advertising
to customers by age.
Predictive An application of advanced statistical, information software, or operations
research methods to identify predictive variables and build predictive
models to identify trends and relationships not readily observed in a
descriptive analysis. Example: Multiple regression is used to show the
relationship (or lack of relationship) between age, weight, and exercise on
diet food sales. Knowing that relationships exist helps explain why one set
of independent variables influences dependent variables such as business
performance.
Prescriptive An application of decision science, management science, and operations
research methodologies (applied mathematical techniques) to make best
use of allocable resources. Example: A department store has a limited
advertising budget to target customers. Linear programming models can be
used to optimally allocate the budget to various advertising media.

The purposes and methodologies used for each of the three types of analytics dif-
fer, as can be seen in Table 1.2. It is these differences that distinguish analytics from
business analytics. Whereas analytics is focused on generating insightful information
 CHAPTER 1 • WHAT ARE BUSINESS ANALYTICS? 5

from data sources, business analytics goes the extra step to leverage analytics to cre-
ate an improvement in measurable business performance. Whereas the process of
analytics can involve any one of the three types of analytics, the major components of
business analytics include all three used in combination to generate new, unique, and
valuable information that can aid business organization decision-making. In addition,
the three types of analytics are applied sequentially (descriptive, then predictive, then
prescriptive). Therefore, business analytics (BA) can be defined as a process begin-
ning with business-related data collection and consisting of sequential application of
descriptive, predictive, and prescriptive major analytic components, the outcome of
which supports and demonstrates business decision-making and organizational per-
formance. Stubbs (2011, p. 11) believes that BA goes beyond plain analytics, requir-
ing a clear relevancy to business, a resulting insight that will be implementable, and
performance and value measurement to ensure a successful business result.

Table 1.2 Analytic Purposes and Tools

Type of Analytics Purpose Examples of Methodologies
Descriptive To identify possible trends in large Descriptive statistics, including
data sets or databases. The purpose measures of central tendency
is to get a rough picture of what (mean, median, mode), measures
generally the data looks like and of dispersion (standard deviation),
what criteria might have potential for charts, graphs, sorting methods,
identifying trends or future business frequency distributions, probability
behavior. distributions, and sampling methods.
Predictive To build predictive models designed Statistical methods like multiple
to identify and predict future trends. regression and ANOVA. Information
system methods like data mining and
sorting. Operations research methods
like forecasting models.
Prescriptive To allocate resources optimally to Operations research methodologies
take advantage of predicted trends or like linear programming and decision
future opportunities. theory.

Business intelligence (BI) can be defined as a set of processes and technologies

that convert data into meaningful and useful information for business purposes. While
some believe that BI is a broad subject that encompasses analytics, business analytics,
and information systems (Bartlett, 2013, p.4), others believe it is mainly focused on
collecting, storing, and exploring large database organizations for information use-
ful to decision-making and planning (Negash, 2004). One function that is generally
accepted as a major component of BI involves storing an organization’s data in com-
puter cloud storage or in data warehouses. Data warehousing is not an analytics or
business analytics function, although the data can be used for analysis. In application,
6 BUSINESS ANALYTICS PRINCIPLES, CONCEPTS, AND APPLICATIONS

BI is focused on querying and reporting, but it can include reported information from
a BA analysis. BI seeks to answer questions such as what is happening now and where,
and also what business actions are needed based on prior experience. BA, on the other
hand, can answer questions like why something is happening, what new trends may
exist, what will happen next, and what is the best course for the future.
In summary, BA includes the same procedures as in plain analytics but has the
additional requirement that the outcome of the analytic analysis must make a measur-
able impact on business performance. BA includes reporting results like BI but seeks
to explain why the results occur based on the analysis rather than just reporting and
storing the results, as is the case with BI. Analytics, BA, and BI will be mentioned
throughout this book. A review of characteristics to help differentiate these terms is
presented in Table 1.3.

Table 1.3 Characteristics of Analytics, Business Analytics, and Business Intelligence

Business Analytics Business Intelligence
Characteristics Analytics (BA) (BI)
Business performance What is happening, What is happening What is happening
planning role and what will be now, what will be now, and what have we
happening? happening, and what is done in the past to deal
the best strategy to deal with it?
with it?
Use of descriptive Yes Yes Yes
analytics as a major
component of analysis
Use of predictive Yes Yes No (only historically)
analytics as a major
component of analysis
Use of prescriptive Yes Yes No (only historically)
analytics as a major
component of analysis
Use of all three in No Yes No
combination
Business focus Maybe Yes Yes
Focus of storing and No No Yes
maintaining data
Required focus of No Yes No
improving business
value and performance
 CHAPTER 1 • WHAT ARE BUSINESS ANALYTICS? 7

1.2 Business Analytics Process

The complete business analytic process involves the three major component steps
applied sequentially to a source of data (see Figure 1.1). The outcome of the business
analytic process must relate to business and seek to improve business performance in
some way.

