Introduction to Business Analytics

Unit 1: What is Business Analytics?

Table of Contents
1. Introduction to the Unit
2. Objectives
3. Overview of Business Analytics
4. Evolution of Business Analytics
5. Business Analytics vs. Business Analysis and Business Intelligence
6. Types of Business Analytics
7. Summary
8. Check Your Understanding
9. Further Reading

Introduction to the Unit

This unit will help you understand the concept of Business Analytics (BA) and why this technique is
important for present-day organisations. You will read about the obejctives, applications and the
prospective benefits of BA. This unit further explains the evolution of BA and discusses the related
concept of scientific management. The phases of BA are also discussed briefly. You will also learn
how BA is related to business analysis and Business Intelligence (BI), and the difference between
the three techniques. The concluding part explains the types of BA and how they are relevant to
organisations.

Objectives
Upon completion of this unit, you will be able to:

 Explain the concept of BA

 Discuss the history and evolution of BA
 Differentiate between BA, business analysis and BI
 Identify the types of BA

Overview of Business Analytics

An explosion on information is the defining feature of today’s information technology-driven world.
Enormous amount of data is generated from multiple sources, such as business interactions,
transactions, social networking and sensors. Often in unstructured forms, the data continues to grow
exponentially. This massive amount of data, referred to as big data, becomes useless if it is not
sorted, analysed, and used in businesses for decision-making and predicting trends for business
growth.

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Major companies around the world are using the concept of analytics to guide the functioning of
businesses. By using the solutions provided by BA, organisations can successfully access,
transform, store, analyse, model and report on big data and use the results to have a steady growth.

BA refers to the skills, technologies, applications and practices for iterative and systematic
exploration of business data and understanding of past business performances to gain new insights,
in order to drive future business planning.

BA can be considered as an application of management science. BA focuses on using:

 Data
 Statistical methods
 Quantitative analysis
 Modelling techniques (such as explanatory and predictive)
 Fact-based management

Organisations use BA to optimise and automate business processes. These are also used to
develop strategy, improve day-to-day functioning and decision-making in organisations. BA is used
both for people-driven decisions as well as automated decisions.

Data driven organisations such as financial institutions, healthcare industry and social media treat
data as their important asset and leverage it for competitive purposes.

Applications of Business Analytics

BA can be applied in varied businesses for informed decision-making. It can be extensively used in
market analysis, consumer behaviour, social network, financial data analysis, crime detection
departments, medical sciences, network and cyber security, retail and supply chains and many
more areas.

As mentioned earlier, financial institutions, such as banks, are data-intensive. A critical success
factor for them to stay profitable is to gain an understanding of customer behaviour. BA helps banks
to categorise their customers, based on their credit risk, usage and other characteristics and then
map these characteristics to product offerings. This helps banks provide customer-friendly products
that increase their credibility in the market. In addition, BA techniques equip banks to manage
market risks and uncertainties, minimise frauds and expand their business into new markets.

The healthcare industry also uses the concept of BA to provide cost-effective and better medical
facilities to patients. Over the years, healthcare costs have increased manifold due to advancement
in healthcare, which have led to the discovery of newer therapies for illnesses. Healthcare
institutions constantly face financial constraints in providing advanced medical treatment that are
partly paid or not paid at all.

Various techniques of BA can be used to deal with such financial problems that affect the provider
side and the payer side of the healthcare industry. One classic example is that of Blue Cross and
Blue Shield Association's Blue Health Intelligence database, which commenced in 2006. This
database comprises the history of 80 million blind patients that can be used to analyse critical
clinical practices, their outcomes, costs versus success and other healthcare trends.

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Some areas where BA is useful are:

 Data mining: Explores data to identify new patterns and relationships.

 Statistical analysis and quantitative analysis: Explains the reason for the occurrence of
certain results
 Multivariate testing: Also known as A/B testing, it involves experiments to test and analyse
previous decisions.
 Predictive modelling: Also known as predictive analytics, it is used for forecasting/predicting
future results.

