AN EXPERIMENT IN A PHENOMENOLOGICAL APPROACH TO THE STUDY OF BUSINESS DECISION-MAKWG Thesis for ihe Degree of D. 8. A. MiCHiGAN STATE UNNERSH’Y Richard Ailan Norman 1966 r} 1.1831417, 'g 5'! Ciiig‘fl'l S 3: . THnols ’ 5 [;§,“_,_,,..._;. by , t -—_—-—-.-——--- n“ A C This is to certify that the thesis entitled AN EXPERIMENT IN A PHENOMENOLOGICAL APPROACH TO THE STUDY OF BUSINESS DECISION-MAKING presented by RICHARD ALLAN NORMAN has been accepted towards fulfillment of the requirements for DOQIQRAL degree inflUSlNESSJDMINISTRATION afim Major professor 0-169 ABSTRACT AN EXPERIMENT IN A PHENOMENOLOGICAL APPROACH TO THE STUDY OF BUSINESS DECISION—MAKING by Richard Allan Norman Business behavior is often considered to be a direct function of the business environment: specific changes in the environment cause managers to make specific decisions. An alternative approach is to consider the business deci- sion-maker as an active element in the process, organizing and interpreting environmental changes and choosing appropriate action according to his own definition of the situation. This work reports the results of an exploratory experiment designed to discover some of the problems and opportunities to be found in applying the latter model to business decision-making. A business game was the research vehicle. The deci- sion behavior of nine teams of undergraduate business students competing in a common "business environment" was used to test the notion that each team would develop a unique definition of the business situation as a basis for its game decisions. An opening series of plays under stable game conditions provided a basis for the development of the team's definition of the situation. Then a drastic change in the game conditions presented a new challenge. The resulting team decisions conformed reasonably well to the Richard Allan Norman previously developed patterns; each team responded differ- ently, in terms of its own definition of the situation and in the predicted direction. This model of business decision behavior deserves further research and development. While the present study was confined to the problem of detecting and describing models of the situation without regard to where they came from or how they were formed, while the test situation was vastly over-simplified, and while the method of analysis was primitive, the results suggest that it may be possible to develop understanding of the relationship between a businessman's definition of his business situation and his business behavior. Not only would such understanding have considerable business value, but also it could contribute significantly to the development of a general theory of the firm. AN EXPERIMENT IN A PHENOMENOLOGICAL APPROACH TO THE STUDY OF BUSINESS DECISION-MAKING By Richard Allan Norman A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF BUSINESS ADMINISTRATION Department of Management 1966 ACKNOWLEDGMENTS As anyone who has tried it knows, writing adequate acknowledgments for a work of this kind is impossible: so many people have made so many contributions that one cannot hope to express his proper appreciation within any reason- able compass. And in my case the difficulty is multiplied because I had the privilege of being a part of the General Electric Company for more than twenty-five years, piling up an intellectual indebtedness that can never be repaid. I am deeply grateful to all of my associates at General Electric, but perhaps most of all to Henry F. DeLong, General Manager, Metallurgical Products Department, a good friend and in my Opinion a model of what a good manager should be. On important occasions he had more confidence in me than I had in myself; he offered encouragement when it was needed and he helped me find my own way. To me, his ability to do this is what has made him the great manager he is. I also want to express my appreciation for all of the help I have received from my colleagues and from the faculty at Michigan State University and especially the advice and counsel of my chairman, Dr. Dalton E. McFarland. Dr. Richard C. Henshaw, Jr., kindly granted me permission to quote ex- tensively from the 1966 mimeographed version of "The Executive 11 Game" used by the College of Business at Michigan State University. But of course most of all it was Elizabeth, my wife, who made_the whole thing possible. It is impossible for me even to begin to express how much I have depended on her or how much she has contributed to this work, but I hope she knows how much I appreciate it. iii TABLE OF CONTENTS ACKNOWLEDGMENTS . . . LIST OF TABLES Chapter I. II. III. PART I. INTRODUCTION. THE ISSUE Objectives of the Research . The Conceptual Foundation for the Research The The The The Problems Addressed by the Research . Research Approach. General Conclusions . Organization of the Thesis. THE DECISION PROBLEM . . . The Mechanistic Approach. Limitations of the Mechanistic Approach. Behavioral Approaches. . . The Phenomenological Approach Conclusion THE RESEARCH PROBLEM . Underlying Problems of Phenomenological Research . . General Guidelines for the Research . The Basis for the Research Approach . Limitations . . PART II. THE EXPERIMENT iv Page ii vi Chapter Page IV. RESEARCH DESIGN 51 The Research Vehicle: The Executive Game . . . . . . 51 The Research Program: The Collection of Data . . . . . . . . 60 The Analysis of Data . 63 V. THE RESEARCH RESULTS 66 The Decision Environment . . . . . . 66 Team #1--Widgets, Ltd. The Response Model. . . . . . . . 72 Team #2--GAS Industries: The "Best" Sales Volume Model . . . . . 77 Team #3--Aurora, Inc. The Market Share Model . . 83 Team #A--BHM Electrical: The Operating Efficiency Model . 88 Team #5-—Exacta Corp. The Maximum Volume Model 93 Team #6--NAMCO: The M0 Team #7--Slater Company: Price Model. . . Team #8--Universa1 Industries: The High Price Model Team #9--Spartan Iron C Inventory Control Mod Summary of Results Conclusion. VI. CONCLUSIONS . . General Conclusions. Specific Conclusions Future Possibilities: Studies . . Future Possibilities: Future Possibilities: Studies . . Future Possibilities: APPENDICES . BIBLIOGRAPHY . . . . del-Less Model. . 99 The Efficient . . 104 . . . . . 110 ompany: The e1. . . . . . 11M . . 120 126 . . 129 . . . . . 129 . . . . . . . 133 Laboratory . . . . . . . 137 Business Studies . 138 Education . . . . . . . 1&2 Business Theory . 1A3 146 167 Table \DCDNONUl 10. ll. 12. 13. 14. LIST OF TABLES Page Game Data Sheet . . . . . . . . . . 53 Computer Statement . . . . . . . . . 56 Price, Sales and Profit Data Available to all Firms . . . . . . . . . . . . 67 Year #1 Results . . . . . . . . . . 69 Year #2 Results . . . . . . . . . . 70 Game Performance--Team #l--Widgets, LTD. . 72 Game Performance--Team #2--Gas Industries . 78 Game Performance—-Team #3--Aurora, Inc. . . 8D Game Performance--Team #AE-BHM Electrical . 89 Game Performance--Team #5--Exacta Corp. . . 9“ Game Performance--Team #6--NAMCO . . . . 100 Game Performance--Team #7--Slater Co. . . 105 Game Performance--Team #8—-Universa1 Industries. . . . . . . . . . . . 111 Game Performance--Team #9--Spartan Iron Co. . . . . . . . . . . . . . 115 V1 PART I THE ISSUE CHAPTER I INTRODUCTION Objectives of the Research Decision--the choice of some specific act from a set of possible acts--lies at the heart of the systems of human activities we call businesses. This study was designed to find out something about the business decision-making pro- cess: to test an approach to the problem of determining why a decision-maker in a particular business situation chooses one course of action rather than another. The study is based on the premise that a decision-maker makes his choice on a basis of his own definition of the situation;1 he decides on a basis of the present and future possibilities that he perceives in the situation rather than the "facts" of the situation as others might see them. If this is so, then to explain or predict an individual decision-maker's 1This phrase, used throughout the paper, is taken from the work of w. I. Thomas. In a sense, this research is based on the Thomas theorem which asserts "If men define situations as real, they are real in their consequences." w. I. Thomas, "The Methodology of Behavior Study," Social Behavior and Personality, ed. Edmund H. Volkhart (New York: Social Science Research Council, 1951), p. 81. The phrase is used and the concept discussed in the organization con- text in James G. March and Herbert A. Simon, Organizations (New York: John Wiley and Sons, Inc., 1958) pp. 151-7. choice in a particular situation one must know something about how he perceives, organizes and evaluates the elements of that situation as well as how his definition of the situ- ation relates to his decision behavior. The problem this poses is how to go about finding what a decision-maker's definition of his business situation is and how it operates in determining his business behavior. This study provided an experiment in a general approach to that problem; its purpose was to explore the difficulties and opportunities such an approach presents to the study of business decision- making. The Conceptual Foundation for the Research The general class of human activity we call business is such a pervasive part of modern life that its significance as a subject of research can be asserted without argument. This particular research addresses those special systems of human behavior we call "businesses." Throughout the study these systems are treated as the cybernetician would view 2 In address- them: not as things, but as ways of behaving. ing a business, the researcher does not ask "what is this thing?" but rather "what does it g9?" It supposes that this pattern of activity we call a business could take many forms and it asks why it takes the particular form it does. Why does it deal in the products it does? Why does it make one 2W. Ross Ashby, An Introduction to Cybernetics (New York: John Wiley and Sons, Inc., 19577, pp. 1, 2. g . component and buy another? Why does it raise prices instead of lowering them? In short, why is a business what it is? Sooner or later the answers to these questions go back to decisions of the people of the business. To find out what makes a business what it is we must find out something about how people make their business decisions and why they choose one action rather than another. This question is the basic concern of this research. The decision problem can be attacked from two quite different and in some ways mutually exclusive standpoints: the "objective" or "external" and the "perceptual" or "phenomenological."3 The objective standpoint is located outside of the decision situation. It is the viewpoint of an observer who has access to all of the past and present as well as some of the future "facts" not only of a particu- lar situation but also of many similar situations and who seeks to explain the decision-maker's behavior in the light of all of those observed facts. Oppositely the locus of the phenomenological approach is the decision-maker himself. Metaphorically speaking, the observer seeks to see the situation through the decision-maker's eyes, taking into 3For treatments of the differences between these approaches see Donald Snygg, "The Need for a Phenomeno- logical System of Psychology," The Phenomenological Problem, ed. Alfred E. Kuenzli (New York: Harper and Brothers Pub- lishers, 1959), pp. 3-27; R. B. Macleod, "The Role of Phenomenological Analysis in Social Psychological Theory," Current Perspectives in Social Psychology, ed. E. P. Hollander and Raymond G. Hunt (New York: Oxford University Press, 1963), pp. 28-A1. account his interpretation, organization and evaluation of the situation, seeking an explanation of his decision in the facts which were pertinent to him at the moment of de— cision. These two approaches deal with quite different sets of facts; they accordingly tend to yield quite different and sometimes quite contradictory explanations of the same decision behavior. Much of the past research of business decision-making, whether focused on the business as such or on the individual in the business situation, has favored the objective view- point. One general class of approach has been to study actual behavior in terms of explicit or implicit standards of what business behavior should be, based on certain as— cribed objectives and standards, and then to search out causes and corrections for the deviations. An opposite class of approach starts with various factors which might tend to influence the decision-maker's behavior in particular ways. Still a third approach uses a kind of averaging process to determine how most decisions usually are made in certain general classes of situations. These approaches are nomo- thetic: they seek general laws applicable to general cases.” While they provide valuable insights to the decision process and speak with authority on what should, could or might happen in general classes of situations, they do not seek ”For a discussion of nomothetic and ideographic ap- proaches to this class of research see Gordon W. Allport, The Use of Personal Documents in Psychological Science (New York: Social Science Research Council, 1942), pp. 53—64. to explain what gig happen or predict what wiii happen in any specific case. The laws of the general case are of undeniable im- portance to our understanding of business, but if one assumes free will, the actual behavior of the individual decision— maker is also of crucial importance to both the business practitioner and the business researcher. He is the one who determines what will happen in the "real" case. Whether one assumes business to be a convergent phenomenon seeking equi- librium in a closed system or assumes it to be an emergent phenomenon seeking new directions of growth in an open system,5 the actual performance of the operating unit must be explained in terms of the choices of the individual. His decisions, whether they are considered to be creative or deviant, information or noise, determine what the business is. And to understand something of them requires an idio— graphic approach, an approach that deals with the individual case and that is centered on the decision—maker as the in- dependent variable, the active agent in the situation. This research explores the possibilities of such an approach. 5For discussions of these differences see Irving Langmuir, "Science, Common Sense and Decency," Science, Vol. 97, N0. 2505 (January, 1943), pp. 107, and R. Boguslaw, The New Utopians (Englewood Cliffs, New Jersey: Prentice- Hall Inc., 1965). With regard to decision theory, see Charles F. Wilson and Marcus Alexis, "Basic Frameworks for Decisions," Journal of the Academy of Management, Vol. 5, No. 2 (August, 1962), pp. 150-164. The Problems Addressed by the Research The basic problems this research addresses are (1) how to find out what a business decision—maker's definition of a situation is and (2) how to relate that definition of the situation to his decision behavior. The underlying postulates are these:6 1. Business decisions are purposeful; they are not random or capricious. 2. Business decision's are determined by the decision- maker's current definition of his business situ- ation: the present facts and future possibilities that he perceives in the existing situation.7 3. The decision—maker's definition of his business situation has properties such as these: a. Discriminable elements: it is made up of the set of elements he differentiates in the situation. b. Organization: the elements are related to one another and to the whole in some way that is meaningful to the decision-maker. c. Fluidity: the content and organization of the definition of the situation is subject to change. 