THE LAGGED EFFECTS OF DECISION VARIABLES ON FINANCIAL PERFORMANCE MEASURES USED IN TWO BUSINESS SIMULATION Developments In Business Simulation & Experiential Exercises, Volume 19, 1992 213 THE LAGGED EFFECTS OF DECISION VARIABLES ON FINANCIAL PERFORMANCE MEASURES USED IN TWO BUSINESS SIMULATION William C. House, University of Arkansas-Fayetteville Lewis A. Taylor, University of Arkansas-Fayetteville ABSTRACT An interesting research question is whether advertising levels, research and development outlays, and plant or asset expansions made in one period in simulated environments will affect outcomes in the next period. Rates of return on sales, assets, and equity are commonly used in both actual and simulated environments to measure financial performance. The lagged effects of decision variables may vary between actual and simulated environments, depending on the specific measures chosen. INTRODUCTION Higher advertising levels have been shown to have a positive impact on perceived product quality, market share, and profitability. R&D outlays often have a negative impact on profitability in the short run but may have a positive long- term impact. High levels of capital intensity (e.g., sales/assets) have also been associated with lower levels of profitability in real world environments. Two simulated environments composed of 28 companies playing the Edge, Keys and Remus Multinational Game and 29 companies playing the executive game are compared in order to determine the effects of growth and leverage ratios on income ratios for a two year period (i.e., current year and lagged year). The growth ratios included sales, income, and asset growth while the leverage ratio included sales/assets, assets/equity, advertising expenses/sales revenues, and R&D outlays/sales revenues. The income ratios used were net income/sales revenues, net income/assets, and net income/equity. RESULTS For the executive game companies, sales, income, and asset growth have a positive impact on return on assets and return on equity for year one but only asset growth is related to return on assets for the business game companies in year one. On a lagged basis, asset growth is the only variable related to return on assets for the executive game companies. All three-growth variables are significantly related to the return on equity on a current and lagged year basis for the business game companies. Among the leverage variables, sales/assets is related to return on assets and return on equity in year one for both simulated environments. Assets/equity is negative related to return on assets in year one and lagged year two but is positively related to return on equity on a lagged basis for the business game companies. These findings correspond to real world studies indicating that more capital intensive and highly leveraged companies will often have lower profits that those with less capital intensity and financial leverage. Advertising expenses/sales revenues in negatively related to return on assets and return on equity for the executive game companies in year one but not lagged year two. For the business game companies, advertising expenses/sales revenues is not significantly related to return on assets in year one or lagged year two. Advertising expenses/sales revenues is negatively related to return on equity in year one but not in lagged year two for the business game companies. R&D expenses/sales revenues in negatively related to return on assets in year one for the executive game companies but not for the business game companies. There is no lagged effect on return on assets in either environment. R&D expenses/sales revenue is positively related to lagged year return on equity for the business game companies but not for the executive game companies. CONCLUSION The lagged relationships generally become more significant when the return on equity is used instead of return on assets in the case of the business game companies but not for the executive game companies. One exception is asset growth, which is positively related to return on equity in year two for both simulated environments. Thus, plant expansion and asset growth in year one can lay the foundation for higher levels of profitability in year two. The negative impact of advertising in both simulations in year one is not consistent with real world experience but may be due in part to the start up nature of first year operations in simulated environments. The negative impact of R&D outlays in year one for the executive game companies and positive impact in lagged year two for the business game companies is consistent with outcomes in many real world environments. The limitations of the study include the fact that only two years of data are examined, not all decision variables are considered, and interrelationships among independent variables are not fully explored. The aggregation of the data into annual segments eliminated consideration of quarterly economic fluctuations and decisions. However, possible lagged effects of decision variables on financial performance measures are highlighted and directions for future research are clearly indicated. Table of Contents Volume 19, 1992 The Pedagogical Utility of a Management Simulation Game in a Business Policy Course Modeling Economic Environments in Business Simulations: Some Comparisons and Recommendations Experiential Learning and TQM Principles: Teaching Behavioral Science in a Business School The Use of Poster Presentations as a Final Project in the Business Policy Course The Device Business: A Management Simulation for Strategy Formulation The Advantages of Experiential learning in the Auditing curriculum A Framework for the Identification of Moderated and Mediated Performance consequences of Pedagogical Alternatives Simulating Qualitative Research Relating to Values and Lifestyle Segmentation A New Market Demand Model for Business Simulators Interactive Optimization Using the Method of Relative Improvement Preferences: Methodology and Empirical Evaluation The Service Trainer Simulation Benefits of Internet Computer Networks for ABSEL Members How Should We Measure