Chapter 1:

Introduction to Business
Analytics
Chapter 1 Topics
 What is Business Analytics?
 Evolution of Business Analytics
 Scope of Business Analytics
 Data for Business Analytics
 Decision Models
 Problem Solving and Decision Making
 Fun with Analytics
What is Business 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.
Evolution of Business Analytics
 Operations research
 Management science
 Business intelligence
 Decision support systems
 Personal computer software
Scope of Business Analytics
 Descriptive analytics
- uses data to understand past and present
 Predictive analytics

- analyzes past performance

 Prescriptive analytics

- uses optimization techniques

Scope of Business Analytics

Example 1.1 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

Scope of Business Analytics
Analytics in Practice:
Harrah’s Entertainment
Harrah’s owns numerous hotels and casinos
Uses analytics to:

- forecast demand for rooms

- segment customers by gaming activities
Uses prescriptive models to:

- set room rates

- allocate rooms
- offer perks and rewards to customers
Data for Business Analytics
 DATA
- collected facts and figures
 DATABASE

- collection of computer files containing data

 INFORMATION

- comes from analyzing data

Data for Business Analytics

Examples of using DATA in business:

 Annual reports
 Accounting audits
 Financial profitability analysis
 Economic trends
 Marketing research
 Operations management performance
 Human resource measurements
Data for Business Analytics
 Metricsare 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
Data for Business Analytics

Example 1.2 A Sales Transaction Database File

Records

Figure 1.1

Entities Fields or Attributes

Data for Business Analytics

Four Types Data Based on Measurement Scale:

 Categorical (nominal) data
 Ordinal data
 Interval data
 Ratio data
Data for Business Analytics

Example 1.3
Classifying Data Elements in a Purchasing Database

Figure 1.2
 Data for Business Analytics

Example 1.3 (continued)

Classifying Data Elements in a Purchasing Database

Figure 1.2
C

C
C

R
R
R

In
In
at

at

at
at

at

at
at
at

te
te
eg

eg

eg
eg l

io

io
io
io

rv
rv
or

or

or
or

al
al
ic

ic

ic
ic
al

al
al
Data for Business Analytics

Categorical (nominal) Data

 Data placed in categories according to a specified

characteristic
 Categories bear no quantitative relationship to one

another
 Examples:

- customer’s location (America, Europe, Asia)

- employee classification (manager, supervisor,
associate)
Data for Business Analytics

Ordinal Data
 Data that is ranked or ordered according to some

relationship with one another

 No fixed units of measurement
 Examples:

- college football rankings

- survey responses
(poor, average, good, very good, excellent)
Data for Business Analytics

Interval Data
 Ordinal data but with constant differences

between observations
 No true zero point
 Ratios are not meaningful
 Examples:

- temperature readings
- SAT scores
Data for Business Analytics

Ratio Data
 Continuous values and have a natural zero point
 Ratios are meaningful
 Examples:

- monthly sales
- delivery times
The 7-step Business Analytics Process
Step 1. Defining the business needs
 understanding what the business would like to
improve on or the problem it wants solved
 If needed the goal is broken into smaller goals.
 Relevant data is decided by the business

stakeholders, business users with the domain

knowledge and the business analyst.
 Key questions to be answered are :

◦ what data is available

◦ how can we use it,
◦ do we have sufficient data
Step 2. Explore the data
 This stage involves cleaning the data, making
computations for missing data, removing
outliers, and transforming combinations of
variables to form new variables using Time
series graphs to indicate any patterns or outliers.
 visualization and descriptive statistics (such as

mean, standard deviation, range, mode, median)

that will provide a basic understanding of the
data.
Step 3. Analyse the data
 using statistical analysis methods such as
correlation analysis and hypothesis testing, the
analyst will find all factors that are related to the
target variable. The analyst will also perform
simple regression analysis to see whether
simple predictions can be made. 
 at this stage data is cut, sliced and diced and

different comparisons are made while trying to

derive actionable insights from the data.
Step 4. Predict what is likely to
happen
  the analyst will model the data using predictive
techniques like decision trees, neural networks and
logistic regression.
 These techniques will uncover insights and patterns
that highlight relationships and ‘hidden evidences’ of
the most influential variables.
 The analyst will then compare the predictive values
with the actual values and compute the predictive
errors.
 Usually, several predictive models are run and the best
performing model selected based on model accuracy
and outcomes.
Step 5. Optimise (find the best solution)

 At this stage the analyst will apply the

predictive model coefficients and outcomes to
run ‘what-if’ scenarios, using targets set by
managers to determine the best solution, with
the given constraints and limitations. The
analyst will select the optimal solution and
model based on the lowest error, management
targets and his intuitive recognition of the
model coefficients that are most aligned to the
organisation’s strategic goal.
Step 6. Make a decision and measure the outcome

 The analyst will then make decisions and take

action based on the derived insights from the
model and the organisational goals. An
appropriate period of time after this action has
been taken, the outcome of the action is then
measured.
Step  7. Update the system with the results of the
decision

 Finally the results of the decision and action

and the new insights derived from the model
are recorded and updated into the database.
Information such as, ‘was the decision and
action effective?’, ‘how did the treatment group
compare with the control group?’ and ‘what
was the return on investment?’ are uploaded
into the database. The result is an evolving
database that is continuously updated as soon
as new insights and knowledge are derived.
Overview of Data Analysis

 Data analysis, is a process for obtaining raw

data, and subsequently converting it into
information useful for decision-making by
users. Data, is collected and analyzed to
answer questions, test hypotheses, or
disprove theories
Data Scientists Vs Data Engineer
Data Engineer Vs Business Data
Analyst
Data Scientists Vs Business Data
Analyst
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
 Decision Models
Example 1.4 Three Forms of a Model
The sales of a new produce, such as a first-
generation iPad or 3D television, often follow a
common pattern.
• Sales might grow at an increasing rate over time
as positive customer feedback spreads.
(See the S-shaped curve on the following slide.)
• A mathematical model of the S-curve can be
identified; for example, S = aebect, where S is
sales, t is time, e is the base of natural logarithms,
and a, b and c are constants.

