Business Analytics

Advanced Study Program

National Economics University

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 Learning Objectives

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 Introduction
Chapter 1

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 Analytic Questions

Suppose you apply for a loan for the first time. How does the bank assess
the riskiness of the loan it might make to you?

How does Amazon.com know which books and other products to

recommend to you when you log in to their web site?

How do airlines determine what price to quote to you when you are
shopping for a plane ticket?

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 Examples - Loan

You may be applying for a loan for the first time, but millions of people around the
world have applied for loans before.

Many of these loan recipients have paid back their loans in full and on time, but some
have not.

The bank wants to know whether you are more like those who have paid back their
loans or more like those who defaulted.

By comparing your credit history, financial situation, and other factors to the vast
database of previous loan recipients, the bank can effectively assess how likely you
are to default on a loan.
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 Examples - Amazon

Amazon.com has access to data on millions of purchases made by customers on its

web site.

Amazon.com examines your previous purchases, the products you have viewed, and
any product recommendations you have provided.

Amazon.com then searches through its huge database for customers who are similar
to you in terms of product purchases, recommendations, and interests.

Once similar customers have been identified, their purchases form the basis of the
recommendations given to you

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 Example – Airline tickets

Prices for airline tickets are frequently updated.

The price quoted to you for a flight between New York and San Francisco today could be very
different from the price that will be quoted tomorrow.
These changes happen because airlines use a pricing strategy known as revenue
management.
Revenue management works by examining vast amounts of data on past airline customer
purchases and using these data to forecast future purchases.
These forecasts are then fed into sophisticated optimization algorithms that determine the
optimal price to charge for a particular flight and when to change that price
Revenue management has resulted in substantial increases in airline revenues

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 Introduction

Three developments spurred recent explosive growth in the use of

analytical methods in business applications:

First development:
 Technological advances—scanner technology, data collection through
e-commerce, Internet social networks, and data generated from personal electronic
devices—produce incredible amounts of data for businesses.

 Businesses want to use these data to improve the efficiency and profitability of their
operations, better understand their customers, price their products more effectively,
and gain a competitive advantage.

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 Introduction (cont.)

Three developments spurred recent explosive growth in the use of

analytical methods in business applications (cont.):

Second development:
 Ongoing research has resulted in numerous methodological developments, including:
 Advances in computational approaches to effectively handle and explore massive amounts of
data.

 Faster algorithms for optimization and simulation.

 More effective approaches for visualizing data.

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 Introduction (cont.)

Three developments spurred recent explosive growth in the use of

analytical methods in business applications (cont.):

Third development:
 The methodological developments were paired with an explosion in computing
power and storage capability.
 Better computing hardware, parallel computing, and cloud computing have
enabled businesses to solve big problems faster and more accurately than ever
before.

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 1.1 Decision Making

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 Decision Making

Managers’ responsibility:
 To make strategic, tactical, or operational decisions.

Strategic decisions:
 Involve higher-level issues concerned with the overall direction of the
organization.
 Define the organization’s overall goals and aspirations for the future.

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 Decision Making (cont.)
Tactical decisions:
 Concern how the organization should achieve the goals and objectives set by its
strategy.
 Are usually the responsibility of midlevel management.

Operational decisions:
 Affect how the firm is run from day to day.
 Are the domain of operations managers, who are the closest to the customer.

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 Decision Making (cont.)

Decision making can be defined as the following process:

1. Identify and define the problem.
2. Determine the criteria that will be used to evaluate alternative solutions.
3. Determine the set of alternative solutions.
4. Evaluate the alternatives.
5. Choose an alternative.

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 Decision Making (cont.)

Common approaches to making decisions include:

 Tradition.
 Intuition.
 Rules of thumb.
 Using the relevant data available.

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 1.2 Business Analytics
Defined

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 Business Analytics Defined

Business analytics:
 Scientific process of transforming data into insight for making better decisions.
 Used for data-driven or fact-based decision making, which is often seen as more
objective than other alternatives for decision making.