Objectives of Business Analytics

BA can be useful to organisations in many ways. Several surveys have indicated that the main
objectives of organisations are:

 Improved predictability: Accurate forecast of market and business trends is one of the most
important objectives of organisations and business houses.
 Cost reduction: Reducing business costs and increasing operational efficiency are important
considerations.
BA is a combination of mathematics and business knowledge. It does not just provide a specific
solution in a single area but offers a complete range of solutions across the enterprise that involves
continuous exploration of the past business performance so as to gain insights into areas unknown
previously and drive decision-making and business-planning. This may involve use of forecasting,
regression and modelling tools to answer the following questions:

1. Why something happened or is currently happening? (It is important to understand the

underlying issue within the business.)
2. What would be the outcome if the current trend continues?
3. What will happen next? (Enterprises want to know how they can use predictive analysis to
forecast trends in market behaviour.)
4. How best can the future be managed? (optimisation)

Role of a Business Analyst

An analytics project is always measured in business terms, such as the potential for profitability and
cost cutting methods. The leader of the analytics team is responsible for identifying the metric for
success that is used to evaluate the project. It is imperative for the leader to follow the best
practices, including mapping out business objectives to the specific questions that analytics
answers.

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Benefits of Business Analytics

The term ‘analytics’ in BA provides insights into obtaining, describing, visualising and using data for
making right decisions and combating uncertainties. BA can be used for speeding up the decision-
making process, reducing the margin of errors and gaining control over business processes.

Let us now look at some benefits of BA.

 Helps improve the quality and relevance of decision-making process

 Helps speed up the decision-making process
 Helps align decision with business strategy
 Reduces expenses
 Increases productivity
 Improves competitiveness
 Enhances revenue
 Shares information with wider audiences and stakeholders
 Makes data available to customers and clients, when required
 Responds accurately to customer needs
 Produces a single, unified view of enterprise information
 Synchronises financial and operational strategies

Figure 1.1 shows how analytics can be successful.

Figure 1.1: Success of Analytics

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Challenges in Business Analytics

BA depends on huge volume of qualitative data which helps industries to become smarter, take
better decisions, make accurate predictions, thereby achieving increased productivity and
continuous growth. However, success in BA depends equally on two factors:

 Organisational alignment and processes

 Analytical tools

In both cases, the quality of data is of great essence. Thus, choosing quality data is a challenge in
itself.

Evolution of Business Analytics

History of Business Analytics

During the 19th century, Frederick Winslow Taylor (Figure 1.2), known as the father of scientific
management, initiated time management exercises to improve business efficiency. BA has been
used since then in businesses for effective and measured decision-making. However, analytics
became more prevalent when Decision Support Systems (DSS) were used for making decisions.
BA evolved with the advancement of hardware and software tools and applications such as
Enterprise Resource Planning (ERP) systems and data warehouses.

Figure 1.2: Frederick Winslow Taylor

Note: A Decision Support System can be defined as an information system in which computer
systems are used for decision-making.

Scientific management or “Taylorism”

Although the practice of management theories can be dated back to the 18th century, significant
developments started only during the 20th century.

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Frederick Winslow Taylor started the scientific management movement as early as the 19th century.
He, along with some of his associates, studied the way industries worked and their productivity
trends. Taylor believed that optimising work was an important factor for improving productivity.

In the year 1909, Taylor published his work, "The Principles of Scientific Management". He
mentioned that productivity can be increased by simplifying and optimising work. His main focus
was largely on the efficiency of work.

Interestingly, during that era, businesses used to function differently. For instance, supervisors had
minimal contact with the workers in a factory. The workers were responsible for generating the
products. There were no standard processes and procedures to generate products.

Taylor believed that supervisors and workers should cooperate and work together to maximise
productivity. Since he believed that workers were motivated by monetary benefits, Taylor proposed
the idea of "a fair day's pay for a fair day's work”.

This meant that workers who achieved high productivity deserved better monetary benefits. This
proposal acted as a motivational factor for workers. Taylor applied several scientific methods such
as time and motion to optimise the level of performance and identify the best possible way to
perform a task. In one such instance, he experimented with a shovel design until he had developed
a design that allowed workers to use it for several hours at a stretch. With bricklayers, he
experimented with the various motions required and developed an efficient way to lay bricks.

