Business simulations provide golden opportunities to make connections to the real-world business. Here, Ana Leiderman talks about how game dynamics lead to insightful decisions about sub-contractors.
In a business simulation teams will push the limits, such as deciding to sell more product than they know they can deliver. But why? Sometimes it is an honest mistake, they get caught up in the excitement, and an error happens. But often it is a deliberate move on their part, and a facilitator needs to watch for the teachable moment and/or control the game.
Some teams develop an early strategy for taking large orders early and securing sales, thinking that their strategy can be supported in their forward-thinking process. They are the ideal candidates for reinforcing the lessons in the Cash Flow Financing and Budgeting tools, and they will usually see their strategy pay off if they manage expansion correctly.
Other teams are all about the game, they care more about beating the other teams in the room and not so much about doing well themselves. This energy usually appears later in the simulation; teams will try to win customers at any price, just to take the sales away from other teams; and it is difficult to dissuade them from their approach. Here the only option the facilitator has is to set strict rules for the last markets that do not allow undeliverable sales. Many teams will back off on their own once they realize that late sales will not show up as added income until they deliver, therefore not improving their winning chances.
Both scenarios illustrate the concept of late delivery of orders; and both provide the opportunity to talk about subcontracting or producing through a third party, as many brands do today.
Subcontracting is an attractive option in the real world, as it can help lower costs and move the burden of inventories and other capital expenditures off the balance sheet, all in exchange for giving up a fraction of the margin.
In general, companies who subcontract their work minimize their risk through tight control of their subcontractors. Establishing and managing the relationship takes time and money, requiring the subcontractor to jump through many hoops in order to win the business. This process includes the disclosure of financial reports, making multiple audit visits, and closely watching capacity, on time in full (OTIF) KPIs, and other indicators.
However on occasion companies will find a profitable opportunity and will push their contractors beyond the limits that they have already established through the audit and control process. Because the contractor values the relationship with the company/brand, they will scramble to meet demand by expanding capacity rapidly and often will fail to deliver. This means the company now has to turn around and not meet its customer´s expectations. The repercussions quickly flow down the supply chain when the customer cancels, the company cancels on its contractor, and the contractor is left holding the inventory and a large debt caused by the expansion. The company loses as well, as many times the contractor will go out of business and the company must go through the process of identifying a new subcontractor and certifying it.
This scenario highlights the importance of working in partnership with subcontractors, viewing them as stakeholders in the company´s success or failure and not just another resource to be managed.
Income/Outcome is a cartoon version of the real world, with the important aspects and relationships highlighted and small details rounded or ignored. But even if a particular item is not modeled in all the detail of the real world, the mindset of the participants will provide clues to their real-world decision-making processes. The difficulties that they get into in the game provide opportunities for them to consider real-world practical problems, and for the facilitator to guide the whole class through a discussion of how these issues are playing out in reality in their company.
It's only a game, so it's safe to take a risk and experiment to see "What Happens If..." Go ahead - the whole class will learn (even if they laugh)...
Ana Leiderman teaches widely and distributes Income/Outcome from Colombia as "Ingresos/Egresos Colombia".
In our Income/Outcome business acumen workshops we teach the difference between budgeting and forecasting from a top-down as opposed to a bottom-up process.
In our view, top-down relates to forecasting results when the future sales are already known, and you can start by filling in the "top line" of the Income Statement. Bottom-up relates to not knowing your sales, and working from a "bottom line" of zero (to determine break-even pricing) or of some more positive number to see if a particular bottom-line profit looks achievable.
In the current Wired edition there is another take on those words: basing perception on fresh sensory information is a "bottom-up" process, while allowing preconceptions and previous experiences to override fresh perception is a "top-down" process.
The issue under discussion is the "hollow mask illusion". Most of us, when presented with a visual of the back of an appropriately-lit mask, will see it as the convex face, even if we know it is the concave back. That's what experience (and maybe genetics) tells us it has to be.
Over 99% of people fall victim to the illusion: we know what it has to be, regardless of what our senses and commonsense are telling us.