6These are partially derived from Arthur W. Combes and Donald Snygg, Individual Behavior (revised edition; New York: Harper and Row, Publishers, 1959), pp. 16-36. 7Kurt Lewin, "Field Theory and Learning," Field Theory in Social Science, ed. Dorwin Cartwright (New York: Harper and Row, Publishers, 1964), pp. 60-84. d. Stability: the rate at which the definition of the situation can change is limited. 4. Although each person's definition of his situation is a unique product of his particular background, it is taken to be grounded in some common "reality;" thus it is possible for one person to understand enough of another's definition of his situation at a given point in time to explain and predict some aspects of his behavior in that situation and at that time. (Note that this study is concerned with what an individual's definition of his situ- ation is at the time of decision and how it relates to his decision; it is not concerned with where his definition of the situation comes from or why he defines it in the particular way he does. For our purposes of the moment this is considered as a separate field of study.) These postulates assert that while the decision of the individual is quite unique, people share certain general ap- proaches to perceiving and organizing present facts and future possibilities.8 The central task is to find out something about these general approaches--to find out in a general way 8For a discussion of some of the concepts underlying these postulates see George H. Mead, Mind, Self and Society (Chicago: The University of Chicago Press, 1934) and Herbert Blumer, "Society as Symbolic Interaction," Human Bshavior and Social Process, ed. Arnold M. Rose (Boston: Houghton Mifflin Company, 1962), pp. 179-192. how people go about defining their individual business situ- ations.9 How do they perceive, differentiate and categorize its elements? How do they relate those elements one to an- other in terms of some over—all direction or purpose? What internal consistency is required? Then how do they modify their definition of the business situation? How do they change it and at what rate can they change it? How much consistency must be maintained over time? And then what is the relationship between the decision-maker's definition of the situation and his actual decision behavior? If one can reconstruct a decision-maker's definition of his business situation, can he use it to define the set of alternatives the decision-maker will consider in a particular case? Can he use it to predict the direction and magnitude of the decision-maker's response in a given situation? But one must seek answers to these general questions at the level of the individual decision-maker. How does one go about finding what a particular person's definition of a specific business situation is in a given instance? How does he detect and measure its changes? And how does one relate his understanding of an individual's definition of his situation to actual decision behavior in specific cases? If one seeks the answers to these questions by the direct approach of asking the subject, the question tends 9For a discussion of this general problem see Jerome S. Bruner, Jacqueline J. Goodnow and George A. Austin, 5 §tudy of Thinking (New York: Science Editions, Inc., 1956). 10 to destroy its own purpose by changing the subject's per— ception of the situation. The alternative approach of non— directive observation either throws the observer back into a behavioral approach or, what amounts to the same thing, invites the researcher to interpret the subject's statements and actions in terms of the researcher's own definition of the situation. This study did not set out to resolve these basic problems of research methodology but to explore prag- matically the feasibility and utility of a specific way of gaining experience with the general conceptual framework provided by the pehnomenological approach in a business setting. In short it attempted to test a way of finding out what a business decision-maker's definition of a busi- ness situation is and how that definition of the situation relates to business behavior. The Research Approach This research explored the concept that a business decision-maker has what to him is a satisfactorily con- sistent, coherent, stable over-all picture of his business situation. It assumed that his specific statements about the operating details of his business as well as his specific day-to-day business actions are all inter-related bits and pieces of a single total picture. Hence if one were to col- lect a wide variety of such bits and pieces--such things as discussions of specific operating rules and limitations, ex— planations of policies, arguments for specific decisions, ‘i P v 11 and actual decisions as they occur in the context of actual operating conditions--one should be able to fit them into a more or less accurate and useful over—all approximation of the decision-maker's total picture: his definition of the business situation. While one would expect such a construct to be subject to continual change, one might also anticipate that its basic configuration will not change so fast as to destroy its usefulness as a subject of research. A business game served as a laboratory for a controlled experiment in the use of the phenomenological frame of refer- ence in the study of business decision-making; it provided not only a business-like situation, but also one that could be suitably observed and controlled for the purposes of the research. Teams of college students served as decision- making units; each team was considered as an individual decision-maker.lO The written plans and strategy statements of the team members, their individual forecasts and decision recommendations and the team decision discussions provided the raw data for reconstructing the team's definition of its situation. After an opening series of team decisions had provided an opportunity to develop an understanding of each 10This use of the term decision-maker is the same as that expressed by R. Duncan Luce and Howard Raiffa, Games and Decisions (New York: John Wiley and Sons, Inc., 1957), p. 13: "Any decision—maker——a single human being or an organization--which can be thought of as having a unitary interest motivating its decisions can be treated as an in- dividual . . ." The concept is discussed in more detail in Chapter III, p. 48. 12 team's basic mode of approach, a drastic change was intro- duced in order to find out how each team would respond to new conditions and how its responses related to its pre— viously established definition of the situation. After a subsequent series of plays the accumulated data were ana— 1yzed not only from the standpoint of characterizing each team's unique approach to the problem, but also from the standpoint of finding out something about how the teams went about selecting, organizing and using their definitions of the situation. Although each team exhibited the expected highly individual decision behavior, they all appeared to follow the same general approach to the problem, using simi- lar techniques to deal with the game's uncertainties and ambiguities. The General Conclusions These experiments indicate that this general avenue of research is worth pursuing. The basic concept of the phenomenological approach--that is, the idea of viewing busi— ness decision-making from the standpoint of the decision- maker--promises to provide an effective approach to explain- ing why an actual decision is what it is and thereby to afford insights to the mechanisms that make a business the unique system of behavior it is. The inductive approach of fitting a large number of specific bits and pieces of in- formation together to form a more or less consistent and stable decision framework appears to offer a practical l3 approach to applying the concept to actual situations, pro- vided a more rigorous and systematic method of handling the data can be developed. But the most challenging and po— tentially rewarding problems revealed by the research center on the study of the processes the decision-maker uses to construct and modify his definitions of business situations. Decision-makers appear to have certain basic ways of ap- proaching and dealing with the highly complex, uncertain, ambiguous situations found in business. They seem to choose a focus of attention11 or a direction of change which serves to give meaning to the elements of the situation and around which the elements of the situation can be organized. They seem to use various coding devices for simplifying the situ- ation by reducing the number of alternatives that need to be considered at any one time to a "manageable" number and by suppressing confusing uncertainties or unwanted vari- ations.12 If we can find out something about how these pro- cesses apply to the practice 6f business decision-making, we may be able to increase not only our understanding of the operation of the business organism, but also our ability to use it effectively for human good. 11March and Simon, loc. cit., p. 152. 12George A. Miller, "The Magical Number Seven, Plus or Minus Two: Some Limits on our Capacity for Processing Information," The Psychological Review, Vol. 63 (March, 1956). pp- 81-97. 14 The Organization_of the Thesis The foregoing has set the general background for the research: its objectives, its conceptual foundations, the nature of the problem it addressed, the way it attacked that problem and the possible contributions that might arise from the study. The following chapters report the research findings and conclusions. Chapter II discusses the ways in which the phenomenological approach may serve to supplement some of the more usual approaches to the decision problem. Chapter III discusses some of the difficulties of the phenomenological approach and the details of how this parti- cular research approach was laid out. Chapter IV treats the research design: it describes the game, how it was played and how the play was observed and recorded to provide the desired data. Chapter V reports the findings of the research: how each team perceived the game situation, the focal point it chose as a basis for organizing its approach and the re- sulting decision patterns. Chapter VI discusses the impli- cations of the experiment: the general conclusions that may be drawn and the future possibilities that flow out of this particular definition of the definition of the situation. CHAPTER II THE DECISION PROBLEM This research addresses the basic question of what makes a business what it is: why, out of all the forms it might take, a business takes the particular form it does. It seeks to attack this problem through the study of de- cision-making: why does a business decision-maker in a particular situation choose one course of action rather than some other possible courses of action? A review of past work in this area reveals that much of it has sought understanding of decision processes from an objective view- point, seeking to classify relationships between objectively observable conditions or events and associated actions. While these approaches have produced a considerable body of significant and highly useful knowledge, they tend to leave a part of the problem untouched: the part of the decision- maker as such, as an active agent capable of evaluating alternatives and making real choices. This chapter seeks to show how this problem fits into some of the more usual approaches to decision-making and how the phenomenological method may serve to supplement those approaches in develop- ing our understanding of the decision-making process. 16 The Mechanistic Approach The term mechanistic is used to refer to all those ap- proaches to the study of business that consider a business as a system of activity that is fundamentally determined by its environment. In this viewpoint a business is taken as a member of a closed system; its operating conditions and its goals are determined by the greater system of which it is a part and thus its behavior can be fully explained in terms of its responses to the demands imposed on it by the forces of that greater system. These approaches tend to con- sider business to be a convergent phenomenon; they search for the general laws that govern all business behavior. Their methods tend to be quite objective: they take the vieWpoint of an omniscient outside observer who sees the system as a whole; then they seek to associate the stimuli they perceive in the environment with the responses of the businesses, searching for central tendencies and averages in large num- bers of cases.1 The underlying model that provides the conceptual framework for most of these studies is the economist's con- cept of the perfect firm in the perfectly competitive market. In this viewpoint a business is considered to be a completely rational profit maximizing mechanism that converts inputs to outputs by some set production function in response to 1A number of writers have reviewed and categorized the varieties of approaches to the study of business. See for example and for references Joseph W. McGuire, Theories of Business Behavior (Englewood Cliffs, N. J., Prentice— Hall, Inc., 1964). 17 whatever conditions are imposed on it by its factor and product markets. It has complete information about its environment, its goals are defined and its operating mechanism is essentially fixed. Its central task is to adjust its rate and mix of inputs and outputs to meet the demands and conditions determined for it. In short, the business is a determinate machine; it is completely deter- mined by its environment.2 This model, like the concept of the frictionless engine or the noiseless communication channel, is not in- tended to represent actual business conditions but to serve as a conceptual device, an abstraction of certain operating tendencies, a logical construct representing how a business should (and presumably could) operate under ideal conditions. While it does not purport to represent how a business can or does operate under actual conditions, it is often taken as a desirable theoretical objective, a goal for which business- men should and do strive. And as such, it is often taken as a bench-mark for the analysis of actual operations; economic efficiency becomes a norm against which actual operations 2These basic concepts are expressed in most currently used economics texts. See for example Kenneth E. Boulding, Economic Analysis (3d ed.; New York: Harper and Brothers, 1955), pp. 491-503; Milton Friedman, Price Theory (Chicago: Aldine Publishing Company, 1962), pp. 93-94; Richard H. Leftwich, The Price System and Resource Allocation (New York: Holt, Rinehart and Winston, 1960), pp. 12, 107; H. H. Liebtrofsky, The Nature of Price Theory (Homewood, 111.: The Dorsey Press, Inc., 1963), pp. 216é246; Tibor Scitovsky, Welfare and Competition (Chicago: Richard D. Irwin, Inc., 1951), pp. 109-113. 