global strategy: making it happen through simulation

W c e Automation

Global Strategy: Making It Happen Through Simulation

Mary McBride and Mike Uretsky

Mary McBride ir mociate director of the Manage- ment Dectjion Laboratmy at Nm Ywk Univem.9. Mike Ureisky ir directw of theManagement Decision Laboratory and president of Business Simulationr, ITU.

A growing trade deficit, declining domestic markets, and fierce competition from abroad have made going global a strategic necessity for many U.S. companies. In 1987, U.S. export volume rose five times faster than any other part of the U.S. economy, gen- erating one out of every sixteen jobs. But the United States has not begun to address the increasing need to develop export capability. Approximately 80 percent of the U.S. export effort comes from a mere 250 out of a possible 300,000 business organizations.

Global capability needs to be developed by large, midsize and small fms seeking competitive advantages and new market opportunities. True capability, however, comes only through solid experience. Unfortunately, although experience may be the best teacher, gaining it on the job can be both costly and risky. Providing competency-building experience in a cost-effective manner is, thus, a challenge to both business schools and company training directors. Moreover, this challenge only increases as organizational budgets become more constrained and the need for overseas expansion becomes more imperative.

GLOBAL CAPABILITY: MAKING THE TRANSITION THROUGH SIMULATION-BASED " I N G

The effectiveness of a global strategy will depend on employees' ability to

apply skills in a new situation. To this end, simulation is an excellent tool. The benefits of using simulation include

1. Guaraanteed completeness of experience. On-the-job training only provides experience with those events that happen to take place. Managers operating overseas typically assume broader responsibility than their domestic coun- terparts, and, therefore, require additional training. Simulators provide experience managing crises-emergencies that may take place.

2. norough documentacfon. Simu- lators provide certifiable experience. All participant actions are carefully and con- sistently monitored, with records show- ing that proficiency has been obtained in critical areas.

3. Low cost. Simulation can be less expensive than reality! While a well- designed simulation is costly, it is frequently less expensive than day-today operation. It is always less expensive than the cost of mistakes.

The cost of not developing global managers adequately can be far more costly than the cost of training. U.S. firms may experience premature return rates of between 45 and 85 percent of their American staff placed overseas. Because it costs about $400,000 to re- cruit and relocate employees for inter-

National Prok ivdy Review/S'*ng 1991 245

M a y McB& and Mike Uretsky ~~ ~~ ~ ~ ~~

246 National Productivity Revim/Spring 1991

national assignments, this return rate can quickly affect the cost effectiveness of any global strategy.

The cost of “flying blind“ in global markets can quickly deplete company resources and weaken managerial re- solve. A few simulated test runs can save a lot of organizations and projects from crashing and burning. Simulation- based training makes it possible to ground learning experience and to test- pilot new approaches in an operating environment simulating those conditions that will affect strategy implementation. It can, therefore, recreate the strategic context in which global managers will operate.

By simulating these contexts, new ideas can be test-piloted through risks of changing market conditions and resource constraints. Managerial commitment can then be built and tested against an experienced course of action. Refinements to strategy can be made before resources are allocated, possibilities can be explored opera- tionally, and specific action plans can be evaluated. Simulation-based training builds competency, because it fos- ters both trial-and-error and guided self-correction. It builds commitment because it allows global strategy to be tested against the reality of organizational culture and its constraints. More- over, it provides a managerial laboratory for identifying current practices that might subvert the success of a global mission.

SIMULATING ORGANIZATIONAL (=uLTuRE: GRAFTING GLOBAL STRATEGY

Experienced global managers know that competition is not the only threat to global strategy. A global strategy requires internal company practices that

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can provide strong backing. In short, it requires a supportive culture. Unfortu- nately, even when organizations face the necessity of competing effectively in global markets, they are often reluctant or unable to manage the influence of their own home country culture on their international efforts.

Managerial culture aligns managerial action and sets goals, while keeping risk-taking within acceptable limits and providing a style for carrying out operations. It focuses staff on actions that have traditionally been rewarded.

A necessary first step in effectively going global is to review the culture- bound practices of the domestic “mother ship.” This information provides a base upon which further strategies and operations must be built. A well-designed simulation can help identlfy and high- light cultural assumptions.

