1

Introduction to Analytics
 1-2
What is Data 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.
Business Analytics (BI) is a subset of Data Analytics

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 1-3
What is Business Analytics?

Business Analytics Applications

 Management of customer relationships
 Financial and marketing activities
 Supply chain management
 Human resource planning
 Pricing decisions
 Sport team game strategies

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 1-4
What is Business Analytics?

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

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 1-5
Scope of Business Analytics

 Descriptive analytics
- uses data to understand past and present
 Predictive analytics
- analyzes past performance
 Prescriptive analytics
- uses optimization techniques

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 1-6
Scope of Business Analytics

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

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 1-7
Data for Business Analytics

 DATA
- collected facts and figures
 DATABASE
- collection of computer files containing data
 INFORMATION
- comes from analyzing data

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 1-8
Data for Business Analytics

 Metrics are used to quantify performance.

 Measures are numerical values of metrics.
 Discrete metrics involve counting
- on time or not on time
- number or proportion of on time deliveries
 Continuous metrics are measured on a continuum
- delivery time
- package weight
- purchase price

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 1-9
Data for Business Analytics
A Sales Transaction Database File

Records

Figure 1.1

Entities Fields or Attributes

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 What is Big Data?

• Information from multiple internal and external sources:

• Transactions
• Social media
• Enterprise content
• Sensors
• Mobile devices
• Companies leverage data to adapt products and services to:
• Meet customer needs
• Optimize operations
• Optimize infrastructure
• Find new sources of revenue
• Can reveal more patterns and anomalies

• IBM estimates that by 2015 4.4 million jobs will be created globally to support big data
• 1.9 million of these jobs will be in the United States
HISTORY OF BUSINESS ANALYITCS

 5000 BC: Grog uses two sticks and four rocks to graph the upward trend in sales of his new invention, the
wheel.
  1969: Woodstock ends in financial disaster after organizers rely on spreadsheets to estimate attendance.
  1976: Analysts’ predictions that this will be the bicentennial of the United States are fulfilled. World
gains sudden interest in the power of predictive analytics.
  1976-TO PRESENT: SAS is formed and begins to give businesses The Power to Know.
Types of Data
• When collecting or gathering data we collect data from
individuals cases on particular variables.
• A variable is a unit of data collection whose value can vary.
• Variables can be defined into types according to the level of
mathematical scaling that can be carried out on the data.
• There are four types of data or levels of measurement:
1. Categorical 2. Ordinal
(Nominal)
3. Interval 4. Ratio
 1-15
Data for Business Analytics

Classifying Data Elements in a Purchasing Database

Figure 1.2

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 1-16
Data for Business Analytics
(continued)

Classifying Data Elements in a Purchasing Database

Figure 1.2

Ra
Ca

Ca

Ra
Ca
Ca ical

Ra
Ra

In
In

te
te
tio
t

tio
te
te

t
tio
eg

eg

io

r
rv
go
go

va
or

or

a
ric
ric

l
l
ic
al

al
al

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 Categorical (Nominal) data
• Nominal or categorical data is data that comprises of categories that cannot be
rank ordered – each category is just different.
• The categories available cannot be placed in any order and no judgement can be
made about the relative size or distance from one category to another.
 Categories bear no quantitative relationship to one another
 Examples:
- customer’s location (America, Europe, Asia)
- employee classification (manager, supervisor,
associate)
• What does this mean? No mathematical operations can be performed on the data
relative to each other.
•Therefore, nominal data reflect qualitative differences rather than quantitative
ones.
Nominal data
Examples:

What is your gender? Did you enjoy the

(please tick) film? (please tick)

Male Yes
Female No
Nominal data

•Systems for measuring nominal data must ensure that each

category is mutually exclusive and the system of
measurement needs to be exhaustive.
• Variables that have only two responses i.e. Yes or No, are
known as dichotomies.
 Ordinal data
• Ordinal data is data that comprises of categories that can be rank ordered.
• Similarly with nominal data the distance between each category cannot be
calculated but the categories can be ranked above or below each other.
 No fixed units of measurement
 Examples:
- college football rankings
- survey responses
(poor, average, good, very good, excellent)
• What does this mean? Can make statistical judgements and perform limited
maths.
Ordinal data
Example:

How satisfied are you with the level of

service you have received? (please tick)

Very satisfied
Somewhat satisfied
Neutral
Somewhat dissatisfied
Very dissatisfied
 Interval and ratio data
• Both interval and ratio data are examples of scale data.
• Scale data:
• data is in numeric format ($50, $100, $150)
• data that can be measured on a continuous scale
• the distance between each can be observed and as a result measured
• the data can be placed in rank order.
 Interval data

• Ordinal data but with constant differences between

observations
• Ratios are not meaningful
• Examples:
• Time – moves along a continuous measure or seconds,
minutes and so on and is without a zero point of time.
• Temperature – moves along a continuous measure of
degrees and is without a true zero.
• SAT scores
Ratio data

• Ratio data measured on a continuous scale and does have a

natural zero point.
 Ratios are meaningful
 Examples:
• monthly sales
• delivery times
• Weight
• Height
• Age
Types of Analytics
 1-26
Decision Models

Model:
 An abstraction or representation of a real system, idea, or object
 Captures the most important features
 Can be a written or verbal description, a visual display, a mathematical formula, or a
spreadsheet representation

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 1-27
Decision Models

Figure 1.3

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 1-28
Decision Models

 A decision model is a model used to understand, analyze, or facilitate decision making.

