Types of business models

Besides simulation models for learning, businesses use models to help with budgeting, planning and operations research and this page clarifies the differences between these.

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Budgeting, planning and operations research models differ from the models used to provide business learning and here I explore each and how they differ. Simulation models can be classified thus:

I started my career designing models for planning, budgetary control and operations research and came back to the UK to launch the first on-line interactive modeling package (PA300). In order to enthuse business people I developed my first business simulation-game to provide learning.  (It is worth mentioning at that time - 1970 - when I mentioned models people thought I was talking about shapely young women!).

This background means that I understand the differences between the three uses as described next.

Planning and Budgetary Control Models

These are the types of simulations that most people are familiar with and have built using spreadsheets. They are used to improve the effectiveness and efficiency of financial planning and budgetary control. Usually, for both budgeting and planning, only the accounting and operating flows are modeled. But these can be complex when the organisation has many products or markets and multistage value chains. Normally, both budgeting and planning models are deterministic rather than stochastic. (But, advanced planning models may be stochastic, where the forecasts have distributions of values.)

Management Science/Operational Research Models

These models are used to investigate a business problem (such as scheduling logic) and as such are the heart of Management Science [1]. Here a model is developed that behaves as exactly as possible like the real system and “great care is taken to ensure that the simulation model is descriptive of the real system” [2]. Thus, Management Science/Operations Research simulations attempt to replicate the real-world situation as accurately as possible. As a consequence the model is likely to be very complex and include operational research and economic models. Further, in order to ensure photo-real accuracy these models are built from the bottom up.

Models for Business Learning

A simulation model for business learning combines aspects of budgeting & planning models and management science models. Like budgeting and planning models, the simulation model will include accounting and operational flow models (White Box Models). Additionally, like management science/operational research models, a business model for learning will include operational research and economic models (Black Box Models). However, as the purpose is learning rather than management science, the operational research and economic models are generally simplified and stylised and should be designed top down from learning objectives and constraints rather than bottom up from real-world replication.

[1] Beer, Stafford (1967) Management Science: The Business Use of Operations Research, Aldus Books Limited, London

[2] Anderson, David R., Dennis J. Sweeney and Thomas A. Williams (1994) An Introduction to Management Science, West Publishing Company, Minneapolis/St Paul


© 2010 Jeremy J. S. B. Hall

Most recent update: 01/01/15
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