Strategic Business Modeling: Part 2

Part 1 of Strategic Business Modeling addressed three prime reasons to strategically plan or strategically model your business: Communicating with Others; Fleshing out the Process; and Testing Results. Now, it is time to explore a range of techniques and how they measure up to the needs of strategic modeling.

1) Annual Budget – Despite all the bad press that budgeting receives, it is a strategic modeling process. The intent of the budgeting process is a two way communication: goals and objectives down the organization’s hierarchy; and resource requirements and expected results up the organization’s hierarchy. While the budget process itself may be documented, how well the budget documents the process to obtain expected results is doubtful and varies from company to company.

While theoretically a budget should be testing results, the process deployed by most companies does not facilitate real scenario playing. Most budget processes deal primarily with accumulating and summarizing financial results with little capability to test the underlying operational processes.

2) Cost Modeling – In the past cost accounting was developed primarily to value inventory. With the advent of computer technology and as business environments have become more complex, valuing inventory is only a small part of cost modeling. In fact, in service businesses, there may not be any inventory at all, but still a huge need to understand the operations and the cost of operations.

When done well, a cost model is a communication channel between operations and finance as well as up and down the organizational hierarchy. Also when done well, cost modeling helps to document business processes and enables different scenarios to be tested and evaluated. Cost Modeling now has several variations most of which are derived from Activity-Based Cost Modeling or ABC.

3) Discrete Event Simulation – With modern software, it is now possible to create visual operational models where a computer model simulates transactions or other events. The model usually incorporates statistical probability and degrees of randomness. Some examples are service queues in banks and call centers, airport arrivals and departures with supporting logistics, and assembly lines.

In Discrete Event Simulation, the process must be well documented or by this means it will become well documented. The value here is truly in the details as testing is its forte. The challenge is then to summarize results to communicate with others not directly involved in the model. Due to the degree of detail required, Discrete Event Simulation is usually applied to specific portions of a business and not to its entirety.

Some advanced applications have used results from Discrete Event Simulation models as inputs to ABC cost models.

4) Operations Research is a mathematical approach to optimizing constraints. It focuses on determining a maximum or a minimum of a selected objective. Operations research was used during World War II to influence how convoys of ships were formed and managed and optimal methods to attack submarines.

This author has developed test examples where an ABC Cost Model was transformed to an Operations Research linear programming model to find an optimum result. Subsequently, the optimized results were returned to the cost model for final costing and reporting.

While extremely powerful, Operations Research is still primarily the domain of mathematical PHD’s due to its complexity.

All of these strategic modeling techniques have a role and application within modern business. No one of them is the ultimate winner to be used to the exclusion of all others. Each has its place where it can shine. Perhaps in time, we can find a way to better integrate these techniques. Then with the swamp drainage well underway and the alligators at bay, we can reap the rewards of strategic business modeling and relax a little bit from the pressure of day-to-day decisions. With competitive pressures and the business environment, our business swamp will never be completely drained. Our job is to try for which customers reward us. Strategic business modeling is our pump. Attention to our pump now drives alligators to find their juicy meals elsewhere.