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What Is Descriptive Analytics?
Key Takeaways
Descriptive analytics takes a full range of raw data and parses it to draw conclusions
that managers, investors, and other stakeholders may find useful and understandable.
This data provides an accurate picture of past performance and how that differs from
other comparable periods. It can also be used to compare the performance with others
within the same industry. These performance metrics can be used to flag areas of
strength and weakness to inform management strategies.
For instance, a report showing sales of $1 million may sound impressive, but it lacks
context. If that figure represents a 20% month-over-month decline, there is cause for
concern. If it is a 40% YOY increase, then it suggests something is going right with
the sales or marketing strategy. However, the larger context including targeted growth
is required to obtain an informed view of the company's sales performance.
Companies can use descriptive analytics to gain valuable insight into how they are
performing. Because it is generally an industry-specific tool, one company can use it
to compare its performance and position in the marketplace with its competitors by
looking at its past performance, such as growth in its revenue and sales. It is also
useful to determine current financial trends, including goals for individuals within the
company.
Descriptive analytics is a very important tool that can be used in different parts of any
business. That's because it allows companies to understand how well it is performing
and where there may be inefficiencies. As such, corporate management can identify
areas for improvement and use it to motivate different teams to implement changes for
continued success.
There are two primary methods by which data is collected for descriptive analytics.
These are data aggregation and data mining. Before data can be made sense of it must
first be gathered and then parsed into manageable information. This information can
then be meaningfully used by management to comprehend where the business stands.
There are a few steps that companies can take in order to successfully implement
descriptive analytics into their business strategy. The following list highlights these
steps along with a description of each.
The larger and more complex a company is, the more descriptive analytics it will
generally use to measure its performance.
One of the main benefits of employing descriptive analytics in the corporate workflow
is that it disseminates information in a simple manner and provides all major
stakeholders with a way to understand complex ideas. This is usually done through
easy-to-understand visuals like charts and graphs. It isn't uncommon to see side-by-
side comparisons of where the company was before with where it is now.
Major stakeholders can see how a company compares to its competition within the
same industry. That's because the variables tend to be the same, such as production
costs, revenue streams, and product offerings. This allows one company to see
whether there are any areas for improvement in their own business plans and models.
Disadvantages
While descriptive analytics helps understand what happened in the past, it doesn't
necessarily open up a window into what to expect in the future. As such, companies
can't count on it to determine how market forces, changes in supply and demand,
economic swings, and other variables may affect them in the future.
Stakeholders may find it challenging to read between the lines, especially when
explicit or implicit bias comes into play. For instance, stakeholders may choose
favorable metrics to analyze and ignore others. Doing so may give others the feeling
that a company is profitable and that there are no areas that require change.
Pros
Cons
Can't be used to determine future performance
Stakeholders can pick-and-choose (favorable) metrics to analyze
These analytics use descriptive analytics and integrate additional data from diverse
sources to model likely outcomes in the near term. These forward-looking analytics
go beyond providing information to assisting in decision-making. These types of
analytics can also suggest courses of action that can maximize positive outcomes and
minimize negative ones.
Predictive Analytics
As its name implies, predictive analytics tries to make predictions about future
performance. This is done through the use of statistics and modeling. Current and past
data are used to determine whether similar outcomes are likely to happen again in the
future.
Companies that employ predictive analytics can benefit by identifying and addressing
inefficiencies. They can also use it to find better and more efficient ways to put their
resources (such as supplies, labor, and equipment) to work.
Prescriptive Analytics
Stakeholders that use prescriptive analysis may be better equipped to make important
decisions across any timeline, including whether they need to invest more in research
and development (R&D), if they should continue with a specific product offering, or
if they need to enter a new market.
Diagnostic Analytics
Diagnostic analytics involves the use of data to understand the relationship between
variables and why certain trends exist. Put simply, it's another way to determine why
something happened. This type of analysis can be undertaken manually or with the
help of computer software.
Unlike other types of analytics, diagnostic analytics does not try to understand a
company's historical performance or to make predictions about what companies can
expect in the future. Instead, it is commonly used by key stakeholders to figure out the
root cause of an event and make changes in the future.
Descriptive analytics is a form of analysis that tries to answer the question "What
happened?" As such, it takes historical data to understand changes that have taken
place. This allows companies to draw comparisons with other reporting periods or
similar companies. By employing descriptive analytics, companies are better able to
identify inefficiencies in their operations and make changes for the future.
Companies can use descriptive analytics to analyze various metrics during a specific
reporting period to help them achieve success. These can be financial and non-
financial. Some companies choose to measure engagement with their audience
through social media because it can tell them whether what worked with a certain ad
campaign or product launch. This can be measured by analyzing how clicks and likes
lead to increased traffic on their sites and, therefore, increases in sales and referrals.
The Bottom Line
Descriptive analytics can be a great way for companies to begin analyzing their
performance metrics. That's because it's one of the easiest forms of data analysis. It's a
straightforward approach to provide management, investors, and analysts with a direct
comparison to similar metrics, such as quarter-over-quarter revenue. Using past
performance can help key stakeholders better understand what happened so they make
better, more informed decisions for the future.