ISMT 200g (Feb 8, 2007 Lecture): Using Simulations in Business Dr. Theodore H. K. Clark Associate Professor and Academic Director of MSc in IS Management The Hong Kong University of Science & Technology and Adjunct Associate Professor of Operations & Information Management (Information Economics and Strategy Group) 1998 – 2001 The Wharton School of the University of Pennsylvania and Baker Scholar with Highest Honors, MBA program and Doctorate in Business Harvard Graduate School of Business

HKUST Business School 2 Using Simulations in Business Simulations are used in Multiple Ways in Business Today Financial Analysis (modeling & “what if” scenarios) Marketing Analysis (pricing vs market share) Product Design (cheaper than prototype) Engineering Analysis (evaluating hard to test factors) Production Scheduling and Tradeoffs (optimize) Training of Employees (management and production) Crisis Management (nuclear plant meltdown)

HKUST Business School 3 Financial Analysis Simulations Managerial Accounting Increasingly Needed Most accounting is FINANCIAL accounting Management Accounting uses data for improving management decisions in the business Real time data provides tools for improved decisions Developing ability to make decisions real-time Making choices and tradeoffs using real time data not a skill that managers automatically have or understand Simulations of this type challenging to design

HKUST Business School 4 Financial Modeling and Scenarios Bankers or investors often want to understand potential risks and returns from financing Consultants may be hired to do financial models to “simulate” future returns, including risks Highly complex financial models are a form of business simulation, with scenarios These models may be used to make decisions about optimization and planning as well as for financial projections and scenarios

HKUST Business School 5 Marketing Analysis Quantitative data from market research on customer preferences can be used to develop marketing tradeoff models Product feature tradeoffs and market preferences Price versus features market share analysis Profitability analysis by customer and segment Activity based costing and profitability based pricing Product design optimization for feature tradeoffs Revenue optimization and load management pricing

HKUST Business School 6 Engineering and Product Design Computer Aided Design Once high cost software, but now commonly available Improves productivity and reduces design cost Faster changes and customization of designs Computer Aided Analysis Finite Element Analysis of Engineering Designs Testing products and designs before prototyping Simulation Modeling (e.g., noise in circuits, etc)

HKUST Business School 7 Scheduling and Planning Hotel and Airline load management systems How much overbooking is optimal given criteria Retail store inventory planning and ordering Avoiding stockouts and markdowns Employee shift and workforce scheduling Limited staff, with sick days and days off E.g., airline crew scheduling – optimization Like production planning in CapSim

HKUST Business School 8 Training of Employees Management training in financial analysis, marketing, scheduling, planning, and product design (CapSim integrates all of these) Marketing training in product design, analysis, and pricing Training in Finance Negotiations Training (simulations) Used in business in 1957! Top Management Decision Simulation

HKUST Business School 9 Examples of Firms Using Simulation Shell Oil (petrochemicals) Exploration for Oil Simulations New Marketing Initiatives Analysis Scenario Planning (macro-economic analysis) Insight (computer reseller) People-Management Issues (HRM) Michelin (tire company) Income-Outcome game (finance)

HKUST Business School 10 Firms Using Simulation (continued) Sterling Health (drug company) Simulated drug testing and design Product marketing and advertising design Top Business Schools (Harvard, Wharton, etc) Team based competition Hands-On management skills training Management Training Firms (e.g. CapSim) Ninth House (gold mine management) Many more firms and products available

HKUST Business School 11 Training Using Simulations Not only for Management Training Especially useful where cost of failure is high Military training Airline pilots Nuclear power plant crisis management Police hostage recovery Gun Marksmanship Training Driving of Cars and Trucks Medical and Emergency Care (e.g., CPR)

HKUST Business School 12 Simulations: Some Final Thoughts Simulations are essentially a way of helping people develop skills and knowledge quickly and at lower cost or lower risk Simulations can help employees and management change perspectives and gain new insights and understanding by changing roles The best business simulations are versatile and customizable for specific firm and function needs Downside of strategic simulation is it takes TIME