INSTITUTE –University School of

Business
DEPARTMENT -AIT
M.B.A

Basics of Business Analytics

Course Code-BBO-104
Faculty Name : Dr. Syed Abou Iltaf Hussain

Lecture no. 4 : Concept of Predictive Analytics

DISCOVER . LEARN . EMPOWER

UNIT-1: Introduction to Business Analytics

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 Introduction of Predictive Analytics

• Predictive analytics is an advanced form of data analytics that attempts to answer the question,
“What might happen next?”
• Predictive analytics is the process of using data to forecast future outcomes. The process uses
data analysis, machine learning, artificial intelligence, and statistical models to find patterns that
might predict future behavior.
• Organizations can use historic and current data to forecast trends and behaviors seconds,
days, or years into the future with a great deal of precision.
• As a branch of data science for business, the growth of predictive and augmented analytics
coincides with that of big data systems, where larger, broader pools of data enable increased
data mining activities to provide predictive insights. Advancements in big data machine learning
have also helped expand predictive analytics capabilities.
 Understanding Predictive Analytics

• Predictive analytics is a form of technology that makes predictions about certain unknowns
in the future.
• It draws on a series of techniques to make these determinations, including artificial
intelligence (AI), data mining, machine learning, modeling, and statistics.
• For instance, data mining involves the analysis of large sets of data to detect patterns from
it. Text analysis does the same, except for large blocks of text.
• Predictive models are used for all kinds of applications, including weather forecasts,
creating video games, translating voice to text, customer service, and investment portfolio
strategies.
• All of these applications use descriptive statistical models of existing data to make
predictions about future data.

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 Understanding Predictive Analytics

• Predictive analytics is also useful for businesses to help them manage inventory, develop
marketing strategies, and forecast sales.
• It also helps businesses survive, especially those in highly competitive industries such as
health care and retail.
• Investors and financial professionals can draw on this technology to help craft investment
portfolios and reduce the potential for risk.
• PWC. "Big data: innovation in investing."

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 How does predictive analytics work?
• Data scientists use predictive models to identify correlations between different elements in selected
datasets. Once data collection is complete, a statistical model is formulated, trained, and modified to
generate predictions.
• The workflow for building predictive analytics frameworks follows five basic steps:
• Step 1: Define the problem: A prediction starts with a good thesis and set of requirements. For instance, can a
predictive analytics model detect fraud? Determine optimal inventory levels for the holiday shopping season?
Identify potential flood levels from severe weather? A distinct problem to solve will help determine what method of
predictive analytics should be used.
• Step 2: Acquire and organize data: An organization may have decades of data to draw upon, or a continual flood of
data from customer interactions. Before predictive analytics models can be developed, data flows must be
identified, and then datasets can be organized in a repository such as a data warehouse like BigQuery.

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 How does predictive analytics work?
• Step 3: Pre-process data: Raw data is only nominally useful by itself. To prepare the data for the predictive analytics
models, it should be cleaned to remove anomalies, missing data points, or extreme outliers, any of which might be
the result of input or measurement errors.
• Step 4: Develop predictive models: Data scientists have a variety of tools and techniques to develop predictive
models depending on the problem to be solved and nature of the dataset. Machine learning, regression models,
and decision trees are some of the most common types of predictive models.
• Step 5: Validate and deploy results: Check on the accuracy of the model and adjust accordingly. Once acceptable
results have been achieved, make them available to stakeholders via an app, website, or data dashboard.

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 Uses of Predictive Analytics
• Forecasting
• Forecasting is essential in manufacturing because it ensures the optimal utilization of resources in a supply chain.
Critical spokes of the supply chain wheel, whether it is inventory management or the shop floor, require accurate
forecasts for functioning.
• Predictive modeling is often used to clean and optimize the quality of data used for such forecasts. Modeling
ensures that more data can be ingested by the system, including from customer-facing operations, to ensure a
more accurate forecast.
• Credit
• Credit scoring makes extensive use of predictive analytics. When a consumer or business applies for credit, data
on the applicant's credit history and the credit record of borrowers with similar characteristics are used to predict
the risk that the applicant might fail to perform on any credit extended.
• Underwriting
• Data and predictive analytics play an important role in underwriting. Insurance companies examine policy
applicants to determine the likelihood of having to pay out for a future claim based on the current risk pool of
similar policyholders, as well as past events that have resulted in payouts. Predictive models that consider
characteristics in comparison to data about past policyholders and claims are routinely used by actuaries.

