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Some trends in corporate modelling
OMEGA Int. J. of Mgmt Sci.. Vol. 13. No, 6. pp. 495-500, 1985
0305-0~.83,85 $3.00+0.00 Copyright ~ 1985 Pergamon Press Ltd
Pnnted in Great Britain. All rights reser,,ed
Some Trends in Corporate Modelling JC HIGGINS University of Bradford Management Centre, UK Received May 1985; in revised form July 1985) This paper reviews the evidence of a number of surveys and case studies of corporate modelling in the U.K. Some general conclusions as to trends are drawn. Thus corporate models will display increasing modularity; will be more likely to include probabilistic elements; will more often incorporate physical flows; and will be generally linked to a greater number of other models in organisations. Micros are making a substantial impact as tools for running decision support systems both of the corporate model and the ad hoc model variety. Forecasting techniques are still greatly underutilised in many organisations. Although most corporate models are currently of the deterministic financial simulation type, the influence of management education will help the adoption of more advanced models by more numerate senior managers and accountants. Indeed there is already evidence that this is happening in some organisations.
INTRODUCTION THE HISTORY of corporate modelling in the U.K. relates largely to the last 15 years. Very few companies possessed corporate models in the late 1960s whilst, by 1975, Grinyer and Wooller [4] reported that only 8% of the "Times 1000" companies had them. However, by the late 1970s a considerable increase had been detected, several observers claiming that up to one half of the U.K.'s largest companies had corporate models. In 1978, for example, computer bureaux reported no fewer than 1500 customers in this field. In the U.S.A., the rate of growth in corporate modelling has been higher than in the U.K. and began a few years earlier. For example, Gershefski [2] reported that in 1968, 20~ of his sample of 323 firms were working with corporate planning models. By 1975, Naylor and Schauland [9] found that 73~ of 346 firms in their survey were using or developing corporate planning models. By 1979, according to Shim and McGlade [11] "nearly every Fortune 1000 company was using a corporate simulation model", whilst in 1982, Klein [8] reported that 86~ of his sample of 204 organisations were using corporate models. Over the 15 years, there has not only been very considerable growth of usage but a number 495
of other important changes: in particular, to the type of model developed; to the software; to the hardware; to the groups of designers; and to the types of use and of user. The main purpose of this paper is to outline some of the changes occurring in these various areas and to indicate some trends for the future.
TYPES OF MODEL There appear to be three main classes of corporate model: (i) Financial simulations which typically incorporate profit and loss accounts, balance sheets, corporate cash flows, perhaps sources and uses of funds and which may also include tax routines. (ii) Operational research models using optimization techniques or probabilistic simulations to investigate resource allocation or to perform investment appraisals. (iii) Other types which may combine models of physical flows, either in operational research or more conventional forms, with financial models at higher organizational levels.
496
HLe,ein.v--Trends in Corporate .~[odelling
Sustained efforts in the U.K. to develop fullscale corporate models of the OR variety were rare in the 1970s. Indeed surveys during the 1970s suggested that some 95°0 of models described as corporate were of the financial simulation variety. During the middle of that decade. the highly turbulent environment gave some assistance to the development of corporate models but as an aid to the control of cash flows rather than for long-term planning purposes. The business environment of that period naturally forced top management to look at short run problems, in particular liquidity, and the calculation of the effects on corporate performance of unusually large changes in prices and in exchange rates. Towards the end of the decade, the U.K. economy experienced a small up-swing and a number of companies returned to the usage of their models for long-term planning, whilst not neglecting their application in control. A number of observers (see, for example, Grinyer and Wooller [5]) have noted a trend towards the modular approach to modelling and this is likely to increase. Some evidence for this is provided by the results of a small-scale survey carried out in 1984 at the Bradford Management Centre. In this postal survey, a questionnaire was sent to each organisation which had replied to the corporate planning and MIS survey conducted by Higgins and Finn [6] in 1977. Thirty-one usable replies were received and, although this is a small sample, it represents a 44% response rate. The 31 organisations covered a range of turnovers from £50m to £7,500m and numbers of employees from 1750 to 282,000. They were drawn from a cross section of industrial and financial sectors. The results are shown in Table 1. It will be noted that two-thirds of the companies answering the questions on trends in corporate model characteristics said that in five years' time they expected
more modularity whilst the remaining one-third indicated that the level would be the same. Fourteen of 19 companies answering questions on structure stated that their present corporate model was modular, the modules being structured by: divisional units, six companies; functional units, four; geographical units, two; subsidiaries, three; and others, two companies. The same 19 companies also described their models as: top-down, seven; bottom-up, seven; and middle-up, five. Secondly, a number of authorities have commented on the trend towards ad hoc modelling; i.e. modelling used to solve a specific problem in contrast to standing models, used commonly as generaters of financial reports. For example, Grinyer [3] reported in 1983 on a survey of the previous year of 52 companies from the Times 1000 list that "Whilst in 1973 virtually all of the corporate models were more permanent or standing ones by 1982 the majority of the companies had used modelling in an ad hoc way, too, to solve specific problems". Table 1 also provides supportive evidence for this conclusion. There may be several reasons for this trend. Thus as accountants and planners with modelling skills enter companies and move up the management hierarchy, they may well introduce ad hoc modelling of particular problems and subsequently input their results into corporate models. Changes in technology, in particular the rapid spread of the mini and micro computer, may also accelerate this trend. Thirdly, we may anticipate more models being developed which link different areas of application with corporate models, or are a reflection