Taylor concluded that people performed differently and had different efficiency levels. This meant
that some people could perform better than others, leading to the fact that the right kind of people
should be chosen for the right job to maximise productivity.
In this backdrop, Taylor proposed a theory that analysed the workflows and suggested
improvements in efficiency and productivity. Taylor and the Gilbreth couple proposed methods that
could measure the productivity of workers. These methods are still used in business operations and
management. Moreover, based on these experiments, Taylor developed four principles of scientific
management that are also known as “Taylorism”.

A recent IBM study on BA and optimisation found that 58 per cent of all organisations are improving
their competitiveness and performance through the use of analytics. As per the report, while some
organisations are using analytics at a basic level, others are more experienced in strategising with
analytics and still others are using analytics as an integral part of their daily operations.

Taylor's principles of scientific management

Taylor proposed the following principles of scientific management based on the various experiments
he performed to determine the optimal working methods:

 Use scientific methods to perform jobs instead of the traditional rule-of-thumb method.
 Use scientific processes to identify workers, train them in their respective jobs and pay attention
to develop individual workers. This strategy works better than leaving the workers to perform on
their own.
 Ensure that the scientific methods are implemented and followed diligently by workers.

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 Ensure that the work to be accomplished is divided among managers and workers in such a way
that managers implement scientific principles and ensure that the work happens as per the
principles and workers perform the jobs as per the stated principles.

These principles, when implemented in factories and workplaces, resulted in an increase in

productivity by a factor of three or more. For example, Henry Ford, founder of the Ford Motor
Company, applied the scientific principles proposed by Taylor in his automobile factories. By using
these scientific principles, even families began to perform their household tasks better.

Limitations of scientific management

While the scientific management principles proposed by Taylor increased productivity, they drew
criticism equally from workers, managers and trade unions. Some of the limitations of using the
scientific management principles are:
 Exploitation of workers: The scientific methods put unnecessary pressure on the workers to
perform better. There was monotony of work. The focus was on improving productivity and
profitability and no attention was paid to the working culture. This led to the exploitation of
workers and developed mistrust between the workers and the management.
 Issue of unity of command: Basis the scientific principles, the workers had to report to several
supervisors. This caused confusion in the workplace and led to the issue of unity of command.
 Mechanical approach: Due to the focus on productivity and profitability, the work environment
for the workers became mechanical. The human element was missing. Workers were
considered similar to machines and had to just keep on working and producing quickly.
 Individualistic approach: Taylor’s methods focussed on an individual worker’s performance
and did not consider group performance. However, for success, it is important to work in a group
and share skills and ideas that lead to better productivity.
 Incorrect assumptions: The assumption that only monetary benefits motivate workers was
incorrect. In reality, workers are also motivated by a healthy work environment and strong social
needs.
 Separating planning from performing: Taylor’s methods proposed a separation of planning
from performing. However, in reality, they both go hand in hand. The individuals who plan should
also perform to understand the nuances of the work. This helps planners create realistic plans.

Phases of Business Analytics

The concept behind BA dates back to the “Taylorism” era. However, Thomas Davenport, a Wall
Street Journal guest blogger, recently said that the “nature of information within the BA
ecosystem has changed considerably”.

The field of analytics has evolved over the past sixty years in three phases.
These three phases of BA are:

 Business Analytics 1.0: This phase is also known as the BI phase. Davenport identified this
phase as an early period of data analysis. For the first time, during this phase, data was
collected from production processes, sales and customer interactions and was documented,
collated and analysed. However, during this phase, much of the time was spent in preparing the