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 Business Analytics Defined (cont.)

Tools of business analytics can aid decision making by:

 Creating insights from data.
 Improving our ability to more accurately forecast for planning.
 Helping us quantify risk.
 Yielding better alternatives through analysis and optimization.

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 1.3 A Categorization of
Analytical Methods and
Models
Descriptive Analytics
Predictive Analytics
Prescriptive Analytics

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 A Categorization of Analytical Methods and Models

Descriptive analytics: Encompasses the set of techniques that describes

what has happened in the past; examples include:
Data queries.
Reports.
Descriptive statistics.
Data visualization (including data dashboards).
Data-mining techniques.
Basic what-if spreadsheet models.

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 A Categorization of Analytical Methods and Models (cont.)

Data query: A request for information with certain characteristics from a

database.
 Query to a manufacturing plant’s database might be for all records of shipments to
a particular distribution center during the month of March.

 A report summarizing relevant historical information for management might be

conveyed by the use of descriptive statistics (means, measures of variation, etc.)
and data-visualization tools (tables, charts, and maps). Simple descriptive
statistics and data-visualization techniques can be used to find patterns or
relationships in a large database

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 A Categorization of Analytical Methods and Models (cont.)

Descriptive Analytics (cont.):

Data dashboards: Collections of tables, charts, maps, and summary

statistics that are updated as new data become available.

Uses of dashboards:
 To help management monitor specific aspects of the company’s performance
related to their decision-making responsibilities.
 For corporate-level managers, daily data dashboards might summarize sales by
region, current inventory levels, and other company-wide metrics.
 Front-line managers may view dashboards that contain metrics related to staffing
levels, local inventory levels, and short-term sales forecasts.

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 A Categorization of Analytical Methods and Models (cont.)

Descriptive Analytics (cont.):

Data mining: The use of analytical techniques for better understanding

patterns and relationships that exist in large data sets.

Examples of data-mining techniques include:

Unsupervised learning techniques which are descriptive methods that seek to identify patterns
based on notions of similarity or correlation

Cluster analysis.

Sentiment analysis.

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 A Categorization of Analytical Methods and Models (cont.)

Predictive analytics: Consists of techniques that use models constructed

from past data to predict the future or ascertain the impact of one variable
on another.

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 A Categorization of Analytical Methods and Models (cont.)

Past data on product sales may be used to construct a mathematical

model to predict future sales.

This model can factor in the product’s growth trajectory and seasonality
based on past patterns.

A packaged-food manufacturer may use point-of-sale scanner data from

retail outlets to help in estimating the lift in unit sales due to coupons or
sales events.

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 A Categorization of Analytical Methods and Models (cont.)

Survey data and past purchase behavior may be used to help predict the
market share of a new product.

All of these are applications of predictive analytics.

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 A Categorization of Analytical Methods and Models (cont.)

Techniques used in Predictive Analytics include:

 Linear regression.
 Time series analysis.
 Data mining is used to find patterns or relationships among elements of the data
in a large database; often used in predictive analytics.
 Simulation involves the use of probability and statistics to construct a computer
model to study the impact of uncertainty on a decision.

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 A Categorization of Analytical Methods and Models (cont.)

Data mining includes supervised learning techniques which use past data to learn the
relationship between an outcome variable of interest and a set of input variables.

A large grocery store chain might be interested in developing a targeted marketing

campaign that offers a discount coupon on potato chips.

By studying historical point-of-sale data, the store may be able to use data mining to
predict which customers are the most likely to respond to an offer on discounted
potato chips, by purchasing higher-margin items such as beer or soft drinks in addition
to the chips, thus increasing the store’s overall revenue.

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 A Categorization of Analytical Methods and Models (cont.)

Simulation involves the use of probability and statistics to construct a computer model
to study the impact of uncertainty on a decision.

Banks often use simulation to model investment and default risk in order to stress-
test financial models.

