Introduction

Chapter 1

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Introduction (Slide 1 of 3)
• Three developments spurred recent explosive growth in the use of
analytical methods in business applications:
• First development:
• Technological advances—scanner technology, data collection through
e-commerce, Internet social networks, and data generated from
personal electronic devices—produce incredible amounts of data for
businesses.
• Businesses want to use these data to improve the efficiency and
profitability of their operations, better understand their customers,
price their products more effectively, and gain a competitive advantage.

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Introduction (Slide 2 of 3)
• Three developments spurred recent explosive growth in the use of
analytical methods in business applications (cont.):
• Second development:
• Ongoing research has resulted in numerous methodological
developments, including:
• Advances in computational approaches to effectively handle and explore
massive amounts of data.
• Faster algorithms for optimization and simulation.
• More effective approaches for visualizing data.

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Introduction (Slide 3 of 3)
• Three developments spurred recent explosive growth in the use of
analytical methods in business applications (cont.):
• Third development:
• The methodological developments were paired with an explosion in
computing power and storage capability.
• Better computing hardware, parallel computing, and cloud computing
have enabled businesses to solve big problems faster and more
accurately than ever before.

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Decision Making

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Decision Making (Slide 1 of 4)
• Managers’ responsibility:
To make strategic, tactical, or operational decisions.
• Strategic decisions:
• Involve higher-level issues concerned with the overall direction of the
organization.
• Define the organization’s overall goals and aspirations for the future.

© 2019 Cengage. All Rights Reserved.

Decision Making (Slide 2 of 4)
• Tactical decisions:
• Concern how the organization should achieve the goals and objectives
set by its strategy.
• Are usually the responsibility of midlevel management.
• Operational decisions:
• Affect how the firm is run from day to day.
• Are the domain of operations managers, who are the closest to the
customer.

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Decision Making (Slide 3 of 4)
Decision making can be defined as the following process:
1. Identify and define the problem.
2. Determine the criteria that will be used to evaluate alternative
solutions.
3. Determine the set of alternative solutions.
4. Evaluate the alternatives.
5. Choose an alternative.

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Decision Making (Slide 4 of 4)
Common approaches to making decisions include:
• Tradition.
• Intuition.
• Rules of thumb.
• Using the relevant data available.

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Business Analytics Defined

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Business Analytics Defined (Slide 1 of 2)
Business analytics:
• Scientific process of transforming data into insight for making better
decisions.
• Used for data-driven or fact-based decision making, which is often seen
as more objective than other alternatives for decision making.

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Business Analytics Defined (Slide 2 of 2)
Tools of business analytics can aid decision making by:
• Creating insights from data.
• Improving our ability to more accurately forecast for planning.
• Helping us quantify risk.
• Yielding better alternatives through analysis and optimization.

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A Categorization of Analytical
Methods and Models
Descriptive Analytics
Predictive Analytics
Prescriptive Analytics

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A Categorization of Analytical Methods and
Models (Slide 1 of 8)
Descriptive Analytics:
• Descriptive analytics: Encompasses the set of techniques that describes
what has happened in the past; examples include:
• Data queries.
• Reports.
• Descriptive statistics.
• Data visualization (including data dashboards).
• Data-mining techniques.
• Basic what-if spreadsheet models.
• Data query: A request for information with certain characteristics from a
database.

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A Categorization of Analytical Methods and
Models (Slide 2 of 8)
Descriptive Analytics (cont.):
• Data dashboards: Collections of tables, charts, maps, and summary
statistics that are updated as new data become available.
• Uses of dashboards:
• To help management monitor specific aspects of the company’s performance
related to their decision-making responsibilities.
• For corporate-level managers, daily data dashboards might summarize sales by
region, current inventory levels, and other company-wide metrics.
• Front-line managers may view dashboards that contain metrics related to
staffing levels, local inventory levels, and short-term sales forecasts.

© 2019 Cengage. All Rights Reserved.

