Every few years, just like clockwork, Bill Biach would have a really good year. He'd reinvest earnings in a new marketing campaign, an extra salesperson or an engineer who added expertise to Biach Industries. Then every few years, just like clockwork, profits would plunge and force him to curtail his marketing efforts, lay off salespeople and furlough engineers.
Biach, whose father founded the 26-person, Cranford, New Jersey, industrial design firm in 1955, went through several cycles before seeing that the cause of the bad times was his reaction to the good times. "We didn't realize it, but we weren't managing these investments well," Biach admits. He'd hire an engineer with expertise in a new market, for instance, but fail to add salespeople with experience in that market. "After four or five years, we had this body of expenses we weren't getting anything from."
Biach gained this insight after modeling the company's boom-and-bust profit swings on a computerized business simulator. The software program used a mathematical model incorporating Biach's figures, such as costs and profit margins, to represent the way the company's policies would fare in the real world, and quickly revealed that although reinvesting in the business may have been well-intentioned, it was poorly executed.
"We realized we needed to be much more diligent about creating an expectation for those investments," says Biach, "monitoring what we were getting and stopping the expense if we couldn't get the results we expected."
It may seem obvious now, but Biach says he might never have figured out the problem without the simulator. Many other businesspeople are also learning that computerized simulations of their companies can provide a safe, inexpensive way to test theories, grasp the workings of complex systems, and reveal problems in communication and management.
Firms such as AT&T, Xerox and Sprint have spent hundreds of thousands of dollars creating complex simulations of their business environments. Smaller firms like Biach Industries are making use of inexpensive simulation programs that run on standard desktop computers. "I think it's just getting started," says James Ritchie-Dunham, president of Strategic Decision Simulation Group, an Austin, Texas, management consulting firm that has helped numerous large corporations and government agencies use simulators.
Mark Henricks is an Austin, Texas, writer specializing in business topics.
The first business simulators were created during World War II by defense contractors trying to figure out how to meet impossible deadlines for the war effort, says Ritchie-Dunham. These early simulators were little more than project-planning maps and flowcharts created by hand.
Since then, computers have been applied to the process. Electronic spreadsheets, for instance, simulate the effect of changing what-if scenarios in accounting, says Barry Richmond, president of High Performance Systems, a Hanover, New Hampshire, simulation software maker.
The introduction of more complex issues into simulation came, oddly enough, from a computer game called SimCity that was intended to be used for entertainment. Shortly after Maxis Corp. debuted the game, which let players simulate the growth of a metropolis, businesspeople began approaching the Orinda, California, company about creating a simulator for real-life businesses.
John Hiles, founder of Monterey, California-based Thinking Tools Inc., a maker of high-end interactive simulation software created specifically to meet that need, has seen how businesses benefit from simulation. Hiles' simulation software, which can cost anywhere from around $1,500 for lower-end software to $1 million for a customized project, is used by several Fortune 500 companies for training and strategizing. Says Hiles, "It all grew out of the success of SimCity."
Land Of Make-Believe
Computer simulators are now commonly used in business schools, where they're often called management flight simulators, and are becoming more widely used in practical business as well. The main reason is the same one that makes flight simulators so useful for training pilots: They provide safe ways for people to test their wings without the danger of crashing.
With a business simulator developed by Richmond with his company's ithink simulation program, business owners see long-term results of moves such as changing prices, adding workers, borrowing money and increasing their own salaries. Entrepreneurs commonly have to run through numerous scenarios before the simulated business will survive for more than a few months without running out of money. In the real world, that would be a disaster. In a simulation, it's just another learning experience.
Biach appreciates the way a simulation shows the interplay of complex systems with many variables over long periods in a way that, he says, human brains could never figure out on their own. "Once you get to a system with even three components to it, it doesn't act intuitively," he says. "You can't just know what's going to happen."
Using simulations also helps businesspeople understand the long-range effects of decisions, Biach says. And, by exposing the assumptions underlying the models people carry in their heads, playing around with a simulation can help communication between groups such as marketing and design.
John Mandelker used an ithink simulator several years ago at Sound Disk-tributors, his 170-employee St. Louis videotape distributor, to help salespeople understand how their actions affected the rest of the company. Salespeople would promise clients immediate shipment on large orders that--due to the need to perform credit checks, establish distribution and so forth--might actually take months to prepare. Salespeople also sometimes failed to tell the purchasing department about customer plans for special promotions, causing sudden runs on inventory that resulted in back orders.
The simulator helped the salespeople understand the need to grasp the requirements for credit checks and the like, and communicate better with other departments. "The salespeople know how to ask the right questions, and they make sure things are done right," Mandelker says now. "That would never have happened if we hadn't run the simulation."
Simulators work best to build understanding and communication when they're used by groups, says Biach. Richmond says many of his clients use them to debug complicated processes such as order administration, while Ritchie-Dunham recommends them for persistent problems that seem to have many possible causes.
Simulations also have specific limitations. They're not for learning new information, warns Hiles. Books and videos are a better way to develop knowledge at a lower cost.
While they can help you check out the probable results of a particular strategy, they are not for making predictions, adds Richmond. "There are always going to be a number of things that are left out of the model because you don't know everything that could happen," he says.
Simulations are only as good as the assumptions used in their models, says Richmond. A formula in a simulation may assume it will take three months to train workers, when actually it may take six months. "If you get cocky about the assumptions and don't subject them to the light of day," Richmond warns, "you can massively fool yourself."
For all their faults, simulations are useful tools. Desktop PC simulation programs can be purchased for a few hundred dollars, and results come in weeks, not months, says Ritchie-Dunham. Entrepreneurs who have difficulty mastering them can find consultants or training firms to help, or attend training seminars sponsored by software companies.
Business is often compared to a game, but simulations take that comparison to a new level. Those who have tried them say they'd no sooner make a major business decision without a simulation than they'd seal a deal without a handshake. "The ability to write a simulation," says Mandelker, "is something I'm always going to rely on."
Biach Industries, (908) 276-3110, email@example.com
High Performance Systems Inc., (603) 643-9636, http://www.hps-inc.com
Strategic Decision Simulation Group, (281) 496-2905, http://www.sdsg.com