Introduction to Business Analytics | 365 Data Science Online Course

All of us have expectations. We all expect to be happy. We all expect to be healthy.

We all expect to be successful in life. And we base our expectations on the values learned from our parents and our community. The same applies for corporations.

Business leaders (or CEOs) aim to set up their companies in a profitable way. They expect to earn more money than the money that was initially invested by shareholders. They expect to grow, and – in addition to being profitable – business leaders want to meet and exceed customer expectations.

So, the same principle applies here. Business leaders want and expect to be successful. However, being successful is a pretty subjective state and depends on who or what you compare yourself to.

The people who have invested in your company, your shareholders, are interested in minimizing all expenses, growing revenues as much as possible, and maximizing profits as a result. Employees, on the other hand, expect a healthy, effective, and efficient working environment, as well as a stable income. This, although absolutely fair, costs money (and therefore isn’t in line with investors’ direct interest).

Nonetheless, fair compensation is necessary for employees to be engaged and motivated. And there are third parties, outside the organisation, who have expectations as well. Suppliers, for example, expect to be paid as soon as possible.

Customers, on the other hand, are very often interested in having the best products at the cheapest price, while authorities are focused on two very different main aspects – job creation and tax collection. So, collectively, all these parties – the people and organisations that have an impact on your business – are called stakeholders. Stakeholders can be internal, which is the case with employees, or they can be external (like suppliers, clients, and tax authorities).

So, we can agree that expectations are pretty subjective in their nature. This is the case not only when we deal with the expectations of different stakeholder groups, but sometimes also when we talk to the individuals in each of these groups. The people composing a given stakeholder group can have different expectations regarding the optimal outcome.

Every CEO wants to have happy and engaged employees. However, at a certain point they realize that some employees are happy because they have a 9 to 5 job, while others are not happy with a 9 to 5 job because they want to be challenged and are interested in learning more in order to grow professionally. Therefore, in practice, it is not easy to deal with subjective information and come up with specific strategies to deal with it.

And this is what management is all about. World-class managers can understand the subtleties of such subjective situations and address them accordingly. In this course, however, we will focus on objective expectations.

Given that a company has multiple stakeholder groups with different and sometimes conflicting expectations, it is up to the CEO and the Board of Directors, to set the expectations. The CEO with his or her management team is responsible for the daily operations, while the board of directors is focused on the longer term, the strategy and vision for the company. That said, the Board and the CEO are collectively best qualified to set objective, non-conflicting expectations for the company.

And that’s exactly what they do. Great! We’ll talk about a company’s long-range plan and about the preparation of an annual business plan.

Of course, our goal is to understand how these two types of plans function together and complement each other, so let’s get started! Typically, in the corporate world, expectations are set in different phases. First, you need to think about the firm’s vision and mission.

In the best-case scenario, the company’s founders and CEO have organized the business with a clear idea of what they would like to achieve. And every CEO has a purpose and vision for their company. The vision of Coca-Cola European Partners, for example, is that they want to be a total beverage company, a leading consumer goods company, and the world’s most valuable Coca-Cola bottler in the world.

The purpose of Coca-Cola is that they want to delight their customers and consumers and are eager to sell great beverages, both delivering great services and creating shared and sustainable value for their stakeholders. Alright, that’s great. But these objectives might have one problem with them.

They are difficult to measure and quantify. This is where the finance department of the company comes in. They need to translate such vision and purpose into numbers.

One way to do that is to predict the company’s revenues, cost of production, and expected profit. Typically, companies prepare a so-called Long-Range Plan, a prediction of how the business would evolve in the next 3 to 5 years. Now, I’m sure you’ll agree that the preparation of this kind of document requires a lot of input from multiple stakeholders.

And since different teams are responsible for different divisions of the firm, you will also need input from strategy, marketing, supply chain, sales, human resources, legal, engineering, finance, and all the other departments that are involved. As you already know, all these units have certain expectations, and they are each accountable for meeting them. Once the expectations are formalized, they are translated into numbers, which are then called a budget or a target.

