So as you probably know, I've been in a business strategy competition this semester, managing a fictional business in a world with 3 domestic areas (Merica 1, 2, 3) and a foreign area (Pandau).
In the class, we ran the business for 3 simulated years of quarterly decisions, and in the intensive phase at the hotel we had to submit an annual report, make 2 years worth of quarterly decisions, and do a presentation to the 'board of directors' all in 2 days.
Needless to say, a busy semester.
Beyond the mechanics of the market that came from making the decisions, I learned two lessons from the simulation that have changed my outlook on tackling problems.
All models are useless
When I downloaded the year 3 quarter 4 reports packet for our business on March 1st, I was confronted with a stark question: what do we do next?
Up until that point our team had focused on getting a feel for the business environment, discovering how the pricing and marketing levers worked, submitting our individual decisions and hoping for the best.
It wasn’t working.
Our market share dropped to 16%. We had 200 units extra inventory. Our product was a flop. We couldn’t outprice the competition. I was stuck trying to divine some pattern in the data, looking for that last bit of information that would clarify what was happening in our business; what we needed to do.
As a math major, this technique had worked well in the platonic world of absolute truths, and even when I branched out into statistics, I could make sense of seemingly random information by unmasking trends amid the noise. My MBA classes reinforced this view, with cases that allowed us to take an impersonal, outsider’s view of the situation. It was easy to declare a strategy broken and suggest solutions that would require a radical shift in direction. We never had to make binding decisions that required us to live with and interpret the unclear responses.
Staring at the quarter 4 reports with concrete numbers in the past and an unwritten future ahead, I realized an implicit assumption underlying my work until this point: I was using static tools in a dynamic world, and our decisions had more sway on most immediate financial results for our firm.
Analysis could illuminate the external world, but it couldn’t make our decisions.
This both clarified our job in the competitive environment, and begged the need for a strategic framework to make decisions. Quantitative tools became a method for predicting factors none of us could control, like macroeconomic demand, so we could get a sense for what goals would be realistic, but our job as managers was to create a definition of success for our firm, and a path to get to that point.
This led us to shift our management philosophy. As CIO, I gathered information on relevant uncontrollable external factors, including estimating the production capacities of our competitors (exhibit 1), and forecasting the amount of industry sales in the upcoming quarters (exhibit 2). This information allowed us to set measurable targets with a clear sense of the actions to get there. For instance, later on, we could set a goal of achieving a 1.5% increase in market share, and with the forecast, would understand the required excess production, financing for overtime, and amount of marketing to increase demand. Our next product was a breakout success, and we had a clear picture on our external environment. We learned not to simply predict the future, but to make it.
Strategy is a Story
By year 6, our team had a good handle on the tactics needed to steer the business towards to the metrics we wanted to win. We had successfully accomplished 8 of our 9 GAR goals, and were in a dominant market position. However, the intensive phase threw the second question. It wasn’t the bank loans (that was an exercise in determination, see exhibit 3). On Thursday night, looking at our historical earnings compared to the competition, I kept asking why do our results look different? Our earnings over time (and related metrics) were a jagged line, but UCR and Idaho’s earnings were a straight linear trend. Even before we got our first bank loan, I sensed we were in serious trouble. Our tactics had given us predictable results on a two quarter horizon for the past 2 years, but the graphs hinted that we didn’t have a clear long term destination in sight. We knew how to move the business’s sails, but we were adrift at sea.
Throughout the semester, we had thrown around the best provider strategy without a concrete definition on what the business would ultimately look like with it. We kept our options open with an organic growth strategy without being committed (or aligned) to any particular vision of the future operations. We let our uncertainty about the future run rampant. We were a story without a plot. In the last three quarters of the simulation, we formulated a vision for what best provider meant to us: strong manufacturing presence in each marketing area with the goal of winning market share from our competitors through an extensive investment in training and lowering the price as our COGS decreased. We finished the competition with a market leading 24.6% market share and a clear path for the next few years. UCR, Idaho, and San Bernardino won the prizes, but we also won an insight into strategy.
On the qualitative side, we decided we were selling pens, but the market growth was 30% per year (so high tech pens...). Our team's strategy was best provider (best quality product at the lowest possible price), and up until we got to the hotel, we'd been doing pretty well (good enough for other teams to single us out in their annual reports =D).
Then our first decision's results came back. Bankruptcy. I didn't anticipate our competitor moving into our crowded market and taking sales, and our team underestimated the cost of expansion (we had ramped up construction on our manufacturing to prepare for whatever the intensive phase could throw at us).