of the organizational structure and nature of control in the organisation. In the first category, for example, we have already noted that the outputs of ad hoc models may provide inputs into corporate models, particularly of a report generating type. A second example is provided
Table 1. Trends in corporate model characteristics (Bradford Management Centre 1984 Survey) Present relative to 5 years ago
Predicted 5 years ahead
Corporate model characteristics
More
Same
Less
More
Same
Less
Simulation Optimisation modelling Deterministic Probabilistic Including physical inputs outputs Modular Ad hoc modelling
5 2 4 2 3 4 9
6 ..i. 5 5 2 7 2
4 2 3 I 3 3 l
II 3 6 6 8 10 lI
6 2 4 5 0 5 3
0 2 I 0 1 0 I
Omega. Vol. 13. No. 6
by Naylor and Tapon [10] who describe the linking of portfolio models with corporate simulation and optimization models. In the second main category one of the most important areas is the control of subsidiaries. In Grinyer and Woolter's main surveys [4 and 5], they discovered that almost half of their companies were using financial models to assist in the control of subsidiaries. For example, of the 51 companies modelling their balance sheet totally in the mid-1970s, 24 of the subsidiaries also involved themselves in balance sheet modelling. Then in 1983, Grinyer [3] reported that 38 of the 52 companies possessing subsidiaries used financial models at subsidiary level: 28 companies adopted the same package throughout the group; 18 transferred data files between subsidiaries and group management. A fourth trend, which could be classified as a sub-set of the previous one, for which there is much evidence from individual companies and from consultants and software houses, is the
497
Table 2. Types of forecasting methods used in corpora:e planning (Bradford Management Centre 1984 Surve.~ Methods Subjective Statistical Curve fitting Time series analysis Explanatory (or causal): Operational research Econometric Technological Social and political Scenario
No. of organisa~ions (base of 20 orgamsa~tons) 13 3 6 2 7 4 4 4
as leading indicators, life cycle analysis, regression, etc.". However, research by the author and colleagues at Bradford does not support this sort of generalisation. For example, the 1984 survey showed that whilst the majority of companies (approximately 85/0) o/ received their forecasts from sources external to the corporate model, those methods were predominantly subjective (see Table 2). It is notable that this is the case even though the sample of companies is extension of corporate model building to include undoubtedly biased towards the more advanced physical inputs and outputs. Again, Table 1 in planning and modelling terms. illustrates this. Fifthly, the distinctive characteristics of T H E I N F L U E N C E OF C O M P U T E R OR~MS models, namely probabilistic apD E V E L O P M E N T S ON proaches and/or optimization, appear to be CORPORATE MODELLING moving at different rates. Thus in spite of the We can trace two parallel developments in greater availability of powerful software, evidence for significant increases in optimization computing. First, remarkable changes in techmodelling at corporate level is hard to come by nology have occurred over the last 15 or so as Table 1 illustrates. Indeed in the same survey years since corporate modelling began on mainonly four organisations out of 31 indicated that frame computers. The introduction of the mini, they were currently running optimization cor- and more recently the micro, has of course had porate models; and two organisations of the an enormous impact and this is illustrated by four were prepared to describe the respective some results from a 1983 survey carried out by applications of their models (both based on Higgins and Opdebeeck [7] shown in Table 3. It packages) in their planning processes, one the will be noted that micros were used by 56 National Coal Board and the other a food companies out of 94. In the smaller 1984 survey, we found that of the 19 companies that replied processor. Finally, the survey found no evidence that the to the question "What kind of computer facility adoption of improved forecasting methods to do you use to run the model'?" ten used mainprovide inputs to corporate models is moving as speedily as the development of corporate models themselves. What appears in the litera- Table 3. Computer-based MIS systems (Higgins and Opdebeeck 1983 Survey) ture is not obviously replicated in real life. For Mixed systems example, Shim and McGlade [11] state "the Single + Mini forecasting systems utilized depend upon the system + Mini + Micro + Micro breadth and planning horizon of the model; Mainframe 27 8 16 33 3 0 4 0 typical methods include market research and Minicomputer Delphi method, time trends, moving a v e r a g e s , Mi_cr°_c_°m_P.Ut_er. 3 .._ 0........ 0 0 Box-Jenkins and various causal methods such Totals 33 8 20 33
498
Higgins--Trends in Corporate Modelling
frame (two with micros), seven micros (in three cases they were a single system) and five minis (in two cases they were a single system). Grinyer and Wooller's 1982 survey [3] showed that about half their sample were using micros for financial modelling, of which half were in conjunction with other systems and half alone. The increased rate of adoption of micros in business is, of course, well known and the linkages which now exist between micros and mainframes greatly enhance the power of the individual manager's decision support system. But it remains to be seen whether line managers as well as staff specialists will take full advantage of the facilities for better planning and control now becoming available. As regards software, changes have also been radical. Fifteen years ago, corporate models were often written in FORTRAN. Such models were expensive to develop, often running into man-years of effort. They also possessed important drawbacks operationally--time and cost of running, indifferent file-handling capabilities-and were succeeded by models written in languages more suited to planning. In the U.K., we have called these new languages "modelling systems" and examples include PROSPER, EPS(FCS) and SSI (SIMPLAN). Seventeen of the companies in the 1984 Bradford Management Centre survey used a modelling package and eight a standard computer language, with five of the respondents using a combination of the two. Packages cited included EPS/FCS (5), MICROMODELLER (2), PROSPER (2) and the IBM LP package (2). Of the eight languages mentioned PLI, APL and FORTRAN were cited by two companies each and PASCAL and BASIC one each.