In business a sense of certainty can be dangerous! Business acumen requires a rapid and accurate flow of information, a team of differently-backgrounded people to discuss ideas with... and the ability to suspend preconceptions. Don't fall victim to illusions!
Robin Helweg-Larsen, Director, Andromeda Simulations International
WARNING: this post is biased! I've only been to Singapore twice, and I only know it as a business visitor, not a resident or other insider. But when clearing Immigration control a) had no lineup although I was coming off a jumbo jet, and b) took 30 seconds... then it was love at first sight.
Here is one of the shopping areas in Singapore's Changi International Airport:
Compare this to the place I was coming from, Saudi Arabia. To get into Saudi Arabia I had to have a letter from the Saudi Foreign Ministry, in response to a request from my sponsor, authorizing the Saudi Embassy to grant me a visa. I tried to get my visa in the US where I live, but the Foreign Ministry letter (in Arabic) was apparently addressed to the Embassy in Bahrain, so my application was denied and I had to fly to Bahrain to apply. However I am not resident in Bahrain, so initially I was told my paperwork was wrong. After various phone calls and negotiations I was told to get a letter from my sponsor, on letterhead and with an official stamp, stating that my sponsor (partly government-owned) urgently requested my presence in the country. This was faxed to the visa processing office that was acting as go-between. This part of the process took three days. Not including the initial application for the letter, or the time and money wasted on applying to the Embassy in the US, or the actual entry which took another hour of standing in line (and fingerprinting, and waiting for the computer system to come back online) at the border crossing on the Causeway from Bahrain.
I may need to get visas for several countries in a year. Some, like Saudi Arabia and the US (where I have been living for 20 years as a Canadian, and still need a visa) take several days. The US visa is good for 5 years, but the Saudi one is issued for sometimes six months, sometimes only one month, depending on the whims of the processing official. So let's say that two work-weeks a year are spent on the visa process while staying in hotels - in Toronto for the US, in Bahrain for Saudi, etc. Unnecessary cost, and a drain on productivity, and repeated again and again.
Modern technology can avoid this: simply allow people in, and monitor them and deport them if there is a problem. This raises privacy issues which I don't care about, because I don't have anything to hide.
What else do I love about Singapore? People there both want to work and are required to work. There is a 2% unemployment rate. The government employs a lot of people in maintenance capacities: the highways are not just perfectly surfaced, they are all lined with flowering bushes and trees. And the bushes are trimmed. And the overpasses and bridges are lined on the outside with bougainvillea and other flowers.
Thw whole place is green. The city has little parks scattered through it, all well maintained. And litter-free. I once saw a couple of pieces of litter on a grassed median, but my taxi passed it before I could get a picture... I never got a second chance. The government is committed to showing the world that a country can be beautiful and efficient, economically powerful and environmentally responsible.
Singapore was ranked No. 1 worldwide for the ease of doing business by the World Bank in 2012... for the 7th consecutive year.
Now, where in Asia would be the right place to put a new Income/Outcome office for Andromeda Training? Saudi Arabia, where I need to spend one week per year and $1,000 on constantly renewing my visa? Or Singapore, where it's 30 seconds, and free?
Robin Helweg-Larsen, Director, Andromeda Simulations International
People learn best when they are engaged. Engagement is easy when people are involved in a team competition. A good business simulation like Income/Outcome provides this. And when people compete head to head to win customers in a competitive market, you have an opportunity for both finance learning and team-building built into a fun activity.
And the stress of preparing for a competitive market, when your financial survival is at stake because of oversupply and a cashflow crisis... Well, it can lead to an explosive response in the classroom. Here's a clip from a workshop I ran in Singapore a couple of days ago:
We use this engagement to teach in several different areas simultaneously:
- Financial terminology
- Creating and using financial statements
- Understanding market forces
- Breaking down silos
- Improved information flows
- Holistic business acumen
- Better decision-making
Who knew a finance training workshop could be so much fun?
Robinn Helweg-Larsen, Director, Andromeda Simulations International
Travel and trade (including the trade in ideas) go together naturally, and therefore so does innovation. You should expect that the crossroads of travel and trade will have not just the biggest mix of peoples, but also the most entrepreneurship and business acumen. If you want to develop an entrepreneurial spirit, therefore, you should look for the greatest crossroads.