Business
Business
Business computer cloud
reports
database or data data storage
set

1. Descriptive Find possible

What happened?
analytic analysis business-related
opportunities.
What’s
happening, why Predict opportunities in
2. Predictive
is it happening, which the firm can take
analytic analysis
and what will advantage.
happen?

Allocate resources to
3. Prescriptive
How shall it be take advantage of the
analytic analysis
handled? predicted opportunities.

Outcome of the entire BA analysis:

Measurable increase in business value and
performance.

Figure 1.1 Business analytic process

The logic of the BA process in Figure 1.1 is initially based on a question: What
valuable or problem-solving information is locked up in the sources of data that an
organization has available? At each of the three steps that make up the BA process,
additional questions need to be answered, as shown in Figure 1.1. Answering all these
questions requires mining the information out of the data via the three steps of analy-
sis that comprise the BA process. The analogy of digging in a mine is appropriate for
the BA process because finding new, unique, and valuable information that can lead
to a successful strategy is just as good as finding gold in a mine. SAS, a major analytic
8 BUSINESS ANALYTICS PRINCIPLES, CONCEPTS, AND APPLICATIONS

corporation (www.sas.com), actually has a step in its BA process, Query Drilldown,

which refers to the mining effort of questioning and finding answers to pull up useful
information in the BA analysis. Many firms routinely undertake BA to solve specific
problems, while other firms undertake BA to explore and discover new knowledge to
guide organizational planning and decision-making to improve business performance.
The size of some data sources can be unmanageable, overly complex, and gener-
ally confusing. Sorting out data and trying to make sense of its informational value
requires the application of descriptive analytics as a first step in the BA process. One
might begin simply by sorting the data into groups using the four possible classifica-
tions presented in Table 1.4. Also, incorporating some of the data into spreadsheets
like Excel and preparing cross tabulations and contingency tables are means of restrict-
ing the data into a more manageable data structure. Simple measures of central ten-
dency and dispersion might be computed to try to capture possible opportunities for
business improvement. Other descriptive analytic summarization methods, including
charting, plotting, and graphing, can help decision makers visualize the data to better
understand content opportunities.

Table 1.4 Types of Data Measurement Classification Scales

Type of Data
Measurement Scale Description
Categorical Data Data that is grouped by one or more characteristics. Categorical data usually
involves cardinal numbers counted or expressed as percentages. Example
1: Product markets that can be characterized by categories of “high-end”
products or “low-income” products, based on dollar sales. It is common to
use this term to apply to data sets that contain items identified by categories
as well as observations summarized in cross-tabulations or contingency
tables.
Ordinal Data Data that is ranked or ordered to show relational preference. Example 1:
Football team rankings not based on points scored but on wins. Example 2:
Ranking of business firms based on product quality.
Interval Data Data that is arranged along a scale where each value is equally distant from
others. It is ordinal data. Example 1: A temperature gauge. Example 2: A
survey instrument using a Likert scale (that is, 1, 2, 3, 4, 5, 6, 7), where 1
to 2 is perceived as equidistant to the interval from 2 to 3, and so on. Note:
In ordinal data, the ranking of firms might vary greatly from first place to
second, but in interval data, they would have to be relationally proportional.
Ratio Data Data expressed as a ratio on a continuous scale. Example 1: The ratio of
firms with green manufacturing programs is twice that of firms without such
a program.
 CHAPTER 1 • WHAT ARE BUSINESS ANALYTICS? 9