The development of micro packages in this decade has greatly facilitated the introduction of micros into the areas of planning and control. A vast number now exist. For example, the Higgins and Opdebeeck survey cited earlier in this section elicited 80 different packages amongst 70 organisations. The most popular were: VISICALC 42; MICROMODELLER 16; SUPERCALC 12; DBASE II I1; MICRO FCS 6. Grinyer [3] found a similar pattern with VISICALC being used by 27 companies and MICROMODELLER, the second most popular, by II. A further indication of the impact of the micro on the development of support systems for strategic decision making and strategic planning is given in Table 4, which is again taken from the Higgins and Opdebeeck 1983 survey. MODEL BUILDERS AND USERS There has been a distinct trend in the U.K. away from development of models by operational researchers and computer specialists to planners and accountants. Thus Higgins and Finn reported in 1977 [6] that accountants followed by planners were the major contributors to the building of corporate models and the companies reporting indicated that accountants made three times the contribution of that of operational researchers in model building. In the 1984 Bradford survey already cited, accountants were again in the lead in terms of percentage contribution as follows: accountants 52%; planners 31%; operational researchers 10%; computer specialists I%; consultants 6%. Grinyer and Wooller (see Grinyer [3]) found in their 1982 survey that accountants were the
Table 4. Use of microcomputers in strategic decisions and strategic planning: 46 respondents (Higgins and Opdebeeck 1983 Survey) Used in financial department but not on a microcomputer (No. of companies) Cash flow models Net present value discounting Sensitivity analysis Financial corporate simulation model Internal rate of return Discounted pay-back period Pay-back period calculation (without discounting) Leasing models Risk analysis Valuation models Capital rationing using linear programming Decision trees Others including forecasting, tax supply'demand modelling (specified by respondents)
9 18 6 I0
Implemented on a microcomputer (No. of companies)
II 18 IO 7 4 0 I
22 19 19 16 12 10 7 6 5 I I 0
0
2
16
Omega, Vol. I3. No. 6
499
Table 5. Use of corporate models
Use
Naylor Schauland 1976 Survey (°o of companies)
Higgins, Finn 1977 Survey (°o of companies~
Higgins Opdebeeck 1984 Survey !Oo of companies)
Evaluation of policy alternatives Financial projections Long-term planning (Analysis for) decision-making Short-term planning Preparation of (financial reports)
79 75 73 58 56 47
63 88 81 44 38 44
53 84 -63 58 79
dominant category of model builders, their involvement being reported by 56 organisations; followed by planners, 33; computer personnel, 25; treasurers, 15 and operational researchers, 14. When we come to look at the main model users, we again find accountants and planners dominant. In the Higgins and Finn survey, 71~o of the corporate models were used by accountants and 53~ by planners, compared with a mere 18~ by operational researchers. In the 1984 Bradford Management Centre survey, accountants were again first, followed by planners and were 20 times more likely to use corporate models than were operational researchers. In their first survey, Grinyer and Wooller found that planners and accountants were top of their model user table with 32}/o of companies citing planners and 31~ accountants, compared with 14~o operational researchers and 6~ computer specialists. By 1982, the relative involvement of accountants had increased by 50% and that of planners by 15~; computer personnel were up 30~ and operational researchers only by 6~o. In 1982, Grinyer and Wooller also established that the model builders and the model users in their sample were largely the same people and, not surprisingly, found that the users were able to change the logic of the models themselves (this happened in 57 out of 68 companies). Uses of corporate models are consistent with the pre-eminence of accountants and planners as designers and users. In Table 5 the results of the Naylor/Schauland [9] and the Higgins/Finn [6] and Higgins/Opdebeeck [7] surveys are compared and it will be noted that the broad patterns are very similar. Grinyer and Wooller (see Grinyer [3]) categorised uses somewhat differently but found some interesting changes between 1973 and 1982. There was a large increase (34~o) in companies using corporate models to assist in their financial planning up to 1 year ahead; negligible change in usage for financial planning 1-5 years ahead but a reduction of 24~/o for financial
