Simulation for Strategic Decision Making in
Times of Uncertainty
By Greg Silverman, July 20, 2020
Uncertainty is a constant, yet businesses don't typically operate with this mindset. While events such as a PR crisis, market shifts, or new competitors happen in the course of business, a single unexpected episode felt simultaneously by both consumers and companies magnifies how uncertainty affects daily operations.
Events that shake our environment are nothing new, but when they affect society on a national or global scale, business leaders must adapt to the changing circumstances. However, that is typically easier said than done. As Strategy + Business explained, business leaders and decision-makers have a difficult time coping with uncertainty, and either extrapolate recent events into the future or reduce their spending across the board as a defensive measure.
This sudden reaction is not only in response to an event itself, but also the business beginning to understand there is uncertainty surrounding their immediate and future growth. Rather than react defensively to a volatile environment, business leaders must be able to make decisions that respond to the events at hand to achieve their goals under different market conditions.
Businesses need a new way to make strategic decisions during times of uncertainty, and simulation is the answer.
Capturing complex systems in simulation
Consider ecosystems, organisms, and even the city where you live - these are all complex systems that rely on the sum of their parts to operate smoothly. Complex Explained discussed how, in a complex system, different components interact with each other on a smaller scale to spontaneously influence behavior on a larger scale. Many study these complex systems scientifically in terms of biology and sociology, but businesses also operate in a complex system of their own and must understand how it influences their decisions.
The market is a complex system itself, where every interaction a consumer has with a brand, or another buyer influences their purchasing decision. In times of uncertainty, the typical behavior of the market is shaken, which in turn, changes the way businesses need to make decisions. The only way to accurately capture this complexity is through simulation that adapts to fluid situations and accommodates novel data.
With a simulated twin of the market, business decision-makers are able to test complex business questions such as "If I change my marketing strategy, how could consumers react?" By pulling different strategic levers in the simulation, organizations pinpoint which of their actions affect their desired outcome to make informed decisions in a timely manner, even when events seem beyond their control.
6 components of complex systems mapped by simulations
Market simulation is the next generation of prescriptive analytics that provides not only business information on what could happen but also the data-backed decision options that help make it happen. Let's explore the six components of complex systems that simulations accommodate to achieve precise and timely insight for decision-makers.
1. Emergence: Nobel winner and distinguished physicist Murray Gell-Mann once said, "You don't need something more to get something more. That's what emergence means." This is also the nature of strategic advantage - the ability to acknowledge the interaction between components has the ability to generate new information on a large scale. Even without drastic changes to the system, businesses must be prepared for new information or trends to emerge and capitalize on them to gain a competitive advantage in their market.
2. System dynamics: A complex system is interconnected so that the interactions of its parts produce their own pattern of behavior over time. In her book "Thinking in Systems," Donella H. Meadows explained that these systems are impacted by outside forces, and the internal response is never simple. And by connected, Meadows does not mean in a linear or organized fashion but rather a connection that spans in many directions simultaneously, creating a feedback loop that changes the underlying stock and flow of a model.
A static model simply cannot handle the system dynamics present in the market, but a simulation accurately captures the underlying feedback loop to show consistent behavior patterns emerging to help businesses make strategic decisions.
3. Consumers: Consumers are a complex system on their own. Each is influenced by their own experiences and beliefs, as well as their interactions with brands and fellow consumers. For a long time, understanding consumer behavior relied solely on scrutinizing past data and trends, but in unprecedented times, even the most well-developed historical model may fail to predict their behavior. Simulation not only takes into account past behaviors but goes a step further to understand how consumers interact in the system - their perceptions, expected utility, and influence - and create emergent opportunities to succeed.
4. Competitor actions: What are your competitors doing in the market, and how can you respond? A simulation addresses how competitors and their decisions impact your organization - whether it be creating more demand or taking shares. Demand, especially in uncertain times, is not inevitable, so it's essential to understand your competitors to continue capitalizing on your market, even if it's smaller due to current events.
5. Marketplace boundaries: Of course, understanding your customers and competitors is only beneficial if you're focusing on the correct space. Simulation allows teams to define who they are trying to acquire and acknowledge the correct competitors in the industry. Setting marketplace boundaries helps businesses stay alert to existing and emerging competition, so they adjust their strategy or take advantage of a new opportunity themselves.
6. Resource constraints: During uncertain times, resources may be tight, and models should be able to account for that and show how reducing spend in certain areas has the potential to affect sales. Simulation puts the power of prescriptive analytics in a business user's hands to provide faster, better, and cost-effective decision-making when every dollar counts.
Simulation helps businesses build scenarios and make strategic decisions to respond to uncertain events as opposed to react. Concentric has the planning platform to help businesses make agile and accurate decisions for these unprecedented times and beyond. Contact us today to learn more.