Introduction to Business Analytics

Prof. Kunal Ghosh

 BUSINESS ANALYTICS: THE SCIENCE OF DATA-DRIVEN DECISION
MAKING

• Go down deep enough into anything and you will find Mathematics”.
— Dean Schlicter
 BUSINESS ANALYTICS: THE SCIENCE OF DATA-DRIVEN DECISION
MAKING

• Business analytics is a set of statistical and operations research

techniques, artificial intelligence, information technology and
management strategies used for framing a business problem,
collecting data, and analyzing the data to create value to
organizations.
 BUSINESS ANALYTICS: THE SCIENCE OF DATA-DRIVEN DECISION
MAKING

• Increasing complexities associated with businesses in the form of

scale of operations and competition demand deeper understanding of
the market and customers to serve better and succeed in the market.
• One of the main reasons for analytics is the scale of operations.
 BUSINESS ANALYTICS: THE SCIENCE OF DATA-DRIVEN DECISION
MAKING

• If Walmart was a country, its GDP would be 28th in the world, its
revenue in 2014 was 485.7 billion US dollars.
• Merchandizing, shelf space allocation, promotions, brand monitoring,
managing talent at the scale of operations of Walmart, Target, and
Amazon requires solving complex problems in real time.
 BUSINESS ANALYTICS: THE SCIENCE OF DATA-DRIVEN DECISION
MAKING

• In today’s world, data-driven decision making through business

analytics is just not an option, but an essential capability that every
organization should acquire irrespective of its size.
• As the competition increases, organizations cannot afford to shield
inefficiencies.
• Analytics provides the capability for the organizations to be efficient
and effective.
 BUSINESS ANALYTICS: THE SCIENCE OF DATA-DRIVEN DECISION
MAKING

• Based on a survey of 3000 executives, Hopkins claimed that there is a

striking correlation between an organization’s analytics sophistication
and its competitive performance.

• The biggest obstacle to adopting analytics is the lack of knowledge

about the tools and techniques that are required.
 BUSINESS ANALYTICS: THE SCIENCE OF DATA-DRIVEN DECISION
MAKING

• The human mind lacks the ability to choose the right decisions due to
the complexity of the problems that the organizations are facing and
the limited time available for decision making (Simon, 1972).
 BUSINESS ANALYTICS: THE SCIENCE OF DATA-DRIVEN DECISION
MAKING

• In the 1980s, the culture of data collection was poor.

• Many organizations did not collect data or the data collected was not
in a form that could be easily used for deriving insights.
• Even in 2019, many companies used to collect data manually which
resulted in data quality issues.
• Organizations found decision making difficult due to the lack of data
that could be made available quickly.
 BUSINESS ANALYTICS: THE SCIENCE OF DATA-DRIVEN DECISION
MAKING

• The introduction of enterprise resource planning (ERP) systems in

many organizations partially solved the problem of non-availability of
data that can be called upon whenever needed.
• However, the data sitting in the ERP systems needed to be analyzed
for problem solving and decision making; the original ERP systems
were not designed to build analytics models.
• Platforms such as SAP HANA and Microsoft Azure try to fill this gap.
 BUSINESS ANALYTICS: THE SCIENCE OF DATA-DRIVEN DECISION
MAKING

• Business Analytics can be broken into 3 components:

Business Context
 Technology
Data Science
BUSINESS ANALYTICS: THE SCIENCE OF DATA-DRIVEN DECISION
MAKING
 Concept of Descriptive, Predictive and Prescriptive Analytics

• Descriptive analytics is the simplest form of analytics that mainly uses

simple descriptive statistics, data visualization techniques, and
business related queries to understand past data.
• One of the primary objectives of descriptive analytics is innovative
ways of data summarization.
• Descriptive analytics is used for understanding the trends in past data
which can be useful for generating insights.
 Concept of Descriptive, Predictive and Prescriptive Analytics

• Descriptive analytics using visualization identifies trends in the data

and connects the dots to gain insights about associated businesses.
• In addition to visualization, descriptive analytics uses descriptive
statistics and queries to gain insights from the data.
• The following are a few examples of insights obtained using
descriptive analytics reported in literature:
 Concept of Descriptive, Predictive and Prescriptive Analytics

• Most shoppers turn towards the right side when they enter a retail
store (Underhill, 2009, pages 77−79). Retailers keep products with
higher profit on the right side of the store since most people turn
right.
• Men are more reluctant to use coupons as compared to women (Hu
and Jasper, 2004).
• While sending coupons, retailers should target female shoppers as
they are more likely to use coupons.
 Concept of Descriptive, Predictive and Prescriptive Analytics

• Trends obtained through descriptive analytics can be used to derive

actionable items.
• For example, when Hurricane Charley struck the U.S. in 2004, Linda
M. Dillman, Walmart’s Chief Information Officer, wanted to
understand the purchasing behavior of their customers (Hays, 2004).
• Using data mining techniques, Walmart found that the demand for
strawberry pop-tarts went up over 7 times during the hurricane
compared to their normal sales rate; the pre-hurricane top-selling
item was found to be beer.
 Concept of Descriptive, Predictive and Prescriptive Analytics

