The following examples illustrate different kinds of models in business:

• a spreadsheet that calculates profitability and cashflow depending on sales and costs outturns
• a GIS system that finds the best location for a superstore based on demographic information about households and the location of competing stores
• a database application that identifies the most promising candidates on which to focus a marketing initiative
• a statistical analysis that measures which tactics (for example, advertising campaigns or pricing policies) have produced the best result
• a set of equations that predicts how sales will be affected by national or international events

For more examples, see the case studies below.

Models offer a tool to inform business planning and decisions. They provide an efficient way to:

• combine and weigh up different factors relevant to a decision
• distil and apply the lessons of past experience
• test whether the judgements and rules of thumb currently used are valid, and incorporate them systematically in future
• build a knowledge base of tried and tested methods, so that corporate memory is maintained when staff move on
  

Case study 1: LeasePlan

The business case
LeasePlan purchases vehicles and then leases them for a period of years to other businesses. When the vehicle is returned, LeasePlan sells it at auction. A major risk is the uncertainty over whether the contract value will prove to have been large enough to cover the difference between the vehicle's purchase price and the residual value that is realised at auction.

The method
In collaboration with LeasePlan's staff, Cambridge Econometrics developed models that predict residual values by car sector and vintage on the basis of assumptions for the economic factors that influence household demand for used cars and the volume of cars coming onto the market in the relevant sector.

The outcome
The models are being maintained and developed in-house, and provide the foundation on which strategic views on likely developments in residual values are prepared in LeasePlan.

Case study 2: Water industry sales

The business case
Water companies in the UK need to prepare sales forecasts to underpin revenue estimates, to inform long-term resource planning, and to support plans submitted to the industry regulator.

The method
Cambridge Econometrics undertook a review of best practice in forecasting in the UK water industry and developed a manual documenting methods that could be applied for each of the various components of water demand. We implemented this method for a number of water companies.

The outcome
Forecasts of water demand were prepared under various scenarios to gauge the impact of alternative assumptions for long-term economic growth in the regions served by the companies and for the diffusion of water-conserving technologies. The forecasts provided an objective, independent assessment that could be incorporated in submissions to the regulator.