ESSENTIALS OF

BUSINESS ANALYTICS

Lecturer: MSc. Le Thu Hang

Faculty of Business and Administration
Foreign Trade University
Chapter 1: Introduction to
Business Analytics
 Points to highlight
 Decision making

 Business Analytics Defined

 A categorization on analytical methods and models

 Big data

 Business Analytics in Practice

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 Introduction
 Business analytics

 is a powerful, magical, new science

is one of the hottest areas in business

 Requires trained manpower

Evidently, knowledge of business analytics would make for a promising

career

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 Figure 1.1: Google trends graph
of searches on the term
ANALYTICS

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 Introduction
Example:
 You apply for a loan for the first time.
How does the bank assess the riskiness of
the loan it might make to you?
 How does Amazon.com know which books
and other products to recommend to you
when you log in to their Web site?
 How do airlines determine what price to
quote to you when you are shopping for a
plane ticket?

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 Examples
 You apply for a loan for the first time. How
does the bank assess the riskiness of the
loan it might make to you?
- Millions of people around the world have applied
for loans. Many of them have paid back their
loans, but some have not.
- The bank wants to know whether you are more
like those who have paid back their loans or more
like those who defaulted.
- By comparing your credit history, financial
situation, and other factors to the vast database of
previous loan recipients, the bank can effectively
assess how likely you are to default on a loan.
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 Examples

 How does Amazon.com know which books

and other products to recommend to you
when you log in to their Web site?
- Amazon.com has access to millions of previous
purchases made by customers on its Web site.
- Amazon.com examines your previous purchases,
the products you have viewed, and any product
recommendations you have provided.
- Amazon.com then searches through its huge
database for customers who are similar to you in
terms of product purchases, recommendations, and
interests. Once similar customers have been
identified, their purchases form the basis of the
8 recommendations given to you.
 Examples
 How do airlines determine what price to
quote to you when you are shopping for a
plane ticket?

- Prices for airline tickets are frequently updated. The

price quoted to you for a flight today could be very
different from the price quoted tomorrow.
- These changes happen because airlines use a
pricing strategy known as revenue management.
Revenue management works by examining vast
amounts of data on past airline customer purchases
and using these data to forecast future purchases.
- These forecasts are then fed into sophisticated
optimization algorithms that determine the optimal
price to charge for a particular flight and when to
change that price. Revenue management has
resulted in substantial increases in airline revenues.
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 Introduction
Three developments spurred recent explosive
growth in the use of analytical methods in business
applications:
First development:
 Technological advances—scanner technology,
data collection through e-commerce, Internet social
networks, and data generated from personal
electronic devices—produce incredible amounts of
data for businesses
 Businesses want to use these data to improve the
efficiency and profitability of their operations, better
understand their customers, price their products
more effectively, and gain a competitive advantage
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 Introduction
Three developments spurred recent explosive
growth in the use of analytical methods in
business applications: (contd.)
 Second development:
 Ongoing research has resulted in numerous
methodological developments, including:
 Advances in computational approaches to
effectively handle and explore massive amounts
of data
 Faster algorithms for optimization and simulation
 More effective approaches for visualizing data

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 Introduction
Three developments spurred recent explosive
growth in the use of analytical methods in
business applications: (contd.)
 Third development:
The methodological developments were paired
with an explosion in computing power and
storage capability
Better computing hardware, parallel
computing, and cloud computing have enabled
businesses to solve big problems faster and
more accurately than ever before

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 1.1. Decision Making
 Managers’ responsibility:
to plan, coordinate, organize, and lead their
organizations to better performance.
Make decisions everyday

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 1.1. Decision Making
 What are needed to make useful
decisions?

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 1.1. Decision Making

Types of decisions
 Strategic decisions
- deal with higher-level issues, e.g. the
overall direction of the organization
- have time horizon of 3 to 5 years
 Tactical decisions
- concern how the organization should
achieve the goals and objectives set by
its strategy,
- are usually the responsibility of midlevel
15 management.
 1.1. Decision Making
 Operational decisions
- Affect how the firm is run from day to
day
- Are the domain of operations
managers, who are the closest to the
customers

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 1.1. Decision Making

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 Check your understanding
Thoroughbred Running Company (TRC)
 a catalog-based retail seller of running shoes
and apparel
 Managers made the following decisions:
(1) how many pairs of each model and size of shoes to
order from the distribution centers and how to schedule
their sales personnel
(2) establish retail stores in the malls and downtown
areas of major cities
(3) how many new stores to open this year, where to
open these new stores, how many distribution centers
will be needed to support the new stores, and where to
locate these distribution centers
18 Q: What type of these above decisions?
 Check your understanding
Thoroughbred Running Company (TRC)
(1) how many pairs of each model and size of shoes to
order from the distribution centers and how to schedule
their sales personnel
A: Operational Decision

(2) establish retail stores in the malls and downtown areas

of major cities
A: Strategic decision

(3) how many new stores to open this year, where to open
these new stores, how many distribution centers will be
needed to support the new stores, and where to locate
these distribution centers
19 A: Tatical decision
 1.2. Business Analytics Defined
What make decision making difficult
and challenging?
 Uncertainty
 Enormous number of alternatives

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 1.2. Business Analytics Defined
Business Analytics
 the scientific process of transforming
data into insight for making better
decisions.

