DeArmond, Justin
MBUS 0673 – Dr. Chen
Business Intelligence Overview and Costco
Abstract:
Business Intelligence as defined by one academic source is “the broader practice of using
technology, applications, and processes to collect and analyze data to support business
decisions.1 Additionally, our text for the course states that business intelligence is “a conceptual
framework for decision support. It combines architecture, databases (or data warehouses),
analytical tools, and applications.2 The two definitions are nearly identical, and focus on helping
managers and leaders to make business decisions. Business intelligence plays a very important
role in the information systems strategy triangle. Businesses today are working hard to utilize
business intelligence and create competitive advantages by mining data and incorporating
business intelligence into its various strategies. Costco, for instance, is utilizing business
intelligence to upsell customers as they check-out of the store. This happens when someone is
close to meeting the requirements for receiving cash back as an executive member. The benefit
for Costco is that they receive an extra $50 for the higher-level membership and retain increased
loyalty from its customers. A fictional market basket analysis is done representing Christmas
items at a Costco warehouse.
Keywords: Data Mining, Data Warehouse, Info System Strategy Triangle, Business Intelligence.
1. Introduction:
In order for a business in today’s hyper-competitive market businesses must not only focus on
providing great products and services to customers, but they must be able to understand and
interpret the massive amounts of data that are created day in and day out within an organization.
Firms must also be able to take a macro view of the environment and gather data that is available
to provide additional insights on how to formulate strategies for the future. Business intelligence
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DeArmond, Justin
MBUS 0673 – Dr. Chen
incorporated with a strong use of the information systems strategy triangle can posture
organizations, such as, Costco for improved business results. By gathering vast amounts of data
on customers Costco can utilize analytical tools to determine how to best service its customers
and when it can bundle products to offer enticing deals to customers, or when to upsell them on
certain products. Costco can develop a strong business strategy first, and then build its
organizational design around its overall strategy, and finally it can incorporate its information
systems into the overall picture to bring effectiveness and efficiency to its business processes.
Most importantly, it can utilize business intelligence to support all three aspects of the strategy
triangle.
Costco is a unique case in the business world as it conducts absolutely no advertising and
charges a membership fee to customers. Costco could get away without charging any fees for
membership, but they see it as a way to maintain loyalty of their customers. In return, consumers
are able to save money on the abundance of wholesale items in bulk. A market basket analysis is
conducted for certain Christmas products. The results are discussed in further detail in this
section.
2. Body:
The following sections will discuss the background and importance of business intelligence,
the information systems strategy triangle, data warehousing, and data mining. These areas all
integrate to provide businesses with information that is molded into actionable knowledge that
aids in the decision-making throughout organizations. Costco, in particular, can make instant
decisions based on members’ purchases at the check-out counter. It has a representative in the
immediate area that can pull your account as another employee is ringing up your purchases.
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DeArmond, Justin
MBUS 0673 – Dr. Chen
This can be done wirelessly all without a customer knowing that they are being analyzed at that
very moment. The Costco representative can then act immediately to offer you an executive
membership by providing very accurate forecasts on how much you will likely spend at Costco
throughout the year.
a. Business Intelligence:
Businesses today must be able to quickly respond to the every changing environment around
them. They must embrace being “reactive, anticipative, adaptive, and proactive” simultaneously
in order to remain competitive. 3 In an effort for businesses to reduce the strategy gap that exists
between themselves and their competitors they can utilize business intelligence. An organization
with a clear vision, mission, objectives, and strategies can integrate business intelligence into
those areas and become more knowledgeable. An increased awareness of how their decisions
are affecting their business in a real-time fashion helps senior decision-makers to better direct the
firm towards its desired position in its respective industry.
Business intelligence has come to encompass many different aspects of information,
information gathering, analytical tools, and processes. During the outset of using gathered
information in the business world managers were looking to be able to forecast and predict
certain trends. 4 To build a business intelligence system it requires four major components: a
data warehouse, business analytics, business performance management, and a user interface. 5
The business intelligence activity involves a variety of personnel to manage, develop,
implement, and use the system. For instance, Costco must utilize its own data sources along
with other industrial competitors for comparison sake (if available). Costco must also have a
knowledgeable technical staff that works on the data warehouse structure and facilities. Next,
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MBUS 0673 – Dr. Chen
Costco must develop or use applications that business users such as store managers or regional
managers can manipulate to make near real-time or real-time decisions that have a positive
impact. Additionally, Costco needs a user-friendly interface that allows anyone in the company
to see a snapshot of certain parameters or information that will enable decision-makers the ability
to make better informed decisions.