Simulations capture current organizational practices. They reveal managers’ cognitive maps, their “theories in use” and the impact of these items on effective organizational action. Simula- tions can, thus, be used to document and “debrief” current practices. Hierar- chical relationships, cross-functional communication patterns, and decision- making styles can be re-examined for their usefulness as the business ex- pands internationally. In addition, simulations can recreate organizational reality. They thus create a “transitional space” where managers can become more aware of their own culturally programmed actions. Simulations mir- ror those organizational practices that must be reinforced and those that must be changed to support a global strategy. In this sense, they allow organizations to begin to test-graft global strategy onto currently existing structures and practices.

Gibbal Strategy: &king it H a w T h g b Simulation

THE CURRENT SIMULATION EFFORT

The use of management simulation can be illustrated by briefly examining two innovative programs and one that is currently being completed. These programs are important because they integrate the skill development benefits of a computer simulation with the possibility of a cultural "debriefmg." The unique combination of simulation and experienced executives within the simulated environment provides a basis for identifying and highlighting the cultural dimension of business activities. Thus, they provide the opportunity to test-pilot strategy in an operating context and to change the context to reflect a variety of market conditions.

The Management Decision Labora- tory (MDL) at New York University's Stem School of Business is a large-scale business simulation. In a sense, it is the business equivalent of an aircraft simulator. Second-year MBA studen- some employed full-time, some already managers, but all with at least three years of experience-participate in the program. They are divided into teams, each representing a separate, simulated company operating in a competitive environment. Company management has the responsibility for making decisions necessary to assure satisfactory corporate performance. The MDL dif- fers from more traditional computer exercises in several important respects:

1. The simulated companies are very realistic. Each company has a history (described in a case), corporate documents, financial and operating records, an existing business plan, and agreed-upon managerial objectives. This is in contrast to more typical business games, in which each team starts de

novo, and has unconstrained freedom of action.

2. The entire simulation is scenario- driven. Administrators determine the training objectives to be achieved. They then create a scenario of events, making sure that the participants are exposed to events and situations that will challenge their ability to accomplish these objec- tiVeS.

3. All the simulated companies have extensive involvement with the business community. Each management team has a board of directors, comprising leading members of the New York-area business community. These people hnction in exactly the same manner as a real corporate board. They meet with management to deal with policy issues and to oversee corporate stewardship. Major business activities, such as corporate financing and labor relations, are handled through similar involvement with area banks, inves- tors, unions, etc.

4. Company management is not tied to computer limitations. They can negotiate business relationships with each other and then find ways to implement the resulting agreements within the simulation.

The combination of these character- istics results in a very important training tool, because the simulation provides

1. Compkte, directed eqxrkmce. On-the-job training is a function of the events that happen to take place. This simulation, by contrast, literally gwran- fees experience in all desired areas.

2. An integraclve ape&m%one that forces participants to pull together all theirfunctionallearningtorunasuccessful company.

3. Experience dealing wttb new situations that batx not tahplace and

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M a v McBride and Mike Ureisky

mGy~takplace.statedanotherway, it helps participants recognize impend- ing crises, avoid them when possible, and learn to deal with them successfully when they are unavoidable.

4. A w k i n g nehuont!wi& thebust- n e s ~ community. Participant-managers, their boards, and their bankers continue to work together long after the simulation is completed.

The Management Decision Labora- tory has important international capa- bilities. It can serve as a training ground for managers who are responsible for developing and implementing global strategy. As it is being run, all companies start with a domestic focus. If the companies decide to embark on international business, they have an inter- esting range of alternatives:

1. They can sell into an international free trade zone.

2. They can source materials from and carry out manufacturing in foreign markets.

3. They can negotiate representation or licensing agreements with companies operating in other “simulated countries.”

4. They can invest in property or companies in other countries.

5. They can form joint ventures. 6. They can network with business

executives in other countries.

The MDL is operating parallel simulations in Finland, France, Italy, and Turkey. Participants in all these simulations-also experienced managers who are enrolled in MBA program, can work with each other through telephone, fax, and e-mail. They thus can gain the cultural and practical ex- periences associated with actually

putting deals together with foreign na- tionals.

The lessons learned from this prcl gram are straightforward:

Running any business SUCC~SS-

fblly requires a sound foundation of technical and analytical skills. Recessionary periods, such as the one now being faced, put an even greater premium on these skills. Going international can be profitable, but it puts operating and organizational strains on all participants. International operations create both logistics and operating problems, as well as an increased opportunity for cultural misun- derstandings. Profitable ventures generally require stepby-step implementation. It is better to start with simple representation agreements before looking more seriously at joint ventures. Costly mistakes can be avoided. Some of the common problems are: failure to communicate effectively with people using English as a second language, failure to protect intellectual property rights, and failure to do explicit contin- gency planning.

