When Daniel C. Smith, president of Capsim Management Simulations Inc., a global virtual business simulation program provider, blames jet lag for not being able to tell this correspondent how long his company has been operational, it is a tad difficult to believe. E specially after hearing him speak on business strategies at a management simulation training programme at the International Management Institute in New Delhi.
Smith, who is an adjunct professor of management at DePaul University in Chicago, began dabbling in simulations as a management student at Northwestern University’s Kellogg School of Management in the early 1980s. In 1984, he published Stratplan , a simulation designed for MBA programmes. His work includes Capstone—a strategy and business planning simulation set in a manufacturing environment; Foundation—a simulation widely used in business schools and community colleges as an introduction to business; and The Herald-Telegram —a newspaper management simulation developed for the Media Management Center at the Medill School of Journalism, Northwestern University.
Capstone—which teaches strategy, accounting, marketing, finance, human resources, teamwork and leadership, among other topics—provides educational business simulations for universities and large corporations.
Capstone simulators are used by a number of Fortune 100 companies, including Microsoft Corp., General Electric Co., General Motors Corp. and Goldman Sachs, and at universities such as Harvard, Wharton, Northwestern and Vanderbilt.
Last year, the firm recorded $4 million (around Rs17 crore) in sales and a 14% year-on-year growth. Even though it has been a big player in the US,?the simulation game provider had few franchises outside the US until about a year-and-a-half ago. Capsim entered the Indian market in 2004 through the franchise route, and has since seen its services being used by Tata Consultancy Services Ltd, Infosys Technologies Ltd, Wipro Ltd, Larsen and Toubro Ltd, Pepsi Foods Pvt. Ltd, Asian Paints Ltd and Kotak Mahindra Bank, among others.
In an interview with Mint, Smith speaks about the advantages of training through business simulators, increasing application of simulators in mapping competencies and the future of simulators in management education.
How do business simulators help students and managers?
We know people learn the most by doing and we are wired to remember highly emotional events. Any event that involves the use of many senses has a far greater impact on us. Business simulators are a high-sensory environment designed to mimic a real-life business situation where managers face a complex and rapidly evolving scenario in which business acumen is tested and enhanced through modelling, analysis and strategic planning.
Photo illustration by Malay Karmakar / Mint
For instance, in Capstone, participants run a $100 million firm for five to eight years. Each simulated year, decisions are required in research and development, marketing, finance, human resources and production. In later rounds, labour negotiations, advanced marketing and total quality management modules are added to continue building complexity and provide opportunities for the playing teams to gain competitive advantage. As the game advances, complex aspects of business such as shareholder value, financial control and operational excellence are brought in.
To ensure every company is assessed on its merits, the management teams select the benchmarks that will best reflect their strategic goals. They choose from two or more measures, including return on equity, return on investment, market capitalization, market share, cumulative profit, return on assets, asset turnover and stock price.
Whether it is students or executives, they learn business by experiencing business. Businesses are risk enterprises, and a mistake could cost you in terms of money, jobs and other resources.
Simulators, on the other hand, give users a second chance to go back and learn from failures. By doing it again and again, users are able to hone their decision-making skills—very important in today’s dynamic business environment.
Is there a difference between simulators for business schools and companies?
There are not many differences, except in terms of goal and delivery. A university will use a simulator to teach students the fundamentals of business and give them a general overview since students have not seen business in motion. They have read about businesses but have not worked for a firm.
Participating business managers, on the other hand, are familiar with being in a firm and have work experience of at least 10 years or more. They are not only focused on a specific learning objective, but also bring a level of competence that you would not expect from a student.
On the delivery front, a university programme is designed in such a way that it allows a lot of time to be devoted to lots of topics. In contrast, corporate workshops are of two or three days duration, necessitating faster and intense programme delivery.
Do business simulators always work? What are the limitations?
Educational business simulators always work. A training simulator, like the ones we develop, always succeed. No surprise there, because a training environment is tightly controlled. Their intent is to demonstrate concepts ranging from cash flow to business strategy.
However, simulators designed to mimic a real-world company suffer from an intrinsic weakness. They look at what has happened in the past and not what could happen in the future.?The risk is that they will reinforce a world view that could be in the process of becoming obsolete.
For instance, we had a major credit card company ask us to design a simulator they could use to impart the top management’s view of the company strategy to employees. It included an assumption about what would happen if the economy turned down suddenly.?Some percentage of customers would default on their debt. We questioned the top management’s estimate of defaults. It seemed too low to us but, at the end of the day, they were the experts in credit cards, not us.
Two years later, the economy turned down, the defaults skyrocketed well beyond their expectations and they took huge losses, eventually being acquired by another company.
The strengths of business simulators are also their weaknesses. They compress time or expand time, making it possible to see business in motion. But, to do this, they must confine themselves to the most important aspects of the business, often leaving out many details. For example, a simulator is most likely to have only one price per product. In the real world, pricing strategies are far more complex and could include various pricing strategies, including discounts, coupons, add-ins, etc.
Do business simulators play more critical and strategic roles in certain industries/firms than others?
Most businesses have models of some sort that are based on prior results. It is always useful to compare the performance of last year to the current year. But, for strategic planning and thinking, simulators are rare.
Is there a killer application in the business simulation space? What is its future going to be in terms of technology and scope of application, etc.?
Probably. We just introduced a simulator to test business acumen. In the simulator, managers run a business while their board of directors asks them questions about what they are doing, and why. You might compare it to a driver’s test. Applicants drive the car and answer questions. The computer capabilities and networks only recently became powerful enough to do this sort of thing.
Looking forward, it is difficult to imagine a world without technology. Any high-risk environment begs for a simulator to test competency—airline pilots, surgeons and business managers are all in high-risk environments. For instance, increasingly, hiring managers will like to test candidates through business simulators, in addition to other interview rounds, to gauge competency levels and also use the results from simulation games for training and career development purposes.
What are the challenges and opportunities of entering an emerging market such as India?
The good news about India is that the higher education system is already first rate, at least the schools that we have dealt with. The bad news lies in the domain. What you don’t know, you don’t know. I suspect Indian schools and professors understand us better than we understand them.