When most trade was by land, the Middle East was the center of the Old World and the place where the greatest trading and innovation took place. When serious ocean travel developed after 1500, factors other than geographic centrality became important - technological competition became the driver of change. This favored a fragmented area like Europe, rather than the empires of China, India and the Arab world. Empires like stability and bureaucracy, whereas an Empire-sized collection of smaller states is more likely to produce a couple of aggressive innovators. The Spanish, Portuguese, French, British and Dutch started trading around the world by sea, and trading posts led to colonies and empires.
With the development of air travel and telecommunication, the patterns have shifted again as all the world starts to be a single market. A diverse market will tend to develop a lingua franca; the early dominance of first Spanish and then French has given way to English, thanks not just to the use of English around the British Commonwealth, but to Hollywood and pop music.
The centers of business acumen tend to be those places with a lot of travel, a big mix of immigration in past couple of generations, and an easy acceptance of English as the first or second language. London, New York and California are obvious examples.
Governments put themselves at a competitive disadvantage if they resist any of these. India and many Arab countries are comfortable with English, but create barriers against immigration because of fear of "losing their culture". They don't want to be "Americanized", without appreciating that "Americanization" is not so much a national phenomenon as a global assimilation. You only have to consider American fast food chains: hamburgers, hot dogs, fries, tacos, pizza, Chinese, ice cream, coffee... none of it originated in the United States, but all of it was modified and the innovations were then mass produced and exported back around the world.
Maintaining your culture is valid to the extent that children benefit by growing up with a sense of living in an orderly and safe society. But they also benefit by having a sense that they are free to experiment, to choose what they want to do in life and who they want to be. The healthiest societies, both economically and socially, are those that respect the diverse origins of the various threads of the social fabric, while expecting that new and unpredictable patterns will constantly be created.
Look to the places who strive to be at the crossroads of global travel and trade, and who are prepared to push government policies to make it happen, and where English is commonly used in the street - whether or not it's the first language of the people. Singapore and Dubai stand out in those ways.
However, there is still a major difference between them: Singapore has a culture of pride in working hard and achieving good results. Too much of Dubai and the whole Arabian peninsula has a culture of male pride in not doing any meaningful work; though the governments are doing their best to change this.
The successful governments will be those who open their doors to travel, trade, innovation... and global culture.
By the way, at Andromeda we don't teach English. For us, the language of business is Finance, and we teach that with the game of Income/Outcome - in 15 languages.
Robin Helweg-Larsen, Director, Andromeda Simulations International
The Company Board® is a graphical presentation of the financial results of a company. Individual line items in the Income Statement and Balance Sheet are represented by colored stacks, with the scale shown in the center. For example, here is Google's 2012 annual report numbers.
The smaller left side of this board is the Income Statement.
money coming into the business is shown by the gold stacks (Sales Revenue, and sometimes by additional Adjustments)
the direct Cost of Revenue (COGS or COS) is shown by the blue stacks;
other Expenses including SG&A, R&D and Taxes are shown by silver stacks;
and the Net Income is given at the bottom, represented by black stacks for Profit (and shadow stacks if a Loss)
The larger right side of this board is the Balance Sheet.
silver represents Cash, Receivables and other (non-inventory) Current Assets. Receivables are automatically calculated to their position on Days Sales Outstanding.
the value of Inventories is shown by the blue stacks along the blue arc;
so the silver and blue stacks represent the Current Assets
and Fixed Assets are shown as copper stacks on the right.
The total amount of these silver, blue, and copper stacks represents the Total Assets, and is equal to the combined total of Liabilities and Equity:
red stacks in the red area of the Balance Sheet represent Short-Term Debt (Current Liabilities) and Long-Term Debt. The stacks nearer to the Cash area are the short-term liabilities coming due within the year;
black stacks in the black corner of the Balance Sheet represent the Equity.
What can we see about Google's 2012 results from this visualization? First that it is very profitable (Income Statement), and has very little debt (Balance Sheet). We don't need to know what the numbers are, because the information as presented here is showing everything as a web of unspoken ratios.