A Categorization of Analytical Methods and
Models (Slide 3 of 8)
Descriptive Analytics (cont.):
• Data mining: The use of analytical techniques for better understanding
patterns and relationships that exist in large data sets.
• Examples of data-mining techniques include:
• Cluster analysis.
• Sentiment analysis.

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A Categorization of Analytical Methods and
Models (Slide 4 of 8)
Predictive Analytics:
• 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.
• Survey data and past purchase behavior may be used to help predict the
market share of a new product.

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A Categorization of Analytical Methods and
Models (Slide 5 of 8)
Predictive Analytics (cont.):
• Techniques used in Predictive Analytics include:
• Linear regression.
• Time series analysis.
• Data mining is used to find patterns or relationships among elements of the
data in a large database; often used in predictive analytics.
• Simulation involves the use of probability and statistics to construct a
computer model to study the impact of uncertainty on a decision.

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A Categorization of Analytical Methods and
Models (Slide 6 of 8)
Prescriptive Analytics:
• Prescriptive Analytics: Indicates a best course of action to take:
• Provide a forecast or prediction, but do not provide a decision.
• A forecast or prediction, when combined with a rule, becomes a prescriptive
model.
• Prescriptive models that rely on a rule or set of rules are often referred to as
rule-based models.

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A Categorization of Analytical Methods and
Models (Slide 7 of 8)
Prescriptive Analytics (cont.):
Model Field Purpose
Portfolio models Finance Use historical investment return data to determine the mix of
investments that yield the highest expected return while controlling
or limiting exposure to risk.

Supply network Operations Provide the cost-minimizing plant and distribution center locations
design models subject to meeting the customer service requirements.

Price-markdown models Retailing Use historical data to yield revenue-maximizing discount levels and
the timing of discount offers when goods have not sold as planned.

• Optimization models: Models that give the best decision subject to

constraints of the situation.

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A Categorization of Analytical Methods and
Models (Slide 8 of 8)
Prescriptive Analytics (cont.):
• Simulation optimization: Combines the use of probability and statistics
to model uncertainty with optimization techniques to find good
decisions in highly complex and highly uncertain settings.
• Decision analysis:
• Used to develop an optimal strategy when a decision maker is faced with
several decision alternatives and an uncertain set of future events.
• Employs utility theory, which assigns values to outcomes based on the
decision maker’s attitude toward risk, loss, and other factors.

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Big Data
Volume
Velocity
Variety
Veracity

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Big Data (Slide 1 of 7)
• 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.
• IBM describes the phenomenon of big data through the four Vs (as
shown in Figure 1.1):
• Volume.
• Velocity.
• Variety.
• Veracity.

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Big Data (Slide 2 of 7)
Figure 1.1: The 4 Vs of Big Data

Source: IBM

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Big Data (Slide 3 of 7)
Volume:
• 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.
Velocity:
• 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.

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Big Data (Slide 4 of 7)
Variety:
• More complicated types of data are now available and are proving to be of
great value to businesses.
• Text data are collected by monitoring what is being said about a company’s
products or services on social media platforms.
• Audio data are collected from service calls.
• Video data are collected by in-store video cameras and used to analyze
shopping behavior.
• Analyzing information generated by these nontraditional sources is more
complicated in part because of the processing required to transform the
data into a numerical form that can be analyzed.

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Big Data (Slide 5 of 7)
Veracity:
• Veracity has to do with how much uncertainty is in the data.
• Inconsistencies in units of measure and the lack of reliability of responses
in terms of bias also increase the complexity of the data.

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Big Data (Slide 6 of 7)
• Represents opportunities.
• Presents challenges in terms of data storage and processing, security,
and available analytical talent.
• The four Vs have led to new technologies:
• Hadoop: An open-source programming environment that supports big
data processing through distributed storage and processing on clusters
of computers.
• MapReduce: A programming model used within Hadoop that performs
two major steps: the map step and the reduce step.

