Sunday, September 5, 2010

Models for Decision Making

What are decision making models? Generally they are tools that allow senior managers to prospectively evaluate management decisions they plan to make for their organization. Decision making models are classified as predictive models and optimization models. Predictive models focus on the likely outcome of a decision over some future time period. For example, a business development manager may wish to understand the impact over time of a marketing campaign prior to initiating it. Predictive decision models in this case would draw on historical data of past marketing campaigns and on professional judgment to forecast the impact of a prospective campaign, given its characteristics. These types of models allow for what is often referred to as "what-if" analysis, allowing the business development manager to "turn the dials" of the base assumptions for the campaign (i.e. target prospects).

Optimization models, on the other hand, take "what-if" analysis of predictive models to the next level. They allow the business manager to understand the "best" set of decisions for a particular business strategy. For the marketing campaign example, an optimization model would suggest target prospects that would generate the best return on investment for the campaign.

For many small and medium sized businesses, these types of decision making tools seem out of reach either because of lack of quantitative resources, or because of the high cost of commercially available decision making tools. These barriers need not prevent the adoption of this type of business strategy, however. Spreadsheet models or spreadsheet simulation provide the necessary technology to deliver decision making tools, at a low cost. Coupled with that, decision modeling consultants can offer quantitative resources on a contract basis that deliver business specific tools to the hands of the business manager.

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