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Business Simulation

Conference Paper · July 2012

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Hans Peter Schröder Liviu Ciucan-Rusu

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 Business Simulation

Hans Peter Schröder

Aleph-Consulting GmbH Verlag, Wiesentalstr. 19, D-65207 Wiesbaden, Germany
Ciucan-Rusua Liviu
University of Tirgu Mures “Petru Maior”, Str. N. Iorga nr. 1,Tirgu Mures, Romania

Abstract

Business Simulation (often called business games) make an unavoidable solution for training
Managers, because they allow theory to be applied into practice in a risk-free environment, and
encourage team working in the process of decision-making. Such a simulation, using a software
application as processing tool, combined with knowledge and skills of a trainer can boost the
main features. Around 98 percent of all accredited universities in the United States are using
business simulations, Faria et al. [1]. This entails an enormous research on this topic. The results
of these studies can be loud Brennan and co-authors summarised as follows [2]: Some studies
have shown that simulation games are a suitable representation of reality, and in a way, as
Managers, they experience in real life. This applies to the formulation of strategies, the analysis
of different factors that influence the outcome as well as the improvement of analytical skills and
team communication. European entrepreneurship education must strive to keep up with the USA,
where the quasi-totality of Business Schools uses simulations as a main tool of teaching
entrepreneurship.
In our paper, we refer to different methods and in detail; we discuss the business simulation tool
PLANET. Finally, we add a case study of the University Petru Maior (Romania) [3] based on the
use of PLANET in management courses of entrepreneurship.

PLANET FINANCIAL TIMES

The independent expert voice for Eastern Europe.

As reported from usually well-informed circles, a
slight upward trend of the economy can be
expected. Experts assume however that this is a
first sign of a following downward trend. Middle
term it is expected that selling will become much
harder. The consumers demand improved quality
with steady or decreasing prices. Advertising
agencies are getting combat-ready. They know that
market positions in growing demand markets can
only be kept through an extensive handling of the
market. The possibilities to react to changing
markets are manifold, be it to retain customers
closer to the company or to generate income
through an aggressive price policy. The rule in this
case is also: there are no patent remedies.
The world market is now receptive for over
productions of domestic producers. However, they
have to prevail over competitors of a similar
production ability and quality profile. Due to cost
reasons, it must be assured that supply contracts
with foreign purchasers have absolute priority.
When the selling mood gets too generous, one
could face price boosting supply shortages on the
domestic market when at the same time sales
abroad are made with fading margins.
Actual Economic Trends, Editorial Vienna

-1-
Overview

The term Business Simulation refers to business game learning methods for simplified
representations of a company in the macro- and micro economic environments in a competitive
market. A realistic simulation of business processes, business simulations are especially suitable
for the training of management and leadership skills.

This applies to the formulation of strategies, the analysis of different factors that influence the
outcome as well as the improvement of analytical skills and team communication. Two types of
business simulations can be distinguished:

1. Case studies that are presented in the form of Excel examples to students and
2. Simulations starting from a more or less complicated initial state evolve into a company's
history by management decisions.

So far, there is no objective evidence that students who learned the expertise based on simulation
have been able to cut in the examination better than their fellow students who are taught, for
example, with the help of case studies.

Tendency for practical simulation

On the other hand could be detected strong correlations to the subjective assessment of the
learning success. This includes statements such as "I have improved my analytical skills", "I can
solve problems better now", "it was helpful in learning new concepts", "I was able to apply what
I've learned before," it was a positive learning experience. "Basically, you can assume that most
people learn best through experience and application of the acquired knowledge: In simulation
can simulate various scenarios, risks, and strategies to try without the same risk of destroying real
wealth or inflict other damages [4].

Simulation or case studies?

Both learning methods serve to illustrate theoretical knowledge practically oriented:

Case Studies. While Case Studies can take over in Excel table’s data from the economic
evaluations, f. e., balance and loss calculation, sales and marketing report, success calculations of
an enterprise - contrived data of a particular situation of an enterprise – are Case Studies able to
prepare specific selected studies. The example can be used as a task for the students to analyse
the situation, to develop strategies and to improve the enterprise. The decisions entered in a
Excel Copy, then the recent analysis of the new results on the base of the changed data shows
whether and how successful the strategies have been for the concerning enterprise. The
comparison of two Excel data sets can still simply be treated. More difficulties will arise if the
competition enterprises should be included in the results or if to pursue medium-term or long-
term strategies have to be considered. Therein the Case Studies are too static and less suitable. In
addition to represent a chronological process, the only way out is often, to set in a random
generator. People are dicing.

