Evans pdf1

Business Analytics: Methods, Models,
and Decisions Managers today no longer make decisions based on pure judgment and experience;
they rely on factual data and the ability to manipulate and analyze data to supplement
their intuition and experience
Third Edition, Global Edition
Chapter 1
Introduction to
Business Analytics
Copyright © 2021 Pearson Education Ltd. Slide - 1

Business Analytics
(Business) 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.
process of transforming data into actions through analysis and insights in the context of organizational decision making and problem solving.

Examples of Applications (1 of 2)
• Pricing
– setting prices for consumer and industrial goods, government
contracts, and maintenance contracts
• Customer segmentation
– identifying and targeting key customer groups in retail,
insurance, and credit card industries
• Merchandising
– determining brands to buy, quantities, and allocations
• Location
– finding the best location for bank branches and ATMs, or where
to service industrial equipment

Examples of Applications (2 of 2)
• Supply Chain Design

– determining the best sourcing and transportation
options and finding the best delivery routes
• Staffing
– ensuring appropriate staffing levels and capabilities,
and hiring the right people
• Health care
– scheduling operating rooms to improve utilization,
improving patient flow and waiting times, purchasing
supplies, and predicting health risk factors
Impacts of Analytics
• Benefits
– …reduced costs, better risk management, faster decisions,
better productivity and enhanced bottom-line performance
such as profitability and customer satisfaction.
• Challenges
– …lack of understanding of how to use analytics, competing
business priorities, insufficient analytical skills, difficulty in
getting good data and sharing information, and not
understanding the benefits versus perceived costs of
analytics studies.

Evolution of Business Analytics (1 of 2)
BI is the term used to collect, manage, analyze, and report data and can answer basic questions as "what products did customer buy? or how
many units sold last month? It was then modernized to information system IS
• Analytic Foundations
– Business Intelligence (BI)
– Information Systems (IS)
– Statistics
Statistics are methods that can summarize data and find patterns, trends, and relationships among the data. It can use basic
tools for description, exploration, estimation, and inference, as well as advanced tools as regression, forecasting, and data
mining.
– Operations Research/Management Science (O

R/MS)
using modeling and optimization techniques to translate real problems into mathematics, spreadsheets, or other computer languages to find the best and
optimal solution/decision

Evolution of Business Analytics (2 of 2)
• Modern Business Analytic Integration of BI/IS, statistics, and operation research/management

science
– Data mining Extracting useful information from data by discovering patterns and trends in a large database using statistical
and analytical tools
to study the impact of uncertainty in estimates and their potential

– Simulation and risk analysis interaction with one another, on the output variable of interest
– Decision Support Systems (DSS)

– Visualization
Decision support systems (DSSs) combined business intelligence concepts with OR/MS models to create analytical-based computer systems to support decision making.
DSSs include three components:
1. Data management. Databases for storing data and allows the user to input, retrieve, update, and manipulate data.
2. Model management. statistical tools and management science models
3. Communication system. interface necessary for the user to interact with the data and model management components.
A key feature is what if analysis
Visualization is the most important and useful component of BA; allows communicating data at all levels of business.
Tableau Software provides simple drag and drop tools for visualizing data from spreadsheets and other databases

A Visual Perspective of Business
Analytics

Software Support and Spreadsheet
Technology
• Commercial software
– IBM Cognos Express
– SAS Analytics
– Tableau
• Spreadsheets
– Widely used
– Effective for manipulating data and developing and
solving models
– Support powerful commercial add-ons
– Facilitate communication of results
Software Used in This Book
• Primary Spreadsheet Software

– Excel 2016 for Windows
– Excel 2016 for Mac
• Optional Software
– StatCrunch (Technology Help sections)
– Analytic Solver (online supplements)

Descriptive, Predictive, and
Prescriptive Analytics
Business analytics begins with the collection, organization, and
manipulation of data and is supported by three major components
• Descriptive analytics: the use of data to understand

past and current business performance and make
informed decisions (Summarizing data into meaningful charts and reports
- How much did we sell from product A? what is the total revenue of last year? ...etc.
• Predictive analytics: predict the future by examining

historical data, detecting patterns or relationships in these
data, and then extrapolating these relationships forward
in time. predict the response of different customer segments to a marketing campaign.... what will happen if profit margin increased by 5%
• Prescriptive analytics: identify the best alternatives to

minimize or maximize some objective USING OPTIMIZATION
Best way to ship goods with minimum costs? products that give highest profits?

