MODELLING WITH SPREADSHEET XIX BATCH

LECTURE-NOTE-01
What is a Model?
A model is abstraction of a real world problem; it tries to capture the
essence of the problem without complicating it with unimportant details.
What is Modelling?
Modelling is the process of creating simplified representation of real
problem in order to understand or control some aspect of it.
Types of Model
Models are of many types like; Mental Model, Physical Model,
Mathematical Models, Visual or Graphic Model and many more. Spreadsheet
model is a form of mathematical model.
Mental Models
You must be crossing many traffic junctions every day. Now assume that
you are approaching a traffic light and it turns green to yellow. What do you do?
You need to make a quick decision, go- no-go. Probably you would consider
many factors, speed of your vehicle, length of crossing, vehicles that are likely
to move from other direction, their distance from your crossing point and the
presence of policeman etc.. You quickly transform these to a measure of
probability of crossing the junction safely and if you cross the junction safely
then odds of policeman catching you and handing over a ticket. You may
discard many other factors like rough surface of the road, vehicle density on the
road etc. being unimportant. You realised or you didnt, you made a mental
model of traffic junction crossing and used it to make a decision to go or to
stop.
Mental models are informal. Unaware of our mental models, we use
them very often. But they influence our actions and decisions more so when
they are primary basis for decision making.
Visual Models
Map is another one of the most common model we encounter every day,
many a time it may be embedded in your smart phone to guide you from one
place to another. Maps are models because they simplify reality by hiding
unimportant details of the area and highlight most important features e.g
highways if you have chosen a map for inter-state long distance travel. While if
MODELLING WITH SPREADSHEET XIX BATCH

you are travelling within a town you need to pick up a map with details of
streets. Thus model we choose must be appropriate to our needs.
An organization chart is a visual model as they may indicate major
channels of communication, reveals position of authority, represent reporting
relationship and identify responsibility for personal decisions. Visual models are
used very often in sports e.g. a football coach making a sketch of a play field
and represent team members and the opponents with Xs and Os to understand
various scenarios and the options with team member in each situation. Most
players may not realize, but the coach is using a model for understanding and
communication.
Physical Models
A model in which physical objects are used to represent the real objects
or situation, usually on a smaller scale. Physical models are used extensively in
the design of buildings, cars, aeroplanes, ships and many products we may be
using in everyday life. These models are also used in education to understand
many scientific concepts. Architect use them to show to their clients how a
proposed building would look like and fits within its surroundings.
Mathematical Models
A model in which quantitative relationship are used to represent a real
situation or phenomena. Mathematical models come in many forms and are
used everywhere be it science, engineering, humanities. For example a traffic-
flow model may predict build-up of congestion on Kukatpally-Miapur road
during 8.00 AM to 11.00 AM from Monday to Friday. Fault-tree model helps
reveal causes of an accident. Reliability model may suggest how much warranty
may be given on a product. A weather prediction model predicts time and extent
of monsoon in India. Mathematical models are extremely powerful especially
when they give insight into the forces driving a particular outcome. Spreadsheet
models are a form of mathematical models.
Why Study Modelling?
Why should we build formal models, when mental models or the Gut-
Feel comes to help, naturally for us to make a decision? The primary purpose
of modelling is to generate insight i.e. to have improved understanding of the
situation or a problem. Mathematical models consist of numbers and the
symbols real benefit comes from using them for better decisions. Better
MODELLING WITH SPREADSHEET XIX BATCH

decisions, more often than not, are the result of better understanding and not just
the number themselves.
Thus we need to study modelling to improve our thinking skills.
Modelling is a discipline that provides a structure for problem solving. Models
provide examples of clear and logical analysis that helps to raise the level of our
thinking; helps improve our quantitative reasoning skills.
A model is like a laboratory in which you can experiment to learn. Like
scientist who uses lab to test ideas, hypothesis, and theories, a business analyst
uses a model to test alternative course of actions and develop not only a
recommended action but equally important, the rational for why that decision
is preferred. The easy to understand rational comes from the insight the business
analyst had discovered while testing the model.
Models in the Business
In business, models are used every day to aid in the decision-making
process. Four types of models are commonly used in business:-
(a) One-time decision models
(b) Decision support models
(c) Models embedded in computer systems
(d) Models used in business education
Many models, business managers/analyst create, are used for one-time
decisions. A corporate evaluation model, for example might be used intensively
during merger negotiations but not thereafter. In another instance a business
manager may create a model to evaluate impact of a promotion campaign on
profit, or to select an IT service provider or to structure terms of a supply
contract. One-time models are generally built by decision makers themselves
more often than not under time pressure. Managerial judgement is often used as
a substitute of empirical data, due to time constraint and data limitations. These
type of models involve the user extensively, reason model is tailored to a
particular decision-making needs.
Decision support systems are computer systems that tie together models,
data, analysis tools and presentation tools into a single integrated package.
These systems are meant for repeated use either by business managers or by
their staff. These systems are used for pricing decisions at oil companies,
MODELLING WITH SPREADSHEET XIX BATCH

product-line profitability analysis at manufacturing firms to cite just a few
examples.
Embedded models are contained within the computer systems that
perform routine repeated tasks with little or no human involvement. For
example inventory replenishment decisions are made by automated systems.
Similarly loan payment on auto lease or prices for stock options is decided by
automated systems. In these cases models themselves are somewhat hidden
within the software; users may not be aware of underlying s model.
Modern business management curriculum is heavily dependent on models
for delivering the basic concept as well as providing numerical results. A basic
marketing course includes demand curves for pricing analysis, a diffusion
model for new-product penetration, and clustering model for market
segmentation. In finance you have option-pricing model, cash-management
model, and the classic portfolio model. In operations management, we
encounter models for inventory control, production scheduling, product mixes,
route planning of vehicles, and employee scheduling etc.
Benefits of Business Models
Modelling allows us to make inexpensive errors.
Propose an idea and test it without having to suffer consequence of bad
idea.
Explore impossible.
Improve business intuition.
Models provide information in timely manner.
Modelling can reduce cost.
Spreadsheet
Spreadsheets have become a common platform for the development and
use of many business models because they provide the end-user with
tremendous flexibility and analytical tools.