Thought Leaders
 Real Learning From Simulations

An executive team wrestles with decisions about a major acquisition. They need to address a complex mix of financial, strategic, cultural, and other issues. How far should sales forces and R&D be integrated? Who should be on the core management team? How can the combined organization capitalize on purchasing synergies? The executives on the team develop a strategy and then watch how these decisions affect the company's valuation in successive quarters. "It is safe to say that the teams are usually surprised at how bad their original integration decisions are," said Professor Robert Holthausen, academic director of Wharton's Mergers & Acquisitions executive program.

In the real world, this would be their only shot. They would have to live with their decisions, good or bad, like the all-too-many executives involved in M&As that don't live up to their potential. But this is a simulation, so managers in this case have a chance to change history. After seeing the results of their original decision, they go back and do it again. This experience, and a debriefing with faculty afterwards, allows them to appreciate the complexities of acquisitions and the strategies that can lead to success.

"The reason for the simulation is to get the participants to understand that there are many facets of an M&A process that normally are treated as independent, but all these things are interdependent," said Holthausen. "They realize the integration decisions that lead to higher value or lower returns."

The Power of Simulations

Advances in computing power have allowed educators, to create simulations that are faster, more complex, interactive and realistic. "The technology allows us to do things now that were very cumbersome to do before," Holthausen said. "We can create something that is more lifelike and bring a more realistic element to market simulations."

This offers a powerful, experiential tool for education. "There are many different ways to learn," said Wharton Professor David Reibstein, who uses simulations on marketing strategy, sales force, and pricing in Wharton's Pricing Strategies: Measuring, Capturing, and Retaining Value and Competitive Marketing Strategy programs. "We have many choices as to how we deliver our materials — we can lecture, generate class discussions, hold field trips, present case studies, and provide simulations. Each has its own value. Sometimes we learn best only by doing. Through the experience we 'see' what works and what doesn't, how things are done, and how they should not be done."

A survey of Wharton MBA students who participated in simulations and other computer-based learning tools developed by Wharton's Alfred West Learning Laboratory found that 86 percent of respondents felt the experience enhanced, or significantly enhanced, learning in class. The students found that the interactive tools were more effective than case-based classes in enhancing attention and engagement.

Learning About the Business

Simulation developer Bruce Gresh, who created the M&A simulation with Holthausen, said simulations for senior executives often are not designed for a simple solution. Instead, they "serve more as a catalyst for discussion," he said. The surprises are where much of the learning occurs. "The simulation has intended consequences and unintended consequences," Gresh said. "That is a pretty powerful feature."

In a sophisticated simulation, the participants receive "high-fidelity" financial statements at the end of each round that look very much like the numbers they use to make their real business decisions. The open-ended complexity of the picture is part of what makes the simulations so realistic. "There are a lot of environments where executives struggle to integrate tons of information," said Gresh. "There is no mechanism to integrate all that without a simulation, but this is the stuff they are actually considering in their decision making. Simulations help make them aware of what the organization is facing in the business environment, often order-of-magnitude changes in the business environment."

Simulations can also be used to test the assumptions of participants. During one simulation for a group of CEOs, Gresh asked participants for their own perspectives on the relationships among certain qualitative factors such as wage levels and employee satisfaction. He put these assumptions into the simulation, and the executives played it out. By the end of the simulation, it was clear that they had made "ridiculous assumptions." For example, very small increases in wages sent employee satisfaction through the roof and led to outrageous performance results.

Learning About the Team

Seeing the business impact of decisions is just part of the learning from simulations. They can also offer deep insights into team dynamics. "At least half the learning is about team dynamics," Gresh said. "A lot of it is having them think about how they function in teams and how hostile competitive conditions can influence decision making."

For example, Gresh recalled a team of CEOs in one simulation who "made a goofy pricing decision." In the debriefing, it turned out that the very persuasive team member who served as head of marketing had talked the other members into a strategy of cutting costs way back, against their better judgment. "These were senior executives, but they went along anyway because he had a strong personality and talked them into it."

Unlike many actual business decisions — where the professional stakes are so large that honest evaluation is often impossible — participants in simulations usually are very candid about what went right or wrong. "People are pretty thoughtful about how the team worked and why," Gresh said. "It is amazing how much insight teams have into things that went on that influenced their decisions."

The Need for Transparency

To keep the exercise from becoming a game, participants need to understand the underlying assumptions of the simulation model up front. This allows them to know why they won or lost. "It has to be transparent," Gresh said. "I'm a big believer in having the decision output that tells them what effect the decisions they made had on the outcome. Sharing the conceptual foundation of the model helps them understand and get into the simulation, and not compartmentalize it as a game."

Doesn't knowing the structure and assumptions behind the simulation allow participants to "game" it? Maybe for a simple exercise, but not for these simulations. Detailed knowledge in advance of how the simulation is constructed is not a particular advantage once it starts. It is management skill and thinking that count. "The dynamics are so complex," Gresh said. "I design and build the simulations, and the teams of senior executives who participate in them always get better results than I do."

    

This month's articles:

  • In the Classroom
    Weaving together online and face-to-face sessions made Booz-Allen's distance learning program anything but virtual.

  • Thought Leaders
    Simulations offer learning about successful strategies and team dynamics, without the high costs.

  • In the Classroom II
    Clorox used a set of "action learning projects" to bring its lessons back to work.

  • Education à la Carte
    Whatever and however you need to learn, Wharton probably has a program to fit your needs, timeframe, and style.