Paul Alton MBA

You may have heard of “Flight Simulator,” a computer program that allows you to learn the principles of flying an airplane without physical risk to the airplane or yourself. You may be surprised to learn that the same kind of program is being used to learn business principles without financial risk to oneself or the company. In January I took one week’s vacation to focus on the second half of a two-week exam that used a computer simulation of a business competing with other businesses. The simulator provided a disturbingly realistic business environment, quickly responding to “bad” business decisions, but showing gradual improvements in response to wise choices.

For the past two years* I have been pursuing a Master’s degree in Business Administration. Much of this adventure has occurred through use of Lotus Notes, a group-ware software product that allows people to collaborate on work even though they may be at different places in the world. In keeping with this format, the final exam for the second phase of the program was a collaborative/competitive exercise with people placed into teams to compete against rival teams in a business simulation.

The business simulation, PharmaSim, is a “brand simulation” involving cough and cold medication. It can be purchased for individual use or used as a group exercise. Participants make decisions on brand formulation, advertising and promotion budgets, advertising message, target demographic groups for the message, as well as product pricing, volume discounts and sales force numbers.

For the exam, each team discussed (through Lotus Notes) its choices for all of the above for each product, and sent its decision to a person in New York who entered all the teams’ choices into the simulator. The simulator calculated how each team did and generated a new set of information. This information included details of how the teams did against each other, along with general economic and market conditions that the teams based their next set of decisions on.

Two simulators had to be run to handle all the students “writing” the exam. The one I was involved with had five teams competing – four human and one computer. Teams included some people who have “worked” together in other courses and some who have not. The first order of business was to work out who was going to represent the team in different roles and how the group would arrive at decisions. The team agreed on deadlines for submissions from individual team members so the team member putting together a single response from the team had time to do the job and meet the deadlines set out in the exam. To give some idea of the volume of input from our team of nine people, there were seven hundred and ninety-two posting at the end of the first week. In addition there were a few heated, long-distance telephone sessions such as the evening there was a power failure in Winnipeg and the person supposed to put together the team response couldn’t fire up his computer. People devoted different amounts of time to the process. I took every week-day evening in the first week and all-day and every evening after that.

The five competing teams enter the scene after three cycles of the simulation have run. Each “company” has the same product, and the same level of profits and costs and the same level of advertising and sales force. Market share is twenty percent each. Each team starts with the same resources and choices available to it. That quickly changes with the impact of team decisions on influencing consumer behaviour.

A company knew more information about itself than it knew about its competitors, but just as in real life, it knew a fair bit about the marketplace, its competitors and consumer preferences and habits. For the first round each company had the same choices and resources available to it, that its competitors had, but after that it didn’t take long for the situation to change.

Ethik was the computer, which adopted a play-it-safe, don’t-rock-the boat strategy and didn’t offer any new products or make any wild changes in its approach. It got what it deserved. I was one of the nine people on the Allstar team and don’t want to appear to brag so will let the exam administrator, Jonathan Powell, do it for me. He summed up our efforts, as follows:

For the Red industry, I would say that Team A won, both in terms of income, market share, and effectiveness of the marketing strategy.

A delicate balance in PharmaSim is to introduce new or reformulated products so as to remain competitive and capture market share, while not having these same new or reformulated products cannibalize existing product lines or introduce dysfunctional cost structures. Team A was successful in navigating this balance by introducing new products that did not undermine their existing markets, coherently allocating resources on PR, advertising, promotion and sales force, and keeping prices sensitive to inflation.

Team C might have given Team A a run for first place except for two pitfalls. First, Team C did not increase prices to correspond with inflation. While this strategy might have increased sales, it dug into revenue throughout the simulation. Eventually, this would have put pressure on Team C to initiate a less incremental price increase in order to preserve margins. The pitfall here is that a less incremental price increase down the road might very well lead to a decrease in market share. Team A therefore won not only in terms of numbers, but in terms of longer term positioning.

Teams B and D also introduced fewer new products than Team A, and again the method of introduction and strategy implementation is instructive. Team B demonstrated that, as with Team C, cutting prices is not always a good idea. In the case of Team B, lower product pricing was implemented in conjunction with lower advertising. While this lead to reduced expenditures, it also lead to low income overall and did little to position Team B for long-term growth in terms of either income or market share.

Team D took a drubbing by mis-reading the economic environment and not following a coherent strategy. In a period of inflation, Team D kept pricing low. Not a problem in and of itself, but Team D also over-projected sales, and increased sales staff and output accordingly. This increased fixed costs and eroded revenue. Compounding this was that Team D lacked an effective, focused strategy, so that increased expenditures in promotion and advertising had minimal effect on revenue or market share. The end result was that Team D was left ill-positioned to compete against the other teams, particularly the more focused and well positioned Team A.

The simulator was a fun and fascinating exercise, but the real value came in how it forced the thinking process and helped the participants understand how the business principles we have been learning fit together to work in real life. As somebody once said, “there is nothing as practical as a good theory.”

* Article published in year 2000 in a corporate newsletter