planning over a longer time horizon than five years. Corporate models were used 15% more for project evaluation. Incidentally, models to aid decisions in marketing, production and distribution all showed significant declines in usage ( - 20~o to - 35~o) and perhaps this is due, at least partly, to the increased influence of accountants. A significant number of corporate models still fall into disuse, in spite of their persuasiveness and the know-how which exists today. In a study of models that failed, Ang and Chua [1] found that 27~ of the total sample in their survey of 113 corporations had been discontinued three years after being built. The most common justifications for this decision were model deficiencies and human problems in implementation and three of the reasons, viz. inflexibility, lack of management support and excessive input data requirements are familiar from other surveys. Simon e¢ al. [12] have discussed why some models fail and identify as a major cause managers' lack of clarity about their need for a particular model. They offer three possible explanations for doubtful justification by management: a subterfuge to establish a data link which will free one part of the organisation to channel information to another; a means of supplying formal rationale for past decisions; a device for establishing a manager's reputation. The Grinyer/Wooller 1982 survey examined the reasons given by 41 companies for discontinuing use of a particular model. The most common reasons were: model only intended as a 'one-off', nine organisations; change in requirements, eight; upgrading model, seven; change of package, four; difficult to use, three; models inflexible, three. Including several other reasons, they suggested that perhaps a quarter of the models could be considered failures. In the Bradford Management Centre 1984 survey, eight organisations had abandoned one or more corporate models in the past citing as
500
Higgins-- Trends in Corporate ),Iodelling
their reasons: too complex to be useful, five; difficult,,' in collecting the necessary data. three: lack of top management support, two; and other reasons, three. In this latter category, comments included: "Central model could not generate commitment from operations": "'The trading situation demanded short-term obvious solutions and a significant resource devoted to longer-term modelling was simply not worthwhile". SOME C O N C L U S I O N S The evidence as to changes in structure and forms of corporate models seem convincing. In particular, we may expect to see more modularity; more ad hoc modelling; more models incorporating probabilistic elements; and more models including physical inputs and outputs. Present trends in hardware and software may be reliably extrapolated along broad lines: a greater use of micros; more user-friendly software; more network development. But it would be foolhardly to attempt to predict the next comparable breakthrough to the silicon chip. Optical fibres appear likely to offer a comparable step forward in communications systems. Apart from developments in computers, British managers will become better informed and more likely to adopt new methods than their predecessors. The present generation of senior management have already learnt that simplicity and low cost and speed of development are to be preferred to sophistication, mathematical complexity, etc. Thus they have moved to modular, simple, deterministic, financial simulation models and have been reinforced in this particular change of direction by the influence of mathematically limited accountants. But because the accountants have become so involved in development and use, this has given such computer-based models a legitimacy which they
might not otherwise have gained via the OR and computer scientist fraternities. The increased emphasis in Britain on management education per se and on the management science education of the professions such as accountancy and engineering will enhance the adoption of more advanced modelling techniques by the next generation of senior management. ACKNOWLEDGEMENTS The author wishes to thank two former research assistants, Mr R Finn and Mr EJ Opdebeeck. t'or their assistance with the Bradford Management Centre surveys reported in the paper.
REFERENCES 1. Ang A and Chua J (1980) Corporate planning models that failed. Managerial Plann. 29(2). 34-38. 2. Gershefski GW (1969) Corporate planning models--the state of the art. Managerial Plann. 18(3), I~5. 3. Grinyer PH (1983) Financial modelling for planning in the U.K. Long Range Plann. 16(5), 58-72. 4. Grinyer PH and Wooller J (1975) Corporate models today. Institute of Chartered Accountants. 5. Grinyer PH and Wooller J (1980) An overview of a decade of corporate modelling in the U.K. Accmg Bus. Res. 11(41), 41-49. 6. Higgins JC and Finn R (1977) Planning models in the UK: A survey. Omega 5(2), 133-147. 7. Higgins JC and Opdebeeck EJ (1984) The microcomputer as a tool in financial planning and control: Some survey results. Accting Bus. Res. 14(56), 333-340. 8. Klein R (1982) Corporate-based financial modelling. J. Syst. Mgmt 33(5), 6-13. 9. Naylor TH and Schauland H (1976) A survey of users of corporate simulation models. Mgrnt Sci. 22(9), 927-937. 10. Naylor TH and Tapon F (1982) The capital asset pricing model: an evaluation of its potential as a strategic planning tool. Mgmt Sci. 28(10), 1116-1173. I1. Shim JK and McGlade R (1984) The use of corporate planning models: past, present and future. J. Op. Res. Soc. 35(10), 885-893. 12. Simon LS, Lamar C and Haines GH Jr. (1976) Managers' use of models. Omega 4(3), 253-264. FOR CORRESPONDENCE: Professor JC Higgins, Unirersity of Bradford Management Centre, Emm Lane, Bradford, West Yorkshire BD9 4jL, UK.
