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
Using Simulations in Business
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Simulations are used in Multiple Ways in Business
Today
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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
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Financial Analysis Simulations
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Managerial Accounting Increasingly Needed
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Developing ability to make decisions real-time
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Most accounting is FINANCIAL accounting
Management Accounting uses data for improving
management decisions in the business
Real time data provides tools for improved decisions
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
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Financial Modeling and Scenarios
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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
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Marketing Analysis
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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
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Engineering and Product Design
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Computer Aided Design
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Computer Aided Analysis
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Once high cost software, but now commonly available
Improves productivity and reduces design cost
Faster changes and customization of designs
Finite Element Analysis of Engineering Designs
Testing products and designs before prototyping
Simulation Modeling (e.g., noise in circuits, etc)
HKUST Business School
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Scheduling and Planning
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Hotel and Airline load management systems
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Retail store inventory planning and ordering
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Avoiding stockouts and markdowns
Employee shift and workforce scheduling
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How much overbooking is optimal given criteria
Limited staff, with sick days and days off
E.g., airline crew scheduling – optimization
Like production planning in CapSim
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Training of Employees
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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!
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Top Management Decision Simulation
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Examples of Firms Using Simulation
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Shell Oil (petrochemicals)
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Insight (computer reseller)
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Exploration for Oil Simulations
New Marketing Initiatives Analysis
Scenario Planning (macro-economic analysis)
People-Management Issues (HRM)
Michelin (tire company)
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Income-Outcome game (finance)
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Firms Using Simulation (continued)
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Sterling Health (drug company)
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Top Business Schools (Harvard, Wharton, etc)
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Simulated drug testing and design
Product marketing and advertising design
Team based competition
Hands-On management skills training
Management Training Firms (e.g. CapSim)
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Ninth House (gold mine management)
Many more firms and products available
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Training Using Simulations
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Not only for Management Training
Especially useful where cost of failure is high
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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)
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Simulations: Some Final Thoughts
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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
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