DECISION MODELING WITH

MICROSOFT EXCEL

Chapter 1

Introduction to Modeling

Copyright 2001
Prentice Hall Publishers and
Ardith E. Baker
INTRODUCTION TO MODELING

Modeling Approach to Decision Making:

Involves __________ based

management models

Uses spreadsheet ________ such as Excel®

This approach is easy for managers to use,

Results in better management__________,
Provides important _________ into problem.
 THE MODELING PROCESS

Managerial Approach to Decision Making

Manager analyzes
situation (_____________) These steps
Use
Makes decision to Spreadsheet
Resolve _______
Modeling

Decisions are
___________

____________
of decision
 THE MODELING PROCESS
as applied to the first two stages of decision making.

Analysis
Model Results

Interpretation
Abstraction

Symbolic
World

Real
World

Management Intuition
Decisions
Situation
 THE MODELING PROCESS
The Role of Managerial Judgment in the Modeling Process:

Analysis

Model Results

Interpretation
Abstraction

Symbolic
World Managerial
Real Judgment
World

Management
Decisions
Situation
Intuition
 THE MODELING PROCESS
Decision Support Models force you to
1. be explicit about your_____________.
2. _______ and record the types of decisions that influence
those objectives.
3. identify and record ____________and trade-offs among
those decisions.
4. think carefully about which __________to include.
5. consider what ____ are pertinent and their interactions.
6. recognize ____________ or limitations on the values.
7. Models allow communication of your ideas and
understanding to facilitate_____________.
Models allow us to use the analytical power of spreadsheets hand in
hand with the data storage and computational speed of computers.
 TYPES OF MODELS

Physical Model
Characteristics
____________
Easy to Comprehend
Difficult to __________and Share
Difficult to Modify and ____________
Lowest Scope of Use

Examples
Model Airplane
Model House
Model City
 TYPES OF MODELS
Analog Model
(A set of relationships through a different, but analogous, medium.)
Characteristics
________________
Harder to Comprehend
Easier to __________and Share
Easier to Modify and Manipulate
Wider Scope of_________

Examples
Road Map
Speedometer
Pie Chart
 TYPES OF MODELS
Symbolic Model
(Relationships are represented mathematically.)
Characteristics
______________
Hardest to Comprehend
Easiest to Duplicate and Share
Easiest to _______and Manipulate
Widest Scope of Use
Examples
Simulation Model
Algebraic Model
Spreadsheet Model
 MORE ON MODELS

A _______is a carefully selected abstraction of________.

Symbolic models
1. always __________reality.
2. incorporate enough __________so that
• the result meets your needs,
• it is ____________with the data you have available,
• it can be quickly analyzed.

Decision models are ________models in which some of the

variables represent decisions that must or could be made.
Decision variables are __________ whose values you
can control, change or set.
 MORE ON DECISION MODELS
Decision models typically include an explicit ____________
measure that gauges the attainment of that___________.

For example, the objective may be to maximize ________

or minimize _______ in relation to a performance measure
(such as sales revenue, interest income, etc).
In summary, decision models
1. selectively describe the ____________situation.
2. designate decision ______________.
3. designate ______________ measure(s) that reflect
objective(s).
 BUILDING MODELS
To model a situation, you first have to ________ it (i.e.,
develop an _________ way of thinking about the situation).
A __________________ involves possible decisions and a
method for measuring their effectiveness.

Steps in modeling:
1. Study the _____________ to Frame the Managerial Situation

2. Formulate a selective _____________________

3. Construct a symbolic (quantitative) ____________

 BUILDING MODELS
1. Studying the Environment
Select those aspects of _________ relevant to the situation
at hand.

2. Formulation
Specific _____________ and simplifications are made.

Decisions and ___________ must be explicitly identified and

defined.
Identify the model’s major conceptual ingredients using
“______________” approach.
 BUILDING MODELS
The “Black Box” View of a Model

Decisions Performance
(Controllable)
Model Measure(s)
Parameters Consequence
(Uncontrollable) Variables
 BUILDING MODELS
3. Model Construction
The next step is to construct a______________________.

______________relationships are developed. Graphing the

variables may help define the relationship.

Var. Y
Var. X

To do this, use “Modeling with Data” technique.

 MODELING WITH DATA
Consider the following data.
Graphs are created to view any ______________between the variables.
This is the first step in formulating the equations in the model.
 CLASSIFICATIONS OF MODELS
Decision making models are classified by the ________________
they address or by the discipline or industry involved.

Classification Examples

Business Function Finance, Marketing, Cost Accounting, Operations

Discipline Science, Engineering, Economics
Industry Military, Transportation, Telecommunications, Non-Profit
Time Frame One Time Period, Multiple Time Periods
Organizational Level Strategic, Tactical, Operational
Mathematics Linear Equations, Non-Linear Equations
Representation Spreadsheet, Custom Software, Paper and Pencil
Uncertainty Deterministic, Probabilistic
 DETERMINISTIC AND
PROBABILISTIC MODELS
Deterministic Models
are models in which all relevant data are assumed to be known
with _____________________.
can handle ________ 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.
are easy to incorporate ________________ on variables.
software is available to optimize constrained models.
allows for managerial _______________ of results.
constrained optimization provides useful way to frame situations.
will help develop your ability to _____________ models in general.
 DETERMINISTIC AND
PROBABILISTIC MODELS
Probabilistic (Stochastic) Models
are models in which some _______ to the model are not known
with certainty.
uncertainty is incorporated via ______________ on these “random”
variables.
very useful when there are only a few uncertain model inputs and
few or no____________________.
often used for strategic decision making involving an organization’s
relationship to its environment.
 ITERATIVE MODEL BUILDING
DEDUCTIVE MODELING

Models Models

Model Building
PROBABILISTIC DETERMINISTIC
MODELS Process MODELS
Models Models

INFERENTIAL MODELING
 ITERATIVE MODEL BUILDING
Deductive Modeling
focuses on the ___________ themselves before data are collected.
variables are interrelated based on _____________ about
algebraic relationships and values of the parameters.
places importance on modeler’s prior __________ and judgments of
both mathematical relationships and data values.
tends to be “____________” initially.

Inferential Modeling
focuses on the _________ as reflected in existing data collections.
variables are interrelated based on an __________ of data to
determine relationships and to estimate values of parameters.
available data needs to be ____________ and readily available.
tends to be “________” initially.
 MODELING AND REAL
WORLD DECISION MAKING
Four Stages of applying modeling to real world
decision making:
Stage 1: Study the environment, formulate the_______
and construct the model.

Stage 2: Analyze the model to generate _____________.

Stage 3: Interpret and ______________ model results.

Stage 4: ______________ validated knowledge.

 MODELING AND REAL
WORLD DECISION MAKING
Management
Modeling Term Lingo Formal Definition Example
Decision Variable Lever Controllable Exogenous Investment
Input Quantity Amount

Parameter Gauge Uncontrollable Exogenous Interest Rate

Input Quantity

Consequence Outcome Endogenous Output Commissions

Variable Variable Paid

Performance Yardstick Endogenous Variable Return on

Measure Used for Evaluation Investment
(Objective Function Value)