In other words, the bottom line Net Income of 2 stacks is the profit from the top line Sales of 10 stacks. If you turn on the Ratios in the bottom right corner you will see that, yes, the Return On Sales is about 20% (and you can see the exact numbers at the same time).
Similarly, $22 billion might sound like a lot of debt. But when you see all the red Liabilities stacks next to all the black Equity stacks, the debt looks comparatively unimportant (and correctly so).
So the Company Board visualization doesn't just present financial data in a more accessible format, it also prioritizes that information and allows a rapid assessment of a company's health and key areas of strategic concern.
Other items you can see in this graphic include that Google makes more money from its cash and investments than it pays in Interest expense (the finance line is gold, not silver). This correlates with the high amount of short-term investments and low amount of debt on the Balance Sheet. Also, the substantial amount in the Balance Sheet's Goodwill (how much more than book value Google paid in buying other companies) demonstrates Google's aggressive growth-through-acquisition strategy.
At Andromeda Training we teach business acumen workshops. The rapid visualization of a company’s finances is useful in the classroom to connect the game board learning back to the client’s real world. And it is useful after the classroom, to refresh the intellectual learning and the experience of the business simulation.
But the Company Board is useful even if you have never participated in an Income/Outcome business simulation. The real power of the Company Board is that it simplifies complex information. Everyone is used to seeing financial statements as columns of numbers - the Company Board provides a new, different, way to approach that same information and to identify immediately if a company looks healthy or not.
Download a free version of our iPad app here or by searching for Visual Finance in the Apple Store. And watch for expanded versions being launched in the near future.
Robin Helweg-Larsen, Director, Andromeda Simulations International Ltd.
Normally our prospective clients are happy with the range of products we offer for teaching business acumen: five levels of program to choose from, multiple industry models, and a dozen languages. And we end our workshops with a module that is unique to Income/Outcome, the "Company Board" that models their company (or a competitor) in the same conceptual format as the game-boards that the teams have been playing on.
But sometimes a client believes the learning would be best if we used the model of their actual situation for the simulation, and had teams play against each other to see who could make the most money. This is a bad idea for various reasons:
- A real world company is complex, but the fundamental driving forces of business activity - and the fundamental concepts for categorizing and analyzing business activity - are simple. In order to most easily grasp the concepts (cash vs profit; Balance Sheet vs Income Statement; cost structure; leverage; etc) and their importance, and to see how they interact to produce a healthy company, a simple model is important.
- Analyzing only their real company will give very limited business acumen. Participants should achieve a big-picture understanding of the whole business world, which will be more useful to them and their company as the industry changes.
- The best strategies in the simulation may be contrary to the strategies of the real-world company. This is not to say that we are teaching that the real-world company is mistaken. The simulation cannot hope to model the whole situation - not just the real company, but the entire environment of competitors, legislation, international trade, etc. And we don't teach a "correct" strategy. Sometimes the winning team is the one that borrowed the most, expanded aggressively, and took lots of risks to sell a high volume. Sometimes the winning team didn't borrow at all, stayed small, and used its strong cash position to find niche opportunities that its competitors couldn't afford to take. It depends on the team's skills.
- Tell people they are running a model of their real company, and they will be nervous and restricted in their thinking. But tell them it's a model of a pretend business, and they will relax and deal with it as a puzzle and a challenge. The latter is the better state for learning.
- The time for the real company is at the end of the workshop, not the beginning. Participants start out purely focused on the game, then make their own connections to the real world, and after a few rounds become interested in analyzing their real company. That is the time for presentations by the Finance Department, and for the Company Board, and for discussions about the company's strategic position and the priorities for moving ahead.
And that is how we structure all our workshops, regardless of the industry model, regardless of whether the workshop runs for a half-day or a full three days, and regardless of the language, culture or continent that it is running in.
The Company Board module and the discussion of the real-world client is a vitally important thing to do - but it is the capstone of the workshop, it cannot be the foundation. Trust me on this: we've had 20 years' experience, we've developed the most effective simulations in the market. The way that we structure it, your participants will love the workshop (which keeps the Training Managers happy), and they will communicate more rapidly and accurately and make better decisions (which keeps the Finance Managers happy).