Simulation is also often used in the pharmaceutical industry to assess the risk of
introducing a new drug.

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 A Categorization of Analytical Methods and Models (cont.)

Prescriptive Analytics: Indicates a best course of action to take:

 Predictive models provide a forecast or prediction, but do not provide a decision.
 A forecast or prediction, when combined with a rule, becomes a prescriptive
model.
 Prescriptive models that rely on a rule or set of rules are often referred to as rule-
based models.

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 A Categorization of Analytical Methods and Models (cont.)

Develop a model to predict the probability that a person will default on a

loan. it means you’ve broken the original loan agreement by discontinuing
payments.

Create a rule that says if the estimated probability of default is more than
0.6, we should not award a loan, now the predictive model, coupled with
the rule is prescriptive analytics.

These types of prescriptive models that rely on a rule or set of rules are
often referred to as rule-based models

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 A Categorization of Analytical Methods and Models
(cont.)
Prescriptive Analytics (cont.):
Model Field Purpose
Portfolio models Finance Use historical investment return data to determine the mix of
investments that yield the highest expected return while controlling
or limiting exposure to risk.
Supply network Operations Provide the cost-minimizing plant and distribution center locations
design models subject to meeting the customer service requirements.

Price-markdown models Retailing Use historical data to yield revenue-maximizing discount levels and
the timing of discount offers when goods have not sold as planned.

• Optimization models: Models that give the best decision subject to

constraints of the situation.

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 A Categorization of Analytical Methods and Models (cont.)

Prescriptive Analytics (cont.):

Simulation optimization: Combines the use of probability and statistics
to model uncertainty with optimization techniques to find good decisions
in highly complex and highly uncertain settings.
Decision analysis:
 Used to develop an optimal strategy when a decision maker is faced with several
decision alternatives and an uncertain set of future events.
 Employs utility theory, which assigns values to outcomes based on the
decision maker’s attitude toward risk, loss, and other factors.

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 Big Data
Volume
Velocity
Variety
Veracity

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 Big Data
Big data: Any set of data that is too large or too complex to be handled by
standard data-processing techniques and typical desktop software.

IBM describes the phenomenon of big data through the four Vs (as shown
in Figure 1.1):
Volume.
Velocity.
Variety.
Veracity.

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 Big Data (cont.)
Figure 1.1: The 4 Vs of Big
Data

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 Big Data (cont.)
Volume:
Because data are collected electronically, we are able to collect more of it.
To be useful, these data must be stored, and this storage has led to vast
quantities of data.
Velocity:
Real-time capture and analysis of data present unique challenges both in
how data are stored and the speed with which those data can be analyzed
for decision making.

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 Big Data (cont.)

Variety:
More complicated types of data are now available and are proving to be of
great value to businesses.
 Text data are collected by monitoring what is being said about a company’s products
or services on social media platforms.
 Audio data are collected from service calls.
 Video data are collected by in-store video cameras and used to analyze shopping
behavior.
Analyzing information generated by these nontraditional sources is more
complicated in part because of the processing required to transform the
data into a numerical form that can be analyzed.

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 Big Data (cont.)
Veracity:
Veracity has to do with how much uncertainty is in the data.
Inconsistencies in units of measure and the lack of reliability of
responses in terms of bias also increase the complexity of the data.

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 Big Data (cont.)

Represents opportunities.
Presents challenges in terms of data storage and processing, security,
and available analytical talent.
The four Vs have led to new technologies:
Hadoop (https://hadoop.apache.org/): An open-source programming
environment that supports big data processing through distributed storage and
processing on clusters of computers.
MapReduce (https://en.wikipedia.org/wiki/MapReduce): A programming model
used within Hadoop that performs two major steps: the map step and the reduce
step.
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 Big Data (cont.)
Data security, the protection of stored data from destructive forces or unauthorized
users, is of critical importance to companies.

