Many corporations design major change programs in the pursuit of competitive advantage, only to find them frustratingly difficult to implement. That’s because a successful program depends not only on a carefully conceived strategy, but also on a culture that accepts change. No matter how well designed a program or how committed a CEO, transformation efforts are likely to founder unless every individual in an organization is prepared to change his or her behavior. Managers in particular need to develop new skills to help other employees alter ingrained working habits.
Unfortunately, change does not come readily to adults. Lectures, training modules, and workshops may lay bare the mechanics of organizational change, but they are unlikely to revolutionize people’s work practices. Most of the time, we learn only through experience. But everyday business is seldom conducive to such learning, since delays and the complexity of most companies tend to obscure the link between decisions and their consequences. Under normal conditions, managers are rarely able to see the full effect of their actions.
The impact of, say, hiring an extra sales representative may not become apparent for several months—by which time other managerial decisions will have muddied the picture. To make things worse, most managers possess only a limited perspective of their organization as a whole. And since their performance is usually judged on near-term results, they have little incentive to contemplate the long-term outcome of their decisions.
In recent years, simulations have gained popularity as a means of overcoming these barriers to learning. A deep body of theoretical literature asserts the power of simulations to change behavior by giving managers the opportunity to experiment, test their assumptions, and learn from their mistakes in a risk-free environment. But the literature has little to say about how the theory can be applied in real corporate situations.
In fact, over 60 percent of US corporations have used some sort of simulation. The bad news is that many of these efforts have failed to deliver genuine and lasting change. As a result, simulations are sometimes dismissed as having more entertainment than educational value. All the same, if they are properly designed, they can play a critical role in successful transformations.
Designing a simulation
A simulation may be run on a computer or played out on a board; in either case, its aim is to show participants how effective their decisions really are. In a good simulation, managers will be able both to see the results of their usual behavior and to experiment with the impact of new working practices. Many of the simulations available on the market are generic and thus of questionable value, since managers will find it hard to learn from games that do not relate to their own business. If the designer of a simulation is not able to forge a clear link with the dynamics of a real company, the players are unlikely to do so either.
A successful simulation will be tailor-made for a specific organization. Devising a customized simulation is a costly and time-consuming endeavor. The designer will need an intimate understanding of both the company and its industry in order to assess the fundamental drivers involved. To gain such an understanding, he or she might conduct interviews with senior and middle managers, perform industry analyses such as benchmarking, use economic models like cost curves, and research best practices.
Whatever the methods used, a thorough grasp of the industry’s past causal relationships is vital. To fine-tune the simulation, the designer must rigorously test its parameters by inputting real-world decisions and checking the accuracy of the simulated outcomes. Although it must be comprehensive enough to capture the complexity of a real business, the simulation should not be so intricate that it cannot clearly show the results of a set of actions. Designers may be tempted to continue adding variables in the effort to mimic reality, but every extra variable obscures the lesson. The trick is to find the right balance, simplifying the decision-making process yet keeping it detailed enough to represent the range of each manager’s responsibilities.
A properly designed simulation exhibits only the principal features of a business system: in other words, the variables that drive the core business dynamics. A simulated hiring process might, for example, reflect the time it takes to recruit a new employee and the way an individual’s contribution improves with experience, yet exclude differences in performance among employees of equal tenure. The simulation must also establish a direct link between actions and performance to prevent participants questioning the validity of its results. There should be a logical connection between, say, the pricing and delivery terms of a bid and the prospect of its winning a customer order.
The more visible the logic, the better. If participants can understand not only their own area of expertise but also the dynamics of the entire business, they will realize how their decisions affect the rest of the organization. Simple devices like handwritten notes or poker chips representing employees, sales calls, or capacity can be passed between the players to help ensure transparency and reinforce learning.
The advantage of simulations based on board games is that they foster a team spirit that will help participants apply their learning in the real world. Though useful in their place, computer simulations can sometimes obscure the logic of causal relationships and isolate participants, depriving them of shared experiences.
After a successful simulation, participants will be keen to continue testing the system, pushing the limits, and improving their performance
Above all, simulations must be a challenge. At the end of a successful simulation, participants will not want to stop: they will be keen to continue testing the system, pushing the limits, and improving their performance. When their full attention has been captured in this way, learning will be automatic.
The case studies in the boxed inserts illustrate how simulations have changed managers’ behavior and improved business performance in three real companies.
When to play
Simulations do not work in every situation. Since creating a tailored simulation is costly and time-consuming, and there are limits to the number of real-world complications that any simulation can incorporate, it is crucial to identify the kind of business that will derive most benefit.
Simulations are especially valuable when the decisions of many people have to be coordinated before an organization can be effective. Another criterion is a degree of dynamic business complexity, whereby gaps in time and distance have the potential to create misunderstandings between managers. In addition, delays between decisions and their effects should be inherent in the real business system so that they can be collapsed in its simulated representation.
Done well, simulations can bring enormous benefits. Indeed, corporations using traditional management training programs may be wasting time and money by comparison. A well-designed simulation will yield much better results and prove more cost-effective, despite the initial expense of design and facilitation.
Simulations are also an ideal way of leveraging the experience of senior managers. When best practices developed over years are built into a simulation, multiple participants gain.
Until recently, few companies would have considered running a simulation designed specifically to meet their needs. Today, however, the software needed to create and support simulations is readily available, user-friendly, and continuously improving; moreover, top-level executives are growing more receptive to new approaches to implementing strategy. For their part, senior and middle managers are seeing their responsibilities expand in scope, and they are becoming more aware that doing the job properly means understanding and managing business dynamics issues. Once senior managers recognize their true power, simulations may come to play a crucial role in every successful corporate transformation. 
About the Authors
Dory Bertsche and Christopher Crawford are consultants, and Steve Macadam is a principal in McKinsey’s Atlanta office.