Business Simulation Writeup

BUSINESS SIMULATION

The mind-set and various processes required to successfully simulate

your Business.

Danish Khidir

Business Simulation

Danish Khidir PGDM –Business Design |

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Index

Sr. No Topic Pg. No

1 Introduction 2

2 Lessons in Innovation 3

Innovate from the Past 3

Design Thinking 4

Key to Transformations 6

Porter’s Five Forces 7

Blue Ocean Strategy 8

Focus Strategy 8

3 Business Models 9

4 Change & Innovation – Getting it Right!! 11

Innovation Diffusion Theory 11

AIDA Model 12

Kotter’s 8 step process for Change Management 13

Psychology of Influence 13

Power 14

5 Decision Making 15

Bias 15

6 Conclusion 16

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Introduction

This paper is a formal report on the Business Simulation Workshop held at Welingkar

Institute of Management. We were thought the various intricacies of designing a Business

Model. This includes the adaptation of Innovation into various Business Models and some

special learning’s from the past which are applicable even today. Moreover various ways of

transforming an existing business model into a better one. The workshop also focussed on

various tools which will help us manage change and innovation even better. Various

examples were quoted saying “It is not necessary to be big organization, to earn big”.

Design thinking concepts were re-iterated with examples from our daily lives making their

importance even more critical. Various theories & models were also discussed along with

their applications in order to provide us the skill to apply them.

There was a perfect balance of application and theoretical concepts. The applications

of these concepts were majorly through simulation in a virtual environment. Simulation

performed helped us identify important flaws which are required to be addressed so as our

applications in the real world are not hampered.

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Lessons in Innovation

Innovate from the Past:

There was immense focus on innovations which have their roots in the past. Also

several trends have shown that majority of the innovations happening today have been

adopted from history. In 1899, Thomas Edison had created a company for selling generators.

Electricity was then used only in the form of direct current. At that time a sufficient amount

of capital must be invested in the generators which were used to produce electricity. Later,

Samuel Anson devised the alternating current which can be transferred over long distances.

After that the focus of electric companies shifted from selling generators to selling electricity

as a service itself. Hence there has always been an Innovation of converting a product

(Capital Expenditure) into a service (utilities). Similarly in the period of the IT boom Bill

Gates developed Windows which focussed on the distribution & use of Windows which can

be said to be an intellectual property. Later the Google boys made computing a utility through

the use of Google Software as a service.

Through the above examples it can be made clear that historical trends like these tend to

repeat. To identify these trends a matrix structure is utilized.

Verticals

Retail Ratings Banking Capital

Markets

Trends

Social Media

Mobile Phones

Cloud

Big Data

Analytics

Through the above matrix trends in the current world are identified along with the

verticals which you are ready to focus on. Then the products in the verticals are identified and

methods are used using the current trends to develop a solution which helps to convert that

product into a service (utility).

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Design Thinking:

Design Thinking is defined as a creative process that is used to create various options

for a solution. Then the best option is picked as a solution.

Synthesis is the solution when it is adopted from other domains and applied to

existing problems. Analysis is when the solution is derived by drilling down data from within

to create a solution. The major disadvantage of using analysis is that the solution derived may

not be the most viable one since all the options are not covered.

Design thinking contains of 3 major aspects.

People – looks into the desirability of the product.

Technology – looks into the feasibility of the product.

Business – looks into the viability of the product.

Convergence Divergence

Analysis

Synthesis

Business

People

Technology

Emotional Innovation

Experience Innovation

Feature Innovation

Process Innovation

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Most innovations are done combining the minimum two of the domains.

People and Technology when combined leads to Feature Innovation. Blackberry push

mail service and blackberry messenger are examples of feature Innovation. Features of the

product are developed to attract customers. The major disadvantage of this is that the

competitor can easily develop better features to push your product out of the market.

Business and Technology when merged together creates Process Innovation. This

leads to development of a superior process compared to the industry standards. The example

for it will be that of Wal-Mart which has built a great supplier chain process giving it a huge

cost advantage over its competitors.

People and Business when combined to build a product is called Emotional

Innovation. Here the emotional value of the product is improved so as to create a value for

the product. Harley Davidson created emotional value for the product by allowing people to

customize their own bikes leading to better revenues.

Last but not the least, all the 3 aspects of design thinking can be used to create a

product. In this case, the product is not the only thing which is created, a whole ecosystem

around the product is created so as to create an experience for the user. The best example for

this would be Apple which has created a whole ecosystem around its products due to i-tunes,

design and superior features etc.

