Decision Sciences -1

UNIT I (Theory)

Introduction to Business analytics: Scope and importance of Business analytics.

Metrics and data classification; Criteria for a good measurement - data reliability,
validity and sensitivity.
Decision models: Descriptive decision models, Predictive Decision Models,
Prescriptive Decision Models.
Data Science vs Decision Science: Overview of Data mining, Data mining models /
approaches in Business. Overview of Machine Learning, Types of Machine leaning
- supervised, unsupervised, semi supervised.
Applications of Business Analytics and Data science

What is Business Analytics?

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.
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
Some common types of decisions that can be enhanced using analytics include
 Pricing decisions
 Decisions to target consumer segments (for example retailers, insurers and credit card
firms)
 Merchandising decisions (for example, brands to buy, quantities and allocations)
 Location decisions and in operations and supply chains, finance, marketing and
human resources – infact in every discipline of business.

What is decision making?

Decision making is the process of making choices by identifying a decision, gathering
information, and assessing alternative resolutions. Using a step-by-step decision-making
process can help you make more deliberate, thoughtful decisions by organizing relevant
information and defining alternatives.
Decision making environments / scenarios in business
Certainty, Uncertainty, Risk
Certainty
Such type of environment is very sure and certain by its nature. This means that all the
information is available and at hand. Such data is also easy to attain and not very expensive to
gather.
Risk
Under the condition of risk, there is the possibility of more than one event taking place.
Which means the manager has to first ascertain the possibility and probability of the
occurrence or non-occurrence of the event.
The manager will generally rely on past experiences to make this deduction.
Uncertainty
In the decision-making environment of uncertainty, the information available to the manager
is incomplete, insufficient and often unreliable.
The decision maker has to obtain some reliable data and make the best decision as per his
judgment.

Problem Solving and Decision-making process

 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
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.
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
3. Structuring the Problem
 Stating goals and objectives
 Characterizing the possible decisions
 Identifying any constraints or restrictions
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 techniques for use in Step 4.
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.
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.
Decision Models in Business Analytics
 Descriptive analytics
- uses data to understand past and present business performance and make informed
decisions.
 Predictive analytics
- analyzes past performance to predict future data
 Prescriptive analytics
- uses optimization techniques to identify the best alternatives to minimize or
maximize some objective.
Example 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
Business Analytics Applications
 Management of customer relationships
 Financial and marketing activities
 Supply chain management
 Human resource planning
 Pricing decisions
 Sport team game strategies

Data for Business Analytics

 DATA
- collected facts and figures
 DATABASE
- collection of computer files containing data
 INFORMATION
 - comes from analyzing data
Examples of using DATA in business:
 Annual reports
 Accounting audits
 Financial profitability analysis
 Economic trends
 Marketing research
 Operations management performance
 Human resource measurements

Data for Business Analytics

 Metric is a unit of measurement that provides a way to objectively quantify
performance.
For example senior managers might assess overall business performance using such metrics
as net profit, return on investment, market share and customer satisfaction.
 Measurement is the act of obtaining the data associated with a metric. Measures are
numerical values associated with a metrics.

 Metrics can be either discrete or continuous

 Discrete metric is one that is derived from counting something.
- on time or not on time
- number or proportion of on time deliveries
 Continuous metrics are based on a continuous scale of measurement. Any metrics
involving dollars, length, time, volume, or weight are continuous.
- delivery time
- package weight
- purchase price
Data for Business Analytics based on Measurement Scale
 Categorical (nominal) data
 Ordinal data
 Interval data
 Ratio data
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)
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)
Interval Data
 Ordinal data but with constant differences between observations
 No true zero point
 Ratios are not meaningful
 Examples:
- temperature readings
- SAT scores
Ratio Data
 Continuous values and have a natural zero point
 Ratios are meaningful
 Examples:
- monthly sales
- delivery times