From Step 1 in the Descriptive Analytic analysis (see Figure 1.1), some patterns
or variables of business behavior should be identified representing targets of business
opportunities and possible (but not yet defined) future trend behavior. Additional
effort (more mining) might be required, such as the generation of detailed statistical
reports narrowly focused on the data related to targets of business opportunities to
explain what is taking place in the data (what happened in the past). This is like a statis-
tical search for predictive variables in data that may lead to patterns of behavior a firm
might take advantage of if the patterns of behavior occur in the future. For example, a
firm might find in its general sales information that during economic downtimes, cer-
tain products are sold to customers of a particular income level if certain advertising is
undertaken. The sales, customers, and advertising variables may be in the form of any
of the measurable scales for data in Table 1.4, but they have to meet the three con-
ditions of BA previously mentioned: clear relevancy to business, an implementable
resulting insight, and performance and value measurement capabilities.
To determine whether observed trends and behavior found in the relationships of
the descriptive analysis of Step 1 actually exist or hold true and can be used to forecast
or predict the future, more advanced analysis is undertaken in Step 2, Predictive Ana-
lytic analysis, of the BA process. There are many methods that can be used in this step
of the BA process. A commonly used methodology is multiple regression. (See Appen-
dix A, “Statistical Tools,” and Appendix E, “Forecasting,” for a discussion on multiple
regression and ANOVA testing.) This methodology is ideal for establishing whether a
statistical relationship exists between the predictive variables found in the descriptive
analysis. The relationship might be to show that a dependent variable is predictively
associated with business value or performance of some kind. For example, a firm
might want to determine which of several promotion efforts (independent variables
measured and represented in the model by dollars in TV ads, radio ads, personal sell-
ing, and/or magazine ads) is most efficient in generating customer sale dollars (the
dependent variable and a measure of business performance). Care would have to be
taken to ensure the multiple regression model was used in a valid and reliable way,
which is why ANOVA and other statistical confirmatory analyses are used to support
the model development. Exploring a database using advanced statistical procedures
to verify and confirm the best predictive variables is an important part of this step in
the BA process. This answers the questions of what is currently happening and why it
happened between the variables in the model.
A single or multiple regression model can often forecast a trend line into the
future. When regression is not practical, other forecasting methods (exponential
smoothing, smoothing averages) can be applied as predictive analytics to develop
needed forecasts of business trends. (See Appendix E.) The identification of future
10 BUSINESS ANALYTICS PRINCIPLES, CONCEPTS, AND APPLICATIONS

trends is the main output of Step 2 and the predictive analytics used to find them. This
helps answer the question of what will happen.
If a firm knows where the future lies by forecasting trends as they would in Step 2
of the BA process, it can then take advantage of any possible opportunities predicted
in that future state. In Step 3, Prescriptive Analytics analysis, operations research
methodologies can be used to optimally allocate a firm’s limited resources to take
best advantage of the opportunities it found in the predicted future trends. Limits
on human, technology, and financial resources prevent any firm from going after all
opportunities they may have available at any one time. Using prescriptive analytics
allows the firm to allocate limited resources to optimally achieve objectives as fully
as possible. For example, linear programming (a constrained optimization method-
ology) has been used to maximize the profit in the design of supply chains (Paksoy
et al., 2013). (Note: Linear programming and other optimization methods are pre-
sented in Appendixes B, “Linear Programming,” C, “Duality and Sensitivity Analysis
in Linear Programming,” and D, “Integer Programming.”) This third step in the BA
process answers the question of how best to allocate and manage decision-making in
the future.
In summary, the three major components of descriptive, predictive, and prescrip-
tive analytics arranged as steps in the BA process can help a firm find opportunities in
data, predict trends that forecast future opportunities, and aid in selecting a course of
action that optimizes the firm’s allocation of resources to maximize value and perfor-
mance. The BA process, along with various methodologies, will be detailed in Chap-
ters 5 through 10.

1.3 Relationship of BA Process and Organization

Decision-Making Process
The BA process can solve problems and identify opportunities to improve busi-
ness performance. In the process, organizations may also determine strategies to guide
operations and help achieve competitive advantages. Typically, solving problems and
identifying strategic opportunities to follow are organization decision-making tasks.
The latter, identifying opportunities, can be viewed as a problem of strategy choice
requiring a solution. It should come as no surprise that the BA process described
in Section 1.2 closely parallels classic organization decision-making processes. As
depicted in Figure 1.2, the business analytic process has an inherent relationship to
the steps in typical organization decision-making processes.
 CHAPTER 1 • WHAT ARE BUSINESS ANALYTICS? 11

BA Process Organization Decision-Making Process*

1. Perception of disequilibrium: Observe

Source of data and become aware of potential problem
(or opportunity) situations.

1. Descriptive 2. Diagnostic process: Attempt to

analytic analysis understand what is happening in a
particular situation.

3. Problem statement: Identify and state

2. Predictive
analytic analysis problems and solution strategies in relation
to organization goals and objectives.

4. Solution strategy selection:

3. Prescriptive Select optimal course of action for the
analytic analysis
organization from the strategies determine
previously, and 5. Implementation:
implement the strategy.
.

Outcome of both of these processes:

Measurable increase in business value and performance

Figure 1.2 Comparison of business analytics and organization decision-making processes

*Source: Adapted from Figure 1 in Elbing (1970), pp. 12–13.