 Types of model input
- data
- uncontrollable variables
- decision variables (controllable)

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 Decision Models 1-29

An Influence Diagram for Total Cost

Descriptive Decision Models

 Simply tell “what is” and describe relationships
 Do not tell managers what to do

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 Descriptive Analytics
• Descriptive analytics, such as reporting/OLAP, dashboards, and
data visualization, have been widely used for some time.
• They are the core of traditional BI.

What has occurred?

Descriptive analytics, such as data visualization, is
important in helping users interpret the output from
predictive and predictive analytics.
 1-31
Decision Models

A Break-even Decision Model

TC(manufacturing) = $50,000 + $125*Q
TC(outsourcing) = $175*Q
Breakeven Point:
Set TC(manufacturing)
= TC(outsourcing)
Solve for Q = 1000 units

Figure 1.7

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 1-32
Decision Models

 Predictive Decision Models often incorporate uncertainty to help managers analyze risk.
 Aim to predict what will happen in the future.
 Uncertainty is imperfect knowledge of what will happen in the future.
 Risk is associated with the consequences of what actually happens.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 Predictive Analytics
• Algorithms for predictive analytics, such as regression analysis, machine
learning, and neural networks, have also been around for some time.
• Prescriptive analytics are often referred to as advanced analytics.

What will occur?

• Marketing is the target for many predictive analytics applications.
• Descriptive analytics, such as data visualization, is important in helping
users interpret the output from predictive and prescriptive analytics.
 Decision Models 1-34

A Linear Demand Prediction Model

As price increases, demand falls.

Figure 1.8

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 1-35
Decision Models

A Nonlinear Demand Prediction Model

Assumes price elasticity (constant ratio of % change in
demand to % change in price)

Figure 1.9

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 1-36
Decision Models

Prescriptive Decision Models help decision makers identify the best solution.
 Optimization - finding values of decision variables that minimize (or maximize)
something such as cost (or profit).
 Objective function - the equation that minimizes (or maximizes) the quantity of interest.
 Constraints - limitations or restrictions.
 Optimal solution - values of the decision variables at the minimum (or maximum) point.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice

Hall
 Prescriptive Analytics
• Prescriptive analytics are often referred to as advanced analytics.
• Regression analysis, machine learning, and neural networks
• Often for the allocation of scarce resources

What should occur?

• For example, the use of mathematical programming for revenue management is common for
organizations that have “perishable” goods (e.g., rental cars, hotel rooms, airline seats).
• Harrah’s has been using revenue management for hotel room pricing for some time.
 Organizational Transformation

• Brought about by opportunity or necessity

• The firm adopts a new business model
enabled by analytics
• Analytics are a competitive requirement
 2013 Academic Research
• A 2011 TDWI report on Big Data Analytics found that
85% of respondents indicated that their firms would
be using advanced analytics within three years

• A 2011 IBM/MIT Sloan Management Review

research study found that top performing
companies in their industry are much more likely
to use analytics rather than intuition across the
widest range of possible decisions.
Conditions that Lead to Analytics-based
Organizations

• The nature of the industry

• Seizing an opportunity
• Responding to a problem
Complex Systems

 Tackle complex problems and provide individualized solutions

 Products and services are organized around the needs of individual customers
 Dollar value of interactions with each customer is high
 There is considerable interaction with each customer
 Examples: IBM, World Bank, Halliburton
 Volume Operations

 Serves high-volume markets through standardized products and services

 Each customer interaction has a low dollar value
 Customer interactions are generally conducted through technology rather than person-to-person
 Are likely to be analytics-based
 Examples: Amazon.com, eBay, Hertz
 The Nature of the Industry: Online Retailers

BI Applications
• Analysis of clickstream data
• Customer profitability analysis
• Customer segmentation analysis
• Product recommendations
• Campaign management
• Pricing
• Forecasting
• Dashboards
 The Nature of the Industry
• Online retailers like Amazon.com and Overstock.com are high
volume operations who rely on analytics to compete.
• When you enter their sites a cookie is placed on your PC and all
clicks are recorded.
• Based on your clicks and any search terms, recommendation
engines decide what products to display.
• After you purchase an item, they have additional information
that is used in marketing campaigns.
• Customer segmentation analysis is used in deciding what
promotions to send you.
• How profitable you are influences how the customer care center
treats you.
• A pricing team helps set prices and decides what prices are
needed to clear out merchandise.
• Forecasting models are used to decide how many items to
order for inventory.
• Dashboards monitor all aspects of organizational performance
 Analytics Help the Cincinnati Zoo Know Its Customers

 What management, organization, and technology factors were behind the

Cincinnati Zoo losing opportunities to increase revenue?
 Why was replacing legacy point-of-sale systems and implementing a data
warehouse essential to an information system solution?
 How did the Cincinnati Zoo benefit from business intelligence? How did it
enhance operational performance and decision making? What role was played
by predictive analytics?
 Visit the IBM Cognos Web site and describe the business intelligence tools that
would be the most useful for the Cincinnati Zoo.