Experiential Learning? An Assessment of Simulation Usage in Management Accounting Courses The Influence of Myers-Briggs Type and Group Dynamics on Simulation Performance Effective Leadership Behavior in the Desert Storm Arena: An Application of the Vroom-Yetton-Jago Model Installing and Consolidating Work-Team Values: The Effects of a Multicultural Outdoors Experiential Program Key Determinants and Decision performance in a Business Simulations and Experiential Learning environment Multi-Cultural Experiential Learning: A Computer Simulation in Indonesia Attitudes Toward and Emotions Related to Women as Managers: A Replication and Beyond Scenario Approach to Simulating Consumer Expenditures: A Cross-Cultural Analysis Insights into Ethical Decision making Activities and Organizational Performance: A Management Simulation Analysis of College Students and Managers Evaluating a Business Simulation Program for Joint Venture Negotiation and Management Teaching Business Interviewing Strategies with an Experiential Approach Cooperative Learning Across the Business Curriculum Modeling Total Quality Elements into a Strategy-Oriented Simulation Teaching Business Decision making using a Simulator Extending the Educational Utility of a Simulated Competition within the Confines of an Established Undergraduate Marketing Curriculum Expert Systems Versus Traditional Methods for Teaching Accounting Issues Confidence Extremes Diminish Quality Performance in a Total Enterprise Simulation Can Ethics Be Taught? A Simulation Tests a Traditional Ethics Pedagogy Through The Looking Glass, Inc.: Organizational Climate Research as Experiential Pedagogy The use of Cluster Analysis for Business Game Performance Analysis Power and Ethnicity: An Experiential Learning Exercise (How to Sensitize Students to Diversity) Directed Development of Critical and Creative Thinking Skills for Case Analysis Implementing Total Quality Management in a Computerized Business Simulation Product Quality in Business Simulations Use of Simulation for Ethics Education in Management Satisfying the University's Customers through Total Quality Management Instruction: A Case Study Personality Characteristics and Group Performance in Total Enterprise Simulations Concepts of Interval Estimation and Quality Control Charts via Computer Simulated Sampling An Examination of the Effect of Team Cohesion, Player Attitude, and Performance Expectations on Simulation Performance Results The Effectiveness of Inventory Management and Production Scheduling Training in a Total Quality Management Environment Peer Group Indicators of the External Validity of Business Games: A five-year Longitudinal Study Political Strategies and Personal Actions Does Practice make Perfect? Observations on Simulation Trial The Use of A Non-Business Computer Simulation to Teach Marketing Management BankPro Commercial Bank Simulation The Production Game Pursuing Excellence: Work Strengths, Assets and relevant Values (An Exercise) Test of a Short Outward Bound Experience for College Students What is it that we want Student To Learn? Using Two TQM Philosophies when Playing Blackjack The Lagged Effects of Decision Variables on Financial Performance Measures Used in Two business Simulations The Development of an Experiential Exercise for Career Planning and Effective Job search Performance Measuring Quality in Management of Business Pedagogy Exploring Quality and Productivity Improvement: Using and Experiential Process Toward a Generalized Architecture for Intelligent Reactive Management Systems The Quality Game TQX: Using Expert Systems to Improve Training in Total Quality Management A Simulation of the Effect of the Medicaid Payment Lag on the Financial Position of Community Pharmacies The Use of a Board of Directors to Evaluate and Validate Decisions in a Competitive Graduate Management Simulation Course The Impact of Academic Dishonesty on Business Simulations and Experiential Learning Activities Picture Project: An Experience of Icebreaking and/or Decision-Making An Effective Role-playing Exercise for Teaching Requisite TQM Supervisory Attitudes/Behavior Computerized Management Simulations and Some Correlates of Students' Satisfaction The Timing and Stability of Reactions to Market Structure in a Single Player Simulation Environment A Graphics Application Extension for a Simulated Decision Support System Environment Aspects of a Group Project Utilizing Actual Business data and a Computerized Accounting System The Role of Universities' Extended Learning Department in Assisting Organizations Implement Total Quality Management A three-dimensional Learning Experience to Develop Total Quality Management Skills Estimating Quality Costs by Computer Simulation Applications and Examples of Quality Control Software Assessing Business Pedagogy A Demonstration of an Experiential Process for Exploring Quality and Productivity Improvement Processes An Action-Ethics Dilemma: A Demonstration Org Sim Jr.: A 2-3 Hour Version of the 2-Day Blanchard/Murrell Organization Simulation Building Buildings: An Experiential Exercise in Organizational Structure, Communication, Leadership and Group Dynamics Expert Systems for Organization Design: A Demonstration A Demonstration of Product Quality in a Business Simulation: Version 2 of CEO Two Revolutions, Total Quality Leadership, and the Baldy: The Story of Milliken Total Quality after the Award - The Xerox Story Building a Competitive Advantage through Customer Satisfaction and Reengineering Human Resource Planning: Managing the Only Renewable Resource for a Competitive Advantage Using Simulations to Teach International Issues: An analysis of the Multinational Management Game's Learning Environment Quality Function Deployment: A Tutorial Care and Nurturing of Teams Making a Good Thing Better: Adding TQM to Participative management Empowering Organizations to Redesign and Transform Themselves - Eastman Chemical Using Simulations in Field Management Development of an International Life Insurance Company Reinforcing the TQ Environment via Simulation Transforming a Business College into a Total Quality College