The complexities of the 4 Vs have increased the demand for analysts, but a shortage
of qualified analysts has made hiring more challenging.

More companies are searching for data scientists, who know how to process and
analyze massive amounts of data.

The Internet of Things (IoT) is the technology that allows data, collected from
sensors in all types of machines, to be sent over the Internet to repositories where it
can be stored and analyzed.

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 Example of Big data & Analytics

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 Example of Big data & Analytics

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 Example of Big data & Analytics

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 Business Analytics in Practice
Financial Analytics Supply-Chain Analytics
Human Resource (HR) Analytics Analytics for Government and
Marketing Analytics Nonprofits
Health Care Analytics Sports Analytics
Web Analytics

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 Business Analytics in Practice
Figure 1.2: The Spectrum of Business Analytics

Source: Adapted from SAS

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 Business Analytics in Practice (cont.)
Predictive and prescriptive analytics are sometimes referred to as
advanced analytics.

Financial Analytics use of predictive models to:

 Forecast financial performance.
 Assess the risk of investment portfolios and projects.
 Construct financial instruments such as derivatives.
 Construct optimal portfolios of investments.
 Allocate assets.
 Create optimal capital budgeting plans.

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 Business Analytics in Practice (cont.)
Human Resource (HR) Analytics - New area of application for analytics.

The HR function is charged with ensuring that the organization:

 Has the mix of skill sets necessary to meet its needs.
 Is hiring the highest-quality talent and providing an environment that retains it.
 Achieves its organizational diversity goals.

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 Business Analytics in Practice (cont.)
Marketing Analytics - Marketing is one of the fastest-growing areas for the
application of analytics.

A better understanding of consumer behavior through the use of scanner

data and data generated from social media has led to an increased interest
in marketing analytics.

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 Business Analytics in Practice (Slide 5 of 11)
A better understanding of consumer behavior through marketing analytics
leads to:
 Better use of advertising budgets.
 More effective pricing strategies.
 Improved forecasting of demand.
 Improved product-line management.
 Increased customer satisfaction and loyalty.

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 Business Analytics in Practice (cont.)
Health Care Analytics - Descriptive, predictive, and prescriptive analytics
are used to improve:
 Patient, staff, and facility scheduling.
 Patient flow.
 Purchasing.
 Inventory control.

Use of prescriptive analytics for diagnosis and treatment may prove to be

the most important application of analytics in health care.

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 Business Analytics in Practice (cont.)

Supply-Chain Analytics:
 The core service of companies such as UPS and FedEx is the efficient delivery of
goods, and analytics has long been used to achieve efficiency.

 The optimal sorting of goods, vehicle and staff scheduling, and vehicle routing are
all key to profitability for logistics companies such as UPS and FedEx.

 Companies can benefit from better inventory and processing control and more
efficient supply chains.

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 Business Analytics in Practice (cont.)
Analytics for Government and Nonprofits:

Analytics for government to:

 Drive out inefficiencies.
 Increase the effectiveness and accountability of programs.

Analytics for nonprofit agencies to ensure their effectiveness and

accountability to their donors and clients.

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 Business Analytics in Practice (cont.)
Sports Analytics

Professional sports teams use to:

Assess players for the amateur drafts.
Decide how much to offer players in contract negotiations.

Professional motorcycle racing teams use sophisticated optimization for

gearbox design to gain competitive advantage.
Teams use to assist with on-field decisions such as which pitchers to use
in various games of a MLB playoff series.

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 Business Analytics in Practice (cont.)
Sports Analytics (cont.):

The use of analytics for off-the-field business decisions is increasing

rapidly.
Using prescriptive analytics, franchises across several major sports
dynamically adjust ticket prices throughout the season to reflect the
relative attractiveness and potential demand for each game.

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 Business Analytics in Practice (cont.)

The use of analytics in sports has gained considerable notoriety since 2003 when
renowned author Michael Lewis published Moneyball.

