Decisions based on models

An example: According to our present world view, the earth is a slightly flattened sphere. In the Middle Ages, the paradigm of the earth as a disk dominated. At that time, ship captains chose their routes based on nautical charts, which were shaped by this view of the world. As a consequence, captains avoided the boundaries of the world to avoid the danger of plunging their ship into the abyss of nothingness - an interesting impact of a model on our actions. Does this raise the question of what implications today's models have on the decisions of managers?

What is a model?

Basically, a model always represents a section of reality. It is an abstract, conceptual representation of a real system. Thus, a model is always theoretical in nature. A crucial question in the selection and evaluation of models is whether they explain a fact consistently, provide useful insights, or enable a forecast that results in helpful recommendations for action. In this respect, a model is always also of a practical nature.

How often do you use models?

Initial findings on the frequency of use of models make it possible to divide the responses of managers into three groups. The first group is of the opinion that models are rarely used for decision support and only in special situations. The second group perceives models as theoretical constructs with little practical use that are rarely applied. The third group associates models in particular with the regular use of planning tools such as SAP, Excel or MS Project. All answers are correct. However, each one assumes a certain, rather limited concept of model. Few people are aware that we use models every day.

What models do you use, and in what way?

When asked which models they use, bachelor students of business administration at the Bern University of Applied Sciences gave accounting or business cycle models, the St. Gallen Management Model or mathematical models as examples. This list reveals different types of models. The four most frequently used distinctions are explicit versus implicit models and static versus dynamic models.

An explicit model comes closest to the everyday understanding of a model. They are conceptual representations of a real fact existing outside a person (e.g. simplified images of an automobile). In contrast, there are implicit models, which always exist only in persons. The term mental model clarifies the relation of the model type to individuals. A mental model contains our individual logics and assumptions about specific effect factors and causal relationships. We use them to estimate the consequences of actions. Explicit models always act only as information providers for the creation and improvement of internal, mental models.

Mainly static models

The majority of models used in business administration are static in nature. They are relatively inexpensive to create, easy to use, and usually quick to learn. Examples are the St. Gallen Management Model, McGregor's Motivation Model or McKinsey's 7-S Model. They are used for cross-sectional analyses, i.e. for the creation of still pictures of states. The dimension "time" is not explicitly considered. Dynamic models differ here in that they explicitly consider the dimension of time. They are created to make changes over time understandable and thus influenceable. In relation to the needs of reality, dynamic models are rarely applied. Often, short-term measures are taken to optimize situations, which are bought by delayed, long-term negative effects. Why are mostly static models applied, if they have disadvantages? The answer probably lies in the small number of people who can understand, apply and criticize dynamic models. This model competence is not taught systematically in university studies. Feedbacks and time delays are largely ignored, and the users thus follow a fundamentally limited world view like the earlier nautical charts of ship captains.

For what purpose do you use models?

Models are used to support decision-making. They help to structure one's own thinking and approach. In the context of an analysis, they serve as a map for orientation. They allow details to be related to the overall picture or details to be understood in their context. They promote the formation of a common language ("unité de doctrine") in management bodies and in companies. This increases the ability to act. In summary, the use of explicit static and especially dynamic models makes managers better thinkers - which is why models are also called thinking tools. They provide the basis for decisions and thus influence the competitiveness of companies. Superior models form the competitive advantage of the future.

How often are models questioned?

According to statements by Executive MBA students, once decisions have been made about models, they are rarely questioned. This is despite the fact that the need to be able to scrutinize current models for appropriateness, usefulness and dangers is continuously increasing. By model competence, we do not mean an assessment such as "the model is not applicable to our business", but the competence to maximize the usefulness of a model while balancing hazards through its application. This is important because the potential dangers of models are usually not recognized. Often, users lack awareness of the basic assumptions of a model. This should be created through university studies. Currently, studies are rather filled "with models" - "about models" is not addressed and taught enough.

Managers with model competence are vital for the survival of companies

The model "the earth is a disk" assumed a danger ("crashing into the depths at the edge of the disk") that did not exist in reality. This prevented the captains from choosing a shorter sea route between two points if it would bring the ship dangerously close to the edge of the world. The model thus limited the potential performance of the captains. Let us now apply this insight to models in business management: static models assume that no hazards can arise as a result of the passage of time. However, experienced executives confirm that the actual dangers in everyday business come in particular from dynamic developments.

Bern University of Applied Sciences https://www.bfh.ch

Info: Dynamic challenges in a globalized economy are increasing rapidly. Paradoxically, however, dynamic models are taught least often. The research group "Strategy and Simulation Lab" at the Bern University of Applied Sciences in Economics is already making an innovative contribution to raising awareness. In courses, dynamic models are developed and applied to promote model thinking and build model competence.