-2-
Simulation. On the other hand, the Simulation models are weighting the chronological behaviour
process, the evolution of an Enterprise over a longer period. A model includes mostly several
enterprises, which stand under each other in competition. The learning-models are thus simplified
that the theory is applicable if possible, in full extent and the functions of the decisions become
clear. The Students make their decisions as Executive Managers of an existing company.
Than the model runs the simulation. The results mostly presented at the end of period of three
month in reality, when the quarterly reports has to be published. A deterministic model punishes
incorrect decisions consistently. It gives no extraordinary correction possibility. Improvements to
better the enterprise situation are possible only in the cream of medium-term strategies. The
decisions and the results depend on each other’s, consequently. It must be planned in the medium
or in the long-term bases. In addition, the competition must be analysed, and further
performance-influence factors, as macroeconomic influence, should be drawn into the strategy,
like in real life.

Learning is Experience; everything else is just Information (Albert Einstein)

Presumably, it is right what Albert Einstein says. Many people feel it, in any case, in such a way.
An enterprise simulation game which exercises the reality and which is organised in groups,
teaches experience in addition to the "Hard Skills" of the economic dependencies, the economic
way of acting, the decision ability and the judgement ability also a line of "Soft Skills" in group
work as: contact ability, communication capability, delegation ability, co-ordination ability.

Simulation models become efficiently, when for the participants a recognition value are given.
Variously applicable is an enterprise simulation game then, if it is organised in subassemblies so
that it can be divided thus in sub-groups that it can come partial or continuous building up the
commitment of training, for example, in the learning-units: the cost control calculation, the
storage control calculation, the finance and investment theory, the pricing or the strategies to the
market conquest.

PLANET

PLANET is with regard to the contents in the economic field, more exactly said, in the field of
the profit oriented companies.

Economic Participants

Private Consumers Companies

Business Enterprises Public Enterprises and

Administrations

Fig. 1. Delimitation of company-economically relevant economy units

-3-
PLANET, processes illustration

PLANET simulates four manufacturing enterprises in their markets and their company-
economical activities. The program PLANET is working deterministic. Decisions of the
management lead consequently to results. Wrong decisions, leading to economic disadvantages,
can be corrected only for the future by planning and decisions. The program works in three time-
phases periods (quarters of a year): past, present and future. At the end of the simulation process
the future becomes present and the present becomes past, but all results are passed as algorithmic
effects to the history in past – f. e. such as customer satisfaction. In this way, the program can
perform over many periods, unless the products have not reached a saturation of all markets.

Fig. 2: Schematic illustration decision processes

PLANET, some technical aspects

The model is based on a system of non/linear equations that simulates the relations of the macro
and micro economic behaviour restricted on 4 companies (groups) in competition (OLIGOPOL).
After getting the equations results an empirical calibration make the projection in the reality of
full economic environment, as it is described in standard specialist literature of economy. Over
years now, PLANET has improved to be a confirm mapping for the market behaviour. Data and
equations at hole form a stable situation of the chaotically organization. Special adapted initial
States of the game must be generated by playing.

The individual decisions made by the enterprises management lead to an acquisition potential and
ends up with entire demand divided onto the different markets.
The potential of the entire demand compared with the single effects done by all other enterprises
management achieve the differences of competition as advantage or disadvantages, but not only.
The real entire demand finally, is also determined by the possibility to sell (consumer’s
inducement) and the reality effect of the consumers (boundary stimulus) reaction. It is understood

-4-
therefor, that the acquisition potential depends also strongly on the selling-political decisions of
all enterprises.
Further actuating variables are the general economic position (Economic activity factor) and the
respective market degree of saturation.

