CRITICAL SUCCESS RATIOS: A COMPARISON OF TWO BUSINESS SIMULATIONS IN A MULTI-YEAR ENVIRONMENT Development In Business Simulation & Experiential Exercises, Volume 18, 1991 137 CRITICAL SUCCESS RATIOS: A COMPARISON OF TWO BUSINESS SIMULATIONS IN A MULTI-YEAR ENVIRONMENT William C. House, University of Arkansas, Fayetteville, AR 72701 (501) 575-4500 Lewis A. Taylor Ill, University of Arkansas, Fayetteville, AR 72701 (501) 575-4007 ABSTRACT In this study, two simulations were compared two ways. They were related to each other for similarities and differences and then examined for their external validity features. It was discovered that both games were useful, yet emphasized different factors that might ultimately influence their use. Rockart (1979) identified ‘critical success factors’ which serve as verbal descriptions a firm’s actions in the most important areas of business performance. Financial and operating ratios are widely used for performance measurement, and permit performance comparisons among companies or operating units for a given time period by adjusting time and scale differences. Key performance ratios can also be determined to show successful or unsuccessful performance in a given industry. COMPONENTS OF RETURN ON ASSETS Return on assets, when broken down into its two basic components (net income/sales revenues and sales/total assets), provides detailed information on sales profitability and the efficient use of assets to produce sales revenue. Actual results should be carefully analyzed to determine which changes are due to accounting treatments and which changes are due to operations of the firm. If net income/sales revenues is multiplied by both sales/assets and assets/equity, the resulting ratio is net income/equity, another common performance measure used by stockholders and financial analysts. Sales/assets can be used to indicate the efficiency with which asset investment is being used to produce sales revenues. Assets/equity is a measure of the extent to which assets are being financed through equity capita: and, indirectly, the relative amount of debt capital being utilized in the total capital structure. The PIMS studies, using a large data base of manufacturing companies, found that market share was positively correlated with higher returns on assets (Gale, 1990). In addition, there is some indication that advertising intensive and research and development intensive strategies, as measured by advertising by advertising expenses/sales revenues and research and development outlays/sales revenues, can result in higher levels of profitability in a long-range sense. STRATEGIC EVALUATION METHODS One of the most pervasive ideas in business is to grow by gaining as much market share as possible through the experience curve. This, in turn, leads to lower costs (all else being equal). One strategy evaluation method appropriate for simulations is Porter’s Market Share Curve. Porter (1980) notes that a firm which fails to clearly use the strategic options of cost leadership, differentiation, or focusing on a particular market segment (i.e., focus) may be ‘stuck in the middle’ and have low (if any) profits. Porter explains that this firm does not have the market share, capital investment, and resolve to play the part of a low-cost operator, the industry- wide differentiation needed to avoid a low cost position, or sufficient focus to operate as the low cost producer in a very limited market segment (Porter, 1980). ROl for this type of company is likely to be low, since market share is in the middle and costs are fairly high. THE EXECUTIVE GAME For business simulations to serve as surrogates of reality, some critics insist that they should incorporate a few salient features of the business world. One particular simulation game in which (Henshaw & Jackson, 1990). Up to nine firms can compete within the same industry and multiple industries are available as well. A typical game that the authors have conducted with business students involves nine firms that compete for a portion of their grade. The team that finishes in first place is one of four types that can be easily related to the experience curve and the market share curve. In the Executive Game, one can opt to use cost leadership, differentiation, or focus strategies. Thus, this game does contain several important features of the real business world enhancing its external validity and relevance as a teaching pedagogy. On the other hand, if a simulation captures the features of uncertainty, complexity, novelty, judgment, and incomplete information (Taylor, 1987) it does not necessarily have to accurately reflect the real world in all content aspects of the game. For example, if marketing expenses comprise a certain portion of a firm’s budget that is relatively stable in the real world, that same amount does not have to be reproduced in a simulation for it to be an effective research and teaching tool. METHOD AND RESULTS A sample of 28 business simulation companies was selected from business policy classes involving senior level and graduate business students playing a modified version of the Edge, Keys, and Remus Multinational Game (1980). Only the U.S. segment of the game was used and quarterly reports were consolidated ~ aggregate data for years one and two. For comparative purposes, a sample of 29 business simulation companies was also drawn from senior and graduate level business policy classes playing the Executive Game. In a similar manner, quarterly data was aggregated to produce annual data for years one and two for the Executive Game. The Edge, Keys, and Remus Game is a moderately complex game involving two products and allowing students to make decisions involving advertising and research and development levels, pricing, number of salespersons, sales commission rates, production quantities and plant expansion. The Executive Game is a one product game in which sales and income results