ADDRESS
0305-0~.83,85 $3.00+0.00 Copyright ~ 1985 Pergamon Press Ltd
Pnnted in Great Britain. All rights reser,,ed
Some Trends in Corporate Modelling JC HIGGINS University of Bradford Management Centre, UK Received May 1985; in revised form July 1985) This paper reviews the evidence of a number of surveys and case studies of corporate modelling in the U.K. Some general conclusions as to trends are drawn. Thus corporate models will display increasing modularity; will be more likely to include probabilistic elements; will more often incorporate physical flows; and will be generally linked to a greater number of other models in organisations. Micros are making a substantial impact as tools for running decision support systems both of the corporate model and the ad hoc model variety. Forecasting techniques are still greatly underutilised in many organisations. Although most corporate models are currently of the deterministic financial simulation type, the influence of management education will help the adoption of more advanced models by more numerate senior managers and accountants. Indeed there is already evidence that this is happening in some organisations.
INTRODUCTION THE HISTORY of corporate modelling in the U.K. relates largely to the last 15 years. Very few companies possessed corporate models in the late 1960s whilst, by 1975, Grinyer and Wooller [4] reported that only 8% of the "Times 1000" companies had them. However, by the late 1970s a considerable increase had been detected, several observers claiming that up to one half of the U.K.'s largest companies had corporate models. In 1978, for example, computer bureaux reported no fewer than 1500 customers in this field. In the U.S.A., the rate of growth in corporate modelling has been higher than in the U.K. and began a few years earlier. For example, Gershefski [2] reported that in 1968, 20~ of his sample of 323 firms were working with corporate planning models. By 1975, Naylor and Schauland [9] found that 73~ of 346 firms in their survey were using or developing corporate planning models. By 1979, according to Shim and McGlade [11] "nearly every Fortune 1000 company was using a corporate simulation model", whilst in 1982, Klein [8] reported that 86~ of his sample of 204 organisations were using corporate models. Over the 15 years, there has not only been very considerable growth of usage but a number 495
of other important changes: in particular, to the type of model developed; to the software; to the hardware; to the groups of designers; and to the types of use and of user. The main purpose of this paper is to outline some of the changes occurring in these various areas and to indicate some trends for the future.
TYPES OF MODEL There appear to be three main classes of corporate model: (i) Financial simulations which typically incorporate profit and loss accounts, balance sheets, corporate cash flows, perhaps sources and uses of funds and which may also include tax routines. (ii) Operational research models using optimization techniques or probabilistic simulations to investigate resource allocation or to perform investment appraisals. (iii) Other types which may combine models of physical flows, either in operational research or more conventional forms, with financial models at higher organizational levels.
496
HLe,ein.v--Trends in Corporate .~[odelling
Sustained efforts in the U.K. to develop fullscale corporate models of the OR variety were rare in the 1970s. Indeed surveys during the 1970s suggested that some 95°0 of models described as corporate were of the financial simulation variety. During the middle of that decade. the highly turbulent environment gave some assistance to the development of corporate models but as an aid to the control of cash flows rather than for long-term planning purposes. The business environment of that period naturally forced top management to look at short run problems, in particular liquidity, and the calculation of the effects on corporate performance of unusually large changes in prices and in exchange rates. Towards the end of the decade, the U.K. economy experienced a small up-swing and a number of companies returned to the usage of their models for long-term planning, whilst not neglecting their application in control. A number of observers (see, for example, Grinyer and Wooller [5]) have noted a trend towards the modular approach to modelling and this is likely to increase. Some evidence for this is provided by the results of a small-scale survey carried out in 1984 at the Bradford Management Centre. In this postal survey, a questionnaire was sent to each organisation which had replied to the corporate planning and MIS survey conducted by Higgins and Finn [6] in 1977. Thirty-one usable replies were received and, although this is a small sample, it represents a 44% response rate. The 31 organisations covered a range of turnovers from £50m to £7,500m and numbers of employees from 1750 to 282,000. They were drawn from a cross section of industrial and financial sectors. The results are shown in Table 1. It will be noted that two-thirds of the companies answering the questions on trends in corporate model characteristics said that in five years' time they expected
more modularity whilst the remaining one-third indicated that the level would be the same. Fourteen of 19 companies answering questions on structure stated that their present corporate model was modular, the modules being structured by: divisional units, six companies; functional units, four; geographical units, two; subsidiaries, three; and others, two companies. The same 19 companies also described their models as: top-down, seven; bottom-up, seven; and middle-up, five. Secondly, a number of authorities have commented on the trend towards ad hoc modelling; i.e. modelling used to solve a specific problem in contrast to standing models, used commonly as generaters of financial reports. For example, Grinyer [3] reported in 1983 on a survey of the previous year of 52 companies from the Times 1000 list that "Whilst in 1973 virtually all of the corporate models were more permanent or standing ones by 1982 the majority of the companies had used modelling in an ad hoc way, too, to solve specific problems". Table 1 also provides supportive evidence for this conclusion. There may be several reasons for this trend. Thus as accountants and planners with modelling skills enter companies and move up the management hierarchy, they may well introduce ad hoc modelling of particular problems and subsequently input their results into corporate models. Changes in technology, in particular the rapid spread of the mini and micro computer, may also accelerate this trend. Thirdly, we may anticipate more models being developed which link different areas of application with corporate models, or are a reflection
