If you could make one business decision 5% better, which would you choose? How much money would you make as a result?
For example, should you raise prices? “I know I may lose some customers, but at the same time, my overall revenue may increase,” says Jim Hoover, PhD, clinical professor and director of the University of Florida’s Business Analytics and Artificial Intelligence Center, in the Warrington College of Business. “For almost every problem now, there’s data being spun off somewhere in your organization that you can use to give you a better estimate.”
That’s where business analytics comes into play. A subset of data analytics—which analyzes and transforms raw data into metrics and insights—business analytics concentrates on resolving a specific business problem. “Business analytics is more targeted toward having a business domain understanding of a problem, as opposed to data analytics, which is broader,” Hoover explains. “You don’t necessarily have to have a business objective for the latter.”
Business Analytics Overview
Whether they want to streamline their workflows, increase sales, or understand why customers leave their shopping carts full, companies across all industries can use business analytics to improve just about any aspect of their operations.
“Business analytics can inform decision-making across all functions within a company, from human resources to sales and marketing, to accounting and finance, to manufacturing and logistics, to management and leadership,” says Matt Crespi, PhD, co-founder of Carnegie Mellon University’s Corporate Startup Lab. “If you collect the right data, analytics can even help you steer and improve your corporate culture.”
To better grasp the possibilities, let’s begin with a brief overview of the types of business analytics and the quantitative methods used to extract their insights.
There are four main types of business analytics that serve different functions:
- Descriptive analytics identifies and tracks patterns and trends in current and past data.
- Diagnostic analytics examines why those trends and events occurred.
- Predictive analytics predicts what is likely to happen in the future.
- Prescriptive analytics attempts to figure out how a company can realize a specific outcome.
Each type is useful on its own, or in combination with the others, to provide a more comprehensive view of business performance that guides strategic decision-making. Behind the scenes are a handful of analytics techniques—performed through the “magic” of statistics, artificial intelligence, and other technologies—that bring out the useful insights:
- Data mining uncovers correlations and patterns in large volumes of structured and unstructured data.
- Text mining extracts patterns from text-based documents, such as email and social media posts.
- Data aggregation combines data from multiple sources to help recognize broader patterns.
- Forecasting analyzes historical business data and external trends to make informed predictions about the future.
- Data visualization helps those less steeped in math and numbers quickly understand what’s going on through charts, graphs, and other visual representations of the information.
“Manufacturers can use predictive analytics to anticipate customer demand and ramp up production,” Crespi says. “In healthcare, we’re seeing network analytics used to track important things like patient flows. But it’s not always obvious how to use that information to improve patient care. There’s a big step up in difficulty when you use analytics to go from tracking to predicting, especially when human behavior is involved and you mean to intervene in order to improve an outcome.”
In other words, as the questions you’re trying to answer increase in complexity, the more sophisticated your business analytics—and analysts—will need to be. Software is widely available, at different price points starting at free, to handle these analyses. “Even as a small business, you have Excel,” the University of Florida’s Hoover points out. “There’s a ribbon in Excel that does forecasting that people don’t even know about.”
Business Analytics Benefits
Reaping the benefits of business analytics begins by defining a business problem and what its successful outcome looks like, Hoover says. Business analytics bridges the problem and outcome by finding relevant patterns in the large volumes of a business’s internal data and, sometimes, external data as well. Armed with the knowledge from those insights, a business can increase market share, boost profits, improve operational efficiency, and better meet customer demands.
More specifically, the benefits of business analytics include:
- A better understanding of business performance: What has and hasn’t worked in the past, what is and isn’t working now, and why. While past performance can’t guarantee future results, patterns and trends are typically quite telling.
- Improved business and marketplace forecasting, courtesy of more accurate estimates related to financial performance or customer demand. For example, retailers can use business analytics to inform when they should order more products.
- Reduced business risks, also due to improved forecasting shifts. Business analytics can pinpoint and mitigate financial, supply chain, and logistics risks by anticipating, for example, a bottleneck in the supply chain due to a material shortage.
- The ability to measure the success of new strategies, how well different business areas are performing, and the effectiveness of marketing campaigns. Results can help companies realize where they may be wasting their efforts and money.
- More competitively priced products and services, which can lead to increased profitability and a bigger slice of market share.
- Higher-level insight about customer behavior and sentiment. For example, companies can analyze customer transactions, social media posts, and data collected from internet-connected devices to better understand shopping preferences and levels of customer satisfaction.
Getting Started
The emergence of easy-to-use, lower-cost business analytics tools has extended their use to smaller companies and their employees, who don’t need a master’s degree in business analytics or specialized expertise to generate reports, charts, and other useful output. Many tools are based in the cloud, which removes the burden and costs associated with infrastructure, software updates, and maintenance that has been another barrier to small-business adoption.
Moreover, companies now have at their disposal many free or low-cost online classes, such as those offered by Udemy and Udacity, to learn the ropes, Hoover points out.
Working with a third-party business analyst or data scientist, whether for software set-up, customization, employee training, or all of the above, is another option—one that doesn’t have to break the bank. Make sure such external helpers have a solid understanding of your business, your technology, and—especially—how to gather and analyze data from multiple sources using advanced statistical techniques. That statistical expertise is required to differentiate between what the data can and can’t tell you.
You Still Have to Think
That said, all of the advanced technology in the world won’t necessarily lead you to the right conclusion. Living, breathing humans are required to interpret the analysis and figure out what to do about it.
Hoover illustrates what this means with a hypothetical example about a business concerned about employee turnover. “There are methods for how to predict who’s most likely to leave based on the data in your HR system,” Hoover says. This data likely includes employees’ salary, annual review rating, rate of absenteeism, and the like. “Maybe you want to take an intervention to keep them from leaving,” Hoover says. “Or maybe what you’ve captured is a bad manager that’s driving some of your people away in a certain department. The tool is not going to know that.”
Crespi goes back to the example of patient flow, which has historically challenged healthcare analysts—to the detriment of patient care and businesses’ bottom line. That has improved more recently by applying the right techniques and incorporating the right social science methods. “Healthcare organizations are adapting and applying social science research, bringing academic insights and methods into the realm of business analytics—and they’re making valuable progress,” Crespi notes.
As these experts make clear, in the end it’s important to remember that business analytics is just a tool—albeit a powerful one—to help business owners think through the crucial decisions they must make, day in and day out.
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