Introduction to Business Analytics

What is Business Analytics?

• Taking in and processing historical business data.
• Analysing that data to identify trends, patterns, and root
causes. Making data-driven business decisions based on those
insights.
• Business analytics refers to the skills, technologies, and
practices for continuous iterative exploration and investigation
of past business performance to gain insight and drive business
planning.
Why Business Analytics?
• Business analysis is used to identify and articulate the need for
change in how organizations work, and to facilitate that change.
As business analysts, we identify and define the solutions that
will maximize the value delivered by an organization to its
stakeholders.
• Business world is ever-changing and businesses have to be
able to adapt to the changes that constantly appear.
Considering the competitive market it is critically important for
any business to properly adapt to those changes. It can save
the organisation from staying behind their competitors.
Business Analyst
• Business Analysts are agents of change
• It is the Business Analyst’s responsibility to make sure
requirements are correct from the start
• Business Analysts always have a backup plan
• Business Analysis requires a dedicated expert
• It’s important that the technical teams to have a focal point,
especially for the design phase
• The Business Analyst can be a key asset during the test
phases of a project
Evolution of Business Analytics
• Analytics Foundation
• Modern Business Analytics
• Decision Support System (DSS)
• Software Support
Data for Business Analytics
• Big Data
• Data Reliability and Validity: Reliability means
consistency in data and validity means data must
purposeful.
Data Reliability and Validity Examples
The number of calls to a customer service desk
might be counted correctly each day (and thus is a
reliable measure) but not valid if it is used to
assess customer dissatisfaction, as many calls
may be simple queries.
Data Reliability and Validity Examples
A tire pressure gage that consistently reads
several pounds of pressure below the true value is
not reliable, although it is valid because it does
measure tire pressure.
Data Reliability and Validity Examples
A survey question that asks a customer to rate the
quality of the food in a restaurant may be neither
reliable (because different customers may have
conflicting perceptions) nor valid (if the intent is to
measure customer satisfaction, as satisfaction
generally includes other elements of service
besides food).
Models in Business Analytics
• 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 representation, a
mathematical formula, or a spreadsheet.
Example: Three Forms of a Model
The sales of a new product, such as a first-generation iPad
or 3D television, often follow a common pattern.
1. Verbal description: The rate of sales starts small as
early adopters begin to evaluate a new product and then
begins to grow at an increasing rate over time as
positive customer feedback spreads. Eventually, the
market begins to become saturated and the rate of
sales begins to decrease.
Example: Three Forms of a Model

2. Visual model: A sketch of sales as an S -shaped

curve over time
Example: Three Forms of a Model

3. Mathematical model:

where S is sales, t is time, e is the base of natural

logarithms, and a, b and c are constants
Types of Models

• Decision Model
• Descriptive Model
• Predictive Model
• Prescriptive Model
Decision Models

• Decision Model - a logical or mathematical

representation of a problem or business situation that can
be used to understand, analyze, or facilitate making a
decision
• Inputs:
– Data - assumed to be constant
– Uncontrollable inputs - quantities that can change but
cannot be controlled
– Decision options - controllable and selected at the
discretion of the decision maker
Example: An Outsourcing Decision
Model
• Production cost: plus fixed cost of $50,000

• Outsourcing cost:

• Q = production volume
•
•

• Breakeven Point:

$50,000 + $125 × Q = $175 × Q

$50,000 = 50 × Q

Q = 1,000

• If Q < 1,000, outsourcing is cheaper.

Descriptive Models
• Descriptive models explain behavior
and allow users to evaluate potential
decisions by asking “what-if?”
questions.
Example: Gasoline Usage Model
• G = gallons of fuel consumed per month
• m = miles driven per day to and from work or
school
• d = number of driving days per month
• f = fuel economy in miles per gallon (mpg)
• a = additional miles for leisure and household
activities per month
Example: Gasoline Usage Model

• Use dimensions for logical consistency:

• Total miles driven per month = m × d + a

• Gallons consumed per month
Predictive Models

• Predictive models focus on what will happen in

the future.
• Many predictive models are developed by
analyzing historical data and assuming that the
past is representative of the future.
Example: A Predictive Sales-Promotion
Model
In the grocery industry, managers typically need to know
how best to use pricing, coupons, and advertising
strategies to influence sales. Grocers often study the
relationship of sales volume to these strategies by
conducting controlled experiments to identify the
relationship between them and sales volumes. That is, they
implement different combinations of pricing, coupons, and
advertising, observe the sales that result, and use analytics
to develop a predictive model of sales as a function of
these decision strategies.
Example Model
Model:
Total Sales = 1105.55 + 56.18 x Price + 123.88
x Coupon + 5.25 x Advertising

If the price is $6.99, no coupons are offered,

and no advertising is done (the experiment
corresponding to week 1), the model estimates
sales as

Total Sales = 1105.55 + 56.18 x 6.99 + 123.88 x 0 + 5.25 x 0 = 1,498.25 units

Prescriptive Models
• Prescriptive models help decision makers identify the
best solution to a decision problem.
• 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
– Optimal solution - values of the decision variables at
the minimum (or maximum) point
Example: A Prescriptive 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 + 3,240.9

Total Revenue = Price × Sales

• Identify the price that maximizes total revenue.

Model Assumptions

• Assumptions are made to

– simplify a model and make it more tractable;
that is, able to be easily analyzed or solved.
– better characterize historical data or past
observations.
• The task of the modeler is to select or build an
appropriate model that best represents the
behavior of the real situation.
Model Assumptions - Example

• Economic theory tells us that demand for a

product is negatively related to its price. Thus, as
prices increase, demand falls, and vice versa
(modeled by price elasticity - the ratio of the
percentage change in demand to the percentage
change in price).
• A key assumption in developing a model is the
type of relationship between demand and price.
Example: A Linear Demand Prediction
Model
As price increases, demand
falls. A simple model is:

where D is the demand, P

is the unit price, a is a
constant that estimates the
demand when the price is
zero, and b is the slope of
the demand function.
Example: A Nonlinear Demand Prediction
Model
Assumes price elasticity is
constant (constant ratio of %
change in demand to % change
in price):

where c is the demand when the

price is 0 and d > 0 is the price
elasticity.
Class Exercises
1. In a toy manufacturing the manufacturer needs to pay rent (p) each
month and monthly electricity (q). To produce each toy the company
incurs cost for plastic (r) and for cloth (s). The variables p, q, r, s are
positive constants. Given the cost model as cost=fixed cost + variable
cost, define the cost model with the given unknown. How does plastic
and cloth affect the cost model? Will the variable plastic influence the
cloth variable?
2. The yearly govt. tax revenue depends on customer income, business
profits, and capital gains defined by
Tax = -2.566 + 3.799 X income + 1.583 X profit + 0.739 X capital
a) Interpret the numbers in this model.
b) What is the govt. tax revenue if a customer earns Rs. 1.2 lac, the
business profits amount to Rs. 8.63 lac and the capital gains are Rs. 5.76
lac ?