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data for analysis rather than analysing the data. This phase was marked by the following
characteristics:
 The business data that was available was in a structured form.
 The volume of data was less in comparison to present-day data.
 The majority of tasks was represented by descriptive analytics.
 Businesses did not consider data analysis as a core part of the job.
 Business Analytics 2.0: This phase started by the mid-2000s, when the data grew in volume
and diversity. This was the era of big data, when the Internet and social media enterprises such
as Amazon and Google started receiving and analysing new kind of information or the big data
that came from sources outside the enterprise. The ecosystem of information changed
dramatically and included a variety of data from social media, financial data, mobile applications
and several other data-generating applications. This period was predominantly marked by
enterprises placing a lot of importance on data analysis.
 Business Analytics 3.0 - the beginning: This phase marks a new era that the world is
soon going to enter and is in its early stages. As predicted by Davenport, in this phase, there is
going to be even greater expansion of data in terms of volume and there will be increased
emphasis on data analysis. The underlying feature of Analytics 3.0 is the integration of many
different strategies. Davenport recommended that organisations will use different types of BA to
have a clear understanding of their own processes and improve the decision-making process. In
the present-day scenario, enterprises are highly data-driven. Strong alignment between the
technology team and the business has resulted in several successful initiatives. Organisations
are proving the notion given by Davenport, who predicted that analytics would become a core
task rather than being a side project.

Analytics 3.0 has the following characteristics:

 Organisational processes, as also the, products and services offered by organisations, will
be supported by BA.
 Business strategies will have analytics as their critical component.
 Analytical tools and technology will be more sophisticated.

Business Analytics vs. Business Analysis and Business Intelligence

Before doing a comparitive study between BA, business analysis and BI, let us understand the
basics of business analysis and BI.

Business analysis

Organisations also use the concept of business analysis to improve their performance. Business
analysis includes a set a predefined tasks and techniques that help enterprises understand their
structure, policies and procedures and operations, and recommend solutions that enable them to
achieve their goals. Thus, business analysis not only comprises system development components
but also includes changes to business strategies, organisation structures, policies, procedures,
processes and information systems. The person who carries out this task is called a Business
Analyst.

Some situations in which business analysis can be implemented are:

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 Creating a business architecture

 Preparing a business case
 Conducting a risk assessment
 Eliciting requirements
 Analysing a business process
 Documenting requirements

Sub-disciplines of business analysis

Some of the sub-disciplines of business analysis are:

 Enterprise analysis or organisation analysis: This involves understanding the requirements of

the enterprise or business as a whole, its strategic direction, and the schemes and ideas that will
enable the business to meet its strategic goals. This broadly involves the following tasks:
 Creating and maintaining the business architecture
 Conducting feasibility studies
 Identifying new business opportunities followed by scoping and defining these opportunities
 Preparing the business case
 Performing the initial risk analysis
 Requirements planning and management: This focuses on planning the requirements
development process, identifying the requirements that are important for implementation and
controlling change.
 Requirements elicitation: This provides techniques for collecting requirements from
stakeholders.
 Requirements analysis or requirements engineering: This explains the requirements in
details which will be implemented by the team. This analysis method heavily overlaps with
business analysis. Requirements analysis includes studying the system to determine the needs
or conditions to meet the altered system. However, business analysis focuses on identifying the
changes required in an organisation to achieve its strategic goals. These changes may include
changes to strategies, structures, policies, procedures, processes and information systems.
 Requirements communication: This lays down the process that ensures that all the
stakeholders of the project have a common understanding of the requirements and their
implementation.
 Solution assessment and validation: This helps the analyst verify the correctness of the
proposed solution, provide the required support to implement the solution and assess the
possible shortcomings in implementation.

Business Intelligence

BI, a subset of BA, is a broad term that refers to several software applications and tools used for
analysing the data generated by organisations. BI helps organisations take better decisions quickly
and with confidence. It helps in improving customer relationships and increasing revenues and
profits. The typical elements of BI include data gathering or information capturing, analysis of the
information and distribution of this information to the right people. Some of the situations in which BI
may fail are when:

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 Organisations fail to recognise the breadth of the problem

 There is lack of top-down support
 There are no standardised processes and procedures in place
 The data available is of no use, which is also called dirty data

Figure 1.3: Business Intelligence

The following activities are closely related to BI:

 Data mining: Data mining is an analytical tool that analyses data from different perspectives and
summarises and categorises it into useful information. In other words, this tool is used for digging
out meaningful data from a data repository. The meaningful data can further be used by
organisations to increase revenues and/or reduce costs. Data mining supports both BA and BI. It
employs several methods for discovering patterns in huge data sets, extracting useful information
and transforming it into a structure that can be easily understood and put to use. Also, data
mining is based on the traditional form of Exploratory Data Analysis (EDA), and shares some of
its techniques. However, data mining differs from EDA in the form that it is oriented towards
applications of the data.