Example 1.1: Retail Markdown Tools to support business analytics:
- Database Queries
- Dashboards
- Data Visualization
Decisions - Statistical methods

- Spreadsheets
- What if analysis
- Forecasting
- Mining
- Optimization
• Most department stores clear seasonal inventory by reducing

prices.
• Key question: When to reduce the price and by how much to
maximize revenue?
• Potential applications of analytics in retail:
– 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

Data for Business Analytics
• Data: numbers or textual data that are collected

through some type of measurement process
• Information: result of analyzing data; that is,
extracting meaning from data to support
evaluation and decision making
primary sources such as internal company records and business transactions, automated data-capturing equipment, and customer market surveys.
secondary sources such as government and commercial data sources, custom research providers, and online research.
Perhaps the most important source of data today is data obtained from the Web

Examples of Data Sources and Uses
• Annual reports
• Accounting audits
• Financial profitability analysis
• Economic trends
• Marketing research
• Operations management performance
• Human resource measurements
• Web behavior
– page views, visitor’s country, time of view, length of time, origin and destination
paths, products they searched for and viewed, products purchased, what reviews
they read, and many others

Big Data
• Big data refers to massive amounts of business data

(volume) from a wide variety of sources (variety), much of
which is available in real time (velocity), and much of
which is uncertain or unpredictable (veracity).
• “The effective use of big data has the potential to
transform economies, delivering a new wave of
productivity growth and consumer surplus. Using big data
will become a key basis of competition for existing
companies, and will create new competitors who are able
to attract employees that have the critical skills for a big
data world.” - McKinsey Global Institute, 2011
Data Reliability and Validity
• Reliability - data are accurate and consistent.

• Validity - data correctly measures what it is
supposed to measure.

Data Reliability and Validity Examples
(1 of 3)
A tire pressure gage that consistently reads

several pounds of pressure below the true value is
not reliable, although it is valid because it does
measure tire pressure.

(2 of 3)
The number of calls to a customer service desk

might be counted correctly each day (and thus is a
reliable measure) but not valid if it is used to
assess customer dissatisfaction, as many calls
may be simple queries.

(3 of 3)
A survey question that asks a customer to rate the

quality of the food in a restaurant may be neither
reliable (because different customers may have
conflicting perceptions) nor valid (if the intent is to
measure customer satisfaction, as satisfaction
generally includes other elements of service
besides food).

Models in Business Analytics
• 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 representation, a mathematical formula,
or a spreadsheet.

Example 1.2: Three Forms of a Model
(1 of 3)
The sales of a new product, such as a first-generation iPad

or 3D television, often follow a common pattern.
1. Verbal description: The rate of sales starts small as
early adopters begin to evaluate a new product and then
begins to grow at an increasing rate over time as
positive customer feedback spreads. Eventually, the
market begins to become saturated, and the rate of
sales begins to decrease.

(2 of 3)
2. Visual model: A sketch of sales as an S-

shaped curve over time

(3 of 3)
3. Mathematical model:
where S is sales, t is time, e is the base of natural

logarithms, and a, b and c are constants

Decision Models
• Decision Model - a logical or mathematical

representation of a problem or business situation that can
be used to understand, analyze, or facilitate making a
decision
• Inputs:
– Data - assumed to be constant
– Uncontrollable inputs - quantities that can change but
cannot be controlled
– Decision options - controllable and selected at the
discretion of the decision maker

Nature of Decision Models

Descriptive Models
• Descriptive models explain behavior and allow

users to evaluate potential decisions by asking
“what-if?” questions.

Example 1.3: Gasoline Usage Model (1
of 2)
• G = gallons of fuel consumed per month

• m = miles driven per day to and from work or
school
• d = number of driving days per month
• f = fuel economy in miles per gallon (mpg)
• a = additional miles for leisure and household
activities per month

Example 1.3: Gasoline Usage Model (2
of 2)
• Use dimensions for logical consistency:
• Total miles driven per month = m × d + a

• Gallons consumed per month

Example 1.4: An Outsourcing
Decision Model (1 of 2)
• Production cost: plus fixed cost of $50,000
• Outsourcing cost:
• Q = production volume
•
•
• Breakeven Point:
$50,000 + $125 × Q = $175 × Q
$50,000 = 50 × Q
Q = 1,000
• If Q < 1,000, outsourcing is cheaper.