Alright. A long-range plan spans the next 3 to 5 years. Once the company is ready with these targets for the coming years, the next phase can begin.

It would consist in detailing out the first year of the long-range plan. We call this the Annual Business Plan (ABP). The preparation of the ABP is on the surface quite similar to that of the Long-Range Plan.

However, the Annual Business Plan requires truly a great level of detail. This is how businesses capture the expectations of stakeholder groups. The next part of the process consists in tracking.

Monitoring how you are progressing against the expectations set in the budget and long-range plan is extremely important. Some of the major activities during this stage is comparing the actuals of the previous month versus the budget, as well as forecasting how the business will progress the year against the set expectations. Typically, companies are re-forecasting their expectations monthly and compare these with the budget and previous forecast.

This helps them adjust their strategy and take additional actions to hit their set budget or targets. For example, if you look at a 12 months period, and see that for the first quarter of the year you are trending lower than your budget, you can expect that this trend will continue and that you will miss your target (your target being your budget). However, now that you have this insight, you know you must take counter measures to turn this trend and hit your budget.

Some actions you could take is making a stronger marketing effort or cutting specific costs. So, a company needs to understand the reason for over or under performance in the course of business operations. And the way this is accomplished is through an effective and efficient set of analysis and analytics that measure performance and allow for corrective measures when necessary.

Great! We briefly mentioned two very important terms. Analytics and analysis.

The two are often used interchangeably and, in general, there isn’t a consensus about which activities fall under the category of analytics and which can be defined as analysis. For the purposes of this course, we’ll adopt the following interpretation. Analysis is the investigation of why something happened.

When we are looking at the variance between actual figures and the numbers in the firm’s budget, we are doing analysis. If we want to understand the underlying business performance of a company, we’d be analysing the variance of a financial item such as revenue. And the way these assessments are done is by using data we have gathered about our business performance so far.

Basically, when you are doing analysis, you look backward in order to understand how your company has performed against the expectations of your stakeholders. Okay! In the beginning of the course, we said that every stakeholder has expectations and that we need to translate these into numbers.

I am referring here to the Long-Range Plan and the detailed plan for the year to come (that’s the Annual Business Plan or ABP). That means that when we prepare these plans, we need to predict what will happen in the future. Of course, we’d usually have some past business data, but sometimes, what happened in the past is not the best predictor of the future.

Therefore, we need to have more sophisticated tools for prediction that are forward-looking rather than backward looking. And this is where analytics comes into play; analytics is a model to create scenarios and predict performance on the basis of these scenarios. In essence, analytics is a strategic asset that enables top management and the Board of Directors to make better informed decisions.

So, the difference between analysis and analytics is that analysis is backward looking, while analytics steps on past and current data, and is primarily forward-looking. we provided a general idea of how companies develop short and long-term expectations. We talked about why that is necessary, and how businesses set up a system to monitor their performance.

So, in this section, we’ll start to examine things in a bit more detail. We’ll do that by looking into practical examples and making sure that you understand well the mechanics of the entire process. Now, although we already discussed the importance of different stakeholder expectations, to address this topic properly, we need to dig deeper.

In the next few lessons, we’ll introduce you to who these stakeholders are, we’ll examine the expectations of the various groups of stakeholders, and we’ll see how these are then translated into the Long Range Plan and the Annual Business Plan. One of the essential pre-requisites of building a forward-looking model for a company’s business is understanding who its stakeholders are and what expectations do they have. Here is how a stakeholder mapping exercise looks like.

The participants will vary from company to company, but in general these are the main stakeholder groups for most companies. As you can see there are several of them. Employees, suppliers, customers, markets of operation, investors, the different communities in the markets of operations, as well as the public administration there.

Here’s an exercise for you. Think of the stakeholders of Coca-Cola in the US and try to recreate the template that you just saw and which will be available as a downloadable resource that comes with this lesson. Once we have identified the different stakeholder groups, it will be our goal to study their expectations.