The organization decision-making process (ODMP) developed by Elbing (1970)

and presented in Figure 1.2 is focused on decision making to solve problems but could
also be applied to finding opportunities in data and deciding what is the best course of
action to take advantage of them. The five-step ODMP begins with the perception of
disequilibrium, or the awareness that a problem exists that needs a decision. Similarly,
in the BA process, the first step is to recognize that databases may contain information
that could both solve problems and find opportunities to improve business perfor-
mance. Then in Step 2 of the ODMP, an exploration of the problem to determine its
size, impact, and other factors is undertaken to diagnose what the problem is. Like-
wise, the BA descriptive analytic analysis explores factors that might prove useful in
solving problems and offering opportunities. The ODMP problem statement step is
similarly structured to the BA predictive analysis to find strategies, paths, or trends
that clearly define a problem or opportunity for an organization to solve problems.
Finally, the ODMP’s last steps of strategy selection and implementation involve the
same kinds of tasks that the BA process requires in the final prescriptive step (make an
12 BUSINESS ANALYTICS PRINCIPLES, CONCEPTS, AND APPLICATIONS

optimal selection of resource allocations that can be implemented for the betterment
of the organization).
The decision-making foundation that has served ODMP for many decades paral-
lels the BA process. The same logic serves both processes and supports organization
decision-making skills and capacities.

1.4 Organization of This Book

This book is designed to answer three questions about BA:

• What is it?
• Why is it important?
• How do you do it?

To answer these three questions, the book is divided into three parts. In Part I,
“What Are Business Analytics?”, Chapter 1 answers the “what” question. In Part II,
the “why” question is answered in Chapter 2, “Why Are Business Analytics Impor-
tant?” and Chapter 3, “What Resource Considerations Are Important to Support
Business Analytics?”
Knowing the importance of explaining how BA is undertaken, the rest of the
book’s chapters and appendixes are devoted to answering that question. Chapter
4, “How Do We Align Resources to Support Business Analytics within an Organi-
zation?”, explains how an organization needs to support BA. Chapter 5, “What Are
Descriptive Analytics?”, Chapter 6, “What Are Predictive Analytics?”, and Chapter
7, “What Are Prescriptive Analytics?”, detail and illustrate the three respective steps
in the BA process. To further illustrate how to conduct a BA analysis, Chapter 8, “A
Final Case Study Illustration,” provides an example of BA. Supporting the analytic
discussions is a series of analytically oriented appendixes that follow Chapter 8.
Part III includes quantitative analyses utilizing computer software. In an effort to
provide some diversity of software usage, SPSS, Excel, and LINGO software output
are presented. SPSS and LINGO can be used together to duplicate the analysis in this
book, or only Excel with the necessary add-ins can be used. Because of the changing
nature of software and differing educational backgrounds, this book does not provide
extensive software explanation.
In addition to the basic content that makes up the body of the chapters, there are
pedagogy enhancements that can aid learning. All chapters begin with chapter objec-
tives and end with a summary, discussion questions, and, where needed, references.
 CHAPTER 1 • WHAT ARE BUSINESS ANALYTICS? 13

In addition, Chapters 5 through 8 have sample problems with solutions, as well as

additional assignment problems.
Some of the more detailed explanations of methodologies are presented in the
appendixes. Their positioning in the appendixes is designed to enhance content flow
and permit more experienced readers a flexible way to select only the technical con-
tent they might want to use. An extensive index allows quick access to terminology.

Summary
This chapter has introduced important terminology and defined business analyt-
ics in terms of a unique process useful in securing information on which decisions can
be made and business opportunities seized. Data classification measurement scales
were also briefly introduced to aid in understanding the types of measures that can be
employed in BA. The relationship of the BA process and the organization decision-
making process was explained in terms of how they complement each other. This
chapter ended with a brief overview of this book’s organization and how it is struc-
tured to aid learning.
Knowing what business analytics are about is important, but equally important is
knowing why they are important. Chapter 2 begins to answer the question.

Discussion Questions
1. What is the difference between analytics and business analytics?
2. What is the difference between business analytics and business intelligence?
3. Why are the steps in the business analytics process sequential?
4. How is the business analytics process similar to the organization decision-
making process?
5. Why does interval data have to be relationally proportional?
14 BUSINESS ANALYTICS PRINCIPLES, CONCEPTS, AND APPLICATIONS

References
Bartlett, R. (2013) A Practitioner’s Guide to Business Analytics. McGraw-Hill,
New York, NY.
Elbing, A.O. (1970) Behavioral Decisions in Organizations. Scott Foresman and
Company, Glenview, IL.
Isson, J.P., Harriott, J.S. (2013) Win with Advanced Business Analytics. John
Wiley & Sons, Hoboken, NJ.
Negash, S. (2004) “Business Intelligence.” Communications of the Association of
Information Systems. Vol. 13, pp. 177–195.
Paksoy, T., Ozxeylan, E., Weber, G.W. (2013) “Profit-Oriented Supply Chain
Network Optimization.” Central European Journal of Operations Research. Vol. 21,
No. 2, pp. 455–478.
Stubbs, E. (2011) The Value of Business Analytics. John Wiley & Sons,
Hoboken, NJ.