Types of data (based on scaling) and their measurement characteristics

Type of Characteristic of data Basic empirical Example

data / operation
Scale

Nominal Classification, but no Determination of Gender (male female)

order, distance or origin equality

Ordinal Classification and order , Determination of Doneness of meat

but no distance or unique greater or lesser vale (well, medium well,
origin medium rare, rare)

Interval Classification, order and Determination of Temperature in degrees

distance but no unique equality of intervals or
origin differences

ratio Classification, order, Determination of Age in years

distance and unique equality of ratios
origin

Measurement Error
This occurs when the observed measurement on a construct or concept deviates from its true
values.
Reasons
 Mood, fatigue and health of the respondent
 Variations in the environment in which measurements are taken
 A respondent may not understand the question being asked and the interviewer may have
to rephrase the same. While rephrasing the question the interviewer’s bias may get into
the responses.
 Some of the questions in the questionnaire may be ambiguous errors may be committed at
the time of coding, entering of data from questionnaire to the spreadsheet

Criteria for good measurement – validity, reliability, sensitivity

Validity
The ability of a scale to measure what was intended to be measured
Face or content validity
 Professional agreement that a scale logically appears to accurately measure what it is
intended to measure.
Concurrent validity:
 A type of criterion validity whereby a new measure correlates with a criterion measure
taken at the same time.
 Manager’s performance assessment and scores of promotion test are correlated.
Predictive validity:
 A type of criterion validity whereby a new measure predicts a future event or correlates
with a criterion measure administered at a later time.
 Scores of recruitment test predict the performance of an employee on job.

Reliability
Reliability is concerned with consistency, accuracy and predictability of the scale.
The degree to which measures are free from random error and therefore yield consistent
results. When the outcome of the measuring process is reproducible, the measuring
instrument is reliable.
Methods to measures Reliability:
 Test–retest reliability
 Split-half reliability
 Cronbach’s Alpha

 Test-retest method –The administering of the same scale or measure to the same
respondents at two separate points in time in order to test for reliability.
Two problems – Sensitize, attitude change due to time, homogeneity.

 Split-half method is the most basic method for checking internal consistency when a
measure contains large number of items.
The researcher may take the result obtained from one half of the scale items (e.g., odd-
numbered items) and check them against the results from the other half of the items (e..,
even-numbered items)
 It is possible to objectively measure the reliability of an instrument using Cronbach’s
alpha, the most widely used objective measure of reliability.

Cronbach's alpha Internal consistency

0.9 ≤ α Excellent
0.8 ≤ α < 0.9 Good
0.7 ≤ α < 0.8 Acceptable
0.6 ≤ α < 0.7 Questionable

Sensitivity
A measurement instrument’s ability to accurately measure variability in
stimuli or responses.
Recording subtle attitude changes:
Less sensitive:
 Agree or Disagree
More sensitive:
 Strongly agree
 Mildly agree
 Neither agree nor disagree
 Mildly disagree
 Strongly disagree

Data Science vs Decision Science

Decision Science

The interdisciplinary field of Decision Science seeks to understand and improve the judgment
and decision making of individuals, groups, and organizations. Decision Science is grounded
in theories and methods drawn from psychology, economics, philosophy, statistics, and
management science.

Data science
Data science is the process of building, cleaning, and structuring datasets to analyze and
extract meaning.
Data science is an interdisciplinary field that uses scientific methods, processes, algorithms
and systems to extract knowledge and insights from noisy, structured and unstructured data,
and apply knowledge and actionable insights from data across a broad range of application
domains.

Business Analytics Data Science

Business Analytics is the statistical study of Data science is the study of data using
 business statistics,
data to gain insights. algorithms and technology.
Uses mostly structured data. Uses both structured and unstructured data.

Does not involve much coding. It is more Coding is widely used. This field is a
statistics combination of
oriented. traditional analytics practice with good
computer
science knowledge
The whole analysis is based on statistical Statistics is used at the end of analysis
concepts. following
coding.
Studies trends and patterns specific to Studies almost every trend and pattern.
business.
Top industries where business analytics is Top industries/applications where data
used: science is
finance, healthcare, marketing, retail, used: e-commerce, finance, machine
supply chain, learning,
telecommunications. manufacturing.