Remember: simple model first, then add complexity, and then customize the model to the real-world company at the end!
Robin Helweg-Larsen, Director, Andromeda Simulations International
We often look at business acumen as a group of business skills competencies including finance, strategy and decision-making.
Today I was reviewing some post-workshop comments from an Income/Outcome program in Japan, and I realized that 'big picture understanding' may not be a defined competency, but it is certainly part of business acumen.
The comments were part of 20+ evaluations for a single program in Japan and I was struck by the 'big picture thinking' of the group. We ask people what they learned and what they will do differently, and these 4 comments all show an improved big picture view of their business world:
- "I will definitely share the problem and look for comments before making decisions - it will make our team stronger in finding solutions." (a change in Leadership style)
- "During the CFO discussion I had an 'aha' moment when thinking about how we can approach CFOs in our customers." (a change in Sales approach)
- "Price is not the only item to make the business profitable." (a change in Finance understanding)
- "Very Convincing Program and I would like to take this program to the rest of the Japan team." (HR or Management.)
By definition a business acumen program will provide a well-rounded view of the business. It is designed to show outlines and relationships as well as details and difficulties: understanding the former gives a better grasp for dealing with the latter.
Our key area of expertise is in making financial information visual, holistic and interconnected. But even that is only a part of the bigger picture of business that comes across in the classroom. The cross-functional activities and discussion broaden general business awareness, develop new insights and skills for every participant, and... improve business acumen!
Eliza Helweg-Larsen, Co-Founder, Andromeda Training Inc.
From our company's earliest beginnings in British Columbia in 1989, through our incorporation of Andromeda Training in North Carolina in 1993 and our creation of the first Income/Outcome simulations in 1996, we have always been prepared to change and adapt. We have grown to be a global training provider with unique strengths in financial visualization.
As Andromeda Training has grown I have found myself increasingly engaged with developing our ability to support international clients with the help of our global network of facilitators and distributors. Our workshops are available in 15 languages, and we work with a variety of consulting companies around the world.
The last twelve months has seen two major initiatives. We partnered with a Saudi company to launch Andromeda Simulations Arabia, now running workshops in Arabic and English in Riyadh, Jeddah, AlKhobar and Abha. In addition, we have restructured our business by creating a new Bahamian corporation, Andromeda Simulations International, as the coordinating office for all our international work.
The choice of the Bahamas is natural for me, as I was brought up on the island of Eleuthera and have always called it my home. In fact our very first "Income/Outcome University" event was held there, in 2002. We are proud that the business has grown to the point that we can include my homeland in our ongoing business activities.
Robin Helweg-Larsen, Co-founder, Andromeda Training Inc, Andromeda Simulations International.
I'm a business owner. I value stability, but I also value improvements. I value low taxes, but I also value a well-educated populace and well-maintained transportation systems. I value freedom from unnecessary bureaucracy, but I also value beneficial controls and fair and transparent processes.
In other words, I understand the legitimate concerns of both the Right and the Left in politics. I'm not in favor of Big Government or Small Government, so much as government that works. Government that is efficient, transparent, and that has remedies for bureaucratic abuse or corruption. I want mechanisms for promoting change in a well-managed way. Businesses value stability; but too much stability becomes stagnation and is bad for business.
The world is in a state of increasingly rapid change, driven by a variety of interlinked factors: technology, mass communication, global travel, immigration, cross-cultural fertilization, and increasingly realistic dreams of longer, healthier and richer lives.
When Andromeda Training teaches business finance and business acumen with Income/Outcome, the necessity of change is an unspoken part of the learning. Change may start from a technological opportunity, or from a response to a customer demand, but it will ripple outwards and change culture and politics. Some people will resist it, some will accept it, and others will modify it and will change the change itself. And however it eventually settles out will then look normal, and the earlier situation will look primitive and inefficient.
After all it was only a few hundred years ago that Western Europeans condemned the very idea of table forks as sinfully pretentious and worthy of death. Read "The Uncommon Origins of the Common Fork" for an entertaining example of how culture changes!
Robin Helweg-Larsen, Co-Founder