Predictive analytics is a statistical technique used to analyze current and historical data in order to make a reasonable prediction about future. In a business environment, organizations employ predictive analytics model to identify market trends, opportunities and risks. Using the predictive analytics, organizations are able to assess potential risks and opportunities to achieve competitive market advantages. In other word, predictive analytics is part of data mining focusing on extracting information from historical data and used the data to predict behavioral patterns and trends. Typically, predictive analytics can be applied to any type of unknown events in order to predict the presents and future events. Banks are the early adopters of predictive analytics model. For example, banks use the data collected from credit scores to determine the likelihood of an individual to qualify for a bank loan. The technique has assisted banks to minimize the risks by detecting applicants likely to default the bank loans.
Apart from the bank sector, several organizations in different sectors also use the predictive model to achieve competitive market advantages. For example, sales and marketing department can use historical sale data collected from a specific geographical region to predict probability of sales in the regions. Using historical sales data, an organizational marketing department can target which region and segment to focus their marketing campaigns. More importantly, organizations can use historical data to optimize between price and demand of any product and determine the best pricing for the product.
Predictive analytics can also assist healthcare sector to achieve a better health outcomes. For example, healthcare sector can use the model to predict likelihood that a patient carrying certain type of symptom is suffering from heart attack. The relationships will assist the healthcare to determine the urgency of the treatment.
The police departments also use predictive analytics to reduce crimes. In 1994, the NYPD (New York Police Department) adopted predictive analytical technique to solve crimes. The NYPD developed COMPSTAT known as Computer Statistics to detect likely areas where crimes could occur, and the NYDP uses the GIS (Geographic Information Systems) to map out likely locations in the New York City that crimes can occur, map problem areas and identify hotspots. Typically, the NYDP uses the COMPSTAT to collect large volume of historical data using mathematicians to develop algorithms running against historical data in order to predict future crimes in New York. The strategy is known as predictive policing. Using this strategy, the New York police department is able to reduce automobile thefts, burglaries, and other crimes in the New York City.
Objective of this paper is to explore the application of predictive analytics, its benefits and shortcomings.
Applications, Benefits and Shortcomings of Predictive Analytics
Predictive analysts use the statistical modeling to understand internal and external value of an organization. The model assists organizations to identify patterns and trends and help decision makers to make effective decisions. Typically, predictive analytics is a proven driven force in business intelligence, which assists organizations to enhance competitive market advantages. Application of predictive analytics cuts across different industries ranging from the financial sector to the retail industry. Consumer behavior forecasting is one of the important aspects where predictive analytics is very important. Forecasting is to accurately predict what will happen in the future, however, forecasting is not always based on knowledge and experience, and accurate forecasting is based on the analysis of historical data to extract useful information from data. Predictive analytics is a power tool that organizations employ to do forecasting. Typically, predictive analytics combines powerful analysis technologies with automated discovery to prepare for future based on the analysis of historical data. The decision makers use a large quantity of structured and unstructured data originated from sources such as Customer feedbacks, Call-Center, Websites, Email, and other sources. These data combined together are analyzed to discover threats, and patterns that assist organizations to make decisions on the direction to take. Predictive analytics is based on algorithms, pattern generation, trend analysis and artificial intelligence to enhance future predictions.
Firms can refine prediction using past data to understand consumer behaviors. Using different range of variables, organizations can analyze the demand to arrive at future demand outcomes. For example, Wal-Mart has been able to predict the demand of snowblowers in winter using hard historical data collected from customer demand. Before wide adoption of predictive analytics, the New York Police was the first organization that uses a large-scale predictive model to combat crime in the New York. The authorities were demanding the NYPD to reduce crime in the New York City despite the budgetary restraints. Ability to use limited resources became a high priority for the police department, and thus, the NYPD developed COMPSTAT software, which was an advanced analytical tool to track crime offenders. While data collection and reporting are very critical, however, the tools are not sufficient to enhance public safety. Predictive policing assists the NYPD to effective use scarce resources to achieve better outcomes. One of the benefits of CompStat technology is that the New York police department is able to identify the crime hotspots, which assists the New York police force to quickly respond to locations where crimes are happening. The New York predictive policing model gains a wide acceptance because the NYPD has been able to reduce crimes. (William and Sean, 2008).The CompStat was adopted in 1994 and before the adoption of CompStat, Robbery rates in New York city were 85,892 in 1993. However, in 1998, robbery rates dropped to 39,003. By 2013, the robbery rates in New York city drooped to 19,128. Similarly, murder rates dropped from 1,927 in 1993 to 335 in 2013. Burglary reduced from 100,936 in 1993 to 17,429 in 2013. Typically, the total crime rates in the New York city dropped from 430,460 in 1993 to 7.400 in 2013. The data in Table 1 shows that predictive policing achieves the measurable results.
Table 1: Historical Crime Rate in New York City
Source: NYPD CompStat Unit (2014).
Following the success that NYPD department derives from the CompStat technology, many organizations also use the predictive analytics to enhance market competitive advantages. Evidenced from CompStat model reveals that collecting data intelligently can assist organizations with limited resources to increase revenues. In the last few decades, businesses have also adopted predictive analytical techniques executing their predictive policing model. For example, Marketing and E-commerce companies have learnt to use advance analytical tool to support business intelligence in order to predict, anticipate, and effectively emerge patterns, trends and consumer behavior.
Predictive analytics is the analysis and systematic review of data using automated methods. By using advanced statistical method in combination with exploratory graphics, artificial intelligence, and machine learning tools, an organization can extract useful information from data. By probing information further, it will be possible to accept or reject hypotheses. Moreover, predictive analytics assists organizations to predict trends, relationships, sequence, and patterns on the data, which can be used to anticipate actions.
Over the years, a company such as Wal-Mart has understood the importance of predicting future demand. For example, Wal-Mart has been able to shift its supply chain by sending bottle water, duct tape and Pop-Tarts to the affected locations during the storm. Essentially, products such as bottled water and duct tape make sense for emergency preparations and responses. While the Pop-Tarts product seems very odd, however, Wal-Mart has used predictive analysis to increase market advantages of Pop-Tarts after analyzing the historical data. Wal-Mart is able to match weather events with the Pop-Tarts. Analysis of the past data assists Wal-Mart to increase demand for the product by accurately forecasting likely of the storm to occur in a particular location. With predictive data analytics, Wal-Mart has been able to adjust its supply chain and move the strawberry Pop-Tarts to locations where there will be a large or bad weather. Thus, accuracy of Wal-Mart speculation increases consumer demand because the company has already moved the products to locations where there is a likely occurrence of storm.
Moreover, insurance companies use predictive analytics to detect fraud and predict the pattern of frauds using a statistical model for fraud prevention. Moreover, auto insurance company can use predictive analytics to determine an accurate premium to charge customer. Underwriters also use predictive analytics to predict bankruptcy, default, and a chance of illness of applicants.
Kent, (2006) argues, "Predictive analytics consists of two major components - advanced analytics and decision optimization. Decision optimization and advanced analytics use comprehensive portfolio of sophisticated statistical techniques and data mining algorithms." (p 40). According to Kent, predictive analytics also uses different tools to predict future trends, and link analysis algorithms, which is the process of developing network of cases and relationships to build patterns and trends. Moreover, regression analysis assists in predicting a value-using dependent and independent variables, estimating forecasting…