This is a very important exercise, because missing on the expectations of an even one stakeholder group can have a massive impact on the firm’s profitability. Think of following situation. A firm doesn’t prioritise social security payments and pays such contributions with a certain delay.

Local authorities will likely fine the company significantly, which is obviously something to be avoided, and a problem that could have serious financial repercussions. So, we need to understand how social securities are calculated and when is the right time to pay them. This example is a bit trivial.

But also think how many such separate aspects need to be taken into consideration for each stakeholder group. I am sure you will agree that such planning needs to be done very thoroughly. The easiest and most effective way to understand the expectations of different stakeholder groups is by asking questions.

Soft skills are very important at this stage. All of us can learn by reading documents on paper, but the most knowledge is to be found from the people around you. To be successful you need to talk to stakeholders and ask the right questions.

Think about which questions you need to ask in order to understand how your sales, production, logistics and finance department works. Ask “who”, “what”, “when”, “where”, “why” and “how” questions. Meet these people and try to understand the risks and opportunities they see.

Listen actively and try to be as flexible as possible to adapt to your stakeholders’ needs. The knowledge you will get from these interviews is the backbone on which we will proceed and start building the firm’s business intelligence – the fundamental ingredient for the business analytics exercise. You have probably heard the term “business intelligence”.

In fact, we’re counting on it. Business intelligence is the ultimate goal of any analytical project: to move from simply having information, consisting in facts and data, and reach valuable insights. The idea is to gain an accurate and deep understanding of a company’s business through business intelligence.

So, in essence, this is an exercise of applying the available knowledge and skills in an organization to Predict and Prescribe the firm’s performance. Of course, there are different strategies to acquire business intelligence. Some of them are rather qualitative and others are numbers-driven.

An example of a qualitative approach to business intelligence is considering a firm’s Risks and Opportunities. This represents a diagnostic and descriptive analysis that takes into consideration the current environment and identifies various risks and opportunities for the business. For example, a risk for a bottling company like Coca-Cola European Partners would be if authorities decide to increase tax on plastics.

But at the same time there could be opportunities too. An example of such opportunity is introducing more healthy drinks. So, once a company receives a Risks and Opportunities report, it can analyse the information relevant for them, and try to or mitigate if something is a risk or explore if it is an opportunity.

Typically, once you have generated a qualitative analysis, you would try to quantify the risks and opportunities you’ve identified. But what does that mean? Well, let’s go back to our example of increased taxes on plastic bottles.

The increased tax will increase the selling price of the product, since it is typically the customer who pays added costs. This in turn will likely result in lower sales for the company. So, in an attempt to quantify the risks from the risks and opportunities report, the company will try to quantify the magnitude of the lower sales.

On the other hand, the tax situation can also be seen as an advantage, as it will stimulate companies to look for alternative packages and recycle more. So, the Risk of higher taxes may result in the opportunity to use environmentally friendly packages and improve recycling practices. So, in the quantitative analysis which will follow, the company will estimate the additional investments required and the impact of these investments on their future sales.

But let’s dig a little deeper into quantitative analysis and try to understand how we can obtain business intelligence insights by stepping on the underlying data, understanding it, and make intelligent conclusions. To do that, we can continue to use the increased tax on plastics example. Let´s apply a simplified predictive analytical tool to translate this situation into financial figures.

Based on our analysis, our predictive model shows that the sale of products in plastics will decrease. What would be the best strategy for our company? We cannot adjust production patterns overnight.

Also, some customers prefer plastic because it is light and is a better alternative to glass. Once again, this begs the question: what would be our strategy? Obviously, we understand that we need to avoid litter and that everybody, including companies, plays an important role in establishing recycling practices.

Alright! So, based on the underlying information, we can come up with the following strategy. The company needs to come up with the appropriate package for the appropriate occasion.

Recall what increasing the plastic tax means for us: we will generate lower sales because the higher taxes will result in higher selling price. So, we can adapt to promote glass package for home usage, while promoting plastic package for usage on the go. This can be combined with a strong message to our customers to recycle and our commitment as a company to use more recycled content.