b. Information System Strategy Triangle:
First, a brief introduction of the information systems strategy triangle. Pearlson and Saunders
define the information systems strategy triangle as “the framework connecting business strategy,
information system strategy, and organizational system strategy.” 6 The three components of this
must first have a strong business strategy that will drive both organizational and information
systems strategy. However, as businesses develop their strategies in the three areas, they must
balance. If one portion of the strategy becomes the focus, then the other areas will suffer and be
a hindrance to the organization. Costco’s business strategy to be the best wholesale retailer must
align with its organizational strategy and information systems strategy. Costco can use business
intelligence to improve the interconnectivity between all of these areas and dig deep to determine
how to improve all of the processes. Again, due to the hyper-competitive business environment a
firm’s strategy triangle must be in constant flux to keep a business competitive. This is where
business intelligence comes into play and allows decision-makers to have access to a great deal
of current and historical data that has been run through analytical tools that provides options for
what a decision-maker can do. For example, with a great business intelligence system, Costco
can better interact with its customers and profit from their habits and patterns.
Additionally, an organization must ensure that its organizational and information systems
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MBUS 0673 – Dr. Chen
strategies align with the business strategy. Looking at the organizational system first, a firm
must make sure that its processes are well coordinated and implemented. Again, business
intelligence can address some of the internal business organization issues if the proper data exists
to analyze and decipher business processes. Costco, could utilize its internal business data to
find more efficient ways of delivering goods to warehouses just-in-time to meet consumer
demands. It could also utilize a business intelligence system to monitor its workforce and
determine if there are performance gaps or opportunities. Next, from an information systems
perspective, a firm must ensure that it has developed and implemented a system that supports its
overall business strategy. If Costco has certain informational service requirements that need to
meet its business strategy, management and its information system leadership must determine the
best system structure to support the organization and business strategies. Developing the right
system for the business is a very important process for any business and can have positive
implications if designed and built well as to create a competitive advantage. Again, business
intelligence can aid companies such as Costco by looking at the system and determining if it is
running and functioning to its capabilities and allows both senior management and information
system management to create knowledge about their internal systems and make decisions that
influence the operations of the firm.
c. Data Warehousing:
Data warehouses are the location where information is stored and collected for conservation
of a firms information and for future exploitation on how a firm can understand the data it has
compiled and how to utilize data transformed into information for future business actions. As
previously discussed above real-time data with business intelligence and analytical tools can give
managers significant insights on making important business decisions. Before a manager can
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MBUS 0673 – Dr. Chen
ever make a decision, the firm must gather data and prepare it for analyzing.
Turban et al define a data warehouses as a “pool of data produced to support decision making;
it is also a repository of current and historical data of potential interest to managers throughout
the organization.” 7 The key characteristics of a data warehouses are that it is subject oriented,
integrated, time variant, and non-volatile. 8 In addition, the following characteristics allow a data
warehouses to be ready for data access: web based, relational/multidimensional, client/server,
real-time, and metadata. 9 A data warehouses for Costco would contain various data about
customers, products and services it provides, employees, and other relevant information. Costco
must have a robust data warehouses due to the sheer size of its operations. It has 622 locations
worldwide with over 174,000 employees.10 In 2010, Costco conducted over 1.7 million
transactions per day.11 The sheer enormity of this information requires Costco to have a large
DW that is likely located near its headquarters in Seattle. With the advent of real-time
processing of data at data warehouses, Costco and other businesses can gain significant insights
into their business.
Developing the right type of data warehouses for a firm will aid them in making business
decisions. The benefits of proper development of a data warehouses are: end users can conduct
multiple different types of analysis on data; user friendly dashboards allow users to have a
tailored view of a specific area or company-wide activity; extremely timely information is
available; access to data is readily available, and company-wide efficiencies are realized with the
proper integration of decision support systems.12 Costco, for instance, can quickly understand if
there is a customer service problem system wide if they are receiving data that indicates such
activity. Corporate leadership can quickly address the problem and provide feedback to team
members and to customers on how they are working to improve relations.
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MBUS 0673 – Dr. Chen
d. Data Mining:
According to Pearlson, data mining is “the process of analyzing data warehouses for “gems”
that can be used in management decision-making.”13 Comparatively, Turban et al define data
mining as a “term used to describe discovering or “mining” knowledge from large amounts of
data.” 14 Organizations are now have the capabilities with data mining to uncover or find gaps or
opportunities that were previously unknown. Firms can take advantage of this information and
with proper decision-making build competitive advantages. Some of the key characteristics of
data mining is that it can find associations, make predictions, identify clusters, and find
sequential relationships.15
For example, Costco can utilize data mining to find out if certain regions of the country
purchase a typical item during certain periods of the year. Alaska, is a great area to study as it is
geographically separated from the continental US and undergoes drastic changes in seasons.