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Figure: 1.4: Data mining

 Online Analytical Processing (OLAP): OLAP is an application that allows organisations to

analyse database information from multiple database systems simultaneously. OLAP data is
multi-dimensional and therefore allows information to be compared in different ways. For
example, an organisation can make comparisons between the sales targets achieved in two
different months. In addition, this can further be compared with the sales targets achieved in a
different location, whose information is stored in a different database.

 Querying and reporting: Querying and reporting techniques use specific tools that help
organisations run regular reports, create organised listings and perform cross-tabular reporting
and querying. For example, Structured Query Language (SQL) is querying and reporting
software.
Enterprises use the BI techniques for accurate decision-making, reducing expenses and identifying
new business opportunities. BI assists organisations in identifying inaccurate business processes
that can be re-engineered.

Several industries use BI to improve their performance. For instance, the hospitality industry is one
of the heavy users of BI techniques. Restaurant chains such as Hardee’s, Wendy’s, Ruby Tuesday
and T.G.I. Friday use the concept of BI to make strategic decisions, such as the food items to be
part of the menus and the cuisines and/or food items that should be removed or replaced. In
addition, they use BI to check on the performance of their outlets and close those that are
underperforming. BI is also used by restaurant owners for taking decisions on tactical matters, such
as improving inefficient processes and renegotiating contracts with food vendors.

The retail industry also uses the techniques of BI heavily. Some examples are:

 Walmart uses a huge quantity of data and analyses it to stay at the top in the market.
 Amazon and Yahoo apply BI techniques to analyse customer interests and market trends. They
follow a "test and learn" approach to business changes.

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How can Business Intelligence systems be implemented?

Organisations can use the following steps to roll out BI systems:

1. Ensure that the data is clean.

2. Ensure that users are well-trained in BI systems.
3. Deploy processes and then make changes as you move forward. This involves producing
reports that will give insights.
4. Build data-warehouses from the beginning. It is best to take an integrated approach.
5. Define the Return on Investments (ROIs) at the start. List the profits that are projected to be
achieved and then perform a reality check on the same every quarter or once in six months.
6. Have a clear focus on the objectives of the business.
7. Implement a BI solution only if you think that your organisation needs it and this system
would help your organisation achieve the desired results.

Note: A data-warehouse refers to the database that is used for reporting and analysing data.

Types of Business Analytics

You know that BA is implemented by organisations to get insights into data for smarter decision-
making and better profitability. Data-driven organisations have better productivity and higher
profitability as compared to their peers who do not implement the principles of BA. Creating a data-
driven organisation is not easy and requires appropriate strategies and execution plans in place.
This might typically involve the following types of analytics:

 Descriptive analytics: What happened?

 Diagnostic analytics: Why did it happen?
 Predictive analytics: What is likely to happen?
 Prescriptive analytics: What should I do about it?
Descriptive analytics

Descriptive analytics is a type of BA that analyses the available data on past events for valid
information to develop future plans and strategies. Descriptive analytics mines the past data for
identifying the reasons for success or failure. This type of data analysis is known as post-mortem
analysis. Different departments such as sales, marketing, finance and operations make use of the
post-mortem analysis to arrive at appropriate conclusions. Descriptive analytics uses models that
classify the data about customers or prospects into specific groups. It identifies relationships
between different components such as customers and products.

Therefore, descriptive models can be used to identify customers on the basis of their product
preferences. Descriptive models can also be simulated to make predictions for organisations.

For instance, descriptive analytics can be used to scan the data on electrical usage, which can
further help in planning the power needs of consumers. It also helps companies that provide
electricity to set optimal costs for electricity utilisation.