With this strategy, our predictive model shows that the lower sales of plastics will be compensated by increased sales of our glass packages. Great! Okay.

In our examples we used the underlying data to obtain business intelligence insights and came up with an intelligent strategy. We used analytical tools to understand our business. We call this Enterprise Performance Management (or EPM).

The ultimate goal of EPM is to understand real business performance. It highlights the underlying effectiveness and efficiency of your operations. The insights you get form EPM helps you build your business plan, your strategy, and highlights the risks and opportunities for your company.

Awesome – now you understand that analytics, like Enterprise Performance Management, gives you better insights about your company’s performance. So, while analysis just describes what has happened in your business, analytics looks at end-to-end processes and gives you the business knowledge necessary to make better informed decisions. Ok.

We are doing excellent. So far, we have covered several important topics. We identified the stakeholders of a company and the kind of expectations they have.

Then we learned how to ask relevant questions to acquire business intelligence insights. And how this helps a company translate such insights into a holistic Long Range Plan and an Annual Business Plan. In addition, we described how the Long Range Plan and the Annual Business Plan are compared against the company’s performance during the year (when actual figures start unfolding).

We have made some excellent progress! And now, it is time to introduce some more sophisticated strategies that could help broaden an analyst’s understanding of a company. We know that the first step of the analytical process is to ask the relevant questions to the firm’s plurality of stakeholders.

Let’s assume that that’s done. They shared with you their views and provided opinions regarding the future development of the business and the goals the company should be aiming towards. In some, cases as we anticipated previously expectations can be conflicting depending on the stakeholders, so we need to know the dependencies between stakeholder expectations.

The best way to understand this better is to dig deeper and develop a deeper understanding of the processes required to carry out the company’s business. Our goal here would be to learn how to translate business knowledge and goals into business processes, which will help us develop an understanding of the underlying dependencies between stakeholders. An improved understanding of the firm’s business will also allow us to come up with more sophisticated, and detailed objectives and targets, which will finally result in the introduction of targets of execution per each process and even sub-processes.

Targets per process and sub-processes are called metrics. Metrics will help us track our performance under different aspects and would enable us to evaluate whether the execution of a particular process or sub-process needs to be improved. It is important to introduce metrics that are standard for the industry we are operating in , as this would allow us to compare our company’s performance against other firms operating in the same field.

Such a comparison is called benchmarking. Ok. Great.

So, basically, we want to map out our company’s processes from “end-to-end” – every step of the way. Starting from the moment when a customer walks into a store or opens up our website placing an order till the invoice is paid by that customer. While performing end-to-end process mapping, you will see that many processes sit with different departments.

Mid and large companies have a sales, manufacuring, logistics, finance, HR and IT divisions. In addition, the end-to-end process mapping exercise, will show that a single process consists of several sub-processess. And quite often some of these sub-processes are carried out by different departments.

Typically , the Operating Model of a company is organised vertically. Starting from the firm’s CEO, going down in hierarchy to the next layers in the organisation. In some cases, we’ll have Senior Vice Presidents, then Vice Presidents followed by Directors, Senior Managers and so on.

We go vertically from CEO to the lowest level in the organisation. Looking at a process end-to-end means that we do not look at the roles and responsibilities of the CEO and the rest of the organisation, but we look at a process from the start till its very end. When performing end-to-end process mapping, it is key to highlight the dependencies between different functions.

Very soon it will become quite clear that getting everyone on the same page is far from immediate. For example, there might be conflicting targets between departments and certain problems are going to arise due to organizational complexities such as conflicting schedules, deadlines, or activities that simply put, stand in each other’s way. The end-to-end mapping exercise is very useful as it could prevent such conflicts and pre-indicates the problematic areas of interaction between departments.

It gives a chances to the heads of these departments to resolve potential issues beforehand and act preemptively. Let’s provide an example. Think of a company that aims to reduce its working capital.

Given that working capital is given by the sum of trade receivables and inventory minus trade payables, one of the ways to achieve a working capital reduction, is to collect money from customers as soon as possible. This will decrase trade receivables and all else being equal working capital. Therefore, the company’s CFO will aim to have payment terms that require very fast payments from customers.