DAT
A TOOLS AND BUSINES
DAT
A TECHNIQUES S
DAT
A
INSIGHT

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 1.2. Business Analytics Defined
Business Analytics
 the scientific process of transforming
data into insight for making better
decisions.

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 1.2. Business Analytics Defined
Tools of business analytics can aid
decision making by:
Uses data to drive decisions
Provide valuable insights to decision-
makers
Recommend a solution for a business
problem
Quantify the risk
Improve ability to forecast for
planning….
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 Check your understanding
What is the end goal of business
analytics?
a/ To put the collected data to some uses
b/ To use data to calculate statistics
c/ To use data to drive decisions that
impact the company’s performance
d/ To keep business updated in terms of
technology

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 1.2. Business Analytics Defined
The difference between analytics and
analysis:
Example: A company has a business problem
that it plans to solve using data.
 In other words, the company want to solve the
problem analytically.
 In order to solve the problem, it needs to be
broken down into smaller questions that can be
answered individually using data. It is possible
that smaller questions are put into different
department to solve together. Each question
can be analyzing a small chain of data. These
individual processes are called analysis
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 1.2. Business Analytics Defined
The difference between analytics
and analysis:

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 1.2. Business Analytics Defined
The difference between analytics
and analysis:
ANALYTICS ANALYSIS
Analytics is the
Analysis is the
science of analysis
process of breaking
where statistics, data
down a complex
mining, computer
problem into its
technology, etc, is
simpler form
used in doing analysis

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 1.3. A Categorization of Analytical
Methods
and Models
Three broad categories of
techniques:
1.Descriptive analytics – what
happened?
2.Predictive analytics – what
might/will happened?
3.Prescriptive Analytics – what
should we do?

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 Descriptive Analytics – what
happened?
 The set of techniques that describes
what happened/has happened in the
past.
 Examples:
Data queries
Reports
Descriptive statistics
Data visualization (including data
dashboards)
Data-mining techniques
Basic what-if spreadsheet models

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 Descriptive Analytics
Data query
 A request for information with certain characteristics from
a database
 Example: a query for all records of customers who
registered an account in company’s website.
 This query provides: the number of customers, contact of
customers (name, DOB, phone number, email, account
type…), the date each customer registered the account,
and so on…
 A report summarizing relevant historical information by
the use of descriptive statistics (means, measures of
variation, etc.) and data visualization tools (tables, charts,
and maps). Simple descriptive statistics and data
visualization techniques can be used to find patterns or
30 relationships in a large database.
 Descriptive Analytics

Data query

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 Descriptive Analytics

Data dashboards
 collections of tables, charts, maps, and summary
statistics that are updated as new data become
available

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 Descriptive Analytics

Data dashboards
 Uses of dashboards
• To help management monitor specific aspects of
the company’s performance related to their
decision-making responsibilities
• For corporate-level managers, daily data
dashboards might summarize sales by region,
current inventory levels, and other company-
wide metrics
• Front-line managers may view dashboards that
contain metrics related to staffing levels, local
inventory levels, and short-term sales forecasts
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 Predictive Analytics
 Techniques that use models constructed
from past data to predict the future or
ascertain the impact of one variable on
another
 Example: past data on product sales may be used
to construct a mathematical model to predict future
sales; Survey data and past purchase behavior may
be used to help predict the market share of a new
product
Linear regression, time series analysis,
some data-mining techniques, and
simulation all fall under the banner of
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predictive analytics.
 Predictive Analytics

Data mining
 techniques used to find patterns or relationships
among elements of the data in a large database
Example: one Midwest grocery chain used the data
mining to analyze local buying patterns. They
discovered that when men bought diapers on
Thursdays and Saturdays, they also tended to buy
beer. The grocery chain could use this information
in various ways to increase revenue. For example,
they could move the beer display closer to the
diaper display

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 Predictive Analytics

Simulation
 involves the use of probability and statistics to
construct a computer model to study the impact
of uncertainty on a decision
 Example: banks often use simulation to model
investment and default risk in order to stress test
financial models; simulation is often used in the
pharmaceutical industry to assess the risk of
introducing a new drug.

