Creating a 3-way model of your business processes can be a powerful tool for streamlining operations and increasing profitability. In this blog post, we will discuss what to consider before creating a 3-way model, as well as the key benefits associated with proper construction and application of the model.

Ultimately, the purpose of this blog post is to provide a guide for designing a 3-way model that is tailored specifically to the needs of your business.

Read on for the key points to keep in mind when creating a 3-way model for your business.

Key Takeaways

  • Considerations to make before creating a 3-way model
  • Benefits of properly constructing and implementing a 3-way model
  • Guidance for designing a 3-way model tailored to your business

What is a 3-Way Model?

A 3-way model is a type of mathematical model used in various industries, including economics and finance, to identify relationships and interactions between three different elements. This model is a powerful tool for data analysis, as it enables a deeper understanding of how a system is affected by the combination of all three elements.


A 3-way model is an instrumental tool for problem-solving and predictive purposes. It is a mathematical function that establishes a relationship between the three input variables, represented on a graph. The value of one variable is dependent on the value of the other two, and changing any one of the three variables can affect all three at the same time. A 3-way model is usually described in algebraic notation with three equations, plus constraints and other goals.

Use Cases

The 3-way model is used in a variety of application areas, such as financial modelling and portfolio optimization, transport modelling, and resource management. It is well suited for identifying relationships between elements in complex phenomena, such as demand substitution and interdependency between products in business processes.

In financial markets, 3-way models can be used to construct portfolios and forecast optimal investments. In transportation, 3-way models help assess travel time, cost and environmental impacts of travel behaviour. In resource management, the 3-way model can be used to study the impact of resource allocation and allocation of scarce resources.

Advantages of Using a 3-Way Model

Creating a 3-way model can give you a sharper, clearer picture of your data than by using 2-way models. Whether you are a business professional, an academic researcher, or simply wanting to gain an improved understanding of the effect of multiple variables, using a 3-way model can provide you with greater accuracy and increased reliability.

Greater Accuracy

By creating a 3-way model you are able to study the relationship of three variables, instead of two. This offers more detailed insight into the effect of each variable on the other two, thus revealing more precise relationships, correlations, and patterns. This is especially useful when looking at potentially complex relationships in groups or collections of data.

Increased Reliability

A 3-way model can also help improve the accuracy of individual variable scores and the reliability of your data. By considering all three variables together in one model, you are able to better weigh their interactions and the contribution they have to each other. This allows you to make more precise estimations of how one variable affects the other two, leading to more reliable variable scores.

Using a 3-way model can give you a much fuller, more detailed understanding of your data than by using two-way models. This provides greater accuracy and increased reliability when comparing the effects of multiple variables, making it an invaluable tool for businesses, research studies, and personal analysis alike.

Disadvantages of Using a 3-Way Model

The primary disadvantage of using a 3-way model is the limitations of use. Many of the techniques and concepts used by 3-way models are not widely accepted or understood by business users. This can make it difficult to get buy-in from executive and managerial teams when more widely accepted yet less efficient models are available. It also requires a higher level of technical knowledge from employees, which poses challenges to some organizations.

Additionally, using a 3-way model can be time-consuming. This type of modeling requires an in-depth understanding of both the data and the processes involved in a company's business operations. A 3-way modeler must create a logical framework that captures all of the complexities of the business and then be able to explain that framework to executives, managers and users. This can involve a great deal of time and effort, and can be more challenging than some more basic models.

Creating a 3-way model requires a great deal of commitment from employees and management to ensure it is well designed and serves its intended purpose. Careful consideration must be given to the potential drawbacks of using a 3-way model before choosing to implement it in an organization.

Different Types of 3-Way Model

When it comes to creating a 3-way model, it’s important to understand the different types of models that are available. The type of model you choose to create depends on the type of data and insights that you need to glean from it. Here are some of the most common types of 3-way models:

Data-generating process model

A Data-generating process (DGP) model is a type of 3-way model that is designed to simulate the process of data generation. This model uses a set of equations to model the behavior of the data as it is generated. DGP models are useful for understanding how complex data sets are generated, and can help predict how the data may evolve in the future.

Structural model

Structural models are 3-way models that are used to uncover the underlying structure of data. This type of model helps to identify patterns and trends in the data, and provides insights into how the data may be correlated. Structural models can also provide predictions about the behavior of data over time.

Behavioral Model

Behavioral models are 3-way models that are focused on simulating the behavior of data. This type of model uses data-driven algorithms to analyze the behavior of the data and provide insights into how the data is likely to behave in different conditions. Behavioral models are useful for predicting changes in data over time, as well as forecasting future outcomes.

What Things to Consider Before Creating a 3-Way Model

Creating a 3-way model of relationships between two entities and outcomes can often be a complex process.

Functional Needs

When considering the creation of a 3-way model, it’s important to start by assessing the functional needs of the system. The 3-way model should be designed to meet the underlying functional requirements, otherwise the model will be redundant and purposeless. Ask yourself what processes need to be mapped and modelled, and start by creating a functional flow chart of the system.


Also important is the usability of the 3-way model. It needs to be easy to understand and intuitive to use, to make sure that it is easy to access and use by end-users of the system. Designing the 3-way model with the users in mind is essential for its success. Ensure that the presentation of the model is clear and concise, with a well-defined structure that supports the users in their workflow.


Finally, it is essential to consider the risk-profile of the 3-way model when making design decisions. Establishing and managing a risk framework will help you in understanding the potential risks associated with particular decisions, which can help in making more informed choices. Additionally, creating a process to identify and monitor any risks can help to minimize the potential negative effects of any future changes to the 3-way model.


When it comes to creating a 3-Way Model, many considerations and planning must be taken into account, as the process can be complex and requires careful deliberation. It’s important to consider the various elements of 3-Way Modeling, such as the mathematical framework, fitting data and model assumptions, as well as the various types of 3-Way Modeling, including linear 3-Way, polynomial 3-Way, and multivalued logic 3-Way.

Other points to consider are the model algorithm and requirements, design optimization, and the suitable software. After finding the best software solution, users must also test their 3-Way Model with sample data. The results given by the 3-Way Model and the accuracy of the model will determine its effectiveness.

Summary of the Discussion

This post has discussed the various elements of creating a 3-Way Model and what factors to consider while developing one. It has detailed the mathematical framework necessary, the various types of 3-Way Modeling, the software and algorithm required, and testing data.

Recommendation to Consider All Points Before Creating a 3-Way Model

In conclusion, when creating a 3-Way Model, it’s important to consider a range of points including the mathematical framework, the various types of 3-Way Modeling, the software solution, the testing data, and the model optimization. Proper consideration of each of these points will help a user to build an effective and accurate 3-Way Model.

Expert-built startup financial model templates

500+ Excel financial model templates for your business plan