Chapter 1: Introduction to

Business Statistics

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Textbook

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Chapter 1: Content

• Scopes of Statistics in business decision-making

• Applications of Statistics in various disciplines of management

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Learning objectives
• To know about the aims and scopes of statistics in business decision-making.
• To be familiar with various applications of statistics in different disciplines of
management.
• To know about different types of data.
• To know about descriptive and inferential statistics.

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What is Statistics?
• Statistics is defined as the science of collecting, presenting, analyzing, and
interpreting data.
• The term statistics can refer to facts such as averages, medians, percentages, and
maximums that help us understand a variety of business and economic
situations.
• In singular sense, statistics refers to the discipline of study.
• In plural sense, statistics refers to data.

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Branches of Statistics
• Statistics
• Descriptive Statistics
• Deals with methods of organizing, summarizing, and
presenting data to extract useful information.
• Inferential Statistics
• Inferential statistics is a body of methods used to draw
conclusions or inferences about characteristics of
populations based on sample data.

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Case 1: Pepsi’s Exclusivity Agreement with a University
• In the last few years, colleges and universities have signed exclusivity agreements
with a variety of private companies. These agreements bind the university to sell
these companies’ products exclusively on the campus. Many of the agreements
involve food and beverage firms.
• A large university with a total enrollment of about 50,000 students has offered
Pepsi-Cola an agreement that would give Pepsi exclusive rights to sell its products
at all university facilities for the next year with an option for future years. In
return, the university would receive 35% of the on-campus revenues and an
additional lump sum of $200,000 per year. Pepsi has been given 2 weeks to
respond.

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Case 1: Continued…
• The management at Pepsi quickly reviews what it knows. The market for soft
drinks is measured in terms of 12-ounce cans. Pepsi currently sells an average of
22,000 cans per week over the 40 weeks of the year that the university operates.
The cans sell for an average of one dollar each. The costs, including labor, total 30
cents per can. Pepsi is unsure of its market share but suspects it is considerably
less than 50%. A quick analysis reveals that if its current market share were 25%,
then, with an exclusivity agreement, Pepsi would sell 88,000 (22,000 is 25% of
88,000) cans per week or 3,520,000 cans per year.

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Case 1: Some basic analysis
• The gross revenue would be computed as follows:
• Gross revenue = 3,520,000 × $1.00/can = $3,520,000.
• This figure must be multiplied by 65% because the university would rake in 35% of the gross.
• So, gross revenue after deducting 35% university take = 65% × $3,520,000 = $2,288,000.
• The total cost of 30 cents per can (or $1,056,000) and the annual payment to the university of $200,000 are
subtracted to obtain the net profit:
Net profit = $2,288,000 − $1,056,000 − $200,000 = $1,032,000
• Pepsi’s current annual profit is 40 weeks × 22,000 cans/week × $.70 = $616,000
• If the current market share is 25%, the potential gain from the agreement is
$1,032,000 − $616,000 = $416,000.

What is the problem with this analysis?

Pepsi does not know how many soft drinks are sold weekly at the university.
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Case 1: Continued…
• Coke is not likely to supply Pepsi with information about its sales.
• So, what would Pepsi do?
• Pepsi assigned a recent university graduate to survey the university’s students to
supply the missing information.
• He collected data from 500 students on the number of cans of soft drinks they
consumed in 7 days.
• How will descriptive statistics help us at this stage?
• We are not interested in what the 500 students are reporting as in knowing the
mean number of soft drinks consumed by all 50,000 students on campus.
• How can we accomplish this goal?

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Case 1: Continued…
• Inferential statistics will help us in thus matter.
• The population in question in this case is the university’s 50,000 students. The
characteristic of interest is the soft drink consumption of this population.
• The cost of interviewing each student in the population would be prohibitive and
extremely time consuming. Statistical techniques make such endeavors
unnecessary.
• We can sample a much smaller number of students (the sample size is 500) and
infer from the data the number of soft drinks consumed by all 50,000 students.
We can then estimate annual profits for Pepsi.

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Scope of Statistics in business decision-making
• Presenting facts in a proper form: Statistical methods present general statements
in a precise and definite form.
• Statement 1: The efficiency of an employee is 9.5 (in a scale of 10).
• Statement 2: The efficiency of an employee is high.
• Statement 1 is more precise and convincing.

• Simplifying unwieldy and complex data: Statistical methods simplify unwieldy

and complex data to make them understandable easily. One cannot grasp their
characteristics unless the data is classified according to some common
characteristics.
• Suppose you are given the weekly wages of 500 workers in a factory. You will not be
able to draw any inference from the data unless you classify them.

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Scope of Statistics: Continued…
• Providing techniques for making comparison: Statistics helps to facilitate a
comparative study of different phenomena over time.
• Suppose as compared to 2010, the sale of a product has increased by 60% in 2020.
Based on this information, we shall be able to throw some light on the changes
happened in the organization.

• To formulate policies in different fields: Statistical methods are very useful in

formulating various policies in social, economic, and business fields.
• The government utilizes vital statistical data for formulating different programs and
plans to be implemented.
• Calculation of consumer price indices for granting dearness allowance to its
employees.

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Scope of Statistics: Continued…
• To study the relationship between different phenomena: Statistical measures
such as correlation and regression are used to study relationships between
variables. Such relationships are important for making decisions.
• Relationship between the demand of a product and its prices.

• To forecast future values: Statistical techniques are used for forecasting future
values of a variable.
• Based on sales figures of the last 10 years, a marketing manager can estimate the
likely demand for his product during the next year.