Example 1.4: An Outsourcing
Decision Model (2 of 2)

Predictive Models
• Predictive models focus on what will happen in

the future.
• Many predictive models are developed by
analyzing historical data and assuming that the
past is representative of the future.

Example 1.5: A Sales-Promotion
Decision Model
In the grocery industry, managers typically need to know
how best to use pricing, coupons, and advertising
strategies to influence sales. Grocers often study the
relationship of sales volume to these strategies by
conducting controlled experiments to identify the
relationship between them and sales volumes. That is, they
implement different combinations of pricing, coupons, and
advertising, observe the sales that result, and use analytics
to develop a predictive model of sales as a function of
these decision strategies.

Example 1.5 Model
Model:
Total Sales = 1105.55 + 56.18 x Price +
123.88 x Coupon + 5.25 x Advertising
If the price is $6.99, no coupons are offered,

and no advertising is done (the experiment
corresponding to week 1), the model estimates
sales as
Total Sales = 1105.55 + 56.18 x 6.99 + 123.88 x 0 + 5.25 x 0 = 1,498.25 units

Prescriptive Models
• Prescriptive models help decision makers identify the
best solution to a decision problem.
• 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
– Optimal solution - values of the decision variables at
the minimum (or maximum) point

Example 1.6: A Prescriptive 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 + 3,240.9
Total Revenue = Price × Sales
• Identify the price that maximizes total revenue.

Model Assumptions
constraints—
limitations, requirements, or other restrictions that are imposed on any solution
An algorithm is a systematic procedure to find a solution to a problem.
search algorithms—solution procedures that generally find good solutions without guarantees of finding the best one.
• Assumptions are made to

– simplify a model and make it more tractable;
that is, able to be easily analyzed or solved.
– better characterize historical data or past
observations.
• The task of the modeler is to select or build an
appropriate model that best represents the
behavior of the real situation.

Model Assumptions - Example
• Economic theory tells us that demand for a

product is negatively related to its price. Thus, as
prices increase, demand falls, and vice versa
(modeled by price elasticity - the ratio of the
percentage change in demand to the percentage
change in price).
• A key assumption in developing a model is the
type of relationship between demand and price.

Example 1.7: A Linear Demand
Prediction Model
As price increases, demand
falls. A simple model is:
where D is the demand, P

is the unit price, a is a
constant that estimates the
demand when the price is
zero, and b is the slope of
the demand function.

Example 1.8: A Nonlinear Demand
Prediction Model
Assumes price elasticity is
constant (constant ratio of %
change in demand to % change
in price):
where c is the demand when the

price is 0 and d > 0 is the price
elasticity.

Uncertainty and Risk
• Uncertainty is imperfect knowledge of what will happen in the future.

• Risk is associated with the consequences of what actually happens.
Risk is evaluated by the magnitude of the consequences and the likelihood that they would occur
• “To try to eliminate risk in business enterprise is futile. Risk is

inherent in the commitment of present resources to future
expectations. Indeed, economic progress can be defined as the
ability to take greater risks. The attempt to eliminate risks, even the
attempt to minimize them, can only make them irrational and
unbearable. It can only result in the greatest risk of all: rigidity.”
– Peter Drucker
you have to make a trade-off between the benefits of greater rewards and the risks of potential losses. Analytic models can help assess risk. A model in which
some of the model input information is uncertain is often called a stochastic, or probabilistic, model. In contrast, a deterministic model is one in which all model
input information is either known or assumed to be known with certainty.

Problem Solving with Analytics
1. Recognizing a problem
2. Defining the problem
3. Structuring the problem
4. Analyzing the problem
5. Interpreting results and making a decision
6. Implementing the solution

Recognizing a 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.

Defining the Problem
Finding the real problem and distinguishing it from symptoms that are observed
• Clearly defining the problem is not a trivial task.

• Complexity increases when the following occur:
– large number of courses of action
– the problem belongs to a group and not an individual
– competing objectives
– external groups are affected
– problem owner and problem solver are not the same
person
– time limitations exist

Structuring the Problem
• Stating goals and objectives

• Characterizing the possible decisions
• Identifying any constraints or restrictions

Analyzing the Problem
• Analytics plays a major role.

• Analysis involves some sort of experimentation
or solution process, such as evaluating different
scenarios, analyzing risks associated with
various decision alternatives, finding a solution
that meets certain goals, or determining an
optimal solution.

Interpreting Results and Making a
Decision
• Models cannot capture every detail of the real

problem.
• Managers must understand the limitations of
models and their underlying assumptions and
often incorporate judgment into making a
decision.
#DIV/0!—A formula is trying to divide by zero.

