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What Is Predictive Modeling?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 November 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
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Predictive modeling is a strategy that involves the creation or selection of a model in an attempt to project the possible outcomes associated with a given action. This approach can be used in a number of situations, such as creating objectives for companies and other organizations, managing an investment portfolio, or working to build and maintain rapport with customers. The idea is usually to look closely at the resources on hand, identify a model that represents the possible use of those resources, and predict what is likely to occur if that particular use is actually implemented.

When applied to investment activity, predictive modeling will impel the investor to consider what impact the acquisition or sale of an asset will have on his or her investment portfolio. Several questions must be addressed, such as how well the asset will integrate with the other assets already in the portfolio. The investor will also want to consider how the portfolio will be affected if the asset performs contrary to the investor’s expectations, and what the long-term benefits of holding on the asset mean in terms of reaching the objectives set by the investor. By creating the model and then projecting the possible outcomes, it is much easier to make an informed decision regarding any buying or selling activity.

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As it relates to the structural organization of a company, predictive modeling can be used to avoid decisions that have a long-term negative impact on the profitability of the business. For example, if a company is considering the elimination of certain positions within the company structure, it is possible to create a model that shows the company organization without those positions. Using the idea of predictive modeling, it is possible to reassign responsibilities to positions that will remain within the structure, and project how well the business will perform under the new approach. If the results are considered acceptable, then the business can proceed with the changes. Should the anticipated outcome appear to be counter-productive, the business can abandon the approach and look for other ways to decrease expenses.

The concept of predictive modeling can also be employed when it comes to managing relationships with customers. Here, the idea is to consider what type of impact some change in product lines, delivery options, or ordering processes will have on the current clientele. If the model has to do with implementing an online ordering system that provides immediate confirmation of the order, and expedites the shipping process, there is a good chance that customer relationships will be enhanced by the changes. Should most of the existing clientele not be in favor of online ordering, the changes may actually hurt existing relationships, especially if the implementation makes other ordering options more cumbersome for the customers. By predicting the possible outcomes of the actions, it is possible to avoid any changes that are likely to damage customer relationships, as well as identify changes that will enhance those relationships and possibly lead to increased profits.

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