The design thinking process consists of the following steps:

Define • Define the problem and remove biases if any

Research

• Reseach on the problem. check for solutions from other domains which are applicable here.

Ideate

• Ideate to make the solution viable for you sector and select improvements which can be made. Also make multiple solutions for the problem.

Prototype • Build a small scale set-up to test feasibility and viability of your solution.

Choose • Choose the best solution out of the possible ones.

Implement • Implement the solution which was selected.

Learn • Imrove the solution by finding out gaps within.

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Key to Transformations:

A business model has three components which an important for making a business

model viable.

Value Creation

Capture Value (Profit & Sustainability)

Deliver Value (Reach)

If these basic factors are achieved the business model is said to be an implementable.

However a business model can be transformed to suit the needs of the people through various

different methods. They are namely through redesign of:

Value Chain: Studying the firm and industry value chain to develop a new value for

customer.

Business Model: Developing a new business model to suit the industry.

Business Process: Developing more efficient or new business processes either to

reduce cost or to add value to the product.

Economics: Changing the economics aspect of the product itself. For example the

production curve (Average Cost v/s Volume) of physical goods is a U curve. While

that of digital good is an exponentially declining curve.

Organization: Changes within the organization so as to create better product delivery

to the customer in terms of quality and cost.

The major factor which is important for getting Change/ Innovation is to define the

problem correctly. Without the problem correctly defined the solution suffers from ambiguity

and also other biases.

The second factor which is critical is that of strategy and implementation. There

should be minimal or zero mismatches between strategy and its implementation. Efforts

should be taken to remove any differences between them.

The important factor lies in creating a system which is a legacy in itself. The solution

should be everlasting i.e. it should be able to react to different situations in the industry or the

market to redefine itself with ease. Hence Agility of the system is always given paramount

importance.

In-case of online transformations, there are basic 3 methods of transformations:

Classic De-Intermediation: Here through the use of online portals an intermediary is

eliminated to add value to the user. Dell used a similar strategy to eliminate distributors

through accepting orders online and also offering customization options to users.

Re-Mediation: Here an intermediary is added to the system which brings in ease of use and

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other facilities. Redbus.com uses an online portal for booking travel tickets online through

aggregation of all travel booking agents. Allows people to choose the time and bus of their

choice.

Network based Mediation: here a whole network acts a mediator. Wikipedia is a classic

example for network based mediation which allows people to submit their work or edit other

people’s work.

Porter’s Five Forces:

This model is normally used for judging the attractiveness of an Industry. But an

innovative application of this theory is to check the effectiveness of the solution. The

Porter’s five forces are studied before the solution is devised and the solution’s effect on the

power within the industry.

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Blue Ocean Strategy:

This type of strategy is to create new markets for a product by adapting the product by

focusing in different cluster of customers. The trick lies in focusing on conscious and un-

conscious non-customers.

The example which fits the theory the best is that of Cirque du Soleil. The normal

circus focuses on kids as their customers. Moreover, the parents are the one who are dragged

into the show as well even though they do not like the show at all. Animal rights activists do

not go to the shows since they are against mistreatment of animals. Cirque du Soleil focused

on these conscious & non-conscious non-customers creating a new market for them. They

built a model with artists performing to opera music, drama performances and dance

sequences. They created a perfect mix of circus arts and street entertainment. This was done

also without animals to bring in people who dislike mistreatment of animals. Now, Cirque du

Soleil is regarded as one of the best entertainment shows in the world.

Focus Strategy:

The key to any success story is to focus on the final goal. The example of milk

sourcing by Amul was given to explain this concept. “Think about the milk, not about the

Cow”. Similar examples of Wikipedia were given which used crowd sourcing to acquire the

information required for its website. Also an example of ‘Plenty of Fish’ was given which

was single headedly run by its owner and had around 20,000 new visitors every year and an

annual revenue of $5million.

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Business Models

A Business Model describes the rationale of how an organization creates, delivers and

captures value.

Whenever a business is established, it either explicitly or implicitly employs a

particular business model that describes the architecture of the value creation, delivery, and

capture mechanisms employed by the business enterprise. The essence of a business model is

that it defines the manner by which the business enterprise delivers value to customers,

entices customers to pay for value, and converts those payments to profit: it thus reflects

management’s hypothesis about what customers want, how they want it, and how an

enterprise can organize to best meet those needs, get paid for doing so, and make a profit.

Business models are used to describe and classify businesses, but they are also used by

managers inside companies to explore possibilities for future development. Also, well known

business models operate as recipes for creative managers.

