Descriptive Analytics: What They Are and Related

Terms
What Is Descriptive Analytics?

Descriptive analytics refers to the interpretation of historical data to better understand

changes that occur in a business. Descriptive analytics describes the use of a range of
historic data to draw comparisons with other reporting periods for the same company
(i.e. quarterly or annually) or with others within the same industry. Most commonly
reported financial metrics are a product of descriptive analytics, such as year-over-
year (YOY) pricing changes, month-over-month sales growth, the number of users, or
the total revenue per subscriber. These measures all describe what has occurred in a
business during a set period.

Key Takeaways

How Descriptive Analytics Works

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.

Descriptive analytics is one of the most basic pieces of business intelligence

companies use. It can often be industry-specific (think the seasonal variation in
shipment completion times) but there are broadly accepted measures common
throughout the financial industry.

Descriptive analytics is an important component of performance analysis so that

managers can make informed strategic business decisions based on historical data.
What Does Descriptive Analytics Tell You?

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.

How Is Descriptive Analytics Used?

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.

For instance, return on invested capital (ROIC) is a form of descriptive analytics

created by taking three data points—net income, dividends, and total capital—and
turning those data points into an easy-to-understand percentage that can be used to
compare one company’s performance to others.

Descriptive analytics provides the "What happened?" information regarding a

company's operations, whole diagnostic analytics provides the "Why did it happen?"
information, and predictive analytics provides information as to "What could happen
in the future?"

Steps in Descriptive Analytics

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.

1. Identifying which metrics to analyze. Before beginning, it's important to decide

which metrics companies want to produce and the time frame for each, such as
quarterly revenue or annual operating profit.
Once all these steps are completed, it's important to present all the data to the
appropriate stakeholders. Using appropriate visual aids, such as charts, graphics,
videos, and other tools can be a great way to provide analysts, investors, management,
and others with the insight they need about the direction of the company.

The larger and more complex a company is, the more descriptive analytics it will
generally use to measure its performance.

Advantages and Disadvantages of Descriptive Analytics

Advantages

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

 Breaks down information so it is easy to understand

 Allows companies to see how they're doing compared to the competition

Cons
  Can't be used to determine future performance
 Stakeholders can pick-and-choose (favorable) metrics to analyze

Descriptive vs. Predictive, Prescriptive, and Diagnostic Analytics

Descriptive analytics provides important information in an easy-to-grasp format. As

such, there will always be a need for this type of analysis. But there may be more
emphasis on newer fields of analytics, including predictive, prescriptive, and
diagnostic analytics.

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

Prescriptive analytics allows companies to use technology to analyze important data

to determine what they need to do to achieve specific results. It takes certain situations
and available resources, along with past and current performance into account to
develop suggestions for the future.

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.

How Can Companies Benefit From Descriptive Analytics?

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.

What Is the Relationship Between Descriptive and Predictive

Analytics?

Descriptive analytics tries to answer the question "What happened?" Predictive

analytics, on the other hand, attempts to answer the "What will happen?" query. This
means that descriptive analytics uses historical data and past performance to figure out
where improvements can be made. Predictive analytics can try to help companies
understand how those changes will impact performance in the future. As such, these
two types of analysis can be used together to work hand-in-hand.

What Is an Example of Descriptive Analytics?

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.