of the organizational structure and nature of control in the organisation. In the first category, for example, we have already noted that the outputs of ad hoc models may provide inputs into corporate models, particularly of a report generating type. A second example is provided
Table 1. Trends in corporate model characteristics (Bradford Management Centre 1984 Survey) Present relative to 5 years ago
Predicted 5 years ahead
Corporate model characteristics
More
Same
Less
More
Same
Less
Simulation Optimisation modelling Deterministic Probabilistic Including physical inputs outputs Modular Ad hoc modelling
5 2 4 2 3 4 9
6 ..i. 5 5 2 7 2
4 2 3 I 3 3 l
II 3 6 6 8 10 lI
6 2 4 5 0 5 3
0 2 I 0 1 0 I
Omega. Vol. 13. No. 6
by Naylor and Tapon [10] who describe the linking of portfolio models with corporate simulation and optimization models. In the second main category one of the most important areas is the control of subsidiaries. In Grinyer and Woolter's main surveys [4 and 5], they discovered that almost half of their companies were using financial models to assist in the control of subsidiaries. For example, of the 51 companies modelling their balance sheet totally in the mid-1970s, 24 of the subsidiaries also involved themselves in balance sheet modelling. Then in 1983, Grinyer [3] reported that 38 of the 52 companies possessing subsidiaries used financial models at subsidiary level: 28 companies adopted the same package throughout the group; 18 transferred data files between subsidiaries and group management. A fourth trend, which could be classified as a sub-set of the previous one, for which there is much evidence from individual companies and from consultants and software houses, is the
497
Table 2. Types of forecasting methods used in corpora:e planning (Bradford Management Centre 1984 Surve.~ Methods Subjective Statistical Curve fitting Time series analysis Explanatory (or causal): Operational research Econometric Technological Social and political Scenario
No. of organisa~ions (base of 20 orgamsa~tons) 13 3 6 2 7 4 4 4
as leading indicators, life cycle analysis, regression, etc.". However, research by the author and colleagues at Bradford does not support this sort of generalisation. For example, the 1984 survey showed that whilst the majority of companies (approximately 85/0) o/ received their forecasts from sources external to the corporate model, those methods were predominantly subjective (see Table 2). It is notable that this is the case even though the sample of companies is extension of corporate model building to include undoubtedly biased towards the more advanced physical inputs and outputs. Again, Table 1 in planning and modelling terms. illustrates this. Fifthly, the distinctive characteristics of T H E I N F L U E N C E OF C O M P U T E R OR~MS models, namely probabilistic apD E V E L O P M E N T S ON proaches and/or optimization, appear to be CORPORATE MODELLING moving at different rates. Thus in spite of the We can trace two parallel developments in greater availability of powerful software, evidence for significant increases in optimization computing. First, remarkable changes in techmodelling at corporate level is hard to come by nology have occurred over the last 15 or so as Table 1 illustrates. Indeed in the same survey years since corporate modelling began on mainonly four organisations out of 31 indicated that frame computers. The introduction of the mini, they were currently running optimization cor- and more recently the micro, has of course had porate models; and two organisations of the an enormous impact and this is illustrated by four were prepared to describe the respective some results from a 1983 survey carried out by applications of their models (both based on Higgins and Opdebeeck [7] shown in Table 3. It packages) in their planning processes, one the will be noted that micros were used by 56 National Coal Board and the other a food companies out of 94. In the smaller 1984 survey, we found that of the 19 companies that replied processor. Finally, the survey found no evidence that the to the question "What kind of computer facility adoption of improved forecasting methods to do you use to run the model'?" ten used mainprovide inputs to corporate models is moving as speedily as the development of corporate models themselves. What appears in the litera- Table 3. Computer-based MIS systems (Higgins and Opdebeeck 1983 Survey) ture is not obviously replicated in real life. For Mixed systems example, Shim and McGlade [11] state "the Single + Mini forecasting systems utilized depend upon the system + Mini + Micro + Micro breadth and planning horizon of the model; Mainframe 27 8 16 33 3 0 4 0 typical methods include market research and Minicomputer Delphi method, time trends, moving a v e r a g e s , Mi_cr°_c_°m_P.Ut_er. 3 .._ 0........ 0 0 Box-Jenkins and various causal methods such Totals 33 8 20 33
498
Higgins--Trends in Corporate Modelling
frame (two with micros), seven micros (in three cases they were a single system) and five minis (in two cases they were a single system). Grinyer and Wooller's 1982 survey [3] showed that about half their sample were using micros for financial modelling, of which half were in conjunction with other systems and half alone. The increased rate of adoption of micros in business is, of course, well known and the linkages which now exist between micros and mainframes greatly enhance the power of the individual manager's decision support system. But it remains to be seen whether line managers as well as staff specialists will take full advantage of the facilities for better planning and control now becoming available. As regards software, changes have also been radical. Fifteen years ago, corporate models were often written in FORTRAN. Such models were expensive to develop, often running into man-years of effort. They also possessed important drawbacks operationally--time and cost of running, indifferent file-handling capabilities-and were succeeded by models written in languages more suited to planning. In the U.K., we have called these new languages "modelling systems" and examples include PROSPER, EPS(FCS) and SSI (SIMPLAN). Seventeen of the companies in the 1984 Bradford Management Centre survey used a modelling package and eight a standard computer language, with five of the respondents using a combination of the two. Packages cited included EPS/FCS (5), MICROMODELLER (2), PROSPER (2) and the IBM LP package (2). Of the eight languages mentioned PLI, APL and FORTRAN were cited by two companies each and PASCAL and BASIC one each.