18 should be measured. Thus in this conceptual framework, the problem of understanding business decision-making becomes one of understanding what choices should be made according to the dictates of the economic model as well as how and why actual business choices differ from what they should have been. The problem of the differences has been approached in decision theory.3 Where the pure economic model supposes that the decision-maker has complete information as a basis for his choices, decision theory considers the cases where he does not have such information. It still considers the firm as a determinate machine with goals that either are or can be objectively defined or ranked, but it considers how the business should operate in the presence of uncertainty or risk or both and seeks to define the rules and procedures the decision-maker should follow to accomplish his purposes under such conditions. Probability theory, operations re- search, game theory, utility theory and a variety of other related disciplines and techniques treat different aspects of the problem, but all within the conceptual framework of 3Some general reviews of the bases for varieties of decision theory are Stephen H. Archer, "The Structure of Management Decision Theory," Academy of Management Journal, Vol. 7, No. 4 (December, 1964), pp. 269-287; William J. Gore and Fred S. Silander, "A Bibliographic Essay on Decision-Making," Administrative Science Quarterly, Vol. IV, No. 1 (June, 1959), pp. 97—121; Martin Shubik, "Studies and Theories of Decision-Making," Administrative Science Quarterly, Vol. 3, No. 3, pp. 289-306. ___,__i ‘.,___ 19 the determinate machine. The system is taken to have an objectively knowable goal; it operates on a basis of certain objectively determinable facts. The basic problem is not really a problem in decision at all; it is one of designing a program or procedure that will make the best possible use of the information available in achieving a specified ob- jective or result. Discrepancies between actual and ideal performance are to be expected because of random variations in the phenomena themselves or because of lack of knowledge, but such discrepancies can be accounted for and controlled by appropriate techniques. Basically, decision theory addresses a problem of machine design. Other students of business decision-making processes seek to explain the differences between what a business is and what it should be in terms of human factors. These approaches either explicitly or implicitly accept the busi- ness as a determinate machine; they focus on the causes and corrections of inefficiencies resulting from human errors, human limitations and human nature. For example the scien- tific management of Frederick Winslow Taylor was based on an acceptance of the existence of a "one best way" and de- voted itself to the technical problems of finding and effecting it.“ Likewise the so—called human relations ”Frederick W. Taylor, "The Principles of Scientific .Management," Classics in Management (New York: American Management Association, 1960), pp. 82-113. (Originally in SCieruflidc Management (Hanover, N. H.: Dartmouth College, 1912 1, pp. 22-55). 2O approaches that followed scientific management accepted the notion of determinable organizational standards and goals; it measured performance against such standards and concerned itself with the problems of getting people to accept and conform to the objectives of the firm.5 Many of the more recent empirical studies of organization be- havior also take the general mission of the business and its standards of performance as an externally imposed, immutable framework and describe individual behavior in terms of that framework either as conforming to it or re- belling against-it or twisting and distorting it.6 In all of these views the actual behavior of the business-~what the business is--is explained in terms of an implicit or explicit norm and the deviant behavior of the individuals who take part in it. A variation of this approach again accepts the theo- retical existence of the perfect business mechanism but seeks to explain the actual in terms of human limitations. By this view men would achieve the ideal of the economists if they could but they cannot_because of the limitations of their 5For example, Rensis Likert, New Patterns of Manage- ment (New York: McGraw-Hill Book Company, Inc., 1961) or Douglas McGregor, The Human Side of Enterprise (New York: McGraw-Hill Book Company, Inc., 1960). 6Chris Argyris, Interpersonal Competence and Organ- izational Effectiveness (Homewood, Illinois: The Dorsey Press, Inc., 1962); Victor A. Thompson, Modern Organization (New York: Alfred A. Knopf, 1961). 21 physiological equipment.7 They are simply not capable of gathering all available information nor are they capable of processing and evaluating all that they can gather. Hence while the ideal of what a business should do holds as'a basic objective and action framework, what a business does do or can do is considered to be determined by the infor- mation handling capabilities of the decision-makers. This line of reasoning suggests that the core problem centers on devising means of extending the individual's data pro- cessing capacity by the use of computers and self-regulating equipment: to minimize if not eliminate human intervention in the business mechanism. In all of these concepts business decision-making in the sense of a free choice between different possible and 9 desirable alternatives does not exist in any positive sense. Risk may exist, but the mechanisms of choice are reducible 7Herbert A. Simon, Administrative Behavior (2d ed. with new introduction; New York: The Macmillan Company, 1957); Richard M. Cyert and James G. March, A Behavioral Theory of the Firm (Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1963). 8Herbert A. Simon, "The Corporation: Will It Be managed by Machines?" Management and Corporations, ed. IWelvin Anshen and Gary Leland Bach (New York: McGraw-Hill .Book Company, Inc., 1960), pp. 17-55; Harold J. Leavitt and 'Thcmas L. Whisler, "Management in the 1980's," Harvard Busi- lness Review, November-December, 1958, pp. 41-48. gcharles K. Ramond, "Theories of Choice in Business," TTua Frontiers of Management Psychology, ed., George Fisk (bkaw York: Harper and Row, Publishers, 1964), pp. 3-17. 22 to rational rules of behavior. Uncertainties may exist, but they too are reducible to mathematical formulae, at least in theory. Supposedly there are ways of determining some "best" course of action in any given business situation with any given amount of information. Limitations of the Mechanistic Approach The mechanistic approach to business decision-making seeks first to show how a business mechanism responds to certain given inputs of information under certain given goal conditions. It attempts to describe the business's sensing apparatus, its automatic transformation mechanisms and its internal regulating devices. Then it seeks to detect and describe the possible sources of inefficiencies or noise in the system and to prescribe means of reducing and controlling such unwanted variations. However this entire structure rests on the "givens": the information inputs on which it operates and the output goals which regulate its operation. Thus while it may be able to prescribe how certain infor- mation should be processed to achieve selected goals or to describe what information might usually be expected to be selected and processed in developing and arriving at gener- ally accepted goals, it has difficulty explaining or pre- dicting what decision an individual actually makes in a given situation. The central reason for this difficulty is that his inputs to the decision mechanism are uniquely his own; they are functions of his perception and inter- pretation of the world and his relationship to it. Hence 23 even though the decision-maker uses impeccable logic in his decision processes, taking advantage of all available cor- rection factors and regulating devices, the output--his choice of action--will be largely determined by his inputs: the facts which he sees as significant to his situation. While relatively little work has been done in explor- ing the nature of the inputs to business decision-making processes, students have long recognized the crucial role of people's systems of beliefs and values in probability theory. The so-called subjectivist school of statistical decision theory10 "holds that probability measures the confidence that a particular individual has in the truth of a particular ."11 According to Lord Keynes, "The term proposition. certain and probable describe the various degrees of rational belief about a proposition which different amounts of know- ledge authorize us to entertain. . . . To this extent, there- fore, probability may be called subjective."l2 These state- ments serve to highlight the concept that decision theory deals more with people's knowledge and beliefs about the real 10Frank P. Ramsey, The Foundations of Mathematics and Other Logical Essays (New York: Harcourt, Brace and Co., 1931); Leonard J. Savage, The Foundations of Statistics (New York: John Wiley and Sons, Inc., 1954); Robert Schlaifer, Probability and Statistics for Business Decisions (New York: McGraw-Hill Book Company, Inc., 1959). llSavage, op. cit., p. 3. 12John Maynard Keynes, A Treatise on Probability (New York: Harper and Row, Publishers, Harper Torchbook edition, 1962). 24 world than about objective facts of the real world: that it measures "confidence in the truth of a particular propo- sition," "degrees of rational belief;" it centers on a "state of mind."13 This is not to say that probability is subject to human caprice. As Keynes points out, "A propo- sition is not probable because we think it so. When once the facts are given which determine our knowledge, what is probable or improbable in these circumstances has been fixed objectively, and is independent of our opinion."lu However, the key phrase is "when once the facts are given." What facts? Given by whom? R. Duncan Luce, in the introduction to Individual Choice Behavior, states the problem as follows: So far, there seems to have been an implicit assumption that no difficulty is encountered in deciding among what it is that an organism makes its choices. Actually, in practice, it is extremely difficult to know, and much experimental technique is devoted to arranging matters so that the organism and the experimenter are (thought to be) in agree- ment about what the alternatives are. All of our procedures for data collection and analysis require the experimenter to make explicit decisions about whether a certain action did or did not occur, and all of our choice theories--including this one-- begin with the assumption that we have a mathemati- cally well-defined set, the elements of which can be identified with the choice alternatives. How these sets come to be defined for organisms, how they may or may not change with experience, how to detect such changes, etc., are questions that have received l3Nicholas Georgescu-Roegen, "The Nature of Expec- tation and Uncertainty," Expectations, Uncertainty, and Business Behavior, ed. Mary Jean Bowman (New York: Social Science Research Council, 1958), p. 12. l“Keynes, 0p. cit., p. 4. 25 but little illumination so far. There are limited experimental results on these topics, but nothing like a coherent theory. Indeed, the whole problem still seems to be floundering at a conceptual level, with us hardly able to talk about it much less to know what experiments to perform.1 In other words, while the decision system itself may be logical and internally consistent, it is not independent and it is not closed. It depends on certain inputs of "amounts of knowledge" and "states of mind;" these are the raw materials with which it works. As these inputs change, the outputs will change, so that in many respects choice lies not at the output end but at the input both with re— spect to the information and the decision system used. Hence, to explain a particular decision, it is not enough to account for the rational processes that a decision-maker could or should use in a particular situation; it is also necessary to know something of his "amount of knowledge" and "state of mind;" we must know how he defines the situation. But the problem extends beyond knowledge of possible states of the world. Choice of action depends not only on one's expectations--his beliefs about alternatives and probable outcomes--but also on his preferences in the specific situation in which he finds himself. The problem of utility measurement is of equal significance to decision theory as is the problem of expectations.16 In the business 15R. Duncan Luce, Individual Choice Behavior (New York: John Wiley and Sons, Inc., 1959), pp. 3-4. 16For a discussion of the place of utility theory in 26 situation, the simple notion of profit maximization seldom, if ever, presents a useful, clean-cut, unambiguous goal suitable for decision purposes. Rather, it is but one member of a set of goals, hedged by all manner of considerations ranging from government regulations to the company president's self-image. There is no need to review utility theory here;17 suffice it to say that currently the closest approach to a means of objectively defining or measuring utility seems to be to have the subject express his preferences in terms of an imaginary lottery that may be compared with the real choice situation,18 and even this approach is hedged in by somewhat questionable assumptions of transitivity and localization of effects. All this is not to say that utility theory does not play an important and useful part in decision theory. How- ever, the problems that have been encountered in treating individual preferences objectively lend emphasis to the vital decision problems, see Chapter 2, R. Duncan Luce and Howard Raiffa, Games and Decisions (New York: John Wiley and Sons, Inc., 1957), pp. 12-38. 17The basic problem is discussed by R. Duncan Luce and Howard Raiffa, Ibid. Among the classic reviews of the problem are Kenneth J. Arrow, "Alternative Approaches to the Theory of Choice in Risk Taking Situations," Econometrica, Vol. XIX (October, 1951), pp. 404-437; Ward Edwards, "The Theory of Decision-Making," Psychological Bulletin, Vol. 51, No. 4 (July, 1954), pp. 380-417; and Mary Jean Bowman (ed.), Expectations, Uncertainty, and Business Behavior (New York: Social Science Research Council, 1958). 18Robert Schlaifer, Probability and Statistics for Business Decisions (New York: McGraw-Hill Book Company, Inc., 1959), pp. 24-48. 27 role of the individual--his definition of the situation, his expectancies and his preferences—-in the decision pro- cess. Thus the classical approach to business decision— making leaves us with the problem of the givens. Any busi- ness situation provides an almost infinitely large number of possibilities for organization and interpretation. What facts sss pertinent in a given situation? What elements are to be differentiated and categorized? How are they to be organized and related to one another? And to what pur- pose? What is the underlying principle of organization, the direction of change that gives meaning and connectedness to the various elements of the situation? The bare elements of the situation have no meaning or organization by themselves; they derive their significance and their interconnectedness from someone's definition of the situation. So "what a business is" is dependent on the particular arrangement of facts which the decision-maker considers to be applicable within the framework of his individual system of attitudes and values; these are the "givens," the inputs to the de- cision system. While the mechanistic approach may be able to tell us what actions should be taken or can usually be expected to be taken under various assumed or convention- alized definitions of the situation, it has difficulty in telling us what actions will be taken in situations that are subject to the actor's definition, and this appears to be the important case in business. 