Four Types of Business Analytics to Know

by October 13, 2017 1 comment

For different stages of business analytics huge amount of data is processed at various steps. Depending on the stage of the workflow and the requirement of data analysis, there are four main kinds of analytics – descriptive, diagnostic, predictive and prescriptive. These four types together answer everything a company needs to know- from what’s going on in the company to what solutions to be adopted for optimising the functions.

The four types of analytics are usually implemented in stages and no one type of analytics is said to be better than the other. They are interrelated and each of these offers a different insight. With data being important to so many diverse sectors- from manufacturing to energy grids, most of the companies rely on one or all of these types of analytics. With the right choice of analytical techniques, big data can deliver richer insights for the companies

Before diving deeper into each of these, let’s define the four types of analytics:

1) Descriptive Analytics: Describing or summarising the existing data using existing business intelligence tools to better understand what is going on or what has happened.

2) Diagnostic Analytics: Focus on past performance to determine what happened and why. The result of the analysis is often an analytic dashboard.

3) Predictive Analytics: Emphasizes on predicting the possible outcome using statistical models and machine learning techniques.

4) Prescriptive Analytics: It is a type of predictive analytics that is used to recommend one or more course of action on analyzing the data.

Let’s understand these in a bit more depth.

 

1. Descriptive Analytics

This can be termed as the simplest form of analytics. The mighty size of big data is beyond human comprehension and the first stage hence involves crunching the data into understandable chunks. The purpose of this analytics type is just to summarise the findings and understand what is going on.

Among some frequently used terms, what people call as advanced analytics or business intelligence is basically usage of descriptive statistics (arithmetic operations, mean, median, max, percentage, etc.) on existing data.  It is said that 80% of business analytics mainly involves descriptions based on aggregations of past performance. It is an important step to make raw data understandable to investors, shareholders and managers. This way it gets easy to identify and address the areas of strengths and weaknesses such that it can help in strategizing.

The two main techniques involved are data aggregation and data mining stating that this method is purely used for understanding the underlying behavior and not to make any estimations. By mining historical data, companies can analyze the consumer behaviors and engagements with their businesses that could be helpful in targeted marketing, service improvement, etc. The tools used in this phase are MS Excel, MATLAB, SPSS, STATA, etc.

 

2. Diagnostic Analytics

Diagnostic analytics is used to determine why something happened in the past. It is characterized by techniques such as drill-down, data discovery, data mining and correlations. Diagnostic analytics takes a deeper look at data to understand the root causes of the events. It is helpful in determining what factors and events contributed to the outcome. It mostly uses probabilities, likelihoods, and the distribution of outcomes for the analysis.

In a time series data of sales, diagnostic analytics would help you understand why the sales have decrease or increase for a specific year or so. However, this type of analytics has a limited ability to give actionable insights. It just provides an understanding of causal relationships and sequences while looking backward.

A few techniques that uses diagnostic analytics include attribute importance, principle components analysis, sensitivity analysis, and conjoint analysis. Training algorithms for classification and regression also fall in this type of analytics

 

3. Predictive Analytics

As mentioned above, predictive analytics is used to predict future outcomes. However, it is important to note that it cannot predict if an event will occur in the future; it merely forecasts what are the probabilities of the occurrence of the event. A predictive model builds on the preliminary descriptive analytics stage to derive the possibility of the outcomes.

The essence of predictive analytics is to devise models such that the existing data is understood to extrapolate the future occurrence or simply, predict the future data. One of the common applications of predictive analytics is found in sentiment analysis where all the opinions posted on social media are collected and analyzed (existing text data) to predict the person’s sentiment on a particular subject as being- positive, negative or neutral (future prediction).

Hence, predictive analytics includes building and validation of models that provide accurate predictions. Predictive analytics relies on machine learning algorithms like random forests, SVM, etc. and statistics for learning and testing the data. Usually, companies need trained data scientists and machine learning experts for building these models. The most popular tools for predictive analytics include Python, R, RapidMiner, etc.

The prediction of future data relies on the existing data as it cannot be obtained otherwise.  If the model is properly tuned, it can be used to support complex forecasts in sales and marketing. It goes a step ahead of the standard BI in giving accurate predictions.

 

4. Prescriptive Analytics

The basis of this analytics is predictive analytics but it goes beyond the three mentioned above to suggest the future solutions. It can suggest all favorable outcomes according to a specified course of action and also suggest various course of actions to get to a particular outcome. Hence, it uses a strong feedback system that constantly learns and updates the relationship between the action and the outcome.

The computations include optimisation of some functions that are related to the desired outcome. For example, while calling for a cab online, the application uses GPS to connect you to the correct driver from among a number of drivers found nearby. Hence, it optimises the distance for faster arrival time. Recommendation engines also use prescriptive analytics.

The other approach includes simulation where all the key performance areas are combined to design the correct solutions. It makes sure whether the key performance metrics are included in the solution. The optimisation model will further work on the impact of the previously made forecasts. Because of its power to suggest favorable solutions, prescriptive analytics is the final frontier of advanced analytics or data science, in today’s term.

 

Conclusion

The four techniques in analytics may make it seem as if they need to be implemented sequentially. However, in most scenarios, companies can jump directly to prescriptive analytics. As for most of the companies, they are aware of or are already implementing descriptive analytics but if one has identified the key area that needs to be optimised and worked upon, they must employ prescriptive analytics to reach the desired outcome.

According to research, prescriptive analytics is still at the budding stage and not many firms have completely used its power. However, the advancements in predictive analytics will surely pave the way for its development. Hope this article gave you a better understanding of the analytics spectrum.

1 Comment so far

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  1. PVS
    #1 PVS 16 October, 2017, 20:22

    Very good description, simple and focused and very easy for beginners to understand the basics of the four types of analytics. Thanks for sharing the article.

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