Costco could use data mining to study and find and predict patterns on when customers are going
to want to buy snow blowers, or other winter related equipment. The more accurately that
Costco can mine data about its Alaska customers the better able it can meet demand. This also
allows Costco the ability to prepare shipments to the region on a just-in-time basis instead of
storing a large amount of inventory during the summer months in Alaska in preparation for the
winter. It is extremely expensive to move and store inventory in Alaska, so the better prepared
Costco is the more it can save and create advantages for the organization.
Additionally, another type of data mining that is useful to retail firms like Costco is a type of
data mining association called Market Basket Analysis. This use of data mining works to try to
associate what customers are buying together, and Costco is a perfect example of what people
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MBUS 0673 – Dr. Chen
are buying together. One of the benefits of shopping at Costco is that customers often buy items
in bulk. Market basket analysis is a form of affinity analysis. It is defined as “a data analysis
and data mining technique that discovers co-occurrence relationships among activities performed
by specific individuals or groups.” 16 The more data a firm has on transactions and develops a
strong market basket analysis program they are able to follow trends, patterns, and buying
behaviors that can lead to more focused selling of those items in store. Again, as Costco has
over 1.7 million transactions per day it has enormous amounts of data that it can mine in order to
gain a better real-time picture. This also allows Costco to make updates and changes as
necessary to its strategy triangle.
3. Example of a Market Basket Analysis:
a. Case Description:
The following is a fictional case of using the Rapidminer data mining software to study a
small sample of Christmas items that are available from Costco warehouses. Costco is a market
leader in wholesale goods in the US and wants to maintain its strong customer loyalty in the
country. The recent hire of Mike, a Gonzaga MBA student, prompted management to test his
skills in data mining processes. Mike studied information systems as an undergraduate and was
eager to utilize his skills and knowledge at Costco to help them develop and maintain their
competitive advantage in the wholesale retail market.
b. Objective:
Using the market basket analysis tool RapidMiner, Mike is tasked to determine the
relationships of various Christmas items that are purchased in the store. Costco wants to look at
bundling or upselling certain Christmas items that members are typically buying together.
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DeArmond, Justin
MBUS 0673 – Dr. Chen
Costco also wants to determine if they should have any member representatives in the area of the
Christmas goods to promote the potential savings of grouping certain items together. If a few of
the items do have a degree of confidence of being bought together, then Costco can bundle or
upsell those items. This study will also help Costco integrate Mike into their business
intelligence initiatives and provide good on the job training.
c. Organization of the Data:
Mike utilized a simple Excel spreadsheet to organize the data for the survey. The items
studied are Christmas trees, tree stands, lawn ornaments, icicle lights, colored and white LED
lights, bulbs, and wreaths. The study is broken down into three columns. The first is the
customer identification, the second is the item identification, and last is the number of a
particular item purchased. The minimum confidence level that will be reported for this data set
is .7 as we want to see a variety of information on customer purchases. The raw data used is as
follows:
customerId itemId
itemCount customerId itemId
itemCount
1 Tree
1
4 Wreath
1
1 Tree Stand
1
4 Lawn Ornaments
3
1 White Lights
4
4 Icile Lights
5
1 Bulbs
3
5 Tree
2
2 Wreath
1
5 Tree Stand
2
2 Colored Lights
10
5 White Lights
3
2 Icile Lights
10
5 Colored Lights
5
2 Lawn Ornaments
4
5 Wreath
1
3 Tree
2
6 Bulbs
2
3 Tree Stand
2
6 Wreath
1
3 Colored Lights
8
6 Colored Lights
10
3 Bulbs
6
6 Lawn Ornaments
5
d. Results:
A brief snapshot of the process results from the RapidMiner software are shown below.
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DeArmond, Justin
MBUS 0673 – Dr. Chen
Above shows the relationships of the Christmas Items being sold at Costco. There are
multiple items that are bought together 50% of the time. These items are wreaths with colored
lights, wreaths with lawn ornaments, and tree stands with trees. The main difference between
these items is that some carry a 75% probability of being purchased together, whereas other
items carry a 100% probability of being purchased together. For instance, the confidence level
of 1.0 shows that there is a 100% probability that Costco shoppers that buy a tree stand will also
buy a Christmas tree.
Based on the confidence levels for this data set, Costco can determine that it can provide
specials that bundle wreaths with colored lights, wreaths with lawn ornaments, and tree stands
with trees. Costco can gain valuable insights by having its workforce continue to conduct
business intelligence studies with market basket analysis tools such as RapidMiner. An even
more detailed study could break down the respective regions or stores that have specific trends.