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Diagnostic analytics

Diagnostic analytics is performed to identify when, where, how and why a particular crisis has
occurred. Statistical techniques such as correlation analysis, hypothesis testing, Analysis of
Variance (ANOVA) and control charts can be used for diagnostic analysis to obtain the desired
results. Diagnostics analytics has reasoning capabilities and helps understand the cause-effect
scenario.

Predictive analytics

Predictive analytics is responsible for converting data into information that is valuable and
actionable. Predictive analytics provides tools that help in determining the feasible outcome of a
situation or an event. It includes several statistical techniques to analyse the current and historical
information in order to forecast future events.

The models of predictive analytics develop the patterns found in the historical and transactional data
of businesses in order to identify various risks and opportunities. Further, these models capture the
relationships among various factors to assess the risks associated with a particular condition or
action. This approach helps in appropriate decision-making.

The following are the basis of predictive analytics:

 Predictive modelling
 Decision analysis and optimisation
 Transaction profiling

Some examples in which predictive analytics can be applied are:

 Optimising Customer Relationship Management (CRM) systems: They help organisations to

analyse customer data and predict the behaviour of customers.
 Organisations offering multiple products to their customers can study the behaviour pattern of
customers in terms of their spending, usage etc.

Prescriptive analytics

Prescriptive analytics goes a little beyond getting insights into data and suggests options for feasible
decisions. It applies techniques such as machine learning to the meaningful information generated
by predictive analytics to suggest the most suitable decisions. Prescriptive analytics also anticipates
why a particular condition will happen.

For every occurrence of an event in business that generates new data, prescriptive analytics makes
use of this data to improve the accuracy of the prediction and provide optimal decision alternatives.

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Prescriptive analytics uses tools such as machine learning, implied mathematical models and
application of business rules for providing decision alternatives.

The areas in which prescriptive analysis can be applied are:

 Healthcare industry, where prescriptive analytics can help hospitals analyse data related to the
economic conditions and health trends of the population to plan for their strategic growth.
 Fluctuating gas prices can impact gas manufacturing costs. By using the techniques of predictive
analytics, statistical methods and mathematical modelling, future gas prices can be predicted and
accordingly, decisions can be made to reduce the production costs.

Summary
BA refers to the skills, technologies, applications, and practices for iterative and systematic
exploration of business data. BA can be applied extensively in market analysis, consumer
behaviour, social network, financial data analysis, crime detection departments, medical sciences,
network and cyber security, and retail and supply chains. BA is useful in data mining, statistical and
quantitative analyses, multivariate testing and predictive modelling. Business analysis is the study of
business activities, problems and solutions, typically within a single organisation whereas BI is a
subset of BA. The different types of BA are descriptive, diagnostic, predictive and prescriptive.

Check Your Understanding

I Fill in the blanks:

a. Descriptive analytics is also known as _______ analysis. (post-mortem)

b. _____ is used to analyse database information from multiple database systems simultaneously.
(OLAP)

II Choose the correct option:

a. What are the main objectives of BA?

i. Improve predictability and reduce costs
ii. Improve decision-making and increase revenue
iii. Improve predictability and increase revenue
iv. Improve decision-making and reduce costs
b. Which type of BA generates new data for every event that happens in a business, uses this data
to make more accurate predictions and provides the best possible decision alternatives?
i. Diagnostic
ii. Prescriptive
iii. Predictive
iv. Descriptive

III. Identify the roles and responsibilities of a Business Analyst.

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IV. What are the challenges in BA?

V. List the various types of Business Analytics that are used by organisations, and briefly describe
each of them.

VI. Find out the famous business analysts in the industry.

VII. Name some well-known business analysts in India.

Further Reading
Analytics at Work: Smarter Decisions, Better Results, by Thomas Davenport, Jeanne Harris, Robert
Morison
http://www.mckinsey.com/insights/big_data_and_advanced_analytics (accessed on June 23, 2014)
http://www.bizedmagazine.com/features/articles/business-case-for-analytics.asp (accessed on June
23, 2014)

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