Sunday, September 10, 2006

The UCLA Executive Game

One of the early applications of computer simulation to business education was an "Executive Game" developed at UCLA. Multiple teams of "executives" would make financial decisions for imaginary firms competing in the business of manufacturing and selling widgets. [1] At the start of the game, each team was given an (identical) profit and loss sheet and balance sheet from the previous quarter for the "firm" they were taking control of.

For each fiscal quarter (usually about a quarter-hour of real time), each team would decide six values:
  1. Selling price
  2. Manufacturing volume
  3. Investment in plant
  4. Advertising budget
  5. Research & Development budget
  6. Dividend

These would be entered into the computer, and based on what the team had decided, what its competitors had decided, and a hidden variable representing general economic conditions, the computer would calculate sales, expenses, and profits for each firm, and print out new P&L and balance sheets. The simulation was a gross simplification of reality:

  • The initial condition of N identical single-product firms constituting the entire market was grossly unrealistic.
  • Non-numerical factors (e.g., quality of R&D, cleverness of advertising) were not considered at all.
  • Real executives have to decide on a much larger collection of budgetary figures.

However, the formulas in the game were intended to be fairly realistic, given the simplifications of the game. For example, advertising had a quicker effect than R&D, but the effect did not persist for as long, unit manufacturing costs depended on the ratio of production to nominal plant capacity, R&D reduced manufacturing costs as well as raising sales, cost of capital depended on net worth, and so on. One aim of the game was to get the players to think strategically, rather than just quarter-to-quarter, about how they were trying to position their firm (low-cost producer, top-of-the-line product, or whatever).

UCLA used the game to train its own business students, and also ran sessions for real executives (presumably at real executive prices--but that would include the donuts and the posh conference room). They also published a technical report completely explaining the internal workings of the game. [2]

Someone passed a copy of this report on to one of the students working at the DPL, with the suggestion that this might be a good way to interest the college's Business & Accounting Department in using the computer. Of course, UCLA's version was written for a different computer, but the report was clear enough, and the formulas were simple enough, that it was not too hard to produce a G-15 version of the program.

The DPL proudly invited the B&A Department's faculty and students to try out the new game. They came, politely played for an afternoon, and were never seen in the DPL again. [3]

However, the denizens of the DPL and their friends took to the game. It was a lot higher-tech than Monopoly, and probably somewhat more realistic--at least, it was my first exposure to P&L statements and balance sheets. We quickly discovered that the game gave no credit at all for paying dividends (they were just subtracted from cash on hand) [4], so we only had five decisions to make, instead of six.

The game also made no attempt to simulate the stock market, so share prices were not an issue, and there were no stock options. [5]

[1] This was long before the Web and web browsers; the term was probably adopted from the popular board game Monopoly.
[2] The principles of the Open Source Movement were being practiced long before it acquired its Capital Letters.
[3] But I did manage to get a substantial column-inch credit in my Journalism course by writing a long story about it that was published in the Napa Register.
[4] One wonders whether this was just an oversight, or was somehow prescient.
[5] I did not become a virtual millionaire until the bubble.


Comment by Anonymous Anonymous:

No Stock options. This game was doomed from the beginning! ;-)

10:52 AM  
Comment by Blogger Jim Horning:

Ah, but in the 1960s, hardly anybody had even heard of stock options, let alone coveted them!

11:39 AM  

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