Technically this is called an emergency bank loan, and in this year's simulation, the market was especially volatile. 3 other teams had gone bankrupt before, but bankruptcy traditionally is a kiss of death in the intensive phase. We were out of the competition, but we decided that we'd continue on. So we continued with our strategy.
Second decision's results. Second bankruptcy. We received an email 10 minutes later from the competition administrator. In this quarter, a massive earthquake rocked merica from coast to coast, kicking out production in every merican area for the entire quarter. We only had a 20% safety stock, and without the sales, our production costs made us bankrupt. Shit.
At that point our room became a flurry of swearing and incredulousness at the whole situation. The other teams had exclusively ramped up production in Pandau (foreign market that was cheaper but supposedly riskier), and they were seemingly rewarded for recklessness with their supply chain. We diversified our production (and kept jobs domestic) only to suffer dramatically. Nobody in our market suffered except for us. "what is the lesson to this!?" we shouted to our advisor. He was baffled too. Our market share dropped from 20% to 14%. Now there was no way we'd even place. We were in last place.
We purposely let ourselves vent (admitting we'd have to come to terms with this, but to get all the frustration out in the open). Then we buckled down. We started considering what people would do in the real world, and decided to sell our newly constructed plant in Merica 2 because we needed the cash, and at 14% market share, we didn't need the plant. We set a new game plan, aiming for 16-18-20% market share in the next few quarters. With only 6 quarters left, we needed to push hard.
The CEO, CFO, COO and I took a walk to get some fresh air, and while we were out, the board of directors made an informal (but scheduled) visit. They were livid we weren't in the room. When we returned, we laid out our cards, said we were frustrated with the sheer impossibility of this event ("we planned for continued operations when losing 2 plants due to a natural disaster, but 75% of our world losing complete production? That's what we'd buy insurance for"). They were understanding, but we were pretty much toast at that point. We promised we'd bounce back and push harder than ever, but the situation was hopeless. at 14% market share (the closest loser had 18%), there was no time to turn this around.
We continued our production strategy, using overtime in anticipation of our capacity being lowered due to the earthquake. Demand in the market also started cooling moderately (which we had anticipated with the market expanding 20% over the gdp).
Then quarter 3 results came in. Companies 2 and 4 (who had escaped the damage from the earthquake) both went bankrupt. We immediately checked for an email about a tsunami or some other disaster. Nothing. This was their own doing. At this point we shouted for joy before we even looked at our market share, we went to 18%.
The board meeting was uneventful (staying up until 2:30am working on it).
The next 3 quarters we pressed forward. We continued gaining market share. Companies 3 and 4 got another bankruptcy.
At the last quarter, we ended with 24.6% market share (the market leader). We haven't gotten the results yet. Qualitatively we didn't do wonderfully on the reports or the presentation, so I don't know if we'll place, but it's surely been a rollercoaster.
I've taken two lessons from this experience. The first is that strategy is essentially a story. Mission, vision, and objectives can help clarify elements into a standardized format, but an overarching narrative with a clear vision (or at least a guess) of the conclusion is necessary to keep from floating around aimlessly. The next is that analysis is most useful for elements that you can’t change, like the past, or uncontrollable factors. It can help illuminate the area around you, but the path forward is in your control--don’t just be a character in someone else’s story.
numbers=['-','1','2','3','4','5','6','7','8','9','0'] file1='./Y3Q2.txt' file2='./Y3Q3.txt' file3='out.txt' number_switch=0 text="" whitespace=" " with open(file1,'r') as f1: f1_lines=f1.readlines() with open(file2,'r') as f2: f2_lines=f2.readlines() with open(file3,'w') as f3: for line_number,line_content in enumerate(f1_lines): f1_text = f1_lines[line_number] f2_text = f2_lines[line_number] if f1_lines[line_number] == f2_lines[line_number]: text=text+f1_text else: for num,char in enumerate(line_content): if (char in numbers) and number_switch==0 and f1_text[num-1] == ' ' and f1_text[num-2]!='&': number_switch=1 start=num elif char==' ' and number_switch==1: number_switch=0 f2num=f2_text[start:num] f1num=f1_text[start:num] if '.' in f2num: diff=float(f2num) - float(f1num) diffstring = str(diff) else: diff=int(f2num)-int(f1num) diffstring=str(diff) pad_length=len(f2num) - len(diffstring) if pad_length<0: diffstring = diffstring[:pad_length] pad_length=0 text=text+pad_length*" "+diffstring elif number_switch==0: text=text+char elif (not (char=="." or char in numbers)) and number_switch==1: text=text+f2_text[start:num-1]+"*" number_switch=0 text=text+"\r\n" f3.write(text)
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