However, it is also true that clients have the same target to optimise their working capital and therefore try to pay as late as possible (because the amount they owe you represents trade payables for them). Very often payment terms are factored into the decision whether to buy one company’s products or another’s. And the sales team prefers allowing more favorable payment terms as their end-goal is achieving higher sales, right?

Hence in our example the company’s sales department needs to balance between winning over the customer and the target imposed by the firm’s CFO of collecting receivables from customers as quickly as possible. You will understand that there might be an animated discussion involving the company’s CFO and the head of sales. And without an end-to-end process mapping this issue would be uncovered only when the conflict between the two division arises, which is certainly undesirable and to be avoided.

The first process we will consider is called ‘hire to retire’ and is frequently abbreviated as ‘H2R. ’ As the name suggests this flow sustains all organizational aspects related to the recruitment of an employee and comprises the set of procedures and activities up until the time that the employee retires. In this context, retirement means multiple things.

It can be related to the employee’s age, resignation, or any other type of situation in which the person leaves the organization. Allow us now to describe some of the different sub-processes hire to retire consists of. The first sub-process is the hiring stage.

As you can imagine, it is composed of several activities such as an initial job posting (which can be done on the firm’s website or through social media), elaborating responses to job ads, shortlisting and interviewing candidates. Naturally, the hiring sub-process is complete once a person is hired. The next sub-process is related to employee information.

Be it basic information, or quarterly, and annual reviews, information about the person’s compensation, performance tracking, holidays, and so forth. Once a person starts working for a company, they need to be onboarded through activities of induction and on-the-job training, after which they will be deployed to commence their duties. Ideally, the employee’s manager would set objectives and goals for that person, as well as manage their training and possibly certifications.

Throughout the different stages of a person’s career they would understandably expect to be rewarded and promoted and that is another part of this sub-process. Every employee is directly interested in receiving their salary on time and having their social securities paid. The function that takes care of this is payroll and this is an important sub-process that is an integral part of the hire to retire process.

Of course, when a person is about to leave a firm (‘employee retirement’), the organization needs to manage a number of activities such as timely handover, address any remaining vacation days, final payment check including non-paid vacation, and, of course, conducting an exit interview. What we just saw is that processes are multifaceted and carried out by different entities in a single organization. In the example of the hire to retire process, the representatives of different divisions need to be involved at different stages of the process.

The Global process owner would have to interact with several divisions: HR, Learning & Development, Payroll, the functional department where the employee operates (e. g. Marketing), Finance, and possibly Auditing.

The next process we will examine is ‘Source to Pay. ' Remember, these lessons are important as they will allow you to understand the type of processes that are taking place in most companies, and this in turn helps us form useful metrics and measurement results. So, reasonably that is the foundation we need to set before going any further.

We need to grasp the idea of the processes and sub-processes that are required to carry out the business, and this knowledge will help us find the optimal way of tracking the organization’s performance. Having said that, we are now ready to examine the source to pay process. Remember this is a pretty standard and universal view of this process.

It is only natural that specific businesses tailor these processes according to their needs and the type of business goals they have set. For example, we might define source to pay as the process related to obtaining and managing raw materials and other supplies that are necessary for production (when the particular business is a production company). Alternatively, for service-oriented businesses, source to pay can be defined as the process of obtaining and managing the products needed for providing the particular type of service that the company offers.

Source to pay involves the transactional flow of data that is sent to a supplier as well as the data that surrounds the fulfillment of the actual order and payment for the product or service. The process goes from point of order to payment. It involves several sub-processes.

Vendor sourcing – which consists of various activities – demand planning, supplier negotiations, selection, and approval of suppliers. So, this stage more or less helps us understand how much and from whom we are going to buy. Then The following stage is procurement.

It requires input from the manufacturing department in terms of which products will be sold and therefore have to be produced. This is linked to establishing the precise raw materials or ingredients that will be needed for production, and also the inventory levels of these ingredients available at the moment. Then once we have figured out the firm’s demand for the specific raw materials or ingredients, a purchase order is raised and suppliers are informed about it.