International Leader I is a week-long program modeled on the MDL and used in executive development programs here and abroad. A program similar to the MDL was recently used as a critical component of a trade development program run in Finland. The objective of this program was to help small and medium-size Finnish companies learn how to build business relationships in

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Global Strategy: Making it Happen Tbmugb Simulation

the United States. All of thepartrcipants in thisprogram w m high-level m c u - tivesofcompaniesplanning to enterthe U.S. market.

A simulation provided the common thread through the program. Participants were required to operate US. compu- nu. The information about the U.S. business environment was reinforced with experience operating in that environment. Thus, participants learned how their prospective "partners" would look at business relationships. The program had a traditional seminar component that covered such topics as criteria for success with U.S. business, understanding the U.S. operating environment, export marketing strategies, strategies for getting started, and sources of information and assistance.

The formal program will be followed with a trade introduction and assistance program. Background information will be developedregardingeachparticipating company. Similar files will be prepared regarding potential U.S. partners. Finnish participants will then be brought to the United States and introduced to agreed- upon potential partners. Guidance will be available to all the companies when it is required.

The lessons learned in this exercise provide a sound base for U.S.-Finnish business. They include:

International business requires a solid understanding of business structure and conditions in both countries. A lot of the information needed is readily available, but a thorough understanding of the environment is required to know how to get it. The most cost-effective way to get information on a foreign market and enter it is frequently

by working through fms that are already there. Business experience is transfer- able. Many skills needed to develop domestic markets are a p pliable (or easily modified) to meet international needs. The success of a venture requires looking beyond it to determine its effect on the people who have to support it. Costly mistakes can be avoided. These include assuming that business practices could be trans- ferred unchanged, ignoring potential logistics crises, and failing to adjust for differences in ac- counting methods.

GLOBAL COW.: A NEW APPROACH TO EFFECTIVE GLOBAL STRATEGY

A new simulation is being built at MDL to further enhance existing capa- bilities and to create cross-national networks of business relationships for the dynamic, global environment of the 1990s.

Global CoQ. simulates the rapidly changing world of international business, encouraging participants to challenge traditional organizational structures. It facilitates innovation in managerial practice and provides companies and managers with experience-based training in the world of global competition. Global Corp. can be used both to build managerial competency and to create organizational commitment to developing, implementing and evaluating global strategy.

Because Global Corp. simulates the realities of international trade, it not only trains participants to think strate- gically, but also ecologically. The ecological manager knows that global strategy must be based on a clear under-

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Mary McBt.ide and Mike Uretsky

standing of the relationship of the fum to each and all of its markets. Global strategy is not only a carefully crafted plan of action, it is also a pattern of relationships and strategic alliances that assure the ability to execute effectively.

Global Corp. starts as a domestic firm. It is successful and it has opportunities to expand through international operations. The opportunities are var- ied and not equally beneficial, ranging from selling into foreign markets, to working through local representatives and wholesalers, to licensing company products, to building manufacturing facilities, to establishing joint ventures. The choice between these alternatives, and the way the selected alternatives are managed, can make the difference between profitable and losing operations.

Each simulated company begins with domestic operations. The participants are required to establish a fm operating base-understanding what it takes to be successful locally. The structure of the simulation requires them to make decisions explicitly and to be account- able for working within agreed-upon plans.

As the firm operates, it has a range of opportunities that can take it into the international arena. Consider the following examples:

It can buy raw materials from foreign sources (other simulated companies that are presumably operating in different countries). It can sell into foreign markets- directly or through other fms that are already in these markets. It can license or source technologies. It can invest in foreign markets or in fms that are already in these markets.

These same options are available to both the firm’s competition and to firms that are based in the foreign markets. The structure of the simulation forces the participants decide whether it is possible or desirable to shift from a purely competitive zero-sum game to a cooperative game that is profitable for everyone.