28 Behavioral Approaches Another general avenue of attack on the problem of business decision—making starts at the other end of the sequence: the possible factors that may cause an individual to define a situation and respond to it in some particular way. These approaches range from studies of linguistics and cultural anthropology through sociology and social psychology to experimental and clinical psychology. They combine to show us that in any situation the individual's behavior is subject to an extraordinarily complex array of conscious and extra-conscious influences.19 They also show us that different individuals in objectively similar situations may define those situations quite differently, depending on what present or past influences are effective in their individual cases. A vast amount of work has been directed toward isolating and measuring behavioral relationships. For the business decision— making problem, the results have been an embarassment of riches: any past decision may be ascribed to a wide variety of causes and any future decision may be projected in a number of different directions depending upon what influencing factors are considered and how they are arranged and weighted. While it is undeniable that these studies provide invaluable insights to what factors might be at work in a particular in— stance or what typical results one might expect from certain 19An inventory of such findings running over 600 pages may be found in Bernard Berelson and Gary A. Steiner, Human Behavior (New York: Harcourt, Brace and World, Inc., 1964). (\J \O causal factors, by themselves they are not intended nor can they be expected to help us explain the unique situation or predict the individual decision. To do this we cannot start with all possible causes and move toward the resulting effect; if anything we must start with the effect and work backward to understand its causes. To use W. I. Thomas's phrase, "We must first understand the past from the present." The Phenomenological Approach The phenomenological approach to the question of what makes a business what it is centers on the decision-maker. It asserts that at least to some extent the business is what he decides it shall be. It assumes that a business is an open system,21 capable of growth in itself, and a part of a larger open system which also is capable of growth. The business is considered to be capable of organizing and in- creasing its internal order and of exchanging energy and information with its environment. While the larger system presents the business with its conditions of survival and growth, in surviving and growing the business helps shape the larger system of which it is a part. Thus the behavior 20 p- 37. 21For discussions of the concept of the open system, see Ludwig von Bertalanffy, Problems of Life (New York: Harper and Brothers, 1952); Gordon W. Allport, "The Open System in Personality Theory," Journal of Abnormal and Social Psychology, Vol. 61 (1960), pp. 301-11; and Boguslaw, loc. cit. Thomas, "The Need for A Social Science," 100. cit., 2O 30 of the business must be explained in terms of the volitional activity of peOple: people who go beyond the search for stability; people who conceive and act to realize new possi- bilities. As such the significant aspects of its behavior are not to be found in the anonymous, convergent, equi- librium-seeking tendencies of the closed system, but in the unique, creative, emergent departures of the dynamic, grow- ing system. These concepts lead to an idiographic rather than a nomethetic approach; a search for meaning, direction and connectedness in the individual creation rather than in the general case. Accordingly its method is to seek the VieWpoint of the decision-maker, to try to see the situation as he perceives it in terms of his purposes and goals rather than to approach the problem as an outside observer with a prepared point of view of what the business "should" do. The initial problem of this approach centers on per- ception: "the processes by which people select, organize and interpret sensory stimulation into a meaningful and coherent picture of the world."22 In any given situation the decision-maker has before him an almost infinite variety of stimuli. Which ones he responds to and how he organizes 22Berelson and Steiner, loc. cit., p. 88. For a comprehensive review of theories of perception see Floyd H. Allport, Theories of Perception and the Concept of Structure (New York: John Wiley and Sons, Inc., 1955); Jerome S. Bruner, "On Perceptual Readiness," The Psycho- logical Review, LXIV (1957), pp. 123-152, presents a statement of the problem together with extensive references. 31 them into a meaningful and coherent picture of the world may depend on a wide variety of factors ranging from immedi- ate physiological conditions--say a state of hunger--to more remote psychological factors going back into his childhood.23 While it is of undoubted importance to understand what these factors are and how they operate, for purposes of the moment it is sufficient to note that this variety exists: that a decision—maker may perceive a situation in many different ways depending on his current perceptual field--his "life space" in Lewin's terms. The elements of a situation an individual perceives is to some extent dependent upon the categorizing system which he brings to the situation.2L4 He has ways of dis- criminating between some aspects and grouping others as equivalents; in other words, he has a coding system which enables him to reduce the infinite variety of surrounding stimuli to some manageable and useful number of classes. To follow the general line of reasoning developed by George Herbert Mead,25 the coding system may be thought of as a way of imparting meaning to a collection of stimuli. Ac- cording to Mead, "language does not simply symbolize a situation or object which is already there in advance; it 23 op. cit. For a review of research in this area, see Bruner, “Bruner, Goodnow and Austin, loc. cit. 25Mead, loc. cit. 32 makes possible the existence or the appearance of that situation or object, for it is a part of the mechanism whereby that situation or object is created."26 Thus in this View, "Man lives in a symbolic environment as well as a physical environment and can be stimulated to act by symbols as well as by physical stimuli."27 And in rationally considering future action (as Opposed to instinctive re- sponse), he tends to deal with some sort of symbolic repre- sentations of what might be in order to determine his course of action. The processes by which an individual develops his coding system appear to range from linguistic and cultural forces to highly personal learning experiences; these need not concern us here. It is important to note, however, that there are grounds for believing (1) that such coding systems are of the nature of pragmatic classification schemes invented by men to deal with the practical problems of existence,28 (2) while the individual's coding system is largely the product of cultural and social forces, it can and does vary within that framework,29 and (3) while the individual's coding 26Ibid., p. 78. 27Arnold M. Rose, Human Behavior and Social Processes (Boston: Houghton Mifflin Company, 1962), p. 5. 28For an analysis of the psychological processes in- volved, see Bruner, Goodnow and Austin, loc. cit. For an analysis Of the mechanical processes, see W. Ross Ashby, Design for a Brain (2d ed. rev. New York: John Wiley and Sons, Inc., 1960). 29Bruner, Goodnow and Austin, loc. cit. 33 system may change with change in his experience, the rate at which it changes tends to be limited.30 In extending this conceptual framework to the analysis of business decisions, one is led to the conclusion that to understand a businessman's choice of action, one must under- stand the unique system of symbolization which he as an in- dividual uses to represent the present and possible business situations he faces: the coding system which he uses to select, organize and interpret the sensory stimulation of his business situation into a meaningful and coherent picture of the world. In other words, one needs to know the pro— cesses by which the businessman defines his situation. Herbert Blumer views the basic problem as follows: Insofar as sociologists or students Of human society are concerned with the behavior of acting units, the position of symbolic interaction requires the student to catch the process of interpretation through which they construct their actions. This process is not to be caught merely by turning to conditions which are antecedent to the process. Such antecedent conditions are helpful in under- standing the process insofar as they enter into it, but . . . they do not constitute the process. Nor can one catch the process merely by inferring its nature from the overt action which is its product. To catch the process, the student must take the role of the acting unit whose behavior he is studying. Since the interpretation is being made by the acting unit in terms of objects designated and appraised, meanings acquired, and decisions made, the process has to be seen from the standpoint of the acting unit. It is the recognition of this fact that makes the research work of such scholars as R. E. Park and W. 1. Thomas so notable. To try to catch the 3OL. Festinger, A Theory of Cognitive Dissonance (New York: Row, Peterson, 1957); Roger Brown, Social Psyehology (New York: The Free Press, 1965), pp. 549-609. 34 interpretative process by remaining aloof as a so- called "Objective" observer and refusing to take the role of the acting unit is to risk the worst kind of subjectivism—-the objective observer is likely to fill in the process of interpretation with his own surmises in place of catching the process as it occurs in the experience of the act- ing unit which uses it.31 Thus to determine the decision-maker's definition of his situation in the individual case one must somehow put himself in the decision-maker's situation and discover what he is trying to accomplish, what his intentions are. This basic direction of change may be taken as the independent variable in the situation; it gives relevance to the parts. The differentiated elements of the environment become de- pendent variables, deriving their meaning and their inter- connectedness from this central direction. From the stand- point of the decision-maker their very existence is de— pendent upon that relationship. That which exists for him exists in terms of its bearing on his intentions; conversely, anything which has no bearing on his intentions has no sensible existence for him. Conclusion The decision problem--the problem of what makes a business what it is--can be approached from many standpoints, all of which help increase our understanding of decision- making and business. Both the mechanistic and the behavioral 31Blumer, "Society as Symbolic Interaction," in Rose, op. cit., p. 188. 35 approaches, essentially nomothetic in orientation and ob- jective in method, tell us a great deal about the general structures Of business decision-making processes: the factors that tend to limit and channel business decisions, the central tendencies within those channels and the rules of good decision practice. A phenomenological approach, idiographic in orientation, based on discovering the view- point of the decision—maker as an independent individual, may be capable of opening another dimension of understand- ing of the decision-making process; one which may lead to an ability to explain and predict the direction and magni- tude of the individual decision. CHAPTER III THE RESEARCH PROBLEM Underlying Problems of Phenomenological Research The underlying problems of applying the phenomeno- logical model tO the study of business decision-making re— volve around the nature of the basic datum itself: a per- son's conception of a total situation Of which he is a central part.1 To discover this conception it is necessary to know something other than how that person Observes the situation; it is necessary to know how he experiences it-- perhaps how he creates it ss an experience. Not only is such datum inaccessible to direct observation, but the very process of observing the process tends to change it. And to further complicate the problem, this elusive, highly per- sonal conception that is the subject of the research is it- self continually changing. While it may have certain stable, continuing properties, at the same time it is in a constant state of flux as it perceives and responds to new aspects of its environment. To the researcher who would scientifically explore other people's perceptions of the world, these 1The general problem is explored in depth by Stephen Strasser, Phenomenology and the Human Sciences (Pittsburg, Pa.: Duquesne University Press, 1963). 36 37 properties present extraordinarily difficult problems. But the existence of these problems in and of themselves need not invalidate the underlying concept nor destroy its useful- ness. On the contrary, they represent basic challenges to the ingenuity of those who would develop such an approach to business phenomena. The first general class of research problem is data collection: what information can one get? And how can he get it? Insofar as one cannot observe the subject's ex— periencing processes directly, he must work with some sort of representation of those processes, some secondary mani— festitation or explanation of how the decision-maker per- ceives the situation in which he finds himself. Regardless of the form that representation takes, the translation will cost information: the expression of the idea will be less than the idea itself. And in addition to those distortions, the process of finding out what the representation is pre- sents further Opportunities for error. Suppose one elects a direct approach: in one way or another he asks the sub- ject how he defines his business situation. The effect is something like Stephen Potter's Gamesmanship plpy of asking a golfing Opponent how he holds his club; as soon as you call his attention to it, he no longer knows how he holds his club, nor can he soon again hold it as he does in his usual play of the game. Similarly if you ask a business man to define his situation you are likely to get back not a report of how he actually experiences his situation, but 38 an "outsider's" account of how he observes himself experi- encing the situation. This is the problem of introspection, a problem that has had a long history in the study of psy- chology and one that continues to represent a serious obsta- cle to the securing of accurate and reliable phenomenological data.2 On the other extreme, however, the researcher seeking to explain a decision-maker's behavior entirely on a basis of "objective" observations of that behavior may tend toward what Blumer calls the "worst kind of subjectivism": an un- witting tendency to accumulate, organize and interpret data in accordance with the researcher's own preconceived ideas by the use of a Procrustean framework that distorts or com- pletely destroys the decision-maker's actual point of view.3 Neither of these dangers can be entirely eliminated. On the one hand, the researcher must to some extent rely on what the decision—maker ssys about his situation. He needs to listen to how the decision-maker explains his choices even though the validity of the explanation itself may be suspect. On the other hand the researcher must also use some sensible scheme to differentiate and organize the data he collects in his observations even though his system of organization may 2For a review of the basic problem see Edwin G. Boring, "A History of Introspection," Psycholpgical Bulletin, Vol. 50, No. 3 (May, 1953), pp. 169-89. 