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 Prescriptive Analytics
 indicate a best course of action to take; that
is, the output of a prescriptive model is a best
decision

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 Prescriptive Analytics
Optimization models: Models that give the
best decision subject to constraints of the
situation
Model Field Purpose

Portfolio models Finance Use historical investment return data to determine the
mix of investments that yield the highest expected return
while controlling or limiting exposure to risk

Supply network Operations Provide the cost-minimizing plant and distribution center
design models locations subject to meeting the customer service
requirements

Price markdown Retailing Uses historical data to yield revenue-maximizing discount

models levels and the timing of discount offers when goods have
not sold as planned

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 Prescriptive Analytics

 Simulation optimization: Combines the use

of probability and statistics to model
uncertainty with optimization techniques to find
good decisions in highly complex and highly
uncertain situation

 Decision analysis
Used to develop an optimal strategy when a
decision maker is faced with several decision
alternatives and an uncertain set of future
events
Employs utility theory, which assigns
39 values to outcomes based on the decision
 Prescriptive Analytics
 Decision analysis
Example: an investor is considering the
purchase of 2 assets, asset A and asset B.
There is little historical data to make any
predictions regarding future returns. There
are four possible states of the economy over
the next year: boom, steady, slow and bust

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 Analytics stages Which
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How the drop- Which
should I
many out rate students
target to
students increased are most
keep
drop-out in the likely to
from
last year? last one drop-out?
dropping
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 Check your understanding
Example 1: A company’s sales
volume rises or falls depending on
its advertising expenditure

Q: Which type of analytics should the

manager use to estimate the sales
expected next year for the planned level
of advertising?

A: Predictive analytics
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 Check your understanding
Example 2: A company plans to
increase its sales force strength using
some new marketing strategies
The company has experimented with this
sales force strength previously and has
monitored sales impact
If the company increases its strenghth, its
competitor will do the same
Q: What types of analytics can a company
use in order to chart its future course of
action?
43 A: Prescriptive analytics
 1.1.3. Big Data

Big data: A set of data that cannot be

managed, processed, or analyzed with
commonly available software in a reasonable
amount of time
Represents opportunities
Presents challenges in terms of data storage
and processing, security, and available
analytical talent
More companies are hiring data scientists
who know how to process and analyze massive
amounts of data

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 Figure 1.2: The 4 Vs of Big Data how to
process and analyze massive amounts of data

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 1.4. Business Analytics in
Practice

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 1.4. Business Analytics in
Practice
Figure 1.3: The Spectrum of Business
Analytics

Predictive and prescriptive analytics are sometimes referred

to as advanced analytics
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 1.4. Business Analytics in
Practice
Financial analytics
Use of predictive models to:
 Forecast future financial performance
 Assess the risk of investment
portfolios and projects
 Construct financial instruments such
as derivatives
 Construct optimal portfolios of
investments
 Allocate assets
 Create optimal capital budgeting
plans
Simulation is also often used to

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assess risk in the financial sector
 1.4. Business Analytics in
Practice
Human resource (HR) analytics
New area of application for analytics
The HR function is charged with ensuring that
the organization:
 Has the mix of skill sets necessary to meet its needs
 Is hiring the highest-quality talent and providing an
environment that retains it
 Achieves its organizational diversity goals

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 1.4. Business Analytics in
Practice
Marketing analytics
Marketing is one of the fastest growing
areas for the application of analytics
A better understanding of consumer
behavior through the use of scanner data
and data generated from social media has
led to an increased interest in marketing
analytics

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 1.4. Business Analytics in
Practice
Marketing analytics (contd.)
A better understanding of consumer
behavior through marketing analytics leads
to:
 Better use of advertising budgets
 More effective pricing strategies
 Improved forecasting of demand
 Improved product line management
 Increased customer satisfaction and loyalty

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 1.4. Business Analytics in
Practice
Health care analytics
Descriptive, predictive, and prescriptive
analytics are used to improve:
 Patient, staff, and facility scheduling
 Patient flow
 Purchasing
 Inventory control
Use of prescriptive analytics for diagnosis
and treatment

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 1.4. Business Analytics in
Practice
Supply chain analytics
The core service of companies such
as UPS and FedEx is the efficient
delivery of goods, and analytics has
long been used to achieve efficiency
The optimal sorting of goods,
vehicle and staff scheduling, and
vehicle routing are all key to
profitability for logistics companies
such as UPS, FedEx, and others like
them
Companies can benefit from better
inventory and processing control
and more efficient supply chains

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 1.4. Business Analytics in
Practice
Analytics for government to:
Drive out inefficiencies
Increase the effectiveness and accountability
of programs
Analytics for nonprofit agencies to ensure
their effectiveness and accountability to their
donors and clients

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 1.4. Business Analytics in
Practice
Sports analytics
Professional sports teams use to:
 Assess players for the amateur drafts
 Decide how much to offer players in contract
negotiations
Professional motorcycle racing teams that
use sophisticated optimization for gearbox
design to gain competitive advantage

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 1.4. Business Analytics in
Practice
Sports analytics (contd.)
The use of analytics for off-the-field business
decisions is also increasing rapidly
Using prescriptive analytics, franchises
across several major sports dynamically
adjust ticket prices throughout the season to
reflect the relative attractiveness and
potential demand for each game

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 1.4. Business Analytics in
Practice
Web analytics
 The analysis of online activity,
which includes, but is not
limited to, visits to web sites
and social media sites such as
Facebook and Twitter
 Leading companies apply
descriptive and advanced
analytics to data collected in
online experiments to
determine the best way to:
 Configure web sites
 Position ads
 Utilize social networks for the
promotion of products and
services
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