The business model structure we were taught consists of major 9 components:

Core Capabilities (Key Activities).

Partner Companies.

Value Configuration (Key Resources).

Cost Structure.

Value Proposition.

Customer Relationship.

Distribution Channel

Target Customer.

Revenue Stream.

Most companies focus on a single factor which is called the Epicentre. The example

for this is Wal-Mart which focuses on the cost structure to deliver value to the customers. The

key lies in studying the business model of the competitor and then creating a business model

which either differentiates with the competitor or emulates the competitor. Target studied

Wal-Mart business model and identified that they couldn’t compete with Wal-Mart’s low cost

strategy hence they decided to focus more on the consumer relationship as a model.

One exercise was performed by students on developing a business model of various

businesses given by the instructor. The topic provided to us was that of an Education

management game development company. Our motive was to study the existing market

structure and develop a business model which focuses on a key factor/component of a

business model development.

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The above model was developed by our team to showcase the business model for the topic

provided.

Besides these there are models which are for web based businesses. They include:

Brokerage: Customers are charged as percentage of the deals done. E.g. Sharekhan.com.

Advertising: the revenue is generated by charging advertisers on the basis of advertisements

done.

Info-mediatory: This model collects data and then generates revenue by selling it.

Merchant: this model is for intermediaries who act as touch points between buyer and seller.

e.g. Flipkart.

Manufacturer: this model is used by manufacturers to sell their goods online. E.g. Dell

Affiliate: the model is suitable for banner exchange companies. E.g. Pay per click.

Community: The model generates revenue by asking for donations from their community.

Subscription: the model generates revenue by charging for right to use for a specific period.

E.g. Financial Times.

Utility: The revenue generated here is by charging as per usage by the customer.

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Change & Innovation – Getting it Right!!

Every idea remains an idea until it is implemented. The implementation should be

proper for idea to be successful. For implementing change, the opposing forces must be

overcome so as bring about the change required.

In the course of this workshop, we were made to simulate a situation in which we

were given an organizational structure. In this case, we have come up with an idea and now

we want it to get it implemented. For this we must convince the whole organizational

structure about the benefits of the idea by performing various actions given in the simulation

itself. The various theories mentioned below explained where we lacked in the exercise itself.

Innovation Diffusion Theory:

The theory defines the various categories in which people lie and their risk taking

ability when adopting different products or technologies. Innovators are risk seeking and tend

to adopt new technologies with ease. Early adopters are risk takers who adopt new product by

trying them out or after seeking reviews from the innovators. This whole process is again

followed for early majority, late majority and then lastly the laggards.

The problem we faced is that we tried to convince all the people within the

organization at once. The key lies in convincing the innovators first since they are the easiest

to convince and also the most risk taking out of the whole lot. These then can be used as a

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reference to convince other factions which includes early adopters, early majorities etc. The

more convinced people, the easier it is to convince people of the other factions.

AIDA Model:

AIDA is a model which is used for advertising a product or services. It is also

applicable communicating ideas as well. It describes a common list of events that may occur

when a consumer engages with an advertisement.

A - Attention (Awareness): attract the attention of the target audience.

I - Interest: raise the target audience’s interest by focusing on and demonstrating advantages

and benefits

D - Desire: convince the target audience that they want and desire the product or service and

that it will satisfy their needs.

A - Action: lead the target audience towards taking action.

The problem faced by students during this exercise was that the events done during

the simulation were not giving proper results as per expectations. The critical factor here was

that actions were required to match the mental state of the recipient. There were certain

events which were suitable for people in the attention category while others suited the ones in

the desire category. The key was to identify which action matched the required mental

category and perform it on the recipient with the same mental category.

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Kotter’s 8 Step Process for Change Management:

John Kotter. A professor at Harvard Business School and world-renowned change

expert, Kotter introduced his eight-step change process in his book, "Leading Change."

Create Urgency: For change to happen, develop a sense of urgency around the need

for change. This may help spark the initial motivation to get things moving.

Form a Powerful Coalition: Convince people that change is necessary. This often

takes strong leadership and visible support from key people within your organization.

Create a Vision for Change: When first thinking about change, there will probably

be many great ideas and solutions floating around. Link these concepts to an overall

vision that people can grasp easily and remember.

Communicate the Vision: Communicate the vision frequently and powerfully, and

embed it within everything.

Remove Obstacles: There might be few people resisting the change process it is

necessary to convince them about the change.

Create Short-term Wins: Nothing motivates more than success. It is necessary to

generate few successes within a short frame of time so as to communicate to the

critics about the calibre of the change.

