Interpretation of Modeling and Simulation

Can there be a better fit for a company out there that uses Microsoft Excel to conduct modeling to simulate their business growth other than Microsoft itself? Microsoft has made billions of dollars selling their Microsoft Office Suites and their home computer operating systems around the world. They have become one of the largest and well known companies in the world. The way that I see it, is that Microsoft’s business model, in a nutshell, is to provide goods and services in the form of software and support to paying customers. One question that may be asked in this day an age is with the advances in cloud computing and Google’s “free” gadgets, will the traditional Microsoft’s business model come to an end? What will Microsoft’s business analysts do in order to change their business model? One can only imagine that it will need to be modeled and simulated first to avoid potentially expensive mistakes.

I must start off by saying that before I started my Systems Modeling Theory online class through Strayer, I thought that it may just be one of the hardest classes to understand that I’ve ever taken throughout the course of my college career. I can say now after having completed the last nine weeks of class that I was correct. What’s hard, is not understanding the concepts of why businesses would use Excel models for their business growth but rather the actual use of Excel itself. With all of the bells and whistles an who’s-its and what’s-its that Excel provides for the Business Analyst professional, it’s extremely hard to get a clear view of just how powerful this software program really is. Enter Stephen G. Powell and Kenneth R. Baker’s “Management Science, The Art of Modeling with Spreadsheets” text book. This has proven to be a very good book for the beginning business professional who would like to learn about modeling and simulation.

As I mentioned earlier, I’ve now completed nine weeks of the Systems Modeling Theory class and I’ve learned many new and exciting features that are available in Excel that can help in modeling. As Powell & Baker (2009) point out in their text book, “Modeling is the process of creating a simplified representation of reality and working with this representation in order to understand or control some aspect of the world.” We practically use some form of modeling in our everyday lives whether it be in our personal lives at home or our professional lives at work. One important aspect of modeling that I’ve learned in my Modeling Theory class so far is that modeling doesn’t just have to be performed in Microsoft Excel with formulas inside of cells. I interpret modeling as the “Testing Phase” to the real world performance of just about anything. Spreadsheet models are the vehicle for modeling in business, but what is used when you’re not forecasting financial numbers? I’m the IT Manager for a contracting company that works for NASA and we have what is called a testing environment that has been modeled after our production environment. It’s basically a mirror image of our “real world” systems. This testing configuration allows us to test new software and theories that we may have. This is another way to model and simulate what our company does in our every day business dealings and allows us to make mistakes at a very low cost. According to Powell and Baker (2009) Modeling is inexpensive and can provide information in a timely manner. Models are simulated structures of a company’s business plan and are used to extrapolate forecasted data for a particular business section or the business as a whole. According to Fettke & Loos (2007), Models are often used for describing the structure and functionality of business systems and can be interpreted as a structured application.

Simulation, sometimes referred to as Monte Carlo Simulation, is a way to create a model and observe how the model would react in the “real world”. Monte Carlo simulation has two methods which are probabilistic or deterministic. According to Hammersley & Handscomb (1964), the simplest Monte Carlo approach to a probabilistic problem is “to observe random numbers, chosen in such a way that they directly simulate the physical random processes of the original problem, and to infer the desired solution from the behavior of these random numbers.” I thought that this description was hands down the best description of what simulation can do for you in modeling. I interpret this quote as saying that for your model to work, you need to select random numbers that can give you the best possible chance of your model producing the desired solution as you would want in your real world problem. Simulation is exactly as it sounds. It’s a way to use your model to show the projected outcome of a real world problem without spending a lot of time, money and effort and turning it into a potentially nasty real world life lesson.

