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Business Software Tools 200

Topic 2 Modelling

Why Model?

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Why Model?

Focus on key aspectsPerform “What if?” (sensitivity analysis)Make predictionsImprove (shared) understandingReduce uncertaintySolve problems…

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Good models

Are parsimoniousHave just enough variables to explain the

variationToo many variables create complexity and

confusion and may mislead (model is overfitted)

Too few variables don’t explain (model is underfitted)

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Good models ctd.

Provide explanationGive accurate predictionsCorrelate with the “real world”

Have face validityAre scalable, extensibleUnderstandable by others

documentation

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Modelling

financialforecastingsimulation/risk analysisMCDM (multi criteria decision making)goal seeking/optimisation/linear

programming

Excel Add-Ins

Analysis ToolPakSolver

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Excel Add-Ins

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Financial models

“adjusting for the time value of money based on interest, depreciation, inflation rates”

NPV (net present value)IRR (internal rate of return)DCF (discounted cash flow)Amortisation (loan repayments)

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Financial models

SoftwareExcel financial functions

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Forecasting

“predicting future values based on past patterns of a time series”

trendregressionexponential smoothingdecompositionBox Jenkins

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Forecasting

SoftwareExcel statistical functions

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Simulation/Risk Analysis

“either the modelling of a process or a form of sensitivity analysis where many “what ifs” are performed”

Systems Dynamicsdynamic based on store/flow/controldifference equations

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Simulation/Risk Analysis

Monte Carlovariation of given variables according to an

assumed statistical patternstatic

Example software@Risk by PalisadeWorks with Excelhttp://www.palisade.com.au/risk/

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Simulation/Risk Analysis

discretesnapshot of model is triggered by an event

continuoussnapshot of model is triggered at regular time

intervalsvisual

interface iconic

abstract .... real

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Regression

statistical modeldependent, independent variablesmay be time basedsoftware

See excel statistical functions andData analysis toolpack add-in

Regression (Excel)

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MCDM (multi criteria decision making)

“exploration of the pain and gain associated with different alternatives”

alternativescriteriarating of alternativesweighting of criteriaexploration

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MCDM ctd

SoftwareHiview3 by Catalyze

http://www.catalyze.co.uk/resources/docs/pdf/Catalyze_Case_Study_Shampoo.pdf

See next slide copied from the above pdf

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Hiview3 – Criteria hierarchy

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Goal Seeking/Optimisation/Linear Programming

“either the search for the pattern of variables that will lead to a goal or the pattern of variables that will optimise a goal under given constraints”

SoftwareGoal seek (in Excel “What if Analysis”)Excel Add In – Solver (optimisation under

constraints)

Goal seek – E.g. Find a Break even point

New Perspectives on Microsoft Office Excel 2007 23

Working with What-If Analysis and Goal Seek

New Perspectives on Microsoft Office Excel 2007 24

Solver (Excel)

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Sensitivity Analysis (“What if”)

“The performing of “what if” analysis in a given model through varying underlying variables”

fixed valuesinterval/incrementsaccording to a statistical pattern

Excel (What if Analysis)

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Excel (What if Analysis)

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