Data science analysis types

• History
• Descriptive
What's happening in my business?
Comprehensive, accurate and live data
Effective visualization
• Diagnostic
Why it is happening?
Ability to drill down to root cause
Ability to isolate all confounding information

• Future
• Predictive
What’s likely to happen?
Business strategies have remained fairly consistent over time.
Historical patterns being used to predict specific outcomes using algorithms
Decisions are automated using algorithms and technology
• Prescriptive
What do I need to do?
Recommend actions and strategies based on champion / challenger testing strategy
outcomes
Applying advanced analytical techniques to make specific recommendations

Data Mining
  Data mining is a rapidly growing field of business analytics focused on better
understanding of characteristics and patterns among variables in large data sets.
 It is used to identify and understand hidden patterns that large data sets may contain.
 It involves both descriptive and prescriptive analytics, though it is primarily
prescriptive.

The Scope of Data Mining

Some common approaches to data mining

 Data Exploration and Reduction

- identify groups in which elements are similar

This approach is often used to understand differences among customers and segment them
into homogenous groups. Such segmentation is useful in design and marketing activities to
better target product offerings. These techniques have also been used to identify
characteristics of successful employees and improve recruiting and hiring practices.
 Classification
- analyze data to predict how to classify a new data element. An example of classification
is spam filtering in an e-mail client. Classification methods can help predict whether a
credit-card transaction may e fraudulent, whether a loan applicant is high risk, or whether a
consumer will respond to an advertisement.
 Association
- is a process of analyzing databases to identify natural associations among variables and
create rules for target marketing or buying recommendations. Amazon makes
recommendations based on past purchases.
 Cause-and-effect Modeling
- is the process of developing analytics models to describe the relationship between
metrics that drive business performance – for example, profitability, customer satisfaction
etc. regression and correlation analysis are key tools for cause-and-effect modeling.

Overview of Machine Learning

Machine Learning is the field of study that gives computers the capability to learn without
being explicitly programmed.

Types of Machine leaning

• Ssupervised learning: we have enough historical data of input and output pairs to
learn the relationship.
• Task driven
• Prediction
e.g. Regression Analysis
• Unsupervised learning: we do not have an output to optimize the behaviour
relationship but discover the internal structure of the data.
• Data driven
• Clusters
e.g. Clustering and Association
 • Reinforcement learning: we keep learning from feedback from the output. This
allows us to have continuous learning.
• Hit & trial
• rewards

• Semi supervised learning:

• Semi-supervised learning is an approach to machine learning that combines a
small amount of labeled data with a large amount of unlabeled data during
training.
• A common example of an application of semi-supervised learning is a text
document classifier.
• So, semi-supervised learning allows for the algorithm to learn from a small
amount of labeled text documents while still classifying a large amount of
unlabeled text documents in the training data.

Business Applications of Data Mining

 Pharmaceutical companies – use data mining to target physicians and tailor market
activities
 Credit card companies – identify customers most likely to be interested in new credit
products
 Transportation companies – identify best prospects for their services
 Consumer package goods – selects promotional strategies to meet their target
customers

Benefits of Business Analytics Tools

The valuable insight provided by BA tools allows organizations and companies to chalk out
ways to optimize and automate business processes. Not only do BA tools help companies
make data-driven decisions, but they also have many more clear-cut advantages:

 Business analytics make tracking and monitoring business processes extremely

efficient and seamless, thereby allowing companies to handle even the most complex
of business operations with ease.
 The market insights offered by BA and BI tools can give you a competitive edge over
your competitors as you always get updates about your competitors, latest consumer
 trends, and also about potential markets. This is highly advantageous for businesses in
a competitive environment.
 BA tools (predictive modeling and predictive analytics) can offer accurate and timely
predictions about the market conditions while simultaneously allowing you to
streamline your marketing strategies for the best possible outcomes.
 Using statistical and quantitative analysis, you can get a plausible explanation on why
specific strategies fail and why others remain successful. Thus, you get a clearer idea
of what kind of plans you should focus on and what to leave out.
 BA tools can efficiently measure the Key Performance Indicator (KPIs) which can
further assist companies to make better and timely decisions.