3This problem is analyzed in Herbert Blumer, Critiques Of Research in the Social Sciences: I (New York: Social Science Research Council, 1939) in which Thomas and Znaniecki's use of personal documents in The Polish Peasant in Europe and America is discussed in depth. 39 fail to parallel and may possibly distort the subjects point of view. But he must use both kinds of data for there appear to be no other kinds. Any they must be used with full recognition of their weaknesses and limitations.“ The second general class of problem of the phenomeno- logical approach is a companion piece to the first: having accumulated the data and assembled them into some sort of representation of the decision-maker's definition of his situation, how can one know that it is valid? How does one know that the mosaic he has constructed out of bits and pieces of Observations is a reasonable representation of what the subject actually experienced in the situation? How does one test it? Because the basic datum is not accessible to direct observation, one can only validate his represen— tation of it by comparing different manifestations of the same phenomenon--direct and indirect statements and actions-- searching out apparent consistencies and contradictions. And to the extent that the decision-maker's definition of the situation is itself continually changing, the researcher is faced with the problem of knowing how the various manifes- tations and representations he is checking against each other fit together at particular points in time. ”The problem is discussed at length in Allport, The Use of Personal Documents in Psychological Science, loc. cit. This was partially in reply to Blumer's criticism of Thomas and Znaniecki's work. 40 To attack these problems with any hope at all, one must start by assuming that a decision-maker is a rational being; that he does in fact have a current definition of his situation which to him is internally consistent and logical, that the rate at which he changes his definition of the situation is limited, and that he normally acts and speaks on a basis of his current definition of his situ- ation. By this line of reasoning the various elements of the decision-maker's definition of his situation derive their meaning and their interconnectedness from the total direction of his intentions; they exist and have meaning to the extent they relate to his over-all conception of his current and future situation. If all this is so, then the task of the researcher is to reconstruct the decision- maker's definition of his situation by assembling all of the bits and pieces of data he can gather into some sort of internally consistent pattern; his job is to develop an internally consistent theory of the case that will accom- modate and explain the evidence he has at hand. This re- solves itself to a "cut and try" approach of erecting a trial framework, fitting the bits and pieces of available data into position, modifying the framework where the evi- dence will not fit, trying more pieces, and so on, always changing the framework to fit the data rather than the re- verse.5 Over a series of such "fittings" it is to be hoped 5Lewin, "Field Theory and Experiment in Social Psycho- logy," loc. cit., pp. 130—154. Lu that certain stable underlying configurations may begin to emerge not only with respect to the interconnectedness of the elements Of the picture, but also with respect to the way the total picture itself changes with new experience. As one approaches an over-all pattern that consistently ac- commodates the available evidence, it may then be considered to be a representation of the way in which the subject tends to define his situation. General Guidelines for the Research Consideration of the above general problems of phenomenological research led to the formulation of certain guidelines for the design Of the specific experiment re- ported herein. While these were largely based on an in- tuitive analysis of the problem, it is to be hoped that these ideas or ones like them may be developed and tested by further experiments in order to provide some useful general principles for research in this conceptual framework. A business decision-maker's definition of his business situation can probably best be constructed by amassing a large number Of objective, undirected observations Of specific statements, explanations and actions in the con- text of actual business Operations at a number of points in time. It_would appear that the more the researcher can deal with specific concrete information in the context of "real" action-demanding situations, the more he can avoid the danger of distortions due to introspection. For example, a business 42 man's decision either to incur costs or not to incur costs for the sake of protecting product quality speaks with more authority than his general policy statements on the subject. Also the more that such Observations are derived from the normal on-going operation Of the business rather than from the questions of a researcher, the more such Observations are likely to reflect the primary concerns of the subject rather than the preconceived notions of the researcher. For example a question about quality will almost certainly draw forth a concerned answer, even though quality may seldom be a real consideration in normal operating decisions. Thus as a general principle of data collection it would ap- pear that to the extent possible research of this kind should center on Observations of actual operations in on-going situ- ations and should seek to collect highly specific data-- comments, discussions, documents, decision records—-generated in the situation itself as a basis for reconstructing a de- cision-maker's definition of his situation. Such an approach should help to minimize the effects of both the observer and the observed on the data. Turning to the question of validation, the basic problem of constructing a unified, consistent model of the decision-maker's definition of his situation centers on developing an over-riding form and direction out of the decision-maker's individual statements and acts that ties those individual acts together into a unified whole. The research must somehow find a theory of the case that 43 accommodates the diversity of behavior displayed by the decision-maker. The validation of this model--as well as its application--rests on the demonstration of its inner consistency: the extent to which its elements can be re- lated to each other and to the whole without internal con- tradictions and inconsistencies, and the extent to which those elements are predictable in terms of the whole. This problem suggests that the research should be designed to collect a wide variety of samples of the decision-maker's behavior in many different situations at different points in time. And to the extent possible, the research should be designed to collect rich samples that catch the full im- port of the decision situation in all of its immediacy in a form that lends itself to detailed analysis and study on the theory that it is in the complexities of the actual situations that the underlying unity of the decision-maker's conceptual framework is revealed. To sum up the above considerations, it appears de- sirable to base research in this area on a relatively large number of objective, non-directed observations of decision- makers' behavior in a wide variety of specific Operating situations at a number of time periods. To catch and hold all of the nuances of the immediate situation, some system Of recording the actual conversations and discussions about the decision as well as the actual decision data itself would be highly desirable. Then one requires some means of organizing these data into internally consistent patterns 44 from which an over-riding definition of the situation can be derived by a process of inductive reasoning and which in turn can be substantiated by a process of deductive reasoning and prediction. The Basis for the Research Approach The general concepts discussed in the foregoing sug- gest that an exploratory experiment might be based on ob- serving the decision behavior of a number of different sub- jects operating in the same situation. Presumably each one would tend to define the situation differently and respond to it differently. If the experimenter could find a means of reconstructing the decision-makers definition Of the situation he should be able to explain and predict their decisions as well as account for the differences between them. The conditions for such an experiment include first a means of placing a number of decision-makers in a common situation where they are confronted with a number of possi- ble choices of actions and the necessity of making certain specific decisions. The conditions should be similar to those encountered in actual business decision situations but sufficiently simplified and controlled to meet the needs of the research. Next the experiment requires an action mechanism: a system for recording and effecting the decision-maker's choices and for reporting back the results of his decisions. The third requirement is a means of 45 discovering and recording the subjects' interpretations and analyses of the situation: a mechanism that will generate spontaneous, voluntary explanations of the reasons for their decisions without appreciably affecting the subjects atti— tudes or evaluations. Ideally these data should center on specific action aspects of the decision situations and should be sufficiently varied and numerous to provide a basis for analyzing their inter—relationships at each decision period as well as over a series of decisions. A business game provided the desired research tool: a common controlled business—like situation within which the decision behavior of a number of individual decision-makers could be observed. While the game was a vastly simplified model of real business Operations, it did present many of the characteristic elements of business decision situations, requiring the participants to make concrete, specific choices based on typically ambiguous, incomplete, ill-structured in- formation in a competitive situation under relatively severe time restrictions. At the same time, the game provided a limited and controlled situation objectively the same for all participants, providing a basis for observing how the individual decision-makers differed in their interpretation of the common environment. And the game provided a con— venient mechanism for Obtaining the subjects' decisions in concrete, Specific form, for effecting those decisions, and for reporting the results back as a basis for further de- cisions, thus providing relatively complete data about the 46 observable facts of the situation. The use of the teams as decision-making units provided a unique means of obtain- ing relatively complete information about the reasons for specific decisions without interference by the researcher. Tape recording the proceedings of the meetings in which the team decisions were argued out provided data that was some- thing like what one might obtain if he could listen to an individual decision-maker talk to himself about the pros and cons of the various courses of action he perceives in a given situation. To obtain these data, the decision meetings were organized so that each member Of the decision-making unit had an Opportunity to present and explain a complete set of decision recommendations based on his analysis of the situation. After all members presented their individual recommendations, a consensus was developed in open discussion. The entire proceedings were recorded on tape for later study and analysis. Additional information about the bases for decisions was obtained from written strategy statements pre- pared by the individual participants at a number of points during the play of the game. In effect, the game provided a small scale business laboratory for observing decision be- havior. The outputs included series of sets of decisions by a number of different decision-making units operating in a controlled situation over a period of time, the results Of those decisions as received by the decision-making units, and extended statements and discussions about the reasons for those decisions. These data were used as a basis for 47 reconstructing the conceptual models that were used in developing those decisions. Limitations This general approach is subject to criticism on a number of scores. The game itself is not a real business situation and is missing some highly critical aspects of the real life situation. The participants were college stu- dents not businessmen; their background of experience and knowledge was restricted and their sense of commitment to the game was somewhat limited. The data collection method of recording the decision discussions may or may not have successfully elicited the "real" reasons behind the decisions. While these and many other avenues of question deserve seri- ous thought and attention in the future development of this general approach, the experiment reported herein was not in— tended to draw specific conclusions about how real business- men operate in real business situations, nor did it set out to provide a definitive relationship between the subjects' comments about decision situations and their actual decision behavior. This research attempted to explore the utility of a general conceptual approach to the decision problem; it used a highly simplified and contrived situation to test that model to discover the nature of the problems attendent to its use and the kinds of things which might have to be isolated and measured to make it useful. Hence the questions which should be asked of the research pertain to the extent 48 to which it sheds light on what we mean by the phenomeno- logical approach to decision-making and how we define such concepts as the definition of the situation in operational terms. One may also question the use of a team as a decision- making unit arguing that it is always the individual who must decide and, as a team is no more than a group of such elementary decision units, one must go back to the individual and his unique personal definition of the situation in order to understand his decisions. This argument has undeniable merit, but perhaps it points the way to further research more than it invalidates the experiment reported here. The focal point of this research is the decision: the overt, accomplished act of choice. This is the datum on which all else is built. It was taken to be a manifestation of some particular definition of a situation. The research under- took to reconstruct that definition. The use of the team as a decision-making unit--a definer Of the situation--not only provides research advantages, but to some extent simu- lates actual business decision mechanisms. Even though a business decision must finally be made by an individual, one may also think Of it as a "team" decision, made in the con- text of a team's definition of the situation. To be ef- fective as a business decision, it must have some degree of understanding and acceptance throughout the organization.6 6Simon, Administrative Behavior, pp. 123-171. 