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Big Data (Slide 7 of 7)
• Data security, the protection of stored data from destructive forces or
unauthorized users, is of critical importance to companies.
• The complexities of the 4 Vs have increased the demand for analysts,
but a shortage of qualified analysts has made hiring more challenging.
• More companies are searching for data scientists, who know how to
process and analyze massive amounts of data.
• The Internet of Things (IoT) is the technology that allows data,
collected from sensors in all types of machines, to be sent over the
Internet to repositories where it can be stored and analyzed.

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Business Analytics in Practice
Financial Analytics
Human Resource (HR) Analytics
Marketing Analytics
Health Care Analytics

Supply-Chain Analytics
Analytics for Government and Nonprofits
Sports Analytics
Web Analytics

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Business Analytics in Practice (Slide 1 of 11)
Figure 1.2: The Spectrum of Business Analytics

Source: Adapted from SAS

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Business Analytics in Practice (Slide 2 of 11)
• Predictive and prescriptive analytics are sometimes referred to as
advanced analytics.
Financial Analytics:
• Use of predictive models to:
• Forecast financial performance.
• Assess the risk of investment portfolios and projects.
• Construct financial instruments such as derivatives.
• Construct optimal portfolios of investments.
• Allocate assets.
• Create optimal capital budgeting plans.
• Simulation is also often used to assess risk in the financial sector.
© 2019 Cengage. All Rights Reserved.
Business Analytics in Practice (Slide 3 of 11)
Human Resource (HR) Analytics:
• New area of application for analytics.
• The HR function is charged with ensuring that the organization:
• Has the mix of skill sets necessary to meet its needs.
• Is hiring the highest-quality talent and providing an environment that
retains it.
• Achieves its organizational diversity goals.

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Business Analytics in Practice (Slide 4 of 11)
Marketing Analytics:
• Marketing is one of the fastest-growing areas for the application of
analytics.
• A better understanding of consumer behavior through the use of scanner
data and data generated from social media has led to an increased
interest in marketing analytics.

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Business Analytics in Practice (Slide 5 of 11)
Marketing Analytics (cont.):
• A better understanding of consumer behavior through marketing
analytics leads to:
• Better use of advertising budgets.
• More effective pricing strategies.
• Improved forecasting of demand.
• Improved product-line management.
• Increased customer satisfaction and loyalty.

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Business Analytics in Practice (Slide 6 of 11)
Health Care Analytics:
• Descriptive, predictive, and prescriptive analytics are used to improve:
• Patient, staff, and facility scheduling.
• Patient flow.
• Purchasing.
• Inventory control.
• Use of prescriptive analytics for diagnosis and treatment may prove to be
the most important application of analytics in health care.

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Business Analytics in Practice (Slide 7 of 11)
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.
• Companies can benefit from better inventory and processing control and
more efficient supply chains.

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Business Analytics in Practice (Slide 8 of 11)
Analytics for Government and Nonprofits:
• Analytics for government to:
• Drive out inefficiencies.
• Increase the effectiveness and accountability of programs.
• Analytics for nonprofit agencies to ensure their effectiveness and
accountability to their donors and clients.

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Business Analytics in Practice (Slide 9 of 11)
Sports Analytics
• Professional sports teams use to:
• Assess players for the amateur drafts.
• Decide how much to offer players in contract negotiations.
• Professional motorcycle racing teams use sophisticated optimization for
gearbox design to gain competitive advantage.
• Teams use to assist with on-field decisions such as which pitchers to use
in various games of a MLB playoff series.

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Business Analytics in Practice (Slide 10 of 11)
Sports Analytics (cont.):
• The use of analytics for off-the-field business decisions is increasing
rapidly.
• Using prescriptive analytics, franchises across several major sports
dynamically adjust ticket prices throughout the season to reflect the
relative attractiveness and potential demand for each game.

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Business Analytics in Practice (Slide 11 of 11)
Web Analytics:
• The analysis of online activity, which includes, but is not limited to, visits
to web sites and social media sites such as Facebook and LinkedIn.
• Leading companies apply descriptive and advanced analytics to data
collected in online experiments to determine the best way to:
• Configure web sites.
• Position ads.
• Utilize social networks for the promotion of products and services.

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