MIS Tutorial class

Introduction to Business Analytics

-Dr. Soohyun Jeon

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 Introduction
• Three developments spurred recent explosive growth in the use
of analytical methods in business applications:

• Technological advances, 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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Google Trends Graph of Searches on the term
Analytics

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Decision Making

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 Decision Making
• Managers’ responsibility:

• To make strategic, tactical, or operational decisions.

• Strategic decisions:
• Involve higher-level issues concerned with the overall direction of
the organization.
• These decisions define the organization’s overall goals and
aspirations for the future.

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 Decision Making
• Tactical decisions:
• Concern how the organization should achieve the goals and
objectives set by its strategy.
• They are usually the responsibility of midlevel management.
• Operational decisions:
• Affect how the firm is run from day to day.
• They are the domain of operations managers, who are the closest
to the customer.

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 Decision Making
• Decision making can be defined as the following process

1. Identify and define the problem

2. Determine the criteria that will be used to evaluate

alternative solutions

3. Determine the set of alternative solutions

4. Evaluate the alternatives

5. Choose an alternative
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 Decision Making
• Common approaches to making decisions

• Tradition  We’ve always done it this way

• Intuition gut feeling, sixth sense

• Rules of thumb  As the restaurant owner, I scheduled

twice the number of waiter and cooks on holidays.

• Using the relevant data available

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Business Analytics Defined

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 Business Analytics Defined
• Business analytics:

• Scientific process of transforming data into insight for making

better decisions.

• Used for data-driven or fact-based decision making, which is often

seen as more objective than other alternatives for decision
making.

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 Business Analytics Defined
• Tools of business analytics can aid decision making by:

• Creating insights from data

• Improving our ability to more accurately forecast for planning

• Helping us quantify risk

• Yielding better alternatives through analysis and optimization

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A Categorization of Analytical Methods
and Models

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 A Categorization of Analytical Methods and
Models
• Descriptive analytics: It encompasses the set of techniques that
describes what has happened in the past.
Examples - data queries, reports, descriptive statistics, data
visualization (data dashboards), data-mining
techniques, and basic what-if spreadsheet
models.

• Data query - It is a request for information with certain

characteristics from a database.
- e.g., manufacturing plant’s database – all records of shipments to
a particular distribution center in certain month

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 A Categorization of Analytical Methods and
Models
• Data dashboards - Collections of tables, charts, maps, and
summary statistics that are updated as new data become
available.
• 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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 A Categorization of Analytical Methods and
Models
• Data dashboards

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 A Categorization of Analytical Methods and
Models
• Predictive analytics: It consists of techniques that use models
constructed from past data to predict the future or ascertain the
impact of one variable on another.

• Survey data and past purchase behavior may be used to help

predict the market share of a new product.

 Previous research showed that firms guided by data-driven

decision making have higher productivity and market value and
increased output and profitability. (ref. “ Strength in Numbers: How does data-
driven decision-making affect firm performance?”. E. Bryiolfsson, et. al., 2013-MIT sloan and
University of Pennsylvania)
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 A Categorization of Analytical Methods and
Models
• Techniques used in Predictive Analytics: contd.

Data mining

• Used to find patterns or relationships among elements of

the data in a large database; often used in predictive
analytics.

Simulation

• It involves the use of probability and statistics to construct

a computer model to study the impact of uncertainty on a
decision. (e.g., Pharmaceutical industry)

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 A Categorization of Analytical Methods and
Models
• Prescriptive Analytics: It indicates a best course of action to take
• Models used in prescriptive analytics:
Optimization models
• Models that give the best decision subject to constraints of the situation.

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 settings.

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.
• It also employs utility theory, which assigns values to outcomes based on
the decision maker’s attitude toward risk, loss, and other factors.

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 A Categorization of Analytical Methods and
Models
• Optimization models
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
design models center locations subject to meeting the customer
service requirements.
Price markdown Retailing Uses historical data to yield revenue-maximizing
models discount levels and the timing of discount offers
when goods have not sold as planned.

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Big Data

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 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.
• Big data represents opportunities.
• It also presents analytical challenges from a processing point of view and
consequently has itself led to an increase in the use of analytics.
• More companies are hiring data scientists who know how to process and
analyze massive amounts of data.
How much data
Walmart and
Facebook generate?

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Business Analytics in Practice

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The Spectrum of Business Analytics

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 Business Analytics in Practice
• Types of applications of analytics by application area

• Financial analytics

• Use of predictive models

• To forecast future financial performance
• To assess the risk of investment portfolios and projects
• To construct financial instruments such as derivatives

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 Business Analytics in Practice
• Financial analytics (contd.)

• Use of prescriptive models

• To construct optimal portfolios of investments

• To allocate assets, and

• To create optimal capital budgeting plans.

• Simulation is also often used to assess risk in the financial sector

e.g., Hypo Real Estate International of simulation model to successfully

manage commercial real estate risk
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 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, and
• achieves its organizational diversity goals.
e.g., Sears Holding Corporation, owner of retailers Kmart and Sears  uses
descriptive and predictive analytics to support employee hiring and to track and
influence retention.

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 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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 Business Analytics in Practice
• Marketing analytics (contd.)
• A better understanding of consumer behavior through marketing
analytics leads to:
• The better use of advertising budgets
• More effective pricing strategies
• Improved forecasting of demand
• Improved product line management, and
• Increased customer satisfaction and loyalty
e.g., Chrysler uses predictive models to support pricing decisions (retail price,
interest rate offers, and rebates) for automobiles
 Generated annual savings of $500 million 28
Google Trends for Marketing, Financial, and Human
Resource Analytics, 2004–2012

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 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

 Could save $300 billion per year (McKinsey Report, 2011. Manyika et al.)

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 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.

For instance, ConAgra Foods uses predictive and prescriptive analytics to better
plan capacity utilization by incorporating the inherent uncertainty in commodities
pricing.
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 Business Analytics in Practice
• Analytics for government

• To drive out inefficiencies

• To increase the effectiveness and accountability of programs

• Analytics for nonprofit agencies

• To ensure their effectiveness and accountability to their donors and

clients.
e.g., The New York State Department has worked with IBM to use prescriptive
analytics in the development of a more effective approach to tax collection.
 increase in collections $83 million over two years
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 Business Analytics in Practice
• Sports analytics

• Used for player evaluation and on-field strategy in professional

sports.

• To assess players for the amateur drafts and to 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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 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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 Business Analytics in Practice
• Web analytics - It is the analysis of online activity, which includes,
but is not limited to, visits to Web sites and social media sites
such as Facebook and LinkedIn.

• Leading companies apply descriptive and advanced analytics to

data collected in online experiments to:
• Determine the best way to configure Web sites,
• Position ads, and
• Utilize social networks for the promotion of products and services

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