Build on the Change: Change projects fail because victory is declared too early.

Quick wins are only the beginning of what needs to be done to achieve long-term

change.

Anchor the Changes in Corporate Culture: To make any change stick, it should

become part of the core of your organization.

Psychology of Influence:

This theory was devised by Robert Cialdini stating the various ways to influence

people. He stated 6 points in his theory which tend to influence people.

Reciprocity - People tend to return a favour.

Commitment and Consistency - If people commit, orally or in writing, to an idea or

goal, they are more likely to honour that commitment because of establishing that idea

or goal as being congruent with their self-image. Even if the original incentive or

motivation is removed after they have already agreed, they will continue to honour the

agreement

Social Proof - People will do things that they see other people are doing

Authority - People will tend to obey authority figures, even if they are asked to

perform objectionable acts.

Liking - People are easily persuaded by other people that they like.

Scarcity - Perceived scarcity will generate demand.

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Power:

Power is frequently defined as the ability to influence the behaviour of people with or

without resistance. The term authority is often used for power perceived as legitimate by the

social structure.

There are basic 5 major types of power:

Positional Power: It is the power of an individual because of the relative position and

duties of the holder of the position within an organization.

Coercive Power: Coercive power is the application of negative influences. It includes

the ability to demote or to withhold other rewards. The desire for valued rewards or

the fear of having them withheld that ensures the obedience of those under power.

Reward Power: Reward power depends on the ability of the power wielder to confer

valued material rewards; it refers to the degree to which the individual can give others

a reward of some kind such as benefits, time off, desired gifts, promotions or

increases in pay or responsibility.

Expert Power: Expert power is an individual's power deriving from the skills or

expertise of the person and the organization's needs for those skills and expertise.

Referent Power: Referent power is the power or ability of individuals to attract

others and build loyalty. It's based on the charisma and interpersonal skills of the

power holder.

The simulation also took into account various types of powers. Hence the application

of these powers within the simulation generated better results if applied correctly.

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Decision Making

Decision making can be regarded as the mental processes resulting in the selection of

a course of action among several alternative scenarios. Every decision making process

produces a final choice. The output can be an action or an opinion of choice.

To learn decision making the best way is to learn hands on. We played a simulation

game where we had to run a company producing a variety of watches and produce them

depending on the forecast and also looking into financial, marketing and human resource

aspects of the company. The only motive of the company was to generate the maximum

profit. The game was a success for us since we managed to achieve a considerable amount of

profit. But there were still some flaws which were to be addressed. The major flaw was that

of biases which are required to be removed for proper decision making.

Bias:

Bias is an inclination of outlook to present or hold a partial perspective at the expense

of possibly equally valid alternatives. Anything biased generally is one-sided and therefore

lacks a neutral point of view.

The types of biases include:

Loss-Gain Framing: people tend to be risk averse when making gains and more risk taking

when making losses. This creates a mismatch in the strategies since they are not fully

speculative or are fully risk averse.

Availability Bias: Due to this bias people tend to overweigh the factors which are available

and under the factors which are unavailable.

Representative Bias: Also known as stereotyping. It is when people tend to put several

factors in certain per allotted baskets without proper analysis.

Confirmation Bias: Known knowledge creates a bias. This normally happens when people

try to fit a data into a theory they want to apply.

Over- Confidence Bias: The difference in confidence and accuracy levels causes this bias.

Group-Think: this normally happens in a brain-storming or a group discussion scenario

when an individual dominates the proceedings. This tends for the group to be aligned towards

one idea even though there may be several objections within. Also, diverse ideas may not be

generated through such groups.

Cognitive Dissonance: this bias makes people stay consistent to reality. They tend to stay

away from event or build a set-up within their minds to avoid any discomfort. These biases

causes’ people to take decisions which are tend to cause any discomfort to them.

Hence while making decisions or framing a problem it is a must to check and remove biases.

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Conclusion

The business simulation workshop conducted was a total success for every student.

The amount of learning & application for the students was immense. We not only learned

many new concepts regarding designing of the business but also learned several new

applications of certain theories in the domain of design. The use of AIDA model for

convincing a recipient of an idea was the best of the lot. The old concepts of design were also

refurbished through this workshop. The simulation games played made us aware of the

various errors which are committed and the biases which cause them. The main focus of such

games was to make mistakes in the virtual world instead of committing them in the real world

where the after effects can be drastic.

Overall the workshop was a total enthralling experience, in terms of both learning as

well as application.

Business Simulation Writeup

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