• These insights were used by Walmart when the next hurricane —

Hurricane Frances— hit the U.S. in August−September 2004; most of
the items predicted by Walmart sold quickly.
• Although the high pre-hurricane demand for beer can be intuitively
predicted, the demand for strawberry pop-tarts was a complete
surprise.
 Concept of Descriptive, Predictive and Prescriptive Analytics

• Simple analysis of data can lead to business practices that result in

financial rewards.
• For instance, companies such as RadioShack and Best Buy found a
high correlation between the success of individual stores and the
number of female employees in the sales team (Underhill, 2009).
 Concept of Descriptive, Predictive and Prescriptive Analytics

• Underhill (2009) also reported that the conversion rate (percentage of

people who purchased something) in consumer durable shops was
higher among female shoppers than among male shoppers.
• Many organizations across the globe have to deal with fraudulent
transactions.
 Concept of Descriptive, Predictive and Prescriptive Analytics

• Sometimes, a simple query can lead to fraud detection.

• In 2014, China Eastern Airline found that a man had booked a first
class ticket more than 300 times in a year and cancelled it before its
expiry for full refund so that he could eat free food at the airport’s
VIP lounge (David K Li, 2014).
• In India, insurance frauds accounted for 2500−3500 crore in 2010
(Anon, 2013). It is always a good practice to start analytics projects
with descriptive analytics.
 Concept of Descriptive, Predictive and Prescriptive Analytics

• In the analytics capability maturity model (ACMM), predictive

analytics comes after descriptive analytics and is the most important
analytics capability.
• It aims to predict the probability of occurrence of a future event such
as forecasting demand for products/services, customer churn,
employee attrition, loan defaults, fraudulent transactions, insurance
claim, and stock market fluctuations.
• While descriptive analytics is used for finding what has happened in
the past, predictive analytics is used for predicting what is likely to
happen in the future.
 Concept of Descriptive, Predictive and Prescriptive Analytics

The ability to predict a future event such as

an economic slowdown,
a sudden surge or
decline in a commodity’s price,
which customer is likely to churn,
what will be the total claim from auto insurance customer,
how long a patient is likely to stay in the hospital, and so on will help
organizations plan their future course of action.
 Concept of Descriptive, Predictive and Prescriptive Analytics

• Anecdotal evidence suggests that predictive analytics is the most frequently

used type of analytics across several industries.
• The reason for this is that almost every organization would like to forecast the
demand for the products that they sell, prices of the materials used by them,
and so on.
• Irrespective of the type of business, organizations would like to forecast the
demand for their products or services and understand the causes of demand
fluctuations.
• The use of predictive analytics can reveal relationships that were previously
unknown and are not intuitive
 Concept of Descriptive, Predictive and Prescriptive Analytics

• The most popular example of the application of predictive analytics is

Target’s pregnancy prediction model discussed earlier in the chapter.
• In 2002, Target hired statistician Andrew Pole; one of his assignments
was to predict whether a customer is pregnant (Duhigg, 2012).
• At the outset, the question posed by the marketing department to
Pole may look bizarre, but it made great business sense.
 Concept of Descriptive, Predictive and Prescriptive Analytics

• Any marketer would like to identify the price-insensitive customers

among the shoppers, and who can beat soon-to-be parents? A list of
interesting applications of predictive analytics is presented in
subsequent slides.
 Concept of Descriptive, Predictive and Prescriptive Analytics

• Prescriptive analytics is the highest level of analytics capability which

is used for choosing optimal actions once an organization gains
insights through descriptive and predictive analytics.
• In many cases, prescriptive analytics is solved as a separate
optimization problem.
• Prescriptive analytics assists users in finding the optimal solution to a
problem or in making the right choice/decision among several
alternatives.
 Concept of Descriptive, Predictive and Prescriptive Analytics

• Operations Research (OR) techniques form the core of prescriptive

analytics.
• Apart from operations research techniques, machine learning
algorithms, met heuristics, and advanced statistical models are used
in prescriptive analytics.
 Concept of Descriptive, Predictive and Prescriptive Analytics

• Note that actionable items can be derived directly after descriptive

and predictive analytics model development;
• However, they may not be the optimal action.
• For example, in a Business to Business (B to B) sales, the proportion of
sales conversions to sales leads could be very low.
 Concept of Descriptive, Predictive and Prescriptive Analytics

• The sales conversion period could be very long, as high as 6 months to

one year.
• Predictive analytics such as logistics regression can be used for
predicting the propensity to buy a product and actionable items (such
as which customer to target) can be derived directly based on
predicted probability to buy or using lift chart
Concept of Descriptive, Predictive and Prescriptive Analytics