The more actionable data that Costco can mine, the better they will be able to take advantage of
opportunities in their stores. Placing items at the entrance and near the checkout lines for these
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MBUS 0673 – Dr. Chen
seasonal items will help them to sell more and drive up profits.
4. Conclusion:
Business intelligence in conjunction with a firm’s information systems strategy triangle can
provide unprecedented information and knowledge to everyone throughout an organization.
Costco, for instance, can utilize its vast amounts of data to potentially save thousands of dollars
on the front side of their business operations by understanding how customers are purchasing
their goods. Additionally, Costco can utilize the information gathered from their business
intelligence systems to create more competitive advantages and to profit more from customers
that shop alike. By incorporating business intelligence into an organization and aligning it with
business strategy, organizational strategy, and information systems strategy a firm can continue
to thrive and move ahead of competition. Competitive forces have continually increased with
the ever-increasing amounts of data that organizations are capable of storing and mining. As
long as a strong strategy triangle and business intelligence systems are developed one can expect
that they can build competitive advantages in today’s market place. Costco for instance is
currently hiring for a business intelligence engineer at their Seattle headquarters. 17 The demand
for experts that are able to aid firms in their ability to mine data will continue to increase in
importance.
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DeArmond, Justin
MBUS 0673 – Dr. Chen
Footnotes:
1. Pearlson, Keri, and Carol S. Saunders. Managing and using information systems: A strategic
approach. Vol. 2. Hoboken, NJ: Wiley, 2004, pg 378.
2. Turban, Efraim, Ramesh Sharda, Jay E. Aronson, and David N. King. Business intelligence:
a managerial approach. Pearson Prentice Hall, 2011, 2008, pg 275.
3. Ibid, pg. 7.
4. Ibid, pg. 9.
5. Ibid, pg. 10.
6. Pearlson, Keri, and Carol S. Saunders. Managing and using information systems: A strategic
approach. Vol. 2. Hoboken, NJ: Wiley, 2004, Pg. 381.
7. Turban, Efraim, Ramesh Sharda, Jay E. Aronson, and David N. King. Business intelligence:
a managerial approach. Pearson Prentice Hall, 2011, 2008, pg 32.
8. Ibid, pg. 32-33.
9. Ibid, pg. 33.
10. "Costco." Wikipedia. N.p., 04 Dec 2013. Web. 8 Dec 2013.
http://en.wikipedia.org/wiki/Costco.
11. "Happy 29th Birthday, Costco!." Addicted to Costco!. N.p., 15 Sep 2012. Web. 8 Dec 2013.
http://addictedtocostco.com/2012/09/15/happy-29th-birthday-costco/.
12. Turban, Efraim, Ramesh Sharda, Jay E. Aronson, and David N. King. Business intelligence:
a managerial approach. Pearson Prentice Hall, 2011, 2008, pg. 49.
13. Pearlson, Keri, and Carol S. Saunders. Managing and using information systems: A strategic
approach. Vol. 2. Hoboken, NJ: Wiley, 2004, pg. 339.
14. Turban, Efraim, Ramesh Sharda, Jay E. Aronson, and David N. King. Business intelligence:
a managerial approach. Pearson Prentice Hall, 2011, pg. 137.
15. Ibid, pg. 141.
16. "Affinity Analysis." Wikipedia. N.p., 11 Nov 2013. Web. 8 Dec 2013.
http://en.wikipedia.org/wiki/Affinity_analysis.
17. Wagner, Cecilia. "Business Intelligence Engineer." LinkedIn. Costco, 23 Sep 2013. Web. 9
Dec 2013. http://www.linkedin.com/jobs2/view/7447531.
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DeArmond, Justin
MBUS 0673 – Dr. Chen
References
"Affinity Analysis." Wikipedia. N.p., 11 Nov 2013. Web. 8 Dec 2013.
http://en.wikipedia.org/wiki/Affinity_analysis.
"Costco." Wikipedia. N.p., 04 Dec 2013. Web. 8 Dec 2013. http://en.wikipedia.org/wiki/Costco.
"Happy 29th Birthday, Costco!." Addicted to Costco!. N.p., 15 Sep 2012. Web. 8 Dec 2013.
http://addictedtocostco.com/2012/09/15/happy-29th-birthday-costco/.
Pearlson, Keri, and Carol S. Saunders. Managing and using information systems: A strategic
approach. Vol. 2. Hoboken, NJ: Wiley, 2004.
Turban, Efraim, Ramesh Sharda, Jay E. Aronson, and David N. King. Business intelligence: a
managerial approach. Pearson Prentice Hall, 2011.
Wagner, Cecilia. "Business Intelligence Engineer." LinkedIn. Costco, 23 Sep 2013. Web. 9 Dec
2013. http://www.linkedin.com/jobs2/view/7447531.
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