Friday, July 19, 2013

Why Wargaming is Useful. The Bankruptcy of Detroit.

One of the major impacts of inexpensive computers is the ability to simulate and game business situations. If you have ever played, SimCity, an early success in the consumer gaming business, you may well have attempted to manage some of the cities that came predesigned in the game. Detroit was one of those cities. I have to admit I was never able to figure out a way to save the SimCity version of Detroit. But playing SimCity certainly honed my interest in and my understanding of urban planning.

Over the years, I have designed and delivered a number of simulations. My largest and most successful was a simulation designed to teach telecom executives about how to compete in a converging world, where fixed line, mobile, broadband data, broadband wireless and video were overlapping. An unusual wrinkle in the design was the idea that in a large corporation, it's not enough to compete with external competitors, you also need to cooperate with internal stakeholders. And just as importantly, you need to understand the different leads and lags that individual functions in the business operate under.

Surprisingly, even managers with long experience in an industry will often underestimate the impact of planning cycle differences. And it's very common for managers to underestimate the range of outcomes possible.

This need to push managers to consider wider extremes is one of the reasons that scenario analysis is talked about so much. But there is theological split in the world of scenario creation and use. Some scenario consultant are quite adamant that scenarios should be stories not numerical models. These professionals are reacting against the phenomenon that spreadsheet sensitivity analysis is sometimes confused with scenario analysis. The use scenario analysis to drag resistant managers kicking and screaming into considering the unthinkable, the Black Swan, and the fat tailed distributions or risk.

But if that battle has been won and managers now understand the vocabulary of  and the differences between sensitivity analysis and scenario analysis, then there is a next generation modeling opportunity, i.e. to translate the stories of a scenario into the impact upon a business.

The impact upon a business may like the wargame reveal not just the sensitivity changes under different scenarios, they may also imply more complex differences in states, e.g.

- what portfolio of IT projects works best over multiple different scenarios
- investments that need to be made before a contingency plan kicks in (as in "We needed to have done that yesterday or last year.")
- business investments that can be thought of as options on a capability, customer group, market or R&D.

In effect, the availability of low cost computing, modeling software and scenarios gives companies the ability to maintain an enterprise and market model as well as providing a vocabulary of stories about possible futures.

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