The development of micro packages in this decade has greatly facilitated the introduction of micros into the areas of planning and control. A vast number now exist. For example, the Higgins and Opdebeeck survey cited earlier in this section elicited 80 different packages amongst 70 organisations. The most popular were: VISICALC 42; MICROMODELLER 16; SUPERCALC 12; DBASE II I1; MICRO FCS 6. Grinyer [3] found a similar pattern with VISICALC being used by 27 companies and MICROMODELLER, the second most popular, by II. A further indication of the impact of the micro on the development of support systems for strategic decision making and strategic planning is given in Table 4, which is again taken from the Higgins and Opdebeeck 1983 survey. MODEL BUILDERS AND USERS There has been a distinct trend in the U.K. away from development of models by operational researchers and computer specialists to planners and accountants. Thus Higgins and Finn reported in 1977 [6] that accountants followed by planners were the major contributors to the building of corporate models and the companies reporting indicated that accountants made three times the contribution of that of operational researchers in model building. In the 1984 Bradford survey already cited, accountants were again in the lead in terms of percentage contribution as follows: accountants 52%; planners 31%; operational researchers 10%; computer specialists I%; consultants 6%. Grinyer and Wooller (see Grinyer [3]) found in their 1982 survey that accountants were the
Table 4. Use of microcomputers in strategic decisions and strategic planning: 46 respondents (Higgins and Opdebeeck 1983 Survey) Used in financial department but not on a microcomputer (No. of companies) Cash flow models Net present value discounting Sensitivity analysis Financial corporate simulation model Internal rate of return Discounted pay-back period Pay-back period calculation (without discounting) Leasing models Risk analysis Valuation models Capital rationing using linear programming Decision trees Others including forecasting, tax supply'demand modelling (specified by respondents)
9 18 6 I0
Implemented on a microcomputer (No. of companies)
II 18 IO 7 4 0 I
22 19 19 16 12 10 7 6 5 I I 0
0
2
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Omega, Vol. I3. No. 6
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Table 5. Use of corporate models
Use
Naylor Schauland 1976 Survey (°o of companies)
Higgins, Finn 1977 Survey (°o of companies~
Higgins Opdebeeck 1984 Survey !Oo of companies)
Evaluation of policy alternatives Financial projections Long-term planning (Analysis for) decision-making Short-term planning Preparation of (financial reports)
79 75 73 58 56 47
63 88 81 44 38 44
53 84 -63 58 79
dominant category of model builders, their involvement being reported by 56 organisations; followed by planners, 33; computer personnel, 25; treasurers, 15 and operational researchers, 14. When we come to look at the main model users, we again find accountants and planners dominant. In the Higgins and Finn survey, 71~o of the corporate models were used by accountants and 53~ by planners, compared with a mere 18~ by operational researchers. In the 1984 Bradford Management Centre survey, accountants were again first, followed by planners and were 20 times more likely to use corporate models than were operational researchers. In their first survey, Grinyer and Wooller found that planners and accountants were top of their model user table with 32}/o of companies citing planners and 31~ accountants, compared with 14~o operational researchers and 6~ computer specialists. By 1982, the relative involvement of accountants had increased by 50% and that of planners by 15~; computer personnel were up 30~ and operational researchers only by 6~o. In 1982, Grinyer and Wooller also established that the model builders and the model users in their sample were largely the same people and, not surprisingly, found that the users were able to change the logic of the models themselves (this happened in 57 out of 68 companies). Uses of corporate models are consistent with the pre-eminence of accountants and planners as designers and users. In Table 5 the results of the Naylor/Schauland [9] and the Higgins/Finn [6] and Higgins/Opdebeeck [7] surveys are compared and it will be noted that the broad patterns are very similar. Grinyer and Wooller (see Grinyer [3]) categorised uses somewhat differently but found some interesting changes between 1973 and 1982. There was a large increase (34~o) in companies using corporate models to assist in their financial planning up to 1 year ahead; negligible change in usage for financial planning 1-5 years ahead but a reduction of 24~/o for financial