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall

1-23
Decision Models

Figure 1.3
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)
 Types of model output

- performance measures
- behavioral measures
Decision Models

Nature of Decision Models

Figure 1.4
Decision Models
Example 1.5 A Sales-Promotion Model
In the grocery industry, managers typically need to
know how best to use pricing, coupons and
advertising strategies to influence sales.
Using Business Analytics, a grocer can develop a
model that predicts sales using price, coupons and
advertising.
Decision Models

Sales = 500 – 0.05(price) + 30(coupons)

+0.08(advertising) + 0.25(price)(advertising)
Decision Models

Descriptive Decision Models

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

Example 1.6 An Influence Diagram for Total Cost

Influence Diagrams
visually show how
various model elements
relate to one another.

Figure 1.5
Decision Models

Example 1.7 A Mathematical Model for Total Cost

TC = F +VQ

TC is Total Cost
F is Fixed cost
V is Variable unit cost
Q is Quantity produced
Figure 1.6
Decision Models
Example 1.8 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
Decision Models
Example 1.9 A Linear Demand Prediction Model
As price increases, demand falls.

Figure 1.8
Decision Models
Example 1.10 A Nonlinear Demand Prediction Model
Assumes price elasticity (constant ratio of % change
in demand to % change in price)

Figure 1.9
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.
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.

Decision Models

Example 1.11 A Pricing Model

 A firm wishes to determine the best pricing for one

of its products in order to maximize revenue.

 Analysts determined the following model:

Sales = -2.9485(price) + 3240.9

Total revenue = (price)(sales)
 Identify the price that maximizes total revenue,

subject to any constraints that might exist.

Decision Models
 Deterministic prescriptive models have inputs that
are known with certainty.
 Stochastic prescriptive models have one or more

inputs that are not known with certainty.

 Algorithms are systematic procedures used to find

optimal solutions to decision models.

 Search algorithmsare used for complex problems

to find a good solution without guaranteeing an

optimal solution.
Problem Solving and Decision Making
 BA represents only a portion of the overall
problem solving and decision making process.
 Six steps in the problem solving process

1. Recognizing the problem

2. Defining the problem
3. Structuring the problem
4. Analyzing the problem
5. Interpreting results and making a decision
6. Implementing the solution
Problem Solving and Decision Making

1. Recognizing the Problem

 Problems exist when there is a gap between what

is happening and what we think should be

happening.
 For example, costs are too high compared with

competitors.
Problem Solving and Decision Making

2. Defining the Problem

 Clearly defining the problem is not a trivial task.
 Complexity increases when the following occur:

- large number of courses of action

- several competing objectives
- external groups are affected
- problem owner and problem solver are not the
same person
- time constraints exist
Problem Solving and Decision Making

3. Structuring the Problem

 Stating goals and objectives
 Characterizing the possible decisions
 Identifying any constraints or restrictions
Problem Solving and Decision Making

4. Analyzing the Problem

 Identifying and applying appropriate Business

Analytics techniques
 Typically involves experimentation, statistical

analysis, or a solution process

Much of this course is devoted to learning BA

techniques for use in Step 4.
Problem Solving and Decision Making

5. Interpreting Results and Making a Decision

 Managers interpret the results from the analysis

phase.
 Incorporate subjective judgment as needed.
 Understand limitations and model assumptions.
 Make a decision utilizing the above information.
Problem Solving and Decision Making

6. Implementing the Solution

 Translate the results of the model back to the real

world.
 Make the solution work in the organization by

providing adequate training and resources.

Problem Solving and Decision Making
Analytics in Practice
Developing Effective Analytical Tools
at Hewlett-Packard
 Will analytics solve the problem?
 Can they leverage an existing solution?

 Is a decision model really needed?

Guidelines for successful implementation:

 Use prototyping.

 Build insight, not black boxes.

 Remove unneeded complexity.

 Partner with end users in discovery and design.

 Develop an analytic champion.

Chapter 1 - Key Terms
 Algorithm  Decision support
 Business analytics systems
 Business intelligence  Descriptive statistics

 Categorical (nominal)  Deterministic model

data  Discrete metric

 Constraint  Entities
 Continuous metric  Fields (attributes)
 Data set  Influence diagram
 Database  Interval data
 Decision model  Management science

(MS)
Chapter 1 - Key Terms (continued)
 Measure  Predictive analytics
 Measurement  Prescriptive analytics
 Metric  Problem solving
 Model  Ratio data
 Objective function  Risk
 Operations research  Search Algorithm
(OR)  Stochastic model
 Optimal solution  Uncertainty
 Optimization
 Ordinal data
Fun with Analytics

www.puzzlOR.com
 Maintained by an analytics manager at ARAMARK.
 Each month a new puzzle is posted.
 Many puzzles can be solved using techniques you

will learn in this course.

 The puzzles are fun challenges.
 A good one to start with is SurvivOR (June 2010).
 Have fun!
Case Study
Performance Lawn Equipment (PLE)
 PLE is headquartered in St. Louis and produces
lawnmowers as well as a recently added a medium
size diesel power lawn tractor.
 The Excel workbook Performance Lawn
Equipment contains performance data that is used
by managers to evaluate business performance.
 As chief analyst to the productions and operations
manager, you need to review all of the Excel
worksheets and prepare a report summarizing the
sources of the data, the types of data measures
used, and the characteristics of the metrics used.