Chapter 1

Introduction

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Introduction

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

• 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

e ciency and pro tability of their operations, better
understand their customers, price their products more
e ectively, and gain a competitive advantage.

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 Introduction
• ree 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 e ectively handle
and explore massive amounts of data

• Faster algorithms for optimization and simulation, and

• More e ective approaches for visualizing data.

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 Introduction
• ree developments spurred recent explosive growth in
the use of analytical methods in business applications:
(contd.)
• ird development:
• e 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.

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Figure 1.1 - 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.
• ese decisions de ne 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.
• ey are usually the responsibility of midlevel
management.
• Operational decisions:
• A ect how the rm is run from day to day.
• ey are the domain of operations managers, who are
the closest to the customer.

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 Decision Making
• Decision making can be de ned as the following process

1. Identify and de ne 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

• Intuition

• Rules of thumb

• Using the relevant data available

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Business Analytics De ned

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 Business Analytics De ned
• Business analytics:

• Scienti c 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 De ned
• 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, repo s, descriptive

statistics, data visualization (data
dashboards), data-mining
techniques, and basic what-if spreadsheet
models.
• Data que - It is a request for information with ce ain 16
A Categorization of Analytical Methods
and Models
• Data dashboards - Collections of tables, cha s, maps,
and summa statistics that are updated as new data
become available.
• Uses of dashboards
• To help management monitor speci c aspects of the
company’s pe ormance related to their decision-making
responsibilities.

• For corporate-level managers, daily data dashboards might

summarize sales by region, current invento levels, and
other company-wide metrics.

• Front-line managers may view dashboards that contain

metrics related to sta ng levels, local invento levels, and
sho -term sales forecasts. 17
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 asce ain the impact of one variable on another.

• Su ey data and past purchase behavior may be used to

help predict the market share of a new product.

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A Categorization of Analytical Methods
and Models

• Techniques used in Predictive Analytics: contd.

Data mining

• Used to nd 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 unce ainty on a decision.

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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
unce ainty with optimization techniques to nd good decisions
in highly complex and highly unce ain settings.

Decision analysis
• Used to develop an optimal strategy when a decision maker is
faced with several decision alternatives and an unce ain set of
future events.
• It also employs utility theo , 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
Po folio Finance Use historical investment return data to
models determine the mix of investments that
yield the highest expected return while
controlling or limiting exposure to risk.
Supply network Operation Provide the cost-minimizing plant and
design models s distribution center locations subject to
meeting the customer se ice
requirements.
Price Retailing Uses historical data to yield revenue-
markdown maximizing discount levels and the timing
models of discount o ers 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 oppo unities.
• 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.

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Business Analytics in Practice

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Figure 1.2 - e 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 nancial pe ormance

• To assess the risk of investment po folios and projects

• To construct nancial instruments such as derivatives

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 Business Analytics in Practice
• Financial analytics (contd.)

• Use of prescriptive models

• To construct optimal po folios of investments

• To allocate assets, and

• To create optimal capital budgeting plans.

• Simulation is also often used to assess risk in the

nancial sector

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 Business Analytics in Practice
• Human resource (HR) analytics

• New area of application for analytics

• e HR function is charged with ensuring that the

organization

• Has the mix of skill sets necessa to meet its needs

• Is hiring the highest-quality talent and providing an

environment that retains it, and

• Achieves its organizational diversity goals.

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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:
• e better use of adve ising budgets

• More e ective pricing strategies

• Improved forecasting of demand

• Improved product line management, and

• Increased customer satisfaction and loyalty

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Figure 1.3 - 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, sta , and facility scheduling

• Patient ow

• Purchasing

• Invento control

• Use of prescriptive analytics for diagnosis and treatment

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 Business Analytics in Practice
• Supply chain analytics
• e core se ice of companies such as UPS and FedEx is
the e cient delive of goods, and analytics has long
been used to achieve e ciency.
• e optimal so ing of goods, vehicle and sta
scheduling, and vehicle routing are all key to pro tability
for logistics companies such as UPS, FedEx, and others
like them.
• Companies can bene t from better invento and
processing control and more e cient supply chains.

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 Business Analytics in Practice
• Analytics for government and nonpro ts

• To drive out ine ciencies

• To increase the e ectiveness and accountability of

programs

• Analytics for nonpro t agencies

• To ensure their e ectiveness and accountability to their

donors and clients.

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 Business Analytics in Practice
• Spo s analytics

• Used for player evaluation and on- eld strategy in

professional spo s.

• To assess players for the amateur drafts and to decide how

much to o er 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
• Spo s analytics (contd.)

• e use of analytics for o -the- eld business decisions is

also increasing rapidly.

• Using prescriptive analytics, franchises across several major

spo s dynamically adjust ticket prices throughout the

season to re ect 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 con gure Web sites,

• Position ads, and

• Utilize social networks for the promotion of products and

se ices

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