49 The problem which lies at the heart of the study centers on the analysis of the data. How can one go about the task of fitting the bits and pieces of comments, dis- cussions and decisions together to form an understandable, unified, consistent framework that not only contains the data at hand, but explains the underlying interconnectedness and direction Of those data? How can one develop an orderly and generally useful approach to discovering and reconstruct- ing a decision-maker's definition of his situation? Even under the simplified and controlled conditions of the game, this problem proved to be extremely complex. The cases were too few and the data too varied to provide a basis for the application of any highly sophisticated techniques and so it was necessary to use a somewhat intuitive approach to the analysis of the data and the reconstruction of the de- cision—maker's definition of his situation. While such an approach leaves a great deal to be desired, it served the basic purposes of the research: it indicated the feasi- bility and applicability of the general conceptual framework as well as the Opportunities and problems it presents. PART II THE EXPERIMENT CHAPTER IV THE RESEARCH DESIGN The Research Vehicle: The Executive Game The principal research instrument was a version of The Executive Game,l a business game developed by Richard C. Henshaw, Jr., Professor of Quantitative Methods, Michigan State University, and James R. Jackson, Professor of Busi- ness Administration, University of California at Los Angeles, and used by the Department of Management of Michigan State University in an introduction to business course at the undergraduate level. This game represents the Operation of an industry in which nine firms, all starting from the same position, compete with one another in the production and sale of a single product. The players "manage" the differ- ent firms, deciding the price at which they want to offer their product, the amounts they want to spend on marketing, research and development, and maintenance, the number of units to be produced, investments to be made in additional capacity and raw materials inventory and the dividends to be paid out. An electronic computer, programmed to simulate 1For a complete description of the game, see Richard C. Henshaw and James R. Jackson, The Executive Game (2d ed. rev., Department of Management, Michigan State University, 1956, Mimeographed). 51 52 firm and industry interactions, determines the results of these decisions for each firm and industry as a whole, and prepares reports of each firm's activities for its managers. This information provides the basis for a new set of de- cisions which are then fed into the computer to determine a new set of results. In the particular program used for this research, after an introductory practice play the partici- pants made a series of eight such decisions representing four quarterly decisions for each of two years. Overall perfor- mance was measured on a basis of the rate of return earned by each firm. In the play of the game, all firms start from the same point with the same basic data: a statement of the company's current situation along with the complete results of its operation in the three months just ended (see Table l). Essentially these data include, first, normally available competitive information such as market prices, unit sales, reported profits and dividends declared; second, operating figures for the previous period such as number of units produced, sold and on hand; third, a profit and loss statement for the quarter; fourth, a cash flow statement; and, finally, a balance sheet as of the beginning of the game. Each firm's management then makes the following de- Cisions for the first game period: Price of Product Production Volume Schedule Marketing Budget Investment in Plant and Research and Development Equipment Budget Purchase of Materials Maintenance Budget Dividends Declared 53 TABLE l.--Game data sheet. Line Data Numbers Titles (For Period 0 Actual) 0 Price 6.40 00 Average Price 6.40 000 Economic Index 103 1 Seasonal Quarter AMJ 2 Total Industry Sales 3,910,959 3 Market Potential 434,551 4 Sales Volume 434,551 5 Percent Share of Industry Sales 11 6 Production This Quarter 400,000 7 a&b Labor Cost per Unit/Materials Cost per unit $1.43/1.58 8 Inventory Finished Goods 65,449 9 Plant Capacity Next Quarter 415,000 10 INCOME (and expense) STATEMENT 11 Receipts, Sales Revenue . $2,781,124 12 Expenses: Labor (original cost/ unit Ex. Overtime 1.43) 573,939 13 Materials (original cost/unit 1.58) 630,667 14 Reduction Finished Goods Inventory 103,652 15 Administration 278,000 16 Marketing 240,000 17 Research & Development 150,000 18 Maintenance 75,000 19 Depreciation 200,000 20 Miscellaneous 2291725 21 Total Expenses 2,480,983 22 Profit Before Income Tax 300,141 23 Addition to Income Tax Fund 144,068 24 Net Profit After Income Tax 156,074 25 Dividends Paid 50,000 26 Addition to Owners' Equity 106,074 54 TABLE l.--(Continued) Line Data Numbers Titles (For Period 0 Actual) 27 CASH FLOW 28 Receipts, Sales Revenue 2,781,124 29 Disbursements: Cash Expense 1,546,664 30 Addition to Inc. Tax Fund 144,068 31 Dividends Paid 50,000 32 Investment in Plant 500,000 33 Purchase of Materials 1,000,000 34 Total Disbursements 3,240,732 35 Addition to Cash Assets -459,608 36 BALANCE SHEET 37 Assets: Net Cash Assets 1,040,392 38 Inventory Value, Finished Goods 196,348 39 Inventory Value, Materials 1,169,333 40 Plant Net Book Value 8,300 000 41 Equities: Owners' Equity of Capital 10,756,074 55 The decisions for all teams are processed by the computer, not only to determine the immediate results for each firm, but also to register the longer term effects of its decisions. Statements of each firm's quarterly per- formance and status are prepared in the same form as the initial data described above. (For an example Of the actual computer output, see Table 2.) The game program is designed to simulate the kinds of inter-relationships and interactions one finds in busi- ness Operations, albeit in highly simplified and standard- ized form.2 The size of the total industry market is deter- mined by the level of economic activity during the quarter, the industry's seasonal pattern of demand, and the actions of the firms in the industry in developing, marketing and 2The description of the main relationships of the game which follows this point provides an illustration of the main thrust of this research. The writer has chosen a particular scheme of organization and a particular sequence for describing the elements of the game. In so doing, he expounds his own model of the situation: how the elements should be grouped, which come first and so on. When he places one element before another, he tends to imply (not without awareness, let us hope) that it "comes before" in the sense of being determined before and hence being of the nature of an independent variable to that which it precedes--which may or may not be the case. For example, this particular model starts with the market and works toward the firm's activities. One might just as well start with the firm and work toward the market; the stated relationships would be the same, but the implications for action would be quite different. In the cases studied, some teams started with the market and others started with the firm; hence their decision patterns were different. a m 44 >wuncw mamzzo 92¢ naouamm v 444 «on pao>~o zcm: cwm an. «a. >p~39m wag.) m34<> w34<> mrwmm< .oz oxz<¢ no mh<¢ >mz wm4xo»zm>zu ruorzw>2~ 1m420 « m 4< a x J~haowxw .pcoEoumum amp5QEooln.m mqmz_ hzcga endow mbmou uz—>¢¢¢x mu4p_:ou mcwzao maoas use: pm: pz peopzw>z_ mocoo swim—2.. m24.>.>z. mewmma zmau >mz upwmm< pwmzm wuz<4qm mewmma zmau o» zo_»_oo< moa.xm».t do mmaxozod »zz_ c_.s mozwo.>_o orou x.» uxcuz_ o» zo_»_oo¢ wmzmdxu xmma mmuam.m»n~wuax zoom xm¢u >»_:eu mmuzzo o» zo.»_oo< o__o x.» rxccz_ cupua »_uoaa .uz ozou we» mxcuz_ :- zo_»_oo< ya» uxouz_ maouwa »_uozd moouzauowum_x zo_»<_uwcamo muzz. mocoo cwxm.z.u zo_»u:omz .05.: boz:\»mcu.m4<_mw»ux muoam.m»d_wuwc p7mxwr¢pm oxen:— 1upzqao hum: >>~u¢o»zw>2~ xw>a mw4_c mu_¢u mach—pwaxou 7o zc_»~>=uuxw 70 a raow_u uc ozu are as >»_sou amazes ole mco~mmd o uo< ecu »:o>_c zed: cwmaa waa zazpwm no ip .u. .wc >».:cu mzoq> ioo<> u;4a> mhmmwa .oz cxz<¢ no whom hwz mw4mch2w>2_ >ac»zu>l_ Imqu hwz rm_u >420 w a Jaum_u zou ampmaoc awn mmuauu>< a cam» 44cm_u uc Lzu wzqc u>_»zuuxu .mpHSmop we prowli.m mqmde 71 This market collapse left many of the firms with negative incomes and large stocks of finished goods. In the follow- ing period a severe price change took place: one firm, team #3--Aurora Incorporated--cut its product price sharply below the going industry level. This break in prices came at the same time as the previously described announcement of a drastic change in direct costs. This change, intro- duced by the researcher as a means Of testing the teams' response patterns, took effect at the beginning of period #5. Time limitations made it necessary for the teams to make their decisions for periods #7 and #8 at the same time. The change in labor cost intorduced at the beginning of period #7 had little effect on the decision patterns. How the individual teams responded to these general conditions and changes is described below. While the models presented tend to oversimplify the teams' decision deliber- ations and performance patterns, it is believed they catch the essence of each team's orientation and definition of the situation. Team #l--Widgets,thd.: The Response Model The history Of Widgets, Ltd's performance is detailed in Table #6. This management team revealed their general model of the firm in the contrast between their decisions for the game's second period and for the third period. In approaching the second period, the seasonal high quarter of October, November, December, their comments went along the following lines: 72 TABLE 6.--Game performance--Team #1--Widgets, Ltd. Practice Period Period 0 Price ($) 6.10 6.40 Average industry price ($) 6.29 6.40 Economic index 106 103 Seasonal quarter (months) JAS AMJ OPERATING DATA (thousands of units) Total industry sales 4,477 3,911 Market potential 623 435 Sales volume 545 435 Percent share of industry sales 12% 11% Production this quarter 480_ 400 Labor cost per unit ($) 1.43 1.43 Materials cost per unit ($) 1.56 1.58 Inventory finished goods 0 65 Plant capacity next quarter 435 415 INCOME STATEMENT (thousands of dollars) Receipts: Sales revenue 3,327 2,781 Expenses: Labor 733 574 Materials 750 631 Reduct. fin. goods inv. val. 196 104 Administration 332 278 Marketing 300 240 Research and development 200 150 Maintenance 80 75 Depreciation 208 200 Miscellaneous 229 230 Total expenses 3,029 2,481 Profit before income tax, 298 300 Addition to income tax fund 143 144 Net profit after income tax 155 156 Dividends paid , 35 50 Addition to owners' equity 120 106 CASH FLOW (thousands of dollars) Receipts: Sales revenue 3,327 2,781 Disbursements: Cash expenses 1,875 1,547 Addition to income tax fund 143 144 Dividends paid 35 50 Investment in plant 600 500 Purchase of materials 1,300 1,000 Total disbursements 3,953 3,241 Addition to cash assets -626 -460 BALANCE SHEET (thousands of dollars) Assets: Net cash assets 414 1,040 Inventory value, finished goods 0 196 Inventory value, materials 1,719 1,169 Plant net book value 8,693 8,300 Owners' equity 10,826 10,706 NOTE: Figures may not add due to rounding. 73 Period Period Period Period Period Period Period Period 1 2 3 4 5 6 7 8 6.25 6.20 6.45 6.20 5.80 6.00 6.25 6.30 6.32 6.32 6.39 6.21 5.77 6.01 6.19 6.19 108 98 92 98 114 121 116 108 JAS 0ND JFM AMJ JAS OND JFM AMJ 4,643 5,051 3,827 4,760 6,553 6,774 5,820 5,295 575 687 394 497 768 901 604 529 480 650 394 497 722 784 604 529 11% 13% 10% 10% 11% 12% 10% 10% 415 650 464 500 650 784 700 600 1.43 1.42 1.42 1.41 1.41 1.41 1.70 1.70 1.56 1.55 1.55 1.54 .77 .77 .78 .79 0 0 7O 72 0 0 96 166 435 454 487 505 522 530 530 530 3,003 4,030 2,540 3,084 4,190 4,701 3,776 3,335 592 1,074 656 715 1,018 1,285 1,333 1,080 649 1,009 717 771 500 602 546 473 196 0 -210 -8 217 0 -287 -212 283 339 348 356 362 367 370 370 300 325 275 300 325 325 325 350 200 200 200 200 200 200 100 100 80 110 85 90 100 115 100 100 208 217 232 244 252 261 265 265 229 243 268 291 248 194 246 244 2.737 3,518 2,572 2,959 3,223 3,349 2.997 2.770 266 512 -32 126 967 1,352 779 565 128 246 -15 60 464 649 374 271 138 266 -16 65 503 703 405 294 0 0 50 25 30 50 0 0 138 266 -66 40 473 653 405 294 3,003 4,030 2,541 3.084 4,190 4,701 3,776 3,335 1,684 2,292 1,833 1,951 2,253 2,486 2,474 2,244 128 246 -15 60 464 649 374 271 0 0 50 25 30 50 0 0 600 800 700 600 600 414 265 265 1,300 0 1,200 500 800 0 800 0 3,712 3,337 3,767 3,137 4,147 3,599 3,913 2,780 -709 692 -1,227 -52 43 1,102 -l36 555 331 1,023 —203 -255 -212 890 754 1,309 0 0 210 217 0 0 287 499 1,821 811 1,294 1,023 1,322 720 974 501 8,693 9,275 9,743 10,100 10,447 10,600 10,600 10,600 10,844 11,110 11,044 11,084 11,557 12,210 12,615 12,909 74 "This is the biggest quarter of the year—-our chance to sell more and make more." "We should lower our price and try to sell more be- cause this is supposed to be one of the more productive periods." "If we are trying to sell more, our marketing budget must go up. It's the big period; there's going to be lots of competition." Their decisions reflected these comments. They lowered their product price, raised their marketing budget and scheduled an increase in production to take advantage of the seasonal opportunity. And as it turned out, they were suc- cessful not only in selling their entire production, but also in realizing the best profits in the industry. In discussing their decisions for the following quarter, the normally low January, February, March period, their state- ments took a different direction: "This is the worst quarter of the year. The economic index is expected to be down and seasonal demand is con- siderably lower in this period. Our sales are going to be down. We should raise our price in order to increase revenue from what [little] we do sell this period." "Our market potential has been more than we could make, probably because we have been spending a lot on market- ing. We are not going to sell as many this quarter so mar- keting should be reduced." 