Models are used every day in business by analysts, marketing researchers and entrepreneurs who are challenged by business decisions that affect their bottom lines. For example, modeling is used when there is a merger of one business with another. We can use the merger between Hewlett Packard (HP hereafter) and Compaq. In the early 2000’s these two technology companies merged when HP bought out Compaq. I’m certain that hundreds of analysts and top executives at HP spent many late nights using Excel modeling and simulation to come up with the forecasted revenue numbers that would give the HP executives an over all idea as to whether or not it would make good business sense to merge with Compaq. It turns out that the forecasted numbers must have made sense because you now have, in my opinion, a better technical product with the two companies merged together. It was a win for the executives at HP and a win for the customers as well. Modeling isn’t just used by industry giants like HP or Compaq. They are also used by your local mom and pop shops that are continually operating on a small budget, especially now that the economy is not as good as it was 5 years ago. An example of a smaller company using modeling would be a small family owned and run coffee shop located in your city of choice. Not only do these smaller coffee shops have to compete with the larger coffee chains, but they are subject to things such as coffee bean harvesting issues that may raise the price that they pay for their coffee. This can create problems for the company if they do not have a good idea as to how long they can sustain paying high prices for their coffee beans. This is where modeling and simulation can improve their business. By preparing themselves and having simulated several scenarios in the high cost of coffee beans or business shortfalls due to unforeseen circumstances they could possibly forecast how long they may be able to operate without earning their needed monthly income. Income that would be used for their operating costs to include any employee’s salaries. Modeling and simulation may also improve their business by helping the owners decide whether or not a promotional campaign makes good sound business sense. As Powell & Baker (2009) point out, “a one-time model might be created to evaluate the profit impact of a promotion campaign, or to help select a health insurance provider, or to structure the terms of a supply contract.”

Spreadsheet modeling can be used to predict the number of units that a company should have produced for a particular model. There is a case involving spreadsheet models that Albright (2009) writes about that describes a company that produces ski jackets for the upcoming winter. They use spreadsheet modeling to help them predict the number of ski jackets they need to have produced for the new ski season. The use of modeling and simulation can help this Ski Jacket business by predict the amount of money they may make in the upcoming winter season. This model will be based upon the number of ski jackets that they will need to produce. Here the tricky part is to make sure that, in their model, the number of ski jackets to produce is very close to the amount of jackets that they will sell. They would need to obtain that information from the past years production and sales results. So there are many ways that modeling and simulation can help businesses prosper as long as the numbers used in the model closely represent the actual numbers that are needed for the real life problem that a business faces. This is not to say that just because you model a problem that you will automatically see growth and advance your business. As with anything else, there is a certain amount of risk associated with modeling and simulation. If your modeling numbers do not closely represent your real world problem then your predictions of production and sales numbers will be off and that could be potentially devastating to your business. Modeling must be done by those who completely understand business and who know how to properly use Microsoft Excel in this manor. I have learned a lot in the last nine weeks in my Modeling class and hope to further my career by using my newly learned knowledge.

Bibliography

Albright, Winston (2009). Practical Management Science Revised 3e, South-Western Cengage Learning, Mason Ohio. Obtained online December 10, 2009 from http://books.google.com/books?id=pdtpVCoxpGIC&pg=PT43&dq=excel+spreadsheet+modeling&lr=&ei=0QbqStiAA56iygSCivSgDA#v=onepage&q=excel%20spreadsheet%20modeling&f=false

Balik, Robert J, & Mehran, Jamshid (2006). Excel Models
Obtained Online on December 1, 2009, from http://homepages.wmich.edu/~balik/AFS06Balik.pdf

Fettke, Peter & Loos, Peter (2007). Reference Modeling for Business Systems Analysts, Idea Group Publishing. Obtained online on November 28, 2009 from http://books.google.com/books?id=xODMuZaM82EC&pg=PT74&dq=models+are+principle+for+modeling+in+business&ei=jgIgS8uTMJP6zAS42oWlCg&cd=1#v=onepage&q=models%20are%20principle%20for%20modeling%20in%20business&f=false

Hammersley, J.M. & Handscomb, D.C (1964). Monte Carlo Methods Methuen’s Monographs on Applied Probability and Statistics, Fletcher & Son’s Ltd. Great Britain. Obtained online from http://books.google.com/books?id=Kk4OAAAAQAAJ&printsec=frontcover&dq=Monte+Carlo+Simulation&ei=HwYgS6qDA5u-zgSL3dyqCg&cd=4#v=onepage&q=Monte%20Carlo%20Simulation&f=false

Microsoft, (2005). Our Business Model, Obtained online Dec 9, 2009, from http://www.microsoft.com/australia/citizenship/knowledge/businessmodel.mspx

Powell, Stephen G. & Baker, Kenneth R. (2009). Management Science, The Art of Modeling with Spreadsheets, John Wiley & Sons, Inc