Applications of Business Analytics

The industries using Business Analytics on a day to day basis will help you
understand what is analytics in a much practical fashion. Here are some of the
industries:

Marketing

Business analytics is gaining ground in the field of marketing because it can reveal vital
statistics about consumer behavior and market trends. Furthermore, it can help companies to
identify their target customers as well as potential markets that promise significant growth.

Finance

Business analytics is crucial to the finance sector. Using BA tools finance companies can
process the vast amounts of data available at their disposal to unravel valuable insights on the
performance of stocks and provide advice to the client whether to hold on to it or sell it.

Human Resources

HR professionals are now using BA and BI tools to conduct relevant background checks on
potential candidates. Using BA tools they can find out detailed information about employee
attrition rate, high-performance candidates, and so on.

Manufacturing

Business analytics has also come to play a pivotal role in the manufacturing sector. It can use
the data to offer meaningful insights into inventory management, supply chain management,
the performance of targets, and risk mitigation plans. Also, BA tools can help companies
scale up their operations efficiency.

Applications of Data Mining

Data mining help us to discover patterns and relationships within that data. Those
connections and insights can enable better business decisions. Data mining can also reduce
risk, helping you to detect fraud, errors, and inconsistencies that can lead to profit loss and
reputation damage. Different industries use data mining to better understand customers and
the business.
Service providers
The first example of Data Mining and Business Intelligence comes from service providers in
the mobile phone and utilities industries. Mobile phone and utilities companies use Data
Mining and Business Intelligence to predict ‘churn’, the terms they use for when a customer
leaves their company to get their phone/gas/broadband from another provider. They collate
billing information, customer services interactions, website visits and other metrics to give
each customer a probability score, then target offers and incentives to customers whom they
perceive to be at a higher risk of churning.
Retail
Another example of Data Mining and Business Intelligence comes from the retail sector.
Retailers segment customers into ‘Recency, Frequency, Monetary’ (RFM) groups and target
marketing and promotions to those different groups. A customer who spends little but often
and last did so recently will be handled differently to a customer who spent big but only once,
and also some time ago. The former may receive a loyalty, upsell and cross-sell offers,
whereas the latter may be offered a win-back deal, for instance.
E-commerce
Perhaps some of the most well -known examples of Data Mining and Analytics come from E-
commerce sites. Many E-commerce companies use Data Mining and Business Intelligence to
offer cross-sells and up-sells through their websites. One of the most famous of these is, of
course, Amazon, who use sophisticated mining techniques to drive their, ‘People who viewed
that product, also liked this’ functionality.
Intrusion Detection
A network intrusion refers to any unauthorized activity on a digital network. Network
intrusions often involve stealing valuable network resources. Data mining technique plays a
vital role in searching intrusion detection, network attacks, and anomalies. These
techniques help in selecting and refining useful and relevant information from large data
sets. Data mining technique helps in classify relevant data for Intrusion Detection System.
Intrusion Detection system generates alarms for the network traffic about the foreign
invasions in the system.
Healthcare and Insurance
A Pharmaceutical sector can examine its new deals force activity and their outcomes to
improve the focusing of high-value physicians and figure out which promoting activities
will have the best effect in the following upcoming months, Whereas the Insurance sector,
data mining can help to predict which customers will buy new policies, identify behavior
patterns of risky customers and identify fraudulent behavior of customers.
 Claims analysis i.e which medical procedures are claimed together.
 Identify successful medical therapies for different illnesses.
 Characterizes patient behavior to predict office visits.

Today, Business Analytics has become an integral part of the business world. As data keeps
on piling up by the minute, more and more organizations are relying on BA and BI tools to
boost profitability and optimize business operations. And with the cut-throat competition
that exists today, businesses that do not integrate business analytics within their framework
are not only missing out on growth opportunities but also might fail to keep up with the
market over time.

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