: Markov Process

Named after Russian mathematician Andrey Markov, due to his seminal work on the analysis of probabilistic events and memory-less processes, Markov process (MP) models the behavior of random events based on pre-defined possible outcomes and the chances of obtaining those outcomes given the current state of the system. The memory-less property implies that the future state of the system depends only on the current state and does not depend upon how the current state was arrived at. In that sense, the system does not have a memory of what happened to it in the past. MP is useful for studying the evolution of systems, or making predictions about them, over repeated transition events. The repeated transitions may be successive time periods, purchase incidents, consecutive selections from available options, etc where the outcome of the transition depends on multiple factors and may not be defined with certainty before the actual occurrence of the transition. For such systems, transition probabilities are defined or estimated to describe the manner in which the system changes from one state to another state during the transition.

An Illustration Assume a market research on Soup sales in Modern Trade channel suggests that 70% of the customers buying Maqqi soups during a purchase are likely to buy the same brand of soup during their next purchase. The same research suggests that 80% of the customers buying Gnorr soups are likely to buy the same brand during their next purchase. The current market share held by Maqqi and Gnorr are approximately 45% and 55% respectively in the Modern Trade channel. For this data, the current state of the system (current market share) and transition probabilities are summarized in Exhibit 1 below

Exhibit 1: Current State, Transition Matrix, and Next State for Soups Market Based on market research report, it is assumed that, on an average, each household purchases soups once a month. Using this information, the likely market share for Maqqi and Gnorr one month hence is also projected in Exhibit 1. The projections are based on simple matrix manipulation of the current state [1 x 2] and transition matrix [2 x 2] to deliver the future state [1 x 2] market share matrix.

The Mechanics of Markov Process Markov process, conceptually and analytically, is very simple to implement. The key steps in conducting a Markov process analysis for business scenarios are outlined in Exhibit 2

Exhibit 2: steps for conducting a Markov Process analysis

The Challenges The complexities in MP analysis arise from the following challenges viz. 1. exhaustively identifying all the potential sequences of states that may follow each other 2. estimating the probabilities of transition from one state to another state for all valid state transitions 3. the process is memory-less in nature; this implies that the current state of the system, along with the transition probabilities, contains all the information necessary to predict the future behavior of the system While these are significant challenges undoubtedly and academically they tend to limit the application of Markov Analysis in certain research areas there are ways to handle these challenges in practical / managerial scenarios. For instance, in the field of computer-generated music compositions, the number of possible notes following any given note is limited. The range of possibilities has been further reduced by observing previous compositions and note sequences. Similarly, for a managerial analysis of brand market shares and customer retention, the managers have a clear idea of who the competitors are and hence these competitors form the set of possibilities for the transition event. Estimation of transition probabilities has been done through analytical and research

techniques including bootstrapping, simulation, scenario analysis, Delphi method, etc. In business scenarios, managers also rely on customer surveys, research reports, FGDs etc to arrive at the transition matrix. The memory-less nature of the process is more of an assumption than a constraint of its analytical prowess. This assumption can be violated and memory can be built into the MP analysis. Such Markov Processes that have memory of previous states (say last n-states) are called Higher Order (nth order) Markov Processes. The MP with no past memory is called the First Order Markov Process. Transition matrices for the higher order MPs may be developed through means similar to those for the First Order MP.

Applications of Markov Process Analysis Due to the simplicity of the approach, and its computational suitability, MP has found its way into multiple and diverse application areas. MP analysis is becoming increasingly popular across old-economy areas like manufacturing, chemical research, etc as well as emerging domains like genetic research, web-analytics, etc. Some of the areas where MP analyses are being used extensively are outlined in Exhibit 3 below

Exhibit 3: Application areas of Markov Process Analysis

Benefits of Deploying Markov Process Analytics Some of the key benefits of leveraging MP analysis for managerial / practical applications are

Formulation simplicity: the analysis process and its logic are fairly simple to model in terms of their transition probabilities and stochastic movement of the system states Analytical expediency: once modeled, the MP analyses can be solved by a wide range of tools including MS Excel (simple MP problems), Matlab, R, SPSS, SAS, etc. most of these tools are widely available within organizations Efficient run-time: the model run-times, even in large sized problems, are manageable. The run-time of most of the MP analyses is of the order n*log(n) (where n is the number of potential system-state outcomes) which is fairly acceptable Extensible: the MP analysis models are easily scalable and adaptable to changing input parameters and relationships without having much impact on the analytical logic or model

The Market Share Paradox (contd.) The market for business class air-travel in South India is catered to predominantly by three major airlines viz. Red Airways, Blue Airlines and Globe Air. Red dominates the market with a 65 percent market share. Blue and Globe have 20 and 15 percent market shares respectively. A recent survey conducted by the Air-Passengers Association (APA) indicated that passengers traveling with Red are most satisfied compared to other airlines operating in South India. As per the APA survey, Red has a customer satisfaction index (CSI) of 0.67 (out of 1) while Blue and Globe had a CSI of 0.46 and 0.50 respectively. The survey also indicated that, on an average, customers on these airlines took approx two months between two consecutive flights. Based on these data, a Markov Process analysis suggests that despite having significantly high customer ranking vis--vis competition Red Airways is in danger of losing approx 10% market share to its competitors. A key observation based on the MP analysis is that Red needs to take measures to enhance its CSI to 0.76 to retain its current market share. Seen this way, MP is also capable of making recommendations to develop action agendas for meeting strategic targets. Should you wish to explore the actual analysis conducted for this problem, please contact us.

How to leverage Markov Process Analytics Markov Process Analysis has evolved significantly over the years in general as well as niche applications. Simpler analyses using MP technique may be conducted by trained managers within the organization. For more complex analyses, however, organizations may leverage the MP analytics techniques by getting their managers specifically trained in it and providing them with the right software and computational devices. Alternatively, organizations may approach data analytics firms that specialize in such techniques and have access to the desired tools.

At Beacon, we have the capability to assist organizations leverage Markov Process Analytics in different functional areas and industries. To know more about how Markov Process based modeling and analytics may help your organization, please contact us.

For further details as to how to conduct the analysis and interpret the results, please contact us at info@thebeaconservices.com or call at +919971767202