Strategy simulation is a powerful method in developing strategy as well as in teaching strategic thinking. Yet, it is an under-used tool both in business schools and organizations. If you are not using this tool, you are very likely missing out. In this article, I explain strategy simulation and how it can benefit your organization in teaching strategic thinking as well as in building strategy alignment.
My first introduction to simulation was during my business school days back in the mid-1990s, when I took a specialized course in decision modeling. Since then, I have used it in many decision making scenarios from capacity planning to strategy development. I have also used the technique to help companies and business students learn strategic thinking.
What is a Simulation?
A simulation (computerized or otherwise) is a way to understand cause-effect relationships in a complex world. Especially where cause-and-effect relationship are neither linear not simple to understand. It involves representing a complex system in a virtual world, observing the behavior of the system in a compressed time frame, and drawing conclusions around the cause effect patterns in the system.
For example, the COVID-19 pandemic and its spread is a complex system involving several forces at play, from infection rates and treatment efficacy to social behavior and health care facilities. If a public health official wants to predict how many hospital beds she would need in a county, there is no linear way to predict it. She would need simulation modeling. Similarly, you need this tool to understand the variables at play in a complex operation like a space shuttle landing. The more complex a system of forces and less understood the cause effect relationship at a systematic level, the more the need for advanced tools like simulation modeling.
A business is a complex system involving multiple actors and forces at play that do not have a simple or linear relationship. Yet, decision makers make long term decisions based on assumption around the working of such a complex system using simpler mental models. When the environment is changing rapidly, it helps a lot to use simulation to test the assumptions around cause effect patterns in a business.
The same methodology can also be used to enter a virtual world in a strategy simulation, wherein individuals take on roles as if they were entering a new reality, take actions, witness results and draw lessons. It is a powerful tool to teach strategic thinking. And beyond that, it is equally useful in bringing about alignment in an organization.
The Unique Challenge of Teaching Strategic Thinking
Business as a field of education differs from traditional fields like psychology or economics in two critical ways:
First, while traditional fields have a hierarchy of concepts, it is less so in business. Although you can understand the utility function in economics or personality theory in psychology standalone and use it well, it is very hard to learn market structure or competitive intensity in a market and then use that concept on a stand along basis for decision making; you will need several other business concepts to be effective.
Second, in business in general and in strategy in particular, you need to understand the cross functional nature of business world. While one can learn the concept of the behavioral approach in psychology and become an expert in it with little depth in cognitive psychology, the same is not true for strategy. If you do not understand financial concepts, basic economics, essence of marketing , and several related areas, it will be hard to make effective strategic decisions.
In short, business education involves mastering a web of concepts not hierarchically related with each other to make effective decisions. Furthermore, the power of business concepts arise from synthesis across these non-hierarchical concepts. This is where the business case method becomes useful.
Business Case Method To Learn Holistic Thinking
That is why case based teaching is essential in a business education. It allows one to witness various aspects of a business situation in a realistic and complex manner. Case method excels in helping aspiring business managers understand and imbue interconnectedness of forces at play in a business environment.
A Void Left From Case Based Teaching
Case method is exceptional but still only give a static perspective. It allows one to build complex mental models and understand the interconnectedness of different facets of business. It excels at teaching analysis, the breaking down of a situation or a problem. But it still is not sufficient to teach synthesis. It also does not teach how to make complex decisions in a fast-paced dynamic context.
Strategy Simulation comes to Rescue
That’s where Strategy simulation enters the world of business education.
What is strategy simulation?
A strategy simulation is a realistic business situation where one steps into the shoes of a decision maker, pursues challenging goals, makes complex decisions, and witnesses the results.
For example, in a simulated scenario, a group of strategy students act as a leadership team of a business. They get detailed briefs of the situation, their roles, their goals, resources at hand and strategic decisions they need to make.
As they make critical decisions, the outside world keeps changing. Competitors make moves. Federal reserve changes the fed funds rate. Government changes trade policies. Economic cycles change. No different from how the actual world works. As fresh information comes in, it forces the team to account for it in their decision making.
At the end of a simulation period they get their business results. Using the results, the team would reflect on their assumptions and efficacy of their decisions. They learn many a lesson in this process. And then they make same decisions in the next period.
This way, a team goes through five years of decision making in a matter of three hours. It forces them to bring all of their knowledge to the table, capture the essence of the situation, and synthesize diverse opinions into a cohesive decision.
Core Benefit of Strategy Simulation
The biggest benefit of using strategy simulation in an educational setting is that it teaches the much needed big-picture thinking. But more importantly, it forces one to synthesize rather than just analyze. It teaches many tacit lessons on team dynamics as much as in business dynamics. And thus it fill a much-needed void in business education.
Benefit of Strategic Simulation in A Corporate Setting
In the corporate context, the benefit is even more. There, the issue is usually that businesses managers know their domains well but they work in their own silos. They already have a deep understanding of how their actions affects others and how others’ actions affect them. Yet, they often forget some of these linkages because daily pressures of the whirlwind draws them deeper into their silos. A simulation exercise is a brilliant training tool to develop strategic thinking and a holistic perspective so badly needed.
Using Strategy Simulation For Strategy Alignment
Beyond training in strategic thinking, this tool also allows another critical benefit. When there is a powerful need for strategic alignment, a memo, a town hall, or even extensive communications rarely fit the bill. How often have you found these tools ineffective in your own organization? A live strategy simulation is a powerful tool in such situations to bring about strategic alignment across an organization. When people make business decisions in a changed scenario and witness the result of their decisions using old thinking, the new reality sinks in and the lessons stay with them. Imagine how useful it would be to generate the level of strategy alignment that you do deeply desire.
A live strategy simulation is a powerful tool in such situations to bring about strategic alignment across an organization.
I have often wondered if George Fisher had used strategy simulation across Kodak in the late 1990s, would that have brought about the much-needed alignment he needed to protect Kodak? In my book The Dark Side of Innovation, I detailed the events that led to the demise of Kodak. A key reasons was a lack of belief in the middle management that there was a need to commercialize digital technologies. If you are making a major change to your strategy, consider a strategy simulation as a tool for organizational alignment.
Key Take Away
In short, strategy simulation is a powerful tool that enables you to teach strategic thinking and build alignment for a new strategy in your organization. If you are not already using this powerful tool, why not?
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