Lewis’ book tells the story of how the Oakland Athletics used an analytical approach
to player evaluation in order to assemble a competitive team with a limited budget.

Professional sports teams use analytics to assess players for the amateur drafts and
to decide how much to offer players in contract negotiations; and teams use analytics
to assist with on-field decisions such as which pitchers to use in various games of a
Major League Baseball playoff series

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 Business Analytics in Practice (cont.)
Web Analytics:

The analysis of online activity, which includes, but is not limited to, visits
to web sites and social media sites such as Facebook and LinkedIn.
Leading companies apply descriptive and advanced analytics to data
collected in online experiments to determine the best way to:
Configure web sites.
Position ads.
Utilize social networks for the promotion of products and services.

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 Legal and Ethical Issues in
the Use of Data and Analytics

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 Legal and Ethical Issues in the Use of Data and Analytics

Increased attention has been paid to ethical concerns around data privacy and the
ethical use of models based on data.

Companies have an obligation to protect the data and to not misuse that data.

Clients and customers have an obligation to understand trade-offs between allowing

their data to be collected, and the benefits they accrue from allowing a company to
collect and use that data.

An agreement must be signed between the customer and the company.

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 Legal and Ethical Issues in the Use of Data and Analytics
(cont.)
One of the strictest privacy laws is the General Data Protection Regulation.
Went into effect in the European Union in May 2018.

Stipulations:
The request for consent to use an individual’s data must be easily understood and
accessible.
The intended use of data must be specified.
Must be easy to withdraw consent.
The individual has a right to a copy of their data and the right to demand their data be

erased.
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 Legal and Ethical Issues in the Use of Data and Analytics
(cont.)
Analytics professionals have a responsibility to behave ethically.

This includes protecting data, being transparent about the data and how it was
collected, and what it does and does not contain.

Analysts must be transparent about the methods used to analyze the data and any
assumptions that have to be made for the methods used.

Analysts must provide valid conclusions and understandable recommendations to

their clients.

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 Legal and Ethical Issues in the Use of Data and Analytics
(cont.)
The American Statistical Association (ASA) and the Institute for Operations Research
and the Management Sciences (INFORMS) provide ethical guidelines for analysts.

The guidelines state that “Good statistical practice is fundamentally based on

transparent assumptions, reproducible results, and valid interpretations.”

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 Summary

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 Summary (1)

There are three categories of analytics: descriptive, predictive, and prescriptive.

Descriptive analytics describes what has happened and includes tools such as
reports, data visualization, data dashboards, descriptive statistics, and unsupervised
learning techniques from data mining.

Predictive analytics consists of techniques that use past data to predict future events
or ascertain the impact of one variable on another. These techniques include
regression, supervised learning techniques from data mining, forecasting, and
simulation.

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 Summary (2)

Decision making can be defined as the following process: (1) identify and define the
problem, (2) determine the criteria that will be used to evaluate alternative solutions,
(3) determine the set of alternative solutions, (4) evaluate the alternatives, and (5)
choose an alternative.

Decisions may be strategic (high level, concerned with the overall direction of the
business), tactical (midlevel, concerned with how to achieve the strategic goals of the
business), or operational (day-to-day decisions that must be made to run the
company).

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 Summary (3)

Prescriptive analytics uses data to determine a course of action. This class of

analytical techniques includes rule-based models, simulation, decision analysis, and
optimization.

Descriptive and predictive analytics can help us better understand the uncertainty and
risk associated with our decision alternatives.

Predictive and prescriptive analytics, also often referred to as advanced analytics,

can help us make the best decision when facing a myriad of alternatives.

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 Summary (4)

Big data is a set of data that is too large or too complex to be handled by standard
data-processing techniques or typical desktop software.

Cloud computing has made storing and processing vast amounts of data more
efficient and more cost effective.

The increasing prevalence of big data is leading to an increase in the use of analytics
and artificial intelligence.

Business analytics helps them understand these data and use them to make better
decisions

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End of Chapter 1

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