75 In accordance with these comments, Widgets, Ltd., raised price, reduced marketing expenditures and cut pro- duction back to one shift capacity to match the anticipated drop in orders. The drop that occurred in sales was even more severe than they had anticipated. As the game progressed the Widgets, Ltd., managers continued to operate with this general model, seeking to sell more in good periods by lowering the price of their product and increasing their marketing efforts and trying to protect themselves in poor periods by raising price and curtailing expenses. When the team was confronted with the drastic changes of period 5--and the effect of the break in the market price and the reduction in material costs was compounded by their own heavy finished goods inventory position--they discussed the situation largely in terms of the effects of these changes on the total industry market. "Everyone's price will go down because of the material cost cut. These price decreases along with the increase in the economic index will raise the total market potential." "There's going to be a lot bigger market. Some people will drop [the price] way down. I can't see the point of that. [If we drop our price by about half the material cost saving] the cut in our price will not give us an in— crease in percentage of the market, but it's going to be a much bigger market." The outcome of these discussions was that the Widgets, Ltd., managers decided to reduce their product price by a 76 moderate amount as indicated, to increase marketing and to schedule a higher level of production to be able to hold their position in the expected "bigger market." In subse- quent periods of the game, Widgets, Ltd., followed the same general pattern, keying their operations to the expected changes in the market. This team's approach to the game has been termed "the response model" because the team members appeared to visu- alize the business primarily in terms of a response mechanism, the primary function of which was to adapt to the conditions provided by the market. They took the state of the market as the basic elemental "fact" of the situation; their Job was to adjust the business's operations to take advantage of that fact. They believed that in a period of high in- dustry sales, the business should strive "to sell more and to make more," such a period was a time to compete aggres- sively for more sales by lowering price and increasing mar— keting efforts. When the total market demand was down, however, the firm could not expect to sell very much; in such periods production should be cut back and expenses curtailed and insofar as sales were limited anyway, one might Just as well raise the price of the product in order to increase the revenue from whatever sales could be made. This general approach had some of the elements of a self-fulfilling prophecy: when a sales increase was pro- Jected, action was taken to increase sales; when a down-turn was predicted, the firm's decisions tended to bring about a 77 change in that direction. As a result, Widgets, Ltd.'s share of the market tended to move with the market, increas— ing in high periods and decreasing in low periods and as a result the firm's variations in sales volume tended to be greater than the total industry variations. The managers were aware of this and while they discussed the "mistake" they had made in raising their product price in the January, February, March period of the first fiscal year of the game, they subsequently made the same set of moves in the corres— ponding period of the second fiscal year, and for the same reasons as they had expressed before. In their view, the market was the independent variable in the situation; all of their decisions depended on what they expected the market to do. Team #2--GAS Industries: The "Best" Sales Volume Model The history of GAS Industries' performance is dee tailed in Table 7. At the outset of the game the GAS In- dustries management team was concerned about pricing the firm's product too low; they wanted to avoid generating more orders than they could fill and they also wanted to avoid the extra costs of overtime production. Their com- ments were along these lines: "We should hold the price up so as to get not so much market but a better profit." "If our price is too low we cannot make all the sales we might. It's better to stay at a higher price and make a profit." 78 TABLE 7.—-Game performance——Team #2—-GAS Industries. Practice Period Period 0 Price ($) 6.15 6.40 Average industry price ($) 6.29 6.40 Economic index 106 103 Seasonal quarter (months) JAS AMJ OPERATING DATA (thousands of units) Total industry sales 4,477 3,911 Market potential 573 435 Sales volume 495 435 Percent share of industry sales 11% 11% Production this quarter 430 400 Labor cost per unit ($) 1.43 1.43 Materials cost per unit ($) 1.57 1-58 Inventory finished goods 0 65 Plant capacity next quarter 440 415 INCOME STATEMENT (thousands of dollars) Receipts: Sales revenue 3,047 2,781 Expenses: Labor 626 574 Materials 675 631 Reduct. fin. goods inv. val. 196 104 Administration 333 278 Marketing 260 240 Research and development 175 150 Maintenance 80 75 Depreciation 208 200 Miscellaneous 242 230 Total expenses 2,795 2,481 Profit before income tax 252 300 Addition to income tax fund 121 144 Net profit after income tax 131 156 Dividends paid 50 50 Addition to owners' equity 81 106 CASH FLOW (thousands of dollars) Receipts: Sales revenue 3,047 2,781 Disbursements: Cash expenses 1,716 1,547 Addition to income tax fund 121 144 Dividends paid 50 50 Investment in plant 700 500 Purchase of materials 1,000 1,000 Total disbursements ‘ 3,587 3,241 Addition to cash assets —540 —460 BALANCE SHEET (thousands of dollars) , Assets: Net cash assets 500 1,040 Inventory value, finished goods 0 196 Inventory value, materials 1,494 1,169 Plant net book value 8,793 8,300 Owners' equity 10,787 10,706 NOTE: Figures may not add due to rounding. 79 Period Period Period Period Period Period Period Period 1 2 3 4 5 6 7 8 6.30 6.40 6.20 6.15 5.75 5.85 6.15 6.00 6.32 6.32 6.39 6.21 5.77 6.01 6.19 6.19 108 98 92 98 114 121 116 108 JAS OND JFM AMJ JAS OND JFM AMJ 4.643 5.051 3.827 4.760 6.553 6.774 5.820 5.295 515 523 490 546 866 1,085 743 723 505 470 490 546 654 750 600 550 11% 9% 13% 11% 10% 11% 10% 10% 440 470 600 575 516 750 600 550 1.43 1.42 1.42 1.42 1.43 1.43 .1472 , 1.72 1.57 1.56. 1.57 1.58 .80 .80 .80 .80 0 0 110 139 0 0 0 o 440 464 493 516 516 516 538 538 3,184 3,008 3,038 3,360 3,763 4,388 3,690 3,300 648 690 951 876 736 1,242 1,105 956 691 734 943 907 410 598 481 443 196 0 -330 —86 416 0 0 0 333 341 348 358 315 365 365 372 240 275 350 450 500 400 400 400 175 185 125 130 100 120 100 100 80 90 100 95 ' 85 95 90 90 208 220 232 247 258 258 258 269 242 262 328 337 287 194 229 190 2,812 2,797 3,046 3,314 3,108 3,272 3,028 2,819 ' 372 211 49 46 655 1,115 662 481 179 101 -4 22 314 535 318 231 194 110 —5 24 341 580 344 250 25 0 o o 0 0 '0 0 169 110 -5 24 341 580 344 250 3.184 3.008 3.038 3.360 3.763 4.388 3.690 3.300 1,718 1,843 2,202 2,246 2,024 2,416 2,289 2,108 179 101 -4 22 314 535 318 231 25 0 0 0 o o 0 0 700 700 820 700 260, 260 700 275 1,000 500 800 800 100 450 450 450 3.621 3.14LI 3.818 3.768 2.698 3.661 3.757 3.063 —437 —136 —780 -408 1,065 726 —67 237 603 467 -313 -721 344 1,069 '1,003 1,239 0 0 330 416 0 0 0 0 1.479 1.245 1.102 995 685 537 506 513 8,793 9,273 9,861 10,314 10,316 10,319 10,761 10,767 10,875 10,985 10,980 11,004 11,345 11,925 12,269 12,519 80 "We want a smaller share of the market at a higher price so we can keep inventory on hand for sales next period." In the Opening period the managers set production at what they believed to be single shift capacity with no over- time. However they were divided as to how they should handle marketing. One team member wanted to "hold down marketing expenditures in order to limit sales potential and avoid having 'unhappy customers,'" while another wanted to increase marketing in order to "equalize the price in- crease." They finally agreed to hold the budget to the previous level without change. In effect both price and marketing decisions were based on the production figure: they were set at points calculated to sell almost but not quite all of the units that could be produced without over- time during the quarter. GAS Industries over-shot the mark in the first period and entered the following quarter--the seasonal peak period of October, November, December--with no inventory. Again production was set at what was believed to be one-shift capacity. Because they had no finished stock on hand, the product price was increased. One of the team members com- mented, "As it is, our inventory is wiped out. By raising price we can make a bigger profit. $6.45 will get as much of the market as we can produce for." At the same time, however, it was agreed that marketing must be increased "to support the higher price . . . to get demand for the product." 81 They again sold out their entire production and as a result decided to modify their general approach by going into overtime production in the following quarter. They agreed that they "should have produced more and sold more last time . . . We can't go on having a larger potential than we can sell. We have been running inventory completely out. We are going to have to produce more." At the same time, however, they recognized that "since this is the low period, [the January, February, March quarter] everybody else is going to go for the market, so we are going to have to raise marketing expenditures a good deal." Accordingly they agreed to reduce price and increase marketing in order to be sure to sell the increased volume of output. As it turned out, they were unsuccessful in selling their output during the January, February, March period, but they con- tinued with the policy of "high volume-low price" supported by increased marketing expenditures in the following quarter. They, too, entered period 5--the experimental period-- with a heavy inventory of finished goods. The changes caused a general review of their approach. "Our previous policy was low price and high volume, but with this material change we need a new policy: we should hold price up and take lower volume." "Everyone else will be cutting price. Lowering ours won't do that much for us. If we can keep marketing high enough we'll still make enough revenue." 82 Their decisions were to reduce price by a relatively small amount, to drop production back to a one shift oper- ation, and to increase their marketing efforts. They were successful in cleaning out their inventory and for the re- mainder of the game they continued to operate at a rela- tively high level of production, but less than capacity, and at relatively low prices. An overall analysis of the GAS Industries decision discussions and performance indicates that this team's primary goal was a "best" sales volume figure for the given market each period: 'a level of sales which appeared to be obtainable without excessive cost in price and marketing expense, but a level which would also provide enough volume for efficient operations. The underlying concept seemed to be that any reasonable sales volume could be realized by pricing and marketing. If the market was expected to be down, price must be reduced and marketing increased; if the market was up, the opposite tack could be taken. The primary decision task of the managers was to select a sales goal each period which they could expect to realize with a relatively high degree of assurance and without excessive costs in price reductions or marketing expenditures, and then to gear all of their decisions to that goal. This is what is meant by terming their approach "the 'best' sales volume model." It is interesting to note that while GAS Industries usually produced at more than one shift capacity, it never 83 produced at maximum capacity. It usually priced its pro- duct Just below the market median. Although the managers always planned on building a small finished goods inven- tory reserve, the firm actually sold its entire production in all but two periods. Team #3--Aurora, Inc.: The Market Share Model The history of Aurora's performance is detailed in Table 8. Aurora started out with a two—stage plan: "[The first step of] the strategy [is] to keep the price consistent with the competition's average price and to keep both research and development and marketing at a high rate so that our team can keep roughly between 11% and 14% of the market. The key point [at this stage] is to sink most of our profit into plant investment . . . to build capacity to handle the eventual rush of demand. The next step is to lower our price far below that of compe- tition. The increase in our profit will come mainly from a vastly increased percentage of the market. The theory is to cut price very low thus taking a very large percent- age of the market. Competition will try to fight this by also lowering price. However our long-run build-up should enable us to outéproduce them and leave us open to further [decreases] in price." The team pursued the first stage of this strategy until the fourth period of the game, when they elected to activate the second step. In the April, May, June quarter 84 TABLE 8.--Game performance--Team #3--Aurora, Inc. Practice Period Period 0 Price ($) 6.30 6.40 Average industry price ($) 6.29 6.40 Economic index 106 103 Seasonal quarter (months) JAS AMJ OPERATING DATA (thousands of units) Total industry sales 4,477 3,911 Market potential 509 435 Sales volume 465 435 Percent share of industry sales 11% 11% Production this quarter 400 400 Labor cost per unit ($) 1.43 1.43 Materials cost per unit ($) 1.57 1.58 Inventory finished goods 0 65 Plant capacity next quarter 430 415 INCOME STATEMENT (thousands of dollars) Receipts: Sales revenue 2,932 2,781 Expenses: Labor 573 574 Materials 630 631 Reduct. fin. goods inv. val. 196 104 Administration 283 278 Marketing 245 240 Research and development 160 150 Maintenance 75 75 Depreciation 208 200 . Miscellaneous 218 230 Total expenses 2,588 2,481 Profit before income tax 345 300 Addition to income tax fund 165 144 Net profit after income tax 179 156 Dividends paid 50 50 Addition to owners' equity 129 106 CASH FLOW (thousands of dollars) Receipts: Sales revenue 2.932 2,781 Disbursements: Cash expenses 1,554 1,547 Addition to inc. tax fund 165 144 Dividends paid 50 50 Investment in plant 500 500 Purchase of materials 1,000 1,000 Total disbursements 3,270 3,241 Addition to cash assets -337 -460 BALANCE SHEET (thousands of dollars) Assets: Net cash assets 703 1,040 Inventory value, finished goods 0 196 Inventory value, materials 1,540 1,169 Plant net book value 8,592 8,300 Owners' equity 10,835 10,706 NOTE: Figures may not add due to rounding. 85 Period Period Period Period Period Period Period Period 1 2 3 4 5 6 7 8 6.35 6.30 6.35 5.50 5.45 5.75 6.00 6.20 6.32 6.32 6.39 6.21 5.77 6.01 6.19 6.19 108 98 92 98 114 121 116 108 JAS OND JFM AMJ JAS OND JFM AMJ 4.643 5.051 3.827 4.760 6.553 6.774 5.820 5.295 503 629 487 '907 1,039 1,183 ”809 665 465 629 487 873 771 810 541 542 10% 12% 13% 18% 12% 12% 9% 10% 400 652 570 768 771 810 541 542 1.43 1.42 1.41 1.40 1.40 1.40 1.68 1.68 1.57 1.54 1.51 1.49 .74 .75 .75 .76 0 23 106 0 0 0 0 0 435 474 512 514 540 541 543 544 2.956 3.964 3.094 4.804 4.203 4.655 3,248 3.362 573 1,083 870 1,256 1,260 1,325 910 911 628 1,005 861 1,145 573 603 406 409 196 -68 —248 317 0 0 0 0 283 339 352 364 365 373 323 324 250 325 400 400 350 300 250 250 170 275 340 340 300 250 200 200 75 90 90 90 90 90 90 90 208 217 237 256 256 270 271 271 229 314 326 380 251 205 199 199 2,612 3,580 3,263 4,548 3,445 3,417 2,649 2,654 344 384 —169 256 758 1,239 599 707 165 184 —81 123 364 595 287 339 179 200 —88 133 394 644 311 368 10 0 0 25 35 40 40 40 169 200 —88 108 359 604 271 328 2,956 3,964 3,094 4,804 4,203 4,655 3.248 3,362 1,580 2,426 2,414 2,830 2,615 2,544 1,972 1.974 165 184 —81 123: 364 595 287 339 10 0 0 25 35 40 40 40 600 1,000 1,000 300 770 300 300 300 750 1,000 1,000 500 550 500 400 450 3.105 4.610 4.333 3.778 4.334 3.978 2.999 3.103 —149 -646 -1,239 1,026 —131 677 248 259 891 245 —994 32 -99 578 827 1,085 o 68 317 0 0 0 0 0 1,291 1,286 1,425 780 757 654 647 688 8,693 9.475 10,238 10,282 10,795 10,825 10,855 10,883 10,875 11,074 10,986 11,094 11,453 12,057 12,329 12,656 86 they dropped their price severely, catching all of their competitors by surprise, as planned. While they "hoped to get more than 17% of the market from the surprise effect," they actually generated orders for a considerably larger portion of the market. Their inventory and production was only enough for 18% of the market, however. While the move was profitable, it did not yield the overwhelming advantage they had originally expected. In considering their decisions for the following period--the experimental period in which the material re- quirements were changed--the team members were primarily concerned with the fact that they had not been able to meet the demand they had created in the previous quarter. "De- mand last time was over 900,000 units; we could only sell 870,000. We will only have about 770,000 to sell this time." (770,000 was their maximum plant capacity and their inventory of finished stock was, of course, fully depleted). They agreed that "everyone is going to be dropping price, but not as radically as we did." That, coupled with their product limitations, led them to decide on a further price decrease of only $.05. And with anticipated demand greater than capacity, they decided that a decrease in the level of marketing expenditures was advisable. In the following period they again sold out and the team members again concerned themselves with "lowering market potential" because of the firm's continued inability to meet demand even at capacity production. 