By Gerhard Diedericks
Simulations and business modeling are fast becoming one of the hottest management tools in use today. Managers use simulations to test-drive new processes before they are implemented, identify the most impactful drivers of profitability, or to assess new go-to-market strategies and likely competitor responses. There is a wide range of possible applications for well-built simulations.
But why? What makes business simulations such a compelling tool for management?
Some lessons just aren’t worth learning in real life because there is no recovery from them. If your process delivers the wrong results, or your company loses a few million dollars, or the market annihilates your new product strategy, in essence you have lost nothing in a simulated environment. However, you've gained a great deal of ‘instant experience’ about the execution challenges you may face. The cost of learning essentially reduces to zero.
Real life doesn’t have a reset or ‘start over’ button which means real life experience offers just one learning path. In a simulated environment, we can reset, and within exactly the same simulated environment, try a new strategy or approach. Because the cost of learning is zero, we are free to try as many different approaches as time allows. Real life offers one learning path and it rewards the low risk incremental approach, thus shutting down many other potentially superior courses of action. Simulation offers unlimited learning paths unbounded by the risk of failure (cost of learning).
Simulations allow us to manipulate time. In real life, time ticks over at a predetermined rate. Managers often make decisions where the results will only become visible months or even years down the line. Not only does this make the acquisition of experience a very slow process, but given the time that has elapsed, the cause and effect between the decisions made long ago and the results achieved become muddled. Simulations allow for time to be accelerated, thus creating immediacy between decision and result.
We can also slow-down time. Often it is necessary to sit back and really think deeply about the situation, decisions and results. Real life, as many time-starved executives will tell you, does not offer that luxury because time advances regardless of our needs. In a simulation, we stop or slow down time to allow for results and outcomes to be digested properly, thereby enhancing the learning process.
Simulation allows us to reduce the level of complexity and noise to an optimal point. In the real business environment, we are constantly dealing with dynamically complex systems and irrelevant distractions (noise) which muddle the cause and effect relationships. Learning becomes difficult. By focusing simulation modeling efforts on only what is useful and relevant, we are able to generate a more complete understanding of the environment we operate in.
Explore the impossible or improbable – it is virtually impossible for someone to make a list of the unforeseen things that will happen and even more difficult to make a list of the undiscovered solutions available. Simulations, when well-built, often deliver the unforeseen and undiscovered, because we have many more iterations available at a much lower cost of learning.
Improve intuition – we learn from our own experiences (the best type of learning) or from the experiences of others through books, presentations, war stories, etc (the most ineffective type of learning). Simulation allows us to turn the experience of others into personal experience for ourselves. And personal experience is what feeds intuition. It makes knowledge visceral and highly actionable.
There is an art to building effective simulations. The skillful craftsman has a finely developed feel for how to model in such a way that simulation rapidly accelerates the acquisition of quality experience.
To learn more about the effectiveness of business simulations, please read the latest white paper: Navigating Strategy Execution: The Case for Custom Business Simulations. About the Author:
Gerhard Diedericks is Vice President, BTS Australia.