BUSINESS SIMULATION

The mind-set and various processes required to successfully simulate your Business.

Danish Khidir

Business Simulation

Index

Sr. No Topic 1 Introduction 2 Lessons in Innovation Innovate from the Past Design Thinking Key to Transformations Porters Five Forces Blue Ocean Strategy Focus Strategy 3 Business Models 4 Change & Innovation Getting it Right!! Innovation Diffusion Theory AIDA Model Kotters 8 step process for Change Management Psychology of Influence Power 5 Decision Making Bias 6 Conclusion

Pg. No 2 3 3 4 6 7 8 8 9 11 11 12 13 13 14 15 15 16

Danish Khidir | PGDM Business Design

Business Simulation

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 learnings 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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Business Simulation

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. Retail Social Media Mobile Phones Cloud Big Data Analytics Verticals Ratings Banking Capital Markets

Trends

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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Business Simulation

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

Divergence

Convergence

Analysis 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.

Feature Innovation

People

Emotional Innovation

Technology

Business

Experience Innovation

Process Innovation
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.
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Business Simulation

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 Reseach on the problem. check for solutions from other domains which are applicable here. Ideate to make the solution viable for you sector and select improvements which can be made. Also make multiple solutions for the problem. Build a small scale set-up to test feasibility and viability of your solution. Choose the best solution out of the possible ones. Implement the solution which was selected. Imrove the solution by finding out gaps within.
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Research

Ideate

Prototype

Choose

Implement

Learn

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Business Simulation

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 peoples work.

Porters 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 Porters five forces are studied before the solution is devised and the solutions effect on the power within the industry.

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Business Simulation

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 unconscious 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 Simulation

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 managements 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 couldnt compete with Wal-Marts 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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Business Simulation

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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Business Simulation

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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Business Simulation

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 audiences 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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Business Simulation

Kotters 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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Business Simulation

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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Business Simulation

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.

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