Senior Management

Breaking the Recession Mind: Simulation Encourages Strategic Innovation

In running a business simulation during a recent session of Wharton's Executive Development Program, Todd Norris, CTO of Simulations International, noticed that participants were more conservative in their decisions than previous classes, reflecting the deepening economic crisis in the world outside.

"This was concerning. They underperformed on overall growth potential, mostly through self-limiting factors," says Norris. "They feared the market was not going to be there. Everyone has recession on their minds now, so they are approaching the simulation very differently."

There was one exception to this way of thinking, however, which demonstrates the power of a divergent strategy. One team in the class, noting that the rest of the industry was playing it safe, charted a course for aggressive growth. "They were wildly successful," Norris says. While a typical successful team in other sessions of the program might double shareholder value during the simulation, this team increased shareholder value by six times. "Their sales and distribution network were so good that they could scale the business at rates that other teams, which were very asset-focused, could not do." It was a graphic demonstration of how the mindsets that managers bring to their strategic challenges limit their ability to see opportunities.

Many Degrees of Freedom

During the Executive Development Program simulation, teams of managers represent different companies in a consumer technology business. Similar to the cell phone industry, the teams represent both equipment manufacturers and service providers. Participants design their business strategy, pricing, and products for different global markets, and then adjust their decisions round by round over a five-year period. "They have a lot of freedom to design the business," Norris says.

The simulation provides participants with extensive consumer information for various markets, including information on early and late adopters. Managers design a portfolio of product offerings with the right features and pricing for different segments. They need to think about moving from new product launch to mature products, managing the portfolio from early adopters to mass markets, moving from a niche product to one that will appeal to millions of people.

Growth in Arid Regions

The teams need to develop strategies for four stylized global regions: Arid (developing region), Turbulent (a large region that is war-torn, with high geopolitical risk), Thriving (technologically hungry, growing economy), and Stable (safe but small). Faculty members play government leaders for each of these regions so the teams can interact with governments.

The teams have to think creatively in markets such as the developing Arid region, where there is limited infrastructure. Cell phones, for example, have been very successful in areas such as Indian and African nations, but companies had to rethink their business models to achieve success. "In some of these regions, companies look at them and say there is no infrastructure there — assuming the infrastructure is someone else's problem to deal with," Norris says. "You have to start from square one with a plan. It challenges them to rethink their business models."

One team, for example, proposed building schools in the Arid region. "The idea is that more education will increase the number of middle-class consumers. The plan is to create the customers," Norris says. "They come up with such obviously bright solutions to problems, that we don't know why people don't do this in real life."

The simulation creates a platform for business model innovation. "In the broad sense of innovation, what they experience in a very real way is that you can reinvent a business model around completely different rules," Norris says.

A Sandbox for Strategy

The simulation, which is an integral part of the Executive Development Program, allows managers to quickly create strategy and see the effect of strategic decisions. "It is a learning laboratory, where they can take the concepts from the classroom and apply them dynamically," Norris says.

It provides an integrated view of business decisions. "How do strategy and marketing work together and with folks in the supply chain? The dynamic complexity of the business is greater than people think," Norris says.

While a simulation may seem like an academic exercise, the creative leaps have real applications when participants return to work. In some simulations Norris has worked on, participants have used the knowledge to land a big contract or repurpose their technology for a new market. "We know it has a powerful effect," Norris says.

And while the actual business environment may be less benign than the one in the simulation, Norris says the overall message to managers still holds: "Teams do poorly when they tend to do the same things, the same way, all the time. They need to think differently."

• Executive Development Program
• Mergers and Acquisitions