Every successful manager knows that there is a large gap between good ideas and the realization of their benefits. Thus, once the decision is made in the simulation, management has the responsibility for assuring its successful implementation. It must deal with essentially the same issues faced by any other company

Obtaining adequate financing Putting a management team in place Learning how to operate in the foreign environment Managingtechnology acquisition, diffusion, and implementation Launching new products in new markets Establishing adequate project management Establishing meaningful budgets Leaming to manage the international aspects of transactions, for example, foreign exchange and customs clearances

Given the local focus of these strategies, participants must first learn to navigate these tasks through their home environments and then learn to modify assumptions and techniques for the new operating environment. In almost every case, the firms learn that they can operate most effectively when working closely with an organization that already knows the market being entered. The possible addition of “real” boards of directors

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Gbbal Strategy: Making it Happen Tbrmrgb Simulation

familiar with the business practices, as well as with the opportunities and constraints of specific country markets, adds a networking dimension to Global Corp. thatisessentialtocr~turalexchange. Global Corp. can, thus, help companies with problems lying at the heart of mod- em international management m n m : raw materials and technology sourcing, management, evaluation, and diffusion. This simulation is an international coop erative effort, with some of the work being carried out in Finland, Italy, and the United States. Teams from Hungary, Poland, the Soviet Union, andVenezuela will be added soon.

Global Corp teaches critical strategic planning lessons to companies involved in international business. In particular, international business can be thought of as a ten-step ECOLOGICAL approach:

Step I: Effectiveness over time can only be based on sustainable competitive advantage.

Step 11: Champions of global strategy must be highly placed and power- fully committed.

Step 111: organizational commitment to global strategy must be developed at all levels of management.

Step Iv: Long-term resource alloca- tions must be available. Global effectiveness requires a longer time frame and a resource commitment adequate for the long haul.

Step V: Off-shore operations require ongoing priority support, not support on an as-needed basis. A global strategy requires organizational structure and systems that will support it.

Step VI: Global strategy requires local understanding. Managers must un- derstand the type of presence-repre- sentarion agreements, licensing, fran- chising, direct investment, joint ven-

tur+necessary in each market and situation.

Step MI: International staff development is critical to global success. A firm must "grow" its national managers into global managers.

Step VIII: Competition is essentially local. Global managers must create the conditions necessary for local competitive advantage-supply and distribution systems that provide adequate market advantage.

Step Ix: All customers require quality commitments. The effectiveness of global strategy will be judged by the customers, based on the products and services they receive. Quality control and improve- ment requires active management and evaluation on site.

Step x: LocaI interests must be inte- grated into global strategy. This requires developing a global culture within the fm that specifically reinforces and rewards thinking past local self-interest.

Global Corp. reinforces this ECO- LOGICAL approach to strategic management of global markets by providing a concentrated simulation of the decision steps involved in the effective execution of a global strategy. Executives are charged with the responsibility for moving a medium-size company with a mature prod- uct and saturated markets into global markets. The company history and simulated scenario quickly focuses participants on the ten ecological realities of going global.

TECHNICALREQUIREMENTSAND AVAILABIUIY

Simulations like those described above require modest resources from companies using them. The following list is comprehensive. A given simulation may require only some of these items:

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Mary McBride and Mike Uretcky

A trainer having a good grasp of training objectives and an understanding of the role played by a simulation An adminiator who can both fine-tune the simulation and oversee its use A large meeting room for orien- tations and debriefmgs. Break-out rooms for use in team meetings. A personal computer for execution of any simulation models Ohis is generally a standard IBM- compatible system with 64OK of RAM, a hard disk, and a printer.) Team acces to personal com- puters for any computer-based decision supports being used

Simulations like the ones described here are readily available through purchase or licensing agreements. Among the sources:

Business Simulations, Inc. 283 Hicks Street Brooklyn, N.Y. 11201 718-797-2053

Burgundy Group 900 North Shore Drive, Suite 215 Lake Bluff, IL 60044 708-615-3400

Management Decision Laboratory Stern Graduate School of Business New York University 100 Trinity Place New York, N.Y. 10006 212-285-8840

Management Simulations Project 4 West 4th Street New York, N.Y. 10003 212-998-6060

Strategic Management Group 3624 Market Street Philadelphia, PA 19104 800-445-7089

The cost varies from $300 to $100,000. The lower end is for a standard program running on a personal computer; the upper end, for customized models. Li- censing fees are lower, but there may be additional costs for consultations and operations supervision.

Going Global: From Slogan to Strategy

Thomas Jefferson, who was passion- ately interested in education and international exchange, once remarked, “I am captivated more by dreams of the future than by the history of the past.” The goal of simulation-based learning is to place global dreaming within the historical past of a company and, by so doing, to make it a reality.

Working in an international market is critical for today’s leading firms. Success in global ventures must be rooted in both an understanding of domestic operations and experience in successfully navigating new, foreign waters. This navigation can certainly be done by trial and error, but it can be accom- plished more safely and more cost effectively by using simulation.0

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global strategy: making it happen through simulation

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