planning over a longer time horizon than five years. Corporate models were used 15% more for project evaluation. Incidentally, models to aid decisions in marketing, production and distribution all showed significant declines in usage ( - 20~o to - 35~o) and perhaps this is due, at least partly, to the increased influence of accountants. A significant number of corporate models still fall into disuse, in spite of their persuasiveness and the know-how which exists today. In a study of models that failed, Ang and Chua [1] found that 27~ of the total sample in their survey of 113 corporations had been discontinued three years after being built. The most common justifications for this decision were model deficiencies and human problems in implementation and three of the reasons, viz. inflexibility, lack of management support and excessive input data requirements are familiar from other surveys. Simon e¢ al. [12] have discussed why some models fail and identify as a major cause managers' lack of clarity about their need for a particular model. They offer three possible explanations for doubtful justification by management: a subterfuge to establish a data link which will free one part of the organisation to channel information to another; a means of supplying formal rationale for past decisions; a device for establishing a manager's reputation. The Grinyer/Wooller 1982 survey examined the reasons given by 41 companies for discontinuing use of a particular model. The most common reasons were: model only intended as a 'one-off', nine organisations; change in requirements, eight; upgrading model, seven; change of package, four; difficult to use, three; models inflexible, three. Including several other reasons, they suggested that perhaps a quarter of the models could be considered failures. In the Bradford Management Centre 1984 survey, eight organisations had abandoned one or more corporate models in the past citing as
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Higgins-- Trends in Corporate ),Iodelling
their reasons: too complex to be useful, five; difficult,,' in collecting the necessary data. three: lack of top management support, two; and other reasons, three. In this latter category, comments included: "Central model could not generate commitment from operations": "'The trading situation demanded short-term obvious solutions and a significant resource devoted to longer-term modelling was simply not worthwhile". SOME C O N C L U S I O N S The evidence as to changes in structure and forms of corporate models seem convincing. In particular, we may expect to see more modularity; more ad hoc modelling; more models incorporating probabilistic elements; and more models including physical inputs and outputs. Present trends in hardware and software may be reliably extrapolated along broad lines: a greater use of micros; more user-friendly software; more network development. But it would be foolhardly to attempt to predict the next comparable breakthrough to the silicon chip. Optical fibres appear likely to offer a comparable step forward in communications systems. Apart from developments in computers, British managers will become better informed and more likely to adopt new methods than their predecessors. The present generation of senior management have already learnt that simplicity and low cost and speed of development are to be preferred to sophistication, mathematical complexity, etc. Thus they have moved to modular, simple, deterministic, financial simulation models and have been reinforced in this particular change of direction by the influence of mathematically limited accountants. But because the accountants have become so involved in development and use, this has given such computer-based models a legitimacy which they
might not otherwise have gained via the OR and computer scientist fraternities. The increased emphasis in Britain on management education per se and on the management science education of the professions such as accountancy and engineering will enhance the adoption of more advanced modelling techniques by the next generation of senior management. ACKNOWLEDGEMENTS The author wishes to thank two former research assistants, Mr R Finn and Mr EJ Opdebeeck. t'or their assistance with the Bradford Management Centre surveys reported in the paper.
REFERENCES 1. Ang A and Chua J (1980) Corporate planning models that failed. Managerial Plann. 29(2). 34-38. 2. Gershefski GW (1969) Corporate planning models--the state of the art. Managerial Plann. 18(3), I~5. 3. Grinyer PH (1983) Financial modelling for planning in the U.K. Long Range Plann. 16(5), 58-72. 4. Grinyer PH and Wooller J (1975) Corporate models today. Institute of Chartered Accountants. 5. Grinyer PH and Wooller J (1980) An overview of a decade of corporate modelling in the U.K. Accmg Bus. Res. 11(41), 41-49. 6. Higgins JC and Finn R (1977) Planning models in the UK: A survey. Omega 5(2), 133-147. 7. Higgins JC and Opdebeeck EJ (1984) The microcomputer as a tool in financial planning and control: Some survey results. Accting Bus. Res. 14(56), 333-340. 8. Klein R (1982) Corporate-based financial modelling. J. Syst. Mgmt 33(5), 6-13. 9. Naylor TH and Schauland H (1976) A survey of users of corporate simulation models. Mgrnt Sci. 22(9), 927-937. 10. Naylor TH and Tapon F (1982) The capital asset pricing model: an evaluation of its potential as a strategic planning tool. Mgmt Sci. 28(10), 1116-1173. I1. Shim JK and McGlade R (1984) The use of corporate planning models: past, present and future. J. Op. Res. Soc. 35(10), 885-893. 12. Simon LS, Lamar C and Haines GH Jr. (1976) Managers' use of models. Omega 4(3), 253-264. FOR CORRESPONDENCE: Professor JC Higgins, Unirersity of Bradford Management Centre, Emm Lane, Bradford, West Yorkshire BD9 4jL, UK.
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