Introduction to Modeling

Week 3
What is a Model?
THE MODELING PROCESS
Managerial Approach to Decision Making
Manager analyzes
situation (alternatives) These steps
Use
Makes decision to Spreadsheet
Modeling
resolve conflict

Decisions are
implemented

Consequences
of decision
A Detailed View of the Modeling Process
1. Diagnose the problem
2. Select relevant aspects of reality
3. Organize the facts; identify the assumptions, objectives, and
decisions to be made
4. Select the methodology
5. Construct the model
6. Solve the model (generate alternatives)
7. Interpret results (in “lay” terms!)
8. Validate the model (does it work correctly?)
9. Do sensitivity analysis (does the solution change?)
10. Implement the solution
11. Monitor results
THE MODELING PROCESS

Analysis
Model Results

Interpretation
Abstraction

Symbolic
World

Real
World

Management Intuition
Decisions
Situation
 The Modeling Process
Analysis

Model Results

Interpretation
Abstraction

Symbolic
World Managerial
Real Judgment
World

Management
Decisions
Situation
Intuition
Reasons for Using Models
 Models force you to:
 Be explicit about your objectives
 Think carefully about variables to include and
their definitions in terms that are quantifiable
 Identify and record the decisions that
influence those objectives
 Identify and record interactions and trade-offs
among those decisions
Reasons (cont.)
 Consider what data are pertinent for
quantification of those variables and
determining their interactions
 Recognize constraints (limitations) on the
values that those quantified variables may
assume
 Allow communication of your ideas and
understanding to facilitate teamwork
Types of Models
MODELING VARIABLES
Management
Modeling Term Lingo Formal Definition Example
Decision Variable Lever Controllable Investment
Input Quantity Amount

Parameter Gauge Uncontrollable Interest Rate

Input Quantity

Consequence Outcome Output Commissions

Variable Variable Paid

Performance Yardstick Return on

Measure Used for Evaluation Investment
(Objective Function Value)
Examples of Decision Model
Assumptions - Profit Models
Profit Formula: ?______________________
If it is beyond your control, do not consider
it!
 Overhead costs - a convenient fiction - we
ignore
 Depreciation - only include if we can use to
shield future taxes
 Costs are linear in the short term
Building Models
Symbolic Model Construction

Mathematical relationships are developed from data.

Graphing the variables may help define the relationship.

Co A+B
st
B
Var. Y

Cost A

Var. X
 Modeling with Data
Consider the following data.
Graphs are created to view any relationship(s) between the variables.
This is the first step in formulating the equations in the model.
Creating the Symbolic Model
Predicting Sales Based on Marketing Expenditures
3000

2500
y = 3.5853x + 357.7
R2 = 0.9316
Sales Revenue (y)

2000

1500

1000

500

0
0 100 200 300 400 500 600 700

Marketing Expenses (x)

 DETERMINISTIC AND
PROBABILISTIC MODELS

Deterministic Models

are models in which all relevant data are assumed to be known

with certainty.
can handle complex situations with many decisions and constraints.
are very useful when there are few uncontrolled model inputs
that are uncertain.
are useful for a variety of management problems.
allow for managerial interpretation of results.
will help develop your ability to formulate models in general.
 DETERMINISTIC AND
PROBABILISTIC MODELS
Probabilistic (Stochastic) Models

are models in which some inputs to the model are not known
with certainty.
uncertainty is incorporated via probabilities on these “random”
variables.
very useful when there are only a few uncertain model inputs and
few or no constraints.
often used for strategic decision making involving an organization’s
relationship to its environment.
 ITERATIVE MODEL BUILDING
Deductive Modeling
focuses on the variables themselves before data are collected.
variables are interrelated based on assumptions about algebraic
relationships and values of the parameters.
places importance on modeler’s prior knowledge and judgments of
both mathematical relationships and data values.
tends to be “data poor” initially.

Inferential Modeling
focuses on the variables as reflected in existing data collections.
variables are interrelated based on an analysis of data to
determine relationships and to estimate values of parameters.
available data need to be accurate and readily available.
tends to be “data rich” initially.
Philosophy of Modeling
 Realism
A model is valuable if you make better
decisions when you use it than when you
don’t.
 Intuition
A manager’s intuition arbitrates the content of
the abstraction, resulting model, analysis, and
the relevance and interpretation of the results.
MGS3100
General Modeling

Chapter 11:
Implementation
 INTRODUCTION
Just as knowledge of Excel is insufficient
without modeling concepts, your knowledge of
spreadsheet modeling alone is insufficient for
truly affecting decision making in organizations.
Creating a model itself, although an important
first step, is far from sufficient in the process of
systematically improving decision making in the
real world of business enterprise.
Inadequate modeling is just one of the reasons
why decision-makers do not make good
decisions.
The purpose of this chapter is to help you
understand why improving the quality of
modeling alone will not necessarily lead to
improved real-world decisions.

This chapter will cover critical oversights that

users new to the concepts of modeling make in
attempting to move forward to apply those ideas
in actual decision-making situations.

The upside and downside potential risks of

applying modeling concepts will be discussed
so that you will come away with a balanced
perspective of the pros and cons of applying
modeling in business practical situations.
 WHAT, AFTER ALL, IS A MODEL?
It is difficult to define a model. One definition
might be:
A model is an abstraction of a business situation
suitable for spreadsheet analysis to support
decision making and provide managerial insights.
To many managers, a model is exquisitely
crafted and professionally polished in
appearance, highly intuitive, self-documenting,
easy to use, completely validated and
generalizable enough to be applied in a variety
of settings by many people.
Consider the following evolution of a model:
 An Institutionalized Model
Sustained by the Organization
Integrated into Organization's
Decision Processes
A Prototype Model Coordinated in Function with
Complete Other Models and Systems
Debugged Useable by Other Managers
Runable by Its Author Maintainable and Extensible
Validated with Test Data by Others
Believed to Deliver Value Need Data Supplied and
Maintained by Others
Effort: 1X Effort: 10X-100X

A Modeling Application An Institutionalized

Usable by a Client Manager Modeling Application
Well Documented
Hardened to Reject Unusual
Data Inputs
Extendable by Author or Client
Manager Validated with
Real-World Data
Known to Deliver Value

Effort: 10X Effort: 100X – 1000X

 The Separation of Players Curse
This framework is a variation of one originally
proposed by C. West Churchman, et. al.
Modeler

Modeler,
Project Curse of Decision
Manager, Client Maker
Decision Player Separation
Maker,
Client

Project Manager
 The Curse of Scope Creep
Narrow Modeling Project
Single Model
Single Objective
Focused Activity
Few Players
Few Stakeholders
Low Effort Curse of
Low Cost Scope Creep
Low Development Risk
Informal Coordination & Project
Management
Low Project Visibility
Scale Diseconomies in
Information Systems for Model
Scale Diseconomies in Model &
Database Maintenance
Deterioration in Model Use as
Early Adopters Move on Low
Potential Organization-wide
Impact
Wide Modeling Project
Multiple (Replicated) Models
Multiple Objectives
Diffused Activity
Many Players
Many Stakeholders
High Effort
High Cost
High Development Risk
Formal Coordination & Project
Management
High Project Visibility
Scale economies in Information
Systems for Model
Scale Economies in model &
Database Maintenance
Support for Model Use
Independent of Early Adopters
High Potential Organizational-
wide Impact