Business Simulation Game Strategy
Response Functions and Algorithms


As in the "real world," playing a business simulation requires that you learn the nature of the underlying response functions and how the set of relevant response functions fit together. A response function shows the relationship between the level of the marketing variable and the level of sales in units. The level of the marketing variable is the actual decision made (e.g., price, advertising, product quality). How do consumers respond when you change the price, the level of advertising, the level of service, or the product quality? Your task is to determine the nature of each of the response functions. The nature of your decision, combined with the decisions made by your competitors, generates the overall demand in the market. The quality of your decisions, relative to your competitors, determines your market share. How much of the market share you actually get depends on your level of inventory. If you sell out of your product, you do not know how many more units you could have sold. It is also possible that you are getting the sales that should have gone to your competitors because they lost the sales due to a lack of inventory, even though their strategy was effective.

In the Business Strategy Game by Thompson and Stappenbeck (7th ed.), nine variables (decision areas) have a positive impact on the level of demand (i.e., demand-generating variables): low price, high quality, high service, high model availability, high advertising level, high number of megastores, high number of retail outlets, and high value of customer rebates. The importance of each of these variables is normally set with a value of 0.75 to 1.25, with 1.00 being the default value and a higher value indicating greater importance. The level of demand influences the performance variables used to measure overall game performance. Assigning a celebrity to represent your product can also enhance your brand image, as is the case in the "real world" (Tiger Woods - Buick). If the celebrity turns into a negative communicator, the opposite can happen (e.g., Michael Jackson - Pepsi, O. J. Simpson - Hertz Car Rental, Kate Moss - H&M, Burberry, Chanel, Tiger Woods - Buick).

In the Business Strategy Game by Thompson and Stappenbeck (7th ed.), game performance is measured by performance in six areas: sales revenue, earnings per share, return on investment (i.e., capital value), market capitalization (stock price x number of outstanding shares), bond rating, and strategy rating. The importance weight for each of these dimensions can be the same or varied, depending on the parameter importance values set by the game administrator. It is also possible that a given variable is of no importance. By performance weight we mean the following:  Given 100%, what percent is assigned to each of the 6 dimensions to indicate its importance in terms of measured overall performance, with the sum of the weights adding to 100%? The higher the assigned weight, the greater the performance importance of the variable. One would normally expect EPS and ROI to be the most important to shareholders. The standard weighted model is as follows: 0.05 for sales revenue, 0.25 for EPS, 0.20 for ROI, 0.20 for market capitalization, 0.15 for bond rating, and 0.15 for strategy rating. The concerns of the company, therefore, are to determine the actual weights and to determine how to improve performance in the important areas, since the game administrator may decide to use different weights.

Your task, as is the case in the business world, is not only to determine the nature of each of the response function, but also to determine the importance of each of the identified variables used to determine overall performance. Check what you and your competitors are doing to see what appears to be working. You also need to determine what decisions made by your firm influence each of the performance measures. You also have to take into account your cost structure and how it influences each performance measure area (e.g., EPS).

As in the business world, bankruptcy is also a possibility. See Edward L. Altman, "Exploring the Road to Bankruptcy," The Journal of Business Strategy, Vol. 4, Issue 2, Fall, 1983, for one approach to help predict the potential for a firm's bankruptcy. This is the bankruptcy model used in the Business Strategy Game (7th ed.). The nature of the model is as follows:

Bankruptcy Index
Index
Bankruptcy Index = 1.2A + 1.4B+ 3.3C + 0.6D + 1.0 E
A
Working Capital/Total Assets
Indicates level of net liquid assets relative to total capitalization.
B
Accumulated Retained Earnings/Total Assets
Indicates level of cumulative profitabilty during the game.
C
Operating Profit/Total Assets
Indicates profit generating power of company's assets.
D
Total Equity/Total Liabilities
Indicates size of losses company can sustain relative to equity (insolvency indicator). The smaller the value, the less equity to cover any losses.
E
Total Revenue/Total Assets
Indicates revenue generating capability of assets.

An index value of at least 3.0 is okay; a value below 1.8 indicates trouble; and a value in between is a zone of caution (i.e., be on the watch).

One common strategy used in the business world is to emulate the market leader. Quite often, competitors will just match the strategies used by the market leader. Such an approach will tend to neutralize the competitive advantage of the market leader in the areas considered (e.g., price, product quality), but it will always leave you one step behind the leader, unless you make a much more effective decision.