Once suppliers deliver the materials ordered, the purchase order can be closed. There is a certain degree of order management that needs to take place – most organizations are constantly in touch with their suppliers and continue to monitor each other’s performance, as well as the contract that is in place. Finally, the process ends when we receive an invoice from suppliers and the invoice is paid.

‘Record to report’ or abbreviated as ‘R2R’ is the process that provides strategic, financial, and operational information related to how a business is performing. This process involves collecting, transforming and delivering relevant, timely and accurate information to stakeholders inside and outside the organization. Such reporting provides insight into whether stakeholder expectations have been met.

Here is how R2R creates useful financial and operational performance indicators. It registers actual data into an ERP system. Within the ERP system we have an existing architecture of how the firm’s information is organized.

The actual data that has been provided as input to the system is organized into sub-ledgers such as accounts payable, accounts receivable, inventory, and orders. Then we group these sub-ledgers into general ledgers, which allows for the transformation of the data into meaningful financial indicators. This is how we obtain some of the most popular financial reports such as Profit & Loss and Balance sheets as well as how departments like Supply Chain prepare scorecards.

Ok, great! We are almost there in terms of describing some of the main processes one will see in a medium and large organization. The last one we’ll consider is called Order to cash, or simply abbreviated as O2C.

This is a set of business processes that involve receiving and fulfilling customer requests for goods or services. O2C is the process of obtaining and managing orders from customers till the customer pays the outstanding invoices. The information obtained when an order is received is provided to the company’s manufacturing department who are sort of ‘activated’ and learn that there is need for producing an additional unit of the product the company offers.

This involves the transactional flow of data that is sent from a customer as well as the data that surrounds the fulfilment of the actual order and receiving payment for the product or service. The process can be divided into a few separate sub-processes. Starting with the Marketing and Sales departments who set up the sales strategy and sell our products.

Pricing can be very complex because of promotions and discounts. For example, when a customer orders a big quantity, the price can be discounted by a certain percentage, or if the company wants to promote a certain product it could provide a price discount. Managing these marketing agreements with customers, is a responsibility of the marketing and finance marketing teams.

Some companies have a direct channel, others use distributors, and some use both distributors and a direct channel. The order fulfilment sub-process ensures we receive orders and also store contact details of every customer in a database. We call this data customer master data.

As soon as we have information regarding the amount of sales orders that have been made we need to notify (a firm’s ERP usually does that automatically) our production team. In this way, they can forecast demand a bit better and start manufacturing. When a customer places an order, the receivables team is responsible for invoicing them.

That means that they link the order, which is typically a combination of several products with the selling price of the products and the customer detail to raise the invoice. When the actual product is delivered to the customer, a financial receivable is created and the invoice is sent. The O2C team monitors the outstanding orders till the payment is made.

As with the other processes we described in this part of the course, the O2C process requires the involvement and hard work of several departments – sales and marketing, supply chain to plan production, manufacturing to produce products, logistics to deliver the products, finance to manage the O2C process and treasury to manage cash payments. When thinking about optimal metrics and ways to improve performance we have to bear in mind how multifaceted a company’s processes are. In conclusion for this chapter, we can say the following.

Typically, overall end-to-end processes are broken down into smaller processes, in order to evaluate sub-processes and activities and to have metrics per sub-process. Presumably, you can now understand how leading companies are organized. On the one hand, you have departments, like the sales department or finance department, whereas on the other hand, you have process leads.

A Global Process lead is a person who is responsible for a process that reaches across the entire organization. Having Global Process Owners gives the advantage that there is an alignment between the different departments about the targets to be achieved. In the opposite case, if an organization does not introduce Global Process owners, but instead creates metrics per each department, we could end up having conflicting targets and potentially problematic situations.

In the next section, we will help you to define the relevant metrics for an organisation and will start looking into performance measurement more closely, stepping on the solid foundation we were able to build here. Thanks for watching!