Dec 9, 2015

Quantitative Models in Business War Games

Many things look very cool but turn out to be not that exciting when one try using them. Like voice-recognition technology or Communism or electric cars. Quantitative simulation in business war games proudly goes into this list as well. War games in business is simulation of moves and counter-moves by opponents in a commercial setting according to Wikipedia and is a part of the large family of exercises that aim at leveling up the strategies and management methods in modern companies. In a gist, a war game has two or more teams competing for some resources - usually it is a market share, sales or other tangible outcomes. These exercises could be very beneficial for a company. In the general case there is no measure for the impact of a strategy and some thought introducing a suitable quantitative model to deal with that. And it is a good idea. Except it is not as it usually does not work.

The major reason driving this conclusion is a model has limited number of variables while the knobs to turn in a business would be many more. And it is not simply the number of variables. There are drivers that were non-existent or proved insignificant during model building but come out as a focal point of newly developed strategy. For example, the discount given to distributors could be something fixed or changing really slow in the historical data and it will not go into the model. However, during the war game a new strategy introduces different way to set these discounts and Houston suddenly has a problem with quantifying the impact to sales of this move. Also, some business are difficult to quantify due to lack of historical data or difficulties of isolating the effect. For example, a competing team could set developing better relations with the distributors as part of their strategy. But "better relation" is difficult to quantify in the absence of adequate methods for measuring it like NPS or similar. Some of these problems could be worked-around by introducing free-entry values to add up to the model outcome. However, it would not not work well as it would bring in the need for additional estimates which means more time and efforts. Expert opinion could be used as well but having such an expert would be expensive and/or not feasible.

Another reason is the development of model itself as it multiplies the efforts and the cost of the war game. Also, there are all the usual problems that come with modeling - data availability, development time and the huge efforts to build its credibility in the organization. This all adds up to the total cost. War games without a model already have a great benefit for the organizations, do not cost peanuts  and a model would not make significant impact.

A serious obstacle for quantitative model is the lack of data for the opponents. A company could model its sales based on all the data it has but modeling another company is close to impossible as vital internal data would be missing. A much more serious problem is that a model that works well for a company would not work well for the competing companies. It is not only because of the data issue but because of the different factors that drive the business. It means one model cannot be applied to all the competing teams. Last but not least, success of a business is not a result just of adjusting some numbers as the policies and the people matter the most.

Another hurdle for using such models is the the environment. Usually this is a market and it reacts to the moves of major players in it. For example, a car market might react swiftly to prices and interest levels of a major player. So the market should change with the strategies of the opponents in a war game. As modeling the total market takes enormous efforts usually it is assumed to be steady. It is good assumptions for many applications but models on volatile or developing markets cannot use it.

Quantitative models might have some place in business war games. I see their best fit is as a supplementary calculations some effects of decisions made during the game. These could be profit/loss calculations, some economic measures, etc. but nothing to deal with bottom line result of a war strategy. In any case, implementation should be done with great care. However, there is at least one reason to include a model to the war game offer - it is the unique selling point of it. It just sounds really cool, isn't it!

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