#N/A—“Not available,” meaning that the formula could not return a result.
#NAME?—An invalid name is used in a formula.
#NUM!—An invalid argument is used in a function, such as a negative number in
SQRT.
#REF!—A formula contains an invalid cell reference.
#VALUE!—Excel cannot compute a function because of an invalid argument

Implementing the Solution
• Translate the results of the model back to the

real world.
• Requires providing adequate resources,
motivating employees, eliminating resistance to
change, modifying organizational policies, and
developing trust.
Cells references:
- relative address: changing the formula to another cell will change the cell references.
- absolute address: using $ before a row label will keep reference fixed to row but the column changes. vice versa
MIN(range)—finds the smallest value in a range of cells
MAX(range)—finds the largest value in a range of cells
SUM(range)—finds the sum of values in a range of cells
AVERAGE(range)—finds the average of the values in a range of cells
COUNT(range)—finds the number of cells in a range that contain numbers
COUNTIF(range, criteria)—finds the number of cells within a range that meet a specified criterion.
COUNTA counts the number of non-blank cells.
COUNTBLANK counts the number of blank cells in a range
text is usually left justified, while numbers are right justified. The function VALUE(text) can be used to convert a text string that represents a number to a number.
CONCATENATE : to join.

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Business Analytics: Methods, Models,

Third Edition, Global Edition

Copyright © 2021 Pearson Education Ltd. Slide - 1

Copyright © 2021 Pearson Education Ltd. Slide - 2

Copyright © 2021 Pearson Education Ltd. Slide - 3

• Supply Chain Design

Copyright © 2021 Pearson Education Ltd. Slide - 5

– Operations Research/Management Science (O

Copyright © 2021 Pearson Education Ltd. Slide - 6

• Modern Business Analytic Integration of BI/IS, statistics, and operation research/management

to study the impact of uncertainty in estimates and their potential

– Decision Support Systems (DSS)

Copyright © 2021 Pearson Education Ltd. Slide - 7

Copyright © 2021 Pearson Education Ltd. Slide - 8

• Primary Spreadsheet Software

Copyright © 2021 Pearson Education Ltd. Slide - 10

• Descriptive analytics: the use of data to understand

• Predictive analytics: predict the future by examining

• Prescriptive analytics: identify the best alternatives to

Copyright © 2021 Pearson Education Ltd. Slide - 11

Decisions - Statistical methods

• Most department stores clear seasonal inventory by reducing

– Predictive analytics: predict sales based on price

Copyright © 2021 Pearson Education Ltd. Slide - 12

• Data: numbers or textual data that are collected

Copyright © 2021 Pearson Education Ltd. Slide - 13

• Financial profitability analysis

• Operations management performance

• Human resource measurements

Copyright © 2021 Pearson Education Ltd. Slide - 14

• Big data refers to massive amounts of business data

• Reliability - data are accurate and consistent.

Copyright © 2021 Pearson Education Ltd. Slide - 16

A tire pressure gage that consistently reads

Copyright © 2021 Pearson Education Ltd. Slide - 17

The number of calls to a customer service desk

Copyright © 2021 Pearson Education Ltd. Slide - 18

A survey question that asks a customer to rate the

Copyright © 2021 Pearson Education Ltd. Slide - 19

• Model - an abstraction or representation of a real

Copyright © 2021 Pearson Education Ltd. Slide - 20

The sales of a new product, such as a first-generation iPad

Copyright © 2021 Pearson Education Ltd. Slide - 21

2. Visual model: A sketch of sales as an S-

Copyright © 2021 Pearson Education Ltd. Slide - 22

where S is sales, t is time, e is the base of natural

Copyright © 2021 Pearson Education Ltd. Slide - 23

• Decision Model - a logical or mathematical

Copyright © 2021 Pearson Education Ltd. Slide - 24

Copyright © 2021 Pearson Education Ltd. Slide - 25

• Descriptive models explain behavior and allow

Copyright © 2021 Pearson Education Ltd. Slide - 26

• G = gallons of fuel consumed per month

Copyright © 2021 Pearson Education Ltd. Slide - 27

• Use dimensions for logical consistency:

• Total miles driven per month = m × d + a

Copyright © 2021 Pearson Education Ltd. Slide - 28

$50,000 + $125 × Q = $175 × Q

• If Q < 1,000, outsourcing is cheaper.