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 Uses of Predictive Analytics
• Marketing
• Individuals who work in this field look at how consumers have reacted to the overall economy when planning on a
new campaign. They can use these shifts in demographics to determine if the current mix of products will entice
consumers to make a purchase. Active traders, meanwhile, look at a variety of metrics based on past events when
deciding whether to buy or sell a security. Moving averages, bands, and breakpoints are based on historical data
and are used to forecast future price movements.
• Fraud Detection
• Financial services can use predictive analytics to examine transactions, trends, and patterns. If any of this activity
appears irregular, an institution can investigate it for fraudulent activity. This may be done by analyzing activity
between bank accounts or analyzing when certain transactions occur.
• Supply Chain
• Supply chain analytics is used to predict and manage inventory levels and pricing strategies. Supply chain
predictive analytics use historical data and statistical models to forecast future supply chain performance,
demand, and potential disruptions. This helps businesses proactively identify and address risks, optimize
resources and processes, and improve decision-making. These steps allow companies to forecast what materials
will be on hand at any given moment and whether there will be any shortages.

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 Predictive Analytics vs. Machine Learning

A common misconception is that predictive analytics and machine learning are the same
things. Predictive analytics help us understand possible future occurrences by analyzing
the past. At its core, predictive analytics includes a series of statistical techniques
(including machine learning, predictive modeling, and data mining) and uses statistics
(both historical and current) to estimate, or predict, future outcomes.

Machine learning, on the other hand, is a subfield of computer science that, as per the
1959 definition by Arthur Samuel (an American pioneer in the field of computer gaming
and artificial intelligence) means "the programming of a digital computer to behave in a
way which, if done by human beings or animals, would be described as involving the
process of learning.".

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 How Businesses Can Use Predictive Analytics

• As noted above, predictive analysis can be used in a number of different applications. Businesses can
capitalize on models to help advance their interests and improve their operations. Predictive models
are frequently used by businesses to help improve their customer service and outreach.
• Executives and business owners can take advantage of this kind of statistical analysis to determine
customer behavior. For instance, the owner of a business can use predictive techniques to identify and
target regular customers who could defect and go to a competitor.
• Predictive analytics plays a key role in advertising and marketing. Companies can use models to
determine which customers are likely to respond positively to marketing and sales campaigns. Business
owners can save money by targeting customers who will respond positively rather than doing blanket
campaigns.

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 Benefits of Predictive Analytics

• There are numerous benefits to using predictive analysis. As mentioned above,

using this type of analysis can help entities when you need to make predictions
about outcomes when there are no other (and obvious) answers available.
• Investors, financial professionals, and business leaders are able to use models to
help reduce risk. For instance, an investor and their advisor can use certain models
to help craft an investment portfolio with minimal risk to the investor by taking
certain factors into consideration, such as age, capital, and goals.
• There is a significant impact to cost reduction when models are used. Businesses
can determine the likelihood of success or failure of a product before it launches.
Or they can set aside capital for production improvements by using predictive
techniques before the manufacturing process begins.

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 Criticism of Predictive Analytics

• The use of predictive analytics has been criticized and, in some cases, legally
restricted due to perceived inequities in its outcomes. Most commonly, this
involves predictive models that result in statistical discrimination against racial or
ethnic groups in areas such as credit scoring, home lending, employment, or risk of
criminal behavior.

• A famous example of this is the (now illegal) practice of redlining in home lending
by banks. Regardless of whether the predictions drawn from the use of such
analytics are accurate, their use is generally frowned upon, and data that explicitly
include information such as a person's race are now often excluded from predictive
analytics.

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 Conclusion

• The goal of predictive analytics is to make predictions about future events, then
use those predictions to improve decision-making. Predictive analytics is used in a
variety of industries including finance, healthcare, marketing, and retail. Different
methods are used in predictive analytics such as regression analysis, decision trees,
or neural networks.

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 Think yourself

1. How Does Netflix Use Predictive Analytics?

2. What Are the 3 Pillars of Data Analytics?
3. What Is Predictive Analytics Good for?
4. What Is the Best Model for Predictive Analytics?
5. What Is the goal and objectives of Predictive Analytics?

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Reference

1. Winston, W. (2016). Microsoft Excel data analysis and business modeling. Microsoft
press.
2. Knaflic, C. N. (2015). Storytelling with data: A data visualization guide for business
professionals. John Wiley & Sons.
Thank you for your attention!

Discussion
THANK YOU

For queries
Email: [email protected]

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