10/29/2017

ESSENTIALS OF
BUSINESS ANALYTICS

Lecturer: MSc. Le Thu Hang

Faculty of Business and Administration
Foreign Trade University

Chapter 1: Introduction to
Business Analytics

1
 10/29/2017

Points to highlight

 Decision making

 Business Analytics Defined

 A categorization on analytical methods and models

 Big data

 Business Analytics in Practice

Introduction

 Business analytics

 is a powerful, magical, new science

 is one of the hottest areas in business

 Requires trained manpower

 By 2018: Shortage of 1.5 millions analysts and managers trained in

making data-driven decisions

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

career

2
 10/29/2017

Figure 1.1: Google trends graph of searches

on the term ANALYTICS

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?

3
 10/29/2017

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.

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 itsWeb 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 recommendations
given to you.
8

4
 10/29/2017

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.

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

10

5
 10/29/2017

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

11

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

12

6
 10/29/2017

1.1. Decision Making

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

GOOD
GOOD RIGHT
MANAGER’S RESULTS
DECISION BAD
BAD WRONG
RESULTS

13

1.1. Decision Making

 What are needed to make useful decisions?

• SPREADSHEET
DATA • TRADITIONAL DATABASE
• FACEBOOK, TWITTER…

TOOLS AND • STATISTICAL MODELS

TECHNIQUES • MACHINE LEARNING…

14

7
 10/29/2017

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 management.

15

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

16

8
 10/29/2017

1.1. Decision Making

17

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
Q:What type of these above decisions?
18

9
 10/29/2017

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

20

10
 10/29/2017

1.2. Business Analytics Defined

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

DATA
TOOLS AND BUSINESS
DATA
TECHNIQUES INSIGHT
DATA

21

1.2. Business Analytics Defined

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

22

11
 10/29/2017

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….

23

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

24

12
 10/29/2017

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

25

1.2. Business Analytics Defined

The difference between analytics and analysis:

26

13
 10/29/2017

1.2. Business Analytics Defined

The difference between analytics and analysis:

ANALYTICS ANALYSIS

Analytics is the science of Analysis is the process of

analysis where statistics, data breaking down a complex
mining, computer technology, problem into its simpler form
etc, is used in doing analysis

27

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?

28

14
 10/29/2017

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

29

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
relationships in a large database.
30

15
 10/29/2017

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

31

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

32

16
 10/29/2017

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
predictive analytics.

33

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

34

17
 10/29/2017

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.

35

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

36

18
 10/29/2017

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

37

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 values to outcomes
based on the decision maker’s attitude toward risk, loss, and
other factors

38

19
 10/29/2017

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

39

Analytics stages
Which
Why has the
How many Which students
drop-out rate
students students are should I
increased in
drop-out last most likely target to
the last one
year? to drop-out? keep from
year?
dropping out

Data Descriptive Diagnostic Predictive Prescriptive

insight decision

40

20
 10/29/2017

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

41

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?
A: Prescriptive analytics

42

21
 10/29/2017

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

43

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

massive amounts of data

44

22
 10/29/2017

1.4. Business Analytics in Practice

 Financial Analytics  Supply-Chain Analytics

 Human Resource (HR)  Analytics for Government
Analytics and Nonprofits
 Marketing Analytics  Sports Analytics
 Health Care Analytics  Web Analytics

45

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
46

23
 10/29/2017

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 assess risk in the
financial sector
47

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

48

24
 10/29/2017

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

49

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

50

25
 10/29/2017

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

51

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
52

26
 10/29/2017

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

53

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

54

27
 10/29/2017

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

55

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 andTwitter
 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

56

28