Question

Think of your own original example of how a business could use the normal distribution to determine probability. How would this help the business make decisions? Please be detailed.

Answer 1

A business can use the normal distribution to determine probability. In many cases, the normal distribution is used because it fits many natural phenomena. For example, heights, blood pressure, measurement error, and IQ scores follow the normal distribution. It is also known as the Gaussian distribution and the bell curve.

In the case of businesses, it can be used as a statistical model that shows the possible outcomes of a particular event or course of action as well as the statistical likelihood of each event.  For example, a company might have a probability distribution for the change in sales given a particular marketing campaign. The values on the "tails" or the left and right end of the distribution are much less likely to occur than those in the middle of the curve.

For example, a business of courier service, there are many courier services in Delhi, which promises to deliver within Delhi in an hour or so. In these businesses, users follow the normal distribution and in this case, it can show the possible outcome of the event.

Probability distributions can be used to create scenario analyses. A scenario analysis uses probability distributions to create several, theoretically distinct possibilities for the outcome of a particular course of action or future event. For example, a business might create three scenarios: worst-case, likely, and best-case. The worst-case scenario would contain some value from the lower end of the probability distribution; the likely scenario would contain a value towards the middle of the distribution, and the best-case scenario would contain a value in the upper end of the scenario. In the case of a courier business, the scenarios can be a promotional event in which they are targeting a particular type of users and by using a probability distribution, they can get the course of action required.

Sales forecasting can be evaluated using a probability distribution. One practical use for probability distributions and scenario analysis in business is to predict future levels of sales. It is essentially impossible to predict the precise value of a future sales level.

In addition to predicting future sales levels, a probability distribution can be a useful tool for evaluating risk. Consider, for example, a company considering entering a new business line. If the company needs to generate $500,000 in revenue in order to break even and their probability distribution tells them that there is a 10 percent chance that revenues will be less than $500,000, the company knows roughly what level of risk it is facing if it decides to pursue that new business line.