are affected by the marketing/price/R&D mix as well as by maintenance, production levels, raw materials purchases and plant expansion decisions. In both games, the assumption is that a consumer product is being produced and marketed. Income, growth, and leverage ratios were calculated for the two business game environments. The income ratios (i.e., net income/sales and net income/assets) were used as dependent performance measures. The growth variables included sales, income, and asset growth as well as market share. Leverage variables included sales/assets, assets/equity, advertising expenses/sales revenues and R&D outlays/sales revenues. The growth and leverage variables were correlated with the income variables for year one and two using a stepwise regression program. It was found that market share and plant expansion were important determinants of profitability in the executive game in a manner consistent with the findings in the PIMS studies. However, increasing advertising and R&D levels seem to contribute to lower profitability, at least in the short run. In the business game environment, market share has a negative, short term impact on profitability whereas increasing advertising and research and development outlays seems to contribute to higher levels of profitability. The choice between the two games would seem to hinge on which set of factors users would like to emphasize. Table of Contents Volume 18, 1991 Personality Types and Total Enterprise Simulation Performance Using DIS 'n DAT as a Decision Support System for a Marketing Simulation Game Theoretical Derivation of a Market Demand Function for Business Simulators The Ethnographic Case Study: An Experiential Approach to Teaching Retail Management Electronic Bulletin Board Systems (BBS): Support Software for Computer Simulations The New Budget Game Negame: A Cross-Cultural Role-Play to Introduce Students to the Familiarization Stage of Negotiations Modeling Short-Run Cost and Production Functions Using Sheppard's Lemma in Computerized Business Simulations Increasing Simulation Realism through the Modeling of Step Costs Predicting Simulation Performance: Differences Between Groups and Individuals A Facility Location Case to Stimulate Classroom Interaction Educational Effectiveness of Business Simulation Gaming: A Comparative Study of Students and Practitioner Perspective Ethical Dilemmas in Experiential Learning: Issues and Strategies A Critical Review and Assessment of ABSEL's Award-Winning Procedures and Protocols Political Risk: A Simulation for Business Practitioners Upside Down: A Cross-Cultural Game in Experiential Learning Gorby's Dilemma: From Communism to Free Enterprise in Two Hours Strategic Market: Planning with the COMPLETE Product Portfolio Analysis Package: A Marketing Decision Support System Career Concepts and Total Enterprise Simulation Performance Experiential Learning in Human Resources: A Performance Appraisal Application Managerial Motivation and Realism Among MBA Student as Viewed through The Looking Glass, Inc. Simulation An Experiential Approach to Teaching Data Analysis Using MYSTAT: Rationale, Procedures and Results Practicing What Was Preached: A Sequential Learning Model put to the Test Student Attitudes about Policy Course Simulations An Investigation of the Relationship Between Simulation Play, Performance Level and Recency of Play on Exam Scores The Effect of Leadership and Cognitive Processing Styles upon Peer Performance Evaluation: Implication for the Utilization of Simulations in Business Pedagogy On the Transfer of Market Oriented Business Games to Socialist Cultures An Application of Financial Analysis of the Business Firm in a Simulated Competitive Environment Collective Bargaining Simulation: An Exercise based on a Familiar Theme Making Business Policy a Strategic Management Experience A Student Exercise for Intergrating the Concepts of Power and Motivation The Boundaries Extended: An Experiment Comparing Dialectical Inquiry, Devil's Advocacy and Consensus Using the Executive Game Using a Simulation Package to Develop a Simulation Exercise in Cost Accounting Success Factors in Experiential Training for Creative Problem-Solving Teams An Experiential Approach for teaching Quality management Critical Success Ratios: A Comparison of Two Business Simulations in a Multi-Year Environment Stocklogs: A Classroom Exercise for Teaching the Logistical Relationship of Location and Inventory The Organizational Leadership Program Simulating Business Decision-Making: Using Statistical Cases for Classroom Exercises Scripting for the Classroom Upgrading the Business Strategy and Policy Game Developing Student Team-Building and Leadership Skills Using Computer-Aided Experiential learning Strategies Organizing and Outward Bound Field Trip An Architecture for Extensible Simulation Games Performance in the Capstone Business Course: What is the effect of Pedagogy, Learning Styles, and Student Motivation? Operational Strategy with Participant-Modifiable Parameters An Example of a Personal Selling Case Transformed into a Role Play Scenario Instructional Software: It's Evolution and Current State of the Art in the Business Curriculum Ascertaining Performance Variables for use in Determining Student's Grades in Courses Employing a Business Simulation Designing Management Seminars Using Business Simulations The Accounting Information Systems Course: Bridging the Gap between the Classroom and the Real World The Good Cooks Guide to Training Excellence: Working with Passion A Demonstration on Multiple Data Collection Methods: Seeing Strategic Issues Through the Looking Glass Simulation Systems Analysis and Design: Why Undergraduate Education gets a Failing Grade Accommodating Organizational Culture: An Evaluation of Management Development Delivery Modes in Varying Organizational Cultures Modeling Total Quality into Business Simulations The Political Futures Game Meeting Meeting Objectives