Because of the dramatic increase in available data, more cost-effective data storage, faster computer processing, and recognition by managers that data can be extremely valuable for understanding customers and business operations, there has been a dramatic increase in data-driven decision making. The broad range of techniques that may be used to support data-driven decisions comprise what has become known as analytics.
Analytics is the scientific process of transforming data into insight for making better decisions. Analytics is used for data-driven or fact-based decision making, which is often seen as more objective than alternative approaches to decision making. The tools of analytics can aid decision making by creating insights from data, improving our ability to more accurately forecast for planning, helping us quantify risk, and yielding better alternatives through analysis.
Analytics can involve a variety of techniques from simple reports to the most advanced optimization techniques (algorithms for finding the best course of action). Analytics is now generally thought to comprise three broad categories of techniques. These categories are descriptive analytics, predictive analytics, and prescriptive analytics.
Descriptive analytics encompasses the set of analytical techniques that describe what has happened in the past. Examples of these types of techniques are data queries, reports, descriptive statistics, data visualization, data dash boards, and basic what-if spreadsheet models.
Predictive analytics consists of analytical techniques that use models constructed from past data to predict the future or to assess the impact of one variable on another.
For example, past data on sales of a product may be used to construct a mathematical model that predicts future sales. Such a model can account for factors such as the growth trajectory and seasonality of the product’s sales based on past growth and seasonal patterns. Point-of-sale scanner data from retail outlets may be used by a packaged food manufacturer to help estimate the lift in unit sales associated with coupons or sales events. Survey data and past purchase behavior may be used to help predict the market share of a new product. Each of these is an example of predictive analytics. Linear regression, time series analysis, and forecasting models fall into the category of predictive analytics; these techniques are discussed later in this text. Simulation, which is the use of probability and statistical computer models to better understand risk, also falls under the category of predictive analytics.
Prescriptive analytics differs greatly from descriptive or predictive analytics. What distinguishes prescriptive analytics is that prescriptive models yield a best course of action to take. That is, the output of a prescriptive model is a best decision. Hence, prescriptive analytics is the set of analytical techniques that yield a best course of action. Optimization models, which generate solutions that maximize or minimize some objective subject to a set of constraints, fall into the category of prescriptive models. The airline industry’s use of revenue management is an example of a prescriptive model. The airline industry uses past purchasing data as inputs into a model that recommends the pricing strategy across all flights that will maximize revenue for the company.
How does the study of statistics relate to analytics? Most of the techniques in descriptive and predictive analytics come from probability and statistics. These include descriptive statistics, data visualization, probability and probability distributions, sampling, and predictive modeling, including regression analysis and time series forecasting. Each of these techniques is discussed in this text. The increased use of analytics for data-driven decision making makes it more important than ever for analysts and managers to understand statistics and data analysis. Companies are increasingly seeking data savvy managers who know how to use descriptive and predictive models to make data-driven decisions.
At the beginning of this section, we mentioned the increased availability of data as one of the drivers of the interest in analytics. In the next section we discuss this explosion in available data and how it relates to the study of statistics.
Source: Anderson David R., Sweeney Dennis J., Williams Thomas A. (2019), Statistics for Business & Economics, Cengage Learning; 14th edition.