87 "We should figure on getting 12% of the market. Our market potential is way too high . . . We are actually losing customers by not being able to meet demand." They decided to again raise their product price; along with that, "the best way to lower our market potential is to lower our R&D and marketing." They continued "cutting down market potential" by raising price and reducing marketing expendi- tures on into January, February and March of the second fiscal year, but in that period they also cut production back to a one shift operation on the grounds that "total industry sales will drop better than a million units [in the coming quarter and] it is not possible to coup (sic) any more than 12% or 15% of the market." A review of Aurora's overall performance indicates that almost invariably the team members constructed their models around market share. Their initial plans were based on the idea that if one could capture a larger share of the market than anyone else, he would automatically make more money than anyone else. When this program proved less than a total success, they revised their approach, but with their attention still centered on market share. Rather than the biggest share of the market, they sought the "right" share: they attempted to get a percentage of the market that was reasonably obtainable from the marketing standpoint and that also was consistent with the firm's production capabilities. Thus while their_plans changed, the construction of their basic model remained the same. 88 In reviewing the team's performance at the end of the game, one of the managers expressed this Opinion: "The way [the leading firm] does it is by assuring themselves of a certain percentage of the market. They spend a lot of time figuring out what the industry sales will be, assume they will get approximately 12% of it, and charge accordingly." Team #4--BHM Electrical: The Operating Efficiency Model The history of BHM Electrical's performance is de— tailed in Table 9. BHM started off in the first period of the game scheduling production at one-shift capacity be— cause "overtime creates losses." At the same time it raised its product price, its marketing budget and its plant in— vestments. Entering the next period, the October, November, December quarter, it again scheduled product1on at one shift capacity and again raised its price because "this is the period when you sell the most units." Marketing was held at the prior level, however, on the grounds that "we can't afford to increase marketing; we don't have enough units to sell. Our inventory is low and we are running at ca- pacity." At the end of the quarter they had sold out their entire production and inventory, so going into the January, February, March period they again scheduled one shift ca- pacity production, holding price and marketing expenditures at the previous quarter's level. This time, with the seasonal drop in industry sales, they were left with a sizeable inventory. As a result, the team members agreed 89 TABLE 9.--Game performance--Team #4—-BHM Electrical. Practice Period Period 0 Price ($) 6.50 6.40 Average industry price ($) 6.29 6.40 Economic index 106 103 Seasonal quarter (months) JAS AMJ OPERATING DATA (thousands of units) Total industry sales 4,477 3,911 Market potential 461 435 Sales volume 461 435 Percent share of industry sales 10% 11% Production this quarter 445 400 Labor cost per unit ($) 1.44 1.43 Materials cost per unit ($) 1.57 1.58 Inventory finished goods 50 65 Plant capacity next quarter 435 415 INCOME STATEMENT (thousands of dollars) Receipts: Sales revenue 2,995 2,781 Expenses: Labor 660 . 574 Materials 701 631 Reduct. fin. goods inv. val. 47 104 Administration 333 278 Marketing 275 240 Research and development‘ 160 150 Maintenance 75 75 Depreciation '208 200 . Miscellaneous 254 230 Total eXpenses 2,712 2,481 Profit before income tax 282 300 Addition to income tax fund 136 144 Net profit after income tax 147 156 Dividends paid 50 50 Addition to owners' equity 97 106 CASH FLOW (thousands of dollars) Receipts: Sales revenue 2,995 2,781 Disbursements: Cash expenses 1,757 1,547 Addition to income tax fund 136 144 Dividends paid 50 50 Investment in plant 600 500 Purchase of materials 1,250 1,000 Total disbursements 3,793 3,241 Addition to cash assets -798 -460 BALANCE SHEET (thousands of dollars) Assets: Net cash assets 242 1,040 Inventory value, finished goods 149 196 Inventory value, materials 1,719 1,169 Plant net book value 8,692 8,300 Owners' equity 10,802 10,706 NOTE: Figures may not add due to rounding. 90 Period Period Period Period Period Period Period Period 1 2 3 4 5 6 7 8 6.50 6.55 6.55 6.40 5.50 6.00 6.00 6.00 6.32 6.32 6.39 6.21 5.77 6.01 6.19 6.19 108 98 92 98 114 121 116 108 JAS OND JFM AMJ JAS OND JFM AMJ 4.643 5.051 3.827 4.760 6.553 6.774 5.820 5.295 458 468 348 410 821 843 671 604 458 454 348 410 666 744 671 569 10% 9% 9% 9% 10% 11% 12% 11% 415 432 454 475 496 744 744 496 1.43 1.43 1.42 1.42 1.42 1.43 1.71 1.71 1.57 1.57 1.57 1.56 .78 .78 .78 .78 22 0 105 171 0 0 73 0 432 454 475 496 496 496 496 496 2,979 2,975 2,282 2,622 3,664 4,461 4,023 3.415 594 616 646 675 704 1,238 1,488 847 653 678 710 742 388 582 581 387 130 66 —316 —196 512 0 -220 220 283 288 295 302 309 359 359 309 260 260 260 270 270 300 300 300 160 165 170 170 150 170 170 170 80 85 85 85 85 ,90 90 85 208 216 227 237 248 ~248 248 248 234 211 284 336 215 168 225 145 2,602 2,586 2,361 2,622 2,881 3,154 3,242 2,710 378 389 -78 0 783 1.308 782 704 181 187 -37 0 376 628 375 338 196 203 —41 0 407 680 407 366 50 5o 50 0 0 40 40 40 146 153 —91 0 407 640 367 326 2.979 2.975 2,282 2,622 3,664 4,461 4,023 3.415 1,611 1,625 1,739 1,838 1.733 2,324 2,632 1,856 181 187 137 0 376 628 375 338 50 50 50 0 0 40 40 40 550 650 650 650 250 250 250 250 1,100 0 1.350 0 800 o 700 0 3.492 2.512 3.752 2.488 3.159 3.242 3.997 2.484 -513 463 —1,469 134 505 1,220 26 931 527 990 —479 -345 160 1,380 1,406 2,337 66 0 316 512 0 0 220 0 1.616 938 1.579 835 1.247 666 784 397 8.643 9.077 9.500 9.912 9.914 9.916 9.918 9.921 10,852 11,005 10,914 10,914 11,321 11,962 12,328 12,654 91 upon a reduction in price and an increase in marketing. In the words of one of the members, they "hoped to sell all the inventory piled up from the period before. We are short of cash, but we have to raise marketing to in- crease sales. If we raise the marketing budget we can sell all we can make as well as our inventory." Production was still scheduled at one shift capacity. "We don't want to go on overtime because it costs too much, but we want to produce at capacity. We are still paying depreciation on our plant even if we aren't producing at plant capacity so by lowering our price and increasing our marketing we hope to get sales volume over plant capacity, thereby cutting into our large inventory." BHM Electrical was not successful in selling their production in this period; hence they entered period #5--the period of the material cost change--with an even larger inventory of finished goods than in the previous period. Their response to the change in material requirements was to drOp their product price by an amount that was greater than the material cost saving. The argument went like this: "If [the others] can drOp their price [by the amount of the cost saving] and make the same money [as before], they are going to do it; since we are high, we must go lower than the rest because we want to sell our inventory . . . We've got to get out of the red. Four other firms are in the red and will think the same way. Inventory carrying costs are high. We will have to be low to clear out inventory." 92 Marketing expenditures were left at the same level as before on the grounds that "we can't afford to raise them while we are in the red." Production was continued at one shift capacity. With this aggressive pricing, BHM Electrical suc- ceeded in generating more orders than it could fill from its current production and inventory. So in approaching the following period-~the October, November, December quarter of the second fiscal year of the game--the managers discussed the advantages of raising prices and holding to single shift Operations as in the past in comparison with setting a lower price and operating at full overtime ca- pacity. They decided with a good season coming they could raise their price from the previous period's extremely low level and, with an increase in marketing expenditures, sell their maximum capacity output. For the first time they went into overtime production, but with the comment that "to do it at a profit we must go all the way." They con- tinued to operate at full capacity in the following period, dropping back to the level of one-shift operations in the final quarter of the game. The BHM Electrical managers seemed to build their decisions throughout the game around plant capacity. Their model of the situation appeared to call for operating the firm at some maximum efficiency level--either a full one shift operation without overtime or a maximum capacity operation with all—out overtime—-and then making whatever 93 price and marketing decisions that were necessary to sell the available product. In their scheme of things, success depended on matching the market to their production capa- bility. Team #5--Exacta Corp.: The Maximum Volume Model The history of Exacta's performance is detailed in Table 10. Early in the game the Exacta Corporation manage- ment decided on a strategy of "an ever-lowering price coupled with an ever—expanding market;" as they saw it, the key to success was "underpricing and overselling com- petitors." In the opening period they set their product price below everyone else in the industry saying, "We know that at $6.00 there is a tremendous market. All we have to do is produce. If [this potential] can be filled, we needn't raise price to make extra profit." To support this strategy they scheduled production at maximum capacity and raised their marketing budget moderately. Research and development was maintained at the previously established level simply to "keep abreast of the market." Their avowed intention was to compete on a basis of price rather than product differentiation. "We want to stay at the bottom of the market [in price]" they said-—and they were successful in doing so for the first two quarters. In going into the third period, the January, February, March quarter of the first fiscal year, the Exacta managers expressed concern about other firms that had higher prices 94 TABLE 10.-—Game performance-~Team #5--Exacta Corp. Practice Period Period 0 Price ($) 6.00 6.40 Average industry price ($) 6.29 6.40 Economic index 106 103 .Seasonal quarter (months) JAS AMJ OPERATING DATA (thousands of units) Total industry sales 4,477 3,911 Market potential 661 435 Sales volume- 565 435 Percent share of industry sales 13% 11% Production this quarter 500 400 Labor cost per unit ($) 1.43 1.43 Materials cost per unit ($) 1.57 1.58 Inventory finished goods 0 65 Plant capacity next quarter 455 415 INCOME STATEMENT (Thousands of dollars) Receipts: Sales revenue 3,393 2,781 Expenses: Labor 773 574 Materials 787 631 Reduct. fin. goods inv. val. 196 104 Administration 333 278 Marketing 320 240 Research and develOpment 150 150 Maintenance 100 75 Depreciation 208 200 Miscellaneous 293 230 Total eXpenses 3,161 2,481 Profit before income tax 232 300 Addition to income tax fund 111 144 Net profit after income tax 121 156 Dividends paid 50 50 Addition to owners' equity 71 106 CASH FLOW (thousands of dollars) Receipts: Sales revenue 3,393 2,781 Disbursements: Cash expenses 1,969 1,547 Addition to income tax fund 111 144 Dividends paid 50 50 Investment in plant 1,000 500 Purchase of materials 1,000 1,000 Total disbursements 4,131 3,241 Addition to cash assets -738 -460 BALANCE SHEET (thousands of dollars) Assets: Net cash assets 302 1,040 Inventory value, finished goods 0 196 Inventory value, materials 1,382 1,169 Plant net book value 9,093 8,300 Owners' equity 10,777 10,706 NOTE: Figures may not add due to rounding. 95 Period Period Period Period Period Period Period Period 1 2 3 4 5 6 7 8 6.00 6.00 6.15 6.10 5.20 6.00 6.20 6.20 6.32 6.32 6.39 6.21 5.77 6.01 6.19 6.19 108 98 92 98 114 121 116 108 JAS OND JFM AMJ JAS OND JFM AMJ 4.643 5.051 3.827 4.760 6.553 6.774 5.820 5.295 642 646 488 630 1,667 1,328 958 788 642 646 488 630 1,021 818 818 788 14% 13% 13% 13% 16% 12% 14% 15% 623 616 660 700 762 818 818 820 1.43 1.43 1.42 1.41 1.41 1.41 1.69 1.69 1.58 1.58 1.55 1.53 .76 .76 .76 .77 46 17 189 259 0 0 0 32 430 456 482 508 545 545 547 573 3,850 3,874 3,000 3,844 5,308 4,907 5.072 4,888 1,039 1,013 1,081 1,142 1,252 1,345 1,616 1,621 981 971 1,023 1,073 580 624 625 627 57 88 -517 -210 777 0 0 -95 333 337 346 354 363 374 375 375 280 280 380 500 1,000 500 450 500 150 150 250 250 250 200 200 200 100 100 100 100 100 100 100 100 208 215 228 241 254 273 273 273 241 256 354 411 623 323 203 270 3.389 3.411 3.245 3.862 5.199 3.740 3.841 3.872 460 463 —245 —19 109 1,167 1,230 1,016 221 222 —118 -9 52 560 590 488 239 241 —127 —10 57 607 640 528 0 0 0 0 0 0 0 0 239 241 —127 -10 57 607 640 528 3.850 3.874 3.000 3.844 5.308 4.907 5.072 4.888 2,144 2,137 2,511 2.758 3,588 2,843 2,944 3,066 221 222 -118 —9 52 560 590 488 0 0 0 0 0 0 0 0 500 750 750 750 1,000 275 300 800 900 1,100 1,000 1,500 0 300 550 650 3,764 4,209 4,143 4,999 4,640 3,978 4,384 5,004 85 —335 -1,143 -1,155 668 929 688 -115 1,125 790 —353 —1,507 -840 89 776 661 139 51 567 777 0 0 0 95 1,088 1,217 1,195 1,621 1,041 717 642 664 8,593 9,128 9,650 10,158 10,904 10,907 10,934 11,461 10,945 11,186 11,059 11,049 11,105 11,713 12,352 12,881 96 but were making more sales and profits than they were. While Exacta was second highest in sales in the prior period, they had some unsold inventory left over. The lowest competitive price had been $6.20 compared with Exacta's $6.00 price. They decided "Low price alone is no longer going to give us a corner on the market. We are going to have to start increasing our research and develop— ment and our marketing. We lost considerable market last time to companies with a higher price because we have not been investing enough. "Those teams must be putting more money in marketing. That's what we should do. They will undoubtedly stay at $6.20. We need all the income we can get if we are going to raise our marketing budget. We must raise price, but we want to stay under those others." So the Exacta management raised the product price to $6.15, made sizeable increases in both research and development and marketing, and scheduled production at close to their maximum capacity. The results of these decisions were most unsatisfactory. The firm failed to sell its output and incurred severe losses. However the Exacta team members agreed they were "not going to panic because we lost a lot of money last quarter. We still think low price and large volume sales is the key to success." They decided to hold to their $6.15 price--still the lowest in the industry-—and to maintain marketing at the increased level set in the previous period. "This [level of marketing expenditures] saved us from greater 97 disaster last time. Since the economic and seasonal factors are turning up, this level of marketing expense should ex— pand our market considerably; perhaps we can pick up a larger percentage of the total." Production was again scheduled close to full capacity "to increase our inventory to be ready for later periods." Exacta entered period 5-—the period of the material cost