Business Analytics Mod 5

Copyright 2013 Pearson Education, Inc.
publishing as Prentice Hall
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Business Analytics: Methods, Models,

and Decisions, 1st edition
James R. Evans
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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

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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.
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Business Analytics Applications

Management of customer relationships
Financial and marketing activities
Supply chain management
Human resource planning
Pricing decisions
Sport team game strategies(game strategy and
optimal ticket prices)

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Importance of Business Analytics

There is a strong relationship of BA with:
- profitability of businesses
- revenue of businesses
- shareholder return
BA enhances understanding of data
BA is vital for businesses to remain competitive
BA enables creation of informative reports

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Operations research
Management science
Business intelligence
Decision support systems
Personal computer software

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Descriptive analytics
- uses data to understand past and present
Predictive analytics
- analyzes past performance
Prescriptive analytics
- uses optimization techniques

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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
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Analytics in Practice:
Harrahs Entertainment
Harrahs 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

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DATA
- collected facts and figures
DATABASE
- collection of computer files containing data
INFORMATION
- comes from analyzing data

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Examples of using DATA in business:

Annual reports
Accounting audits
Financial profitability analysis
Economic trends
Marketing research
Operations management performance
Human resource measurements

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Metrics are used to quantify performance.

Ex: Overall business performance can be assessed by
using metrics as net profit, ROI, market share
,Customer Satisfaction etc.
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

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Example 1.2
A Sales Transaction Database File
Records
Figure 1.1
Entities
Fields or Attributes

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Four Types Data Based on Measurement Scale:

Categorical (nominal) data
Ordinal data
Interval data
Ratio data

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Example 1.3
Classifying Data Elements in a Purchasing Database
Figure 1.2

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Example 1.3 (continued)

Classifying Data Elements in a Purchasing Database

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Figure 1.2
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Categorical (nominal) Data

Data placed in categories according to a specified
characteristic
Categories bear no quantitative relationship to one
another
Examples:
- customers location (America, Europe, Asia)
- employee classification (manager, supervisor,
associate)

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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)

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Interval Data
Ordinal data but with constant differences between
observations
No true zero point
Ratios are not meaningful
Examples:
- temperature readings
- SAT scores

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Ratio Data
Continuous values and have a natural zero point
Ratios are meaningful
Examples:
- monthly sales
- delivery times

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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

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Figure 1.3
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A decision model is a model used to understand,

analyze, or facilitate decision making.
Most decision models have 3 Types of input
- data Ex: Cost, Machine capabilites
- uncontrollable variables Ex: Customer Demand,
Inflation, investment returns
- decision variables (controllable) Ex: Production
quantity, No. of staffs to be employed
Types of model output
- performance measures
- behavioral measures

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Nature of Decision Models
Figure 1.4

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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.

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

+0.08(advertising) + 0.25(price)(advertising)
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Decision Models are used in each of the 3 major

areas of business analytics
Descriptive
Predictive
Perspective

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Descriptive Decision Models

Simply tell what is and describe relationships
Do not tell managers what to do
Example : An Influence Diagram for Total Cost
Influence Diagrams
visually show how
various model elements
relate to one another.
Figure 1.5
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Example : 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

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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.
Ex for Predictive decision model
How demand is influenced by price?
Predicting the pattern of sales of a new product over a
period of time.

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Example 1.9 A Linear Demand Prediction Model

As price increases, demand falls.
Figure 1.8

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Example 1.10 A Nonlinear Demand Prediction Model

Assumes price elasticity (constant ratio of % change
in demand to % change in price)
Figure 1.9
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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.
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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.

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Deterministic prescriptive models have inputs that

are known with certainty.
Ex: LPP, Transportation problem
Stochastic prescriptive models have one or more
inputs that are not known with certainty.
Ex: Exponential smoothing for demand forecasting ,
Game theory, deciding the insurance coverage against

risk of fire, accidents, sickness )

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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

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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.

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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
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3. Structuring the Problem

Stating goals and objectives
Characterizing the possible decisions
Identifying any constraints or restrictions

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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.

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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.

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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.

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Copyright 2013 Pearson Education, Inc.

publishing as Prentice Hall

Business Analytics: Methods, Models,

What is Business Analytics?

Copyright 2013 Pearson Education, Inc.

Analytics is the use of:

Business Analytics Applications

Copyright 2013 Pearson Education, Inc.

Importance of Business Analytics

Copyright 2013 Pearson Education, Inc.

Copyright 2013 Pearson Education, Inc.

Copyright 2013 Pearson Education, Inc.

Example 1.1 Retail Markdown Decisions

analytics: examine historical data for

Copyright 2013 Pearson Education, Inc.

Copyright 2013 Pearson Education, Inc.

Examples of using DATA in business:

Copyright 2013 Pearson Education, Inc.

Metrics are used to quantify performance.

Copyright 2013 Pearson Education, Inc.

A Sales Transaction Database File

Copyright 2013 Pearson Education, Inc.

Four Types Data Based on Measurement Scale:

Copyright 2013 Pearson Education, Inc.

Copyright 2013 Pearson Education, Inc.

Example 1.3 (continued)

Copyright 2013 Pearson Education, Inc.

Categorical (nominal) Data

Copyright 2013 Pearson Education, Inc.

Copyright 2013 Pearson Education, Inc.

Copyright 2013 Pearson Education, Inc.

Copyright 2013 Pearson Education, Inc.

Copyright 2013 Pearson Education, Inc.

A decision model is a model used to understand,

Copyright 2013 Pearson Education, Inc.

Nature of Decision Models

Copyright 2013 Pearson Education, Inc.

Example 1.5 A Sales-Promotion Model

Copyright 2013 Pearson Education, Inc.

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

Decision Models are used in each of the 3 major

Copyright 2013 Pearson Education, Inc.

Descriptive Decision Models

Example : A Mathematical Model for Total Cost

Copyright 2013 Pearson Education, Inc.

Predictive Decision Models often incorporate

Copyright 2013 Pearson Education, Inc.

Example 1.9 A Linear Demand Prediction Model

Copyright 2013 Pearson Education, Inc.

Example 1.10 A Nonlinear Demand Prediction Model

Prescriptive Decision Models help decision makers

Example 1.11 A Pricing Model

Copyright 2013 Pearson Education, Inc.

Deterministic prescriptive models have inputs that

Game theory, deciding the insurance coverage against

Copyright 2013 Pearson Education, Inc.

BA represents only a portion of the overall

Copyright 2013 Pearson Education, Inc.

1. Recognizing the Problem

Copyright 2013 Pearson Education, Inc.