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Scope of Statistics: Continued…
• To measure uncertainty: Probability theory helps to measure the chance of
occurrence of uncertain event. This concept is useful in decision-making.
• You can estimate the probability success of launching a new product based on the
past success probabilities.
• To test a hypothesis: Statistical methods are extremely useful in formulating and
testing hypotheses and for the development of new theories.
• A company is keen to know the effectiveness of its new drug to control malaria. It
could do so by using a statistical technique called Chi-square Test.
• To draw inferences: Statistical methods are useful in drawing inferences
regarding the characteristics of the population based on sample data.
• A shopping mall can estimate the satisfaction of customers by analyzing the sample
data.

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Data and Dataset
• Data are the facts and figures collected, analyzed, and summarized for
presentation and interpretation.
• All data collected in a study are referred to as the dataset for the study.

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Elements, Variables, and Observations
• Elements are the entities on which data are collected.
• A variable is a characteristic of interest for the elements.
• The set of measurements obtained for an element is called an observation.
• A dataset with n elements contains n observations.
• The total number of data values in a complete data set is the number of elements
multiplied by the number of variables.

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 Data, Dataset, Element, Variable, and Observation
Variables

Company Stock Exchange Annual Sales ($M) Earnings per share ($)
Dataram NQ 73.10 0.86
EnergySouth N 74.00 1.67 Observation
Element Names Keystone N 365.70 0.86
LandCare NQ 111.40 0.33
Psychemedics N 17.60 0.13

Data Set

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Classification of Data

• Data
• Qualitative
• Ordinal
• Non-ordinal
• Quantitative
• Discrete
• Continuous

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An Alternative Classification

• Data
• Frequency data
• Non-frequency data
• Time series data
• Cross-sectional data

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Cross-Sectional Data
The data collected on different units for the same time period are called cross-
sectional data.

Example:
Data detailing the price of all the SUV segment car models in August 18, 2020 in
Raipur.

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Time Series Data
The data collected on the same unit for different time periods is known as the time
series data.

Example
Daily closing price of Bitcoin from Oct 02, 2017 to Feb 01, 2020.

Graphs of time series data help analysts understand

• what happened in the past
• identify any trends over time, and
• project future levels for the time series

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Example: Daily closing price of Bitcoin
Daily closing price of Bitcoin (US$)
25000

20000

15000
Price (US$)

10000

5000

Time

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Analytics
Analytics is the scientific process of transforming data into insight for making better
decisions.
Techniques
Descriptive analytics: This describes what has happened in the past.

Predictive analytics: Use models constructed from past data to predict the future
or to assess the impact of one variable on another.

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Big data and Data Mining
Big data: Large and complex data set.

Three V’s of Big data:

Volume : Amount of available data
Velocity: Speed at which data is collected and processed
Variety: Different data types

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Data Warehousing

Data warehousing is the process of capturing, storing, and maintaining the data.
• Organizations obtain large amounts of data daily by means of magnetic card
readers, bar code scanners, point of sale terminals, and touch screen monitors.
• Walmart captures data on 20-30 million transactions per day.
• Visa processes 6,800 payment transactions per second.

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Data Mining
• Methods for developing useful decision-making information from large
databases.
• Using a combination of procedures from statistics, mathematics, and computer
science, analysts “mine the data” to convert it into useful information.
• The most effective data mining systems use automated procedures to discover
relationships in the data and predict future outcomes prompted by general and
even vague queries by the user.

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Data Mining Applications
• The major applications of data mining have been made by companies with a
strong consumer focus such as retail, financial, and communication firms.
• Data mining is used to identify related products that customers who have already
purchased a specific product are also likely to purchase (and then pop-ups are
used to draw attention to those related products).
• Data mining is also used to identify customers who should receive special
discount offers based on their past purchasing volumes.

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Data Mining Requirements
• Statistical methodology such as multiple regression, logistic regression, and
correlation are heavily used.
• Also needed are computer science technologies involving artificial intelligence
and machine learning.
• A significant investment in time and money is required as well.

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Data Mining Model Reliability
• Finding a statistical model that works well for a particular sample of data does not
necessarily mean that it can be reliably applied to other data.
• With the enormous amount of data available, the data set can be partitioned into
a training set (for model development) and a test set (for validating the model).
• There is, however, a danger of overfitting the model to the point that misleading
associations and conclusions appear to exist.
• A careful interpretation of results and extensive testing is important.

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Ethical Guidelines for Statistical Practice
• In a statistical study, unethical behavior can take a variety of forms including
• Improper sampling
• Inappropriate analysis of the data
• Development of misleading graphs
• Use of inappropriate summary statistics
• Biased interpretation of the statistical results
• One should strive to be fair, thorough, objective, and neutral as you collect,
analyze, and present data.
• As a consumer of statistics, one should also be aware of the possibility of
unethical behavior by others.

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Applications in Business and Economics
Accounting
• Regression analysis of security price reaction to accounting disclosure.
• Time series analysis of accounting data series and specification of models of
investor expectations concerning the generating process.
• Classification techniques for analyzing or predicting events such as bankruptcy,
troubled loans, etc.
• One can find applications of regression, discriminant analysis, probit, logit,
recursive partitioning, and so forth.

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Applications in Business and Economics
Economics
• Economists use statistical information in making forecasts about the future of the
economy or some aspect of it.

Finance
• Financial advisors use price-earnings ratios and dividend yields to guide their
investment advice.

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Applications in Business and Economics
Marketing
• Electronic point-of-sale scanners at retail checkout counters are used to collect
data for a variety of marketing research applications.

Production
• A variety of statistical quality control charts are used to monitor the output of a
production process.

Information Systems
• A variety of statistical information helps administrators assess the performance of
computer networks.

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