Fig. 3: Schematic illustration of the program course

PLANET, Groups and Interfaces

Daten

Verarb
Eingab
U1

Initial_Betrieb
Test
U2
Perioden Initial_Start

U1 ==> Directory Enterprise1
U3
U2 ==> Directory Enterprise2
U3 ==> Directory Enterprise3
U4 U4 ==> Directory Enterprise4
Fig. 4: Enterprise Interfaces
U1, U2, U3, U4 are the actual Enterprises
subdirectories:
Output: The reports will be available, when report
printing in the submenus of Reports and Protocols and
Excel Sheets are executed. By a link to this
subdirectories U1, U2, U3, U4 of course with a legacy
concept the results of the enterprises can be viewed and
used as a base of strategically information.
Input: The Input Apps are links to the Enterprise
Dialogs for each separate Enterprise only - via Intranet
and Internet.
-5-
 PLANET, Results and Reports

Internal Results • Production Report

Quartal Reports • Sales Report
• Finance Report

External Results Investor Relations • Balance

• Win and Loss
Calculation

Influences & Effects • Trainers Protocol

Trainer Reports
• Input Protocol

Fig. 5: Submenu Reports and Protocols (Opportunities)

PLANET, Production Report, Part I

MACHINES IN PROCESS 50.000.000

MACHINES IN CONSTR. 1.250.000

PERSONELL BUDGET IS NOT SUFFICIENT

The fixed asset - and also the production capacity - was

The machines Investments will
become productive after two
periods.
built up in the past with investments steps, in each case
5.000.000 €. Because the life cycle of a machine in
production is accepted to be five years (20 periods), all four
periods machines in the value of 5.000.000 € will become
unusual (the machines in operation and the sum of the
writing-off are shortened around this amount). To hold the
production capacity at the moment level, a re-invest of the
named writing-offs is necessary.

Through refrained re-investments, the production capacity

reduces all four periods around 100.000 machine hours.

-6-
PLANET, Production Report, Part II

If the stock of raw material is too small for

the current period, however, the automatically
lasted special purchases lead a delivery just in
time, so that enough raw material are
available to the production directly, but must
be resorted on higher cost prices. The
minimum order quantity for the special order
is 100.000 KG and as required in each case in
10.000 kg steps upwards. In this respect the
purchasing
The amount of the final stock can be
shortened at too high EUR/piece
costs around value adjustments. As a
measure of a cut of the production
costs serves in this case the
aleph-Consulting
transgression of 75 percent of the
average selling price determined
about all markets and enterprises.

The fabrics (raw material)

purchase price difference is fixed costs = part of fixed storage costs * capacity in pieces of fabrics
the sum of the difference variable costs = ((available amount + (available amount - consumption) /2)
between the fabrics (raw * standard price * part of variable storage costs
material) purchase for the
standard price (price for
500.000 KG) and the in fact
paid price

The calculation of the production

The Boundary Costs uses only the
costs as full costs describes the
variable Costs allocated to the
situation of a complete utilisation of
Production. Basically it can be used
the production capacities to 100
to calculate the Margin per Product
percent.

Overhead Costs per Piece

Tariff Contracts and
Suppliers fix these
Quantities

Write-Off per Piece

Average Personnel Costs per Hour

Total Personnel Costs /Production in Piece

Personnel Time per Piece

The standard calculation is used for the determination of the company internal production costs of a product based on the
capacities valid at the end of the previous period, fabrics (raw material) prices and personnel costs to be expected. -7-
PLANET, Sales Report, Part I

Price from Order

Stock is different
448,00 to the actual
Price 444,00
Delivery Priority (Price is
fixed by Contract

For the Strategy the total

Costs and Orders compared
with the own Companies
numbers can also be very
helpful.

-8-
PLANET, Sales Report, Part II

Order Stock from previous

Periods, not alder than two
Orders cancel by unsatisfied
demand of Customers.

High
Priority of
Contracts

-9-
PLANET, Finance Report, Part I

Machine Investments
which corresponds to 4. Period,
the productive Capacity the annual financial
statements

Machine Investments
in Construction but not
yet productive

Liabilities from the

Income Tax inter-
annual + actual Period

Cumulated Wins from

former Periods added to
the Reserves

- 10 -
PLANET, Finance Report, Part II
The imputed interests represent
an accepted interest rate of the
invested necessary operational
capital used in the enterprise
business process
PLANET, Reports and Decision Data
All results and data are available as Excel spreadsheets data and can be used directly for creating
business graphics and time series.
The Price difference is the sum of the
difference between the fabrics purchase
for the standard price (price for 500.000
KG) and the in fact paid price.
The Production Costs are
the total Costs of sales
Products from Reference
Calculation.
A Revaluation of the Stock Fabrics is
nessacary when the Standard Price has
changed.
The final stock can be shortened
at too high EUR/piece costs
around value adjustments.
Result of the Period
- 11 -
PLANET, a case study from the business simulation

The case study refers to PLANET, a derivative of the well-known former IBM simulation
TOPIC, which proved to be a very complex and realistic business simulation, having the capacity
to provide a business environment of the industry and a complete set of operational reports that
can draw a clear picture for the four simulated companies. The study was conducted with the
students of the Master's program (2012) Management at the University Petru Maior [5].

Findings and results

(Excerpts of: Liviu, Ciucan-Rusua, SciVers ScienceDirect, Procedia Economics and Finance (2012), Emerging
Markets Queries in Finance and Business [5]).

The decision process within teams was based on a collaborative work under the coaching of the
trainer – referee, whose goal was to encourage debates over the fundamentals of decisions.
Mainly, the trainees had to deal with a complete set of functional reports in order to come up with
the decisions for each period (eight simulated periods – SP, meaning two fiscal years - FY) in the
following areas: marketing effort (communication and sales force), pricing, payroll, outsourcing
and international trade, logistics, investments and financing, according to their interest regarding
the competition on market segments.
All companies started from an identical initial state, in a positive business environment first FY,
and worse macro-economic conditions in the last FY, trying to copy the trend of a realistic
economic downturn, symptoms of crisis an recession.

It is obvious that turnover can be easily consider as the leading indicator when assessing the
trading performance of a company, and also very attractive for a competitive analysis. The four
simulated companies improved their sales results by percentages from almost 10 to more than
double, in the last case an exception due to the focusing on the export market, an opportunity
seized that made a clear difference. Anyway, in this particular case of the E4, we can also see
highs and lows in the trend, meaning a kind of confusion in the strategy, different from the one of
the E1 for instance.

- 12 -
Profit is considered by most of the people the “ultimate result” of a company, the VIP indicator
of the overall performance in business. In this case, the gaps between the initial state and the final
one are important. After a small recovery in the last period of FY1, the E4 plunged into the loss
during the second FY. E1 and E2 consolidated their positive result, gaining 147% and 55% from
the initial state, switching rankings after the FY2 compared with FY1.

This is a representation of the Gross Margin evolution, the indicator that we consider the most
appropriate for expressing the value added, according to the Planet application. All simulated
companies got a better result than the initial state, between 20 % and 190% growth. We continue
to see the two extremes, E3 and E4, but this proves a situation similar with the fact in the real
business, so it worth comparing each result with the average of the industry, actually represented
by E1.

- 13 -
The core of the three previous indicators relies on the quantity of products sold, in other words
the number of satisfied orders received, both from the internal and international market. E3
confirms its best performance, especially in the first part of the second FY, but with not so
promising trend, due both to the restrictions and a higher competition on the export market. E2
and E3 manage to fight the signs of recession, while E1 oscillates in amplitude of about 15%
from the initial state.

The Market Share indicator is often used as an objective for a company, an expression of the
competitive position in an industry. There is a slight change from the situations detailed in the
first four tables, because we took into consideration only the internal market. E2 earned the
leading rank, managing to improve 56% the initial equal share of the market. E3 kept interest for
the internal market, challenging the leader (80% relative market share). In this simulated case, we
can talk about two followers, E4 and E1, whose gaps from the average market share are 55% and
90%.

- 14 -
 More Details: Liviu, Ciucan-Rusua, SciVers ScienceDirect, Procedia Economics and Finance
(2012), Emerging Markets Queries in Finance and Business.

[1] Faria, A.J./Wellington, W.J., A survey of simulation game users, former-users, and never-
users, Simulation and Gaming, 35(2004), 178-207
[2] Brennan, R., W./Vos, L., Student experiences of the use of a marketing simulation game,
London, 2008
[3] Action and reaction – case study from a business simulation, Liviu Ciucan-Rusua, “Petru
Maior” University of Tirgu-Mures, Romania; Institute of National Economy, Romanian
Academy, Bucharest, Romania.
[4] Should You Be Using Simulations? Harvard Management Update, June (2000)
[5] Liviu, Ciucan-Rusua, SciVers ScienceDirect, Procedia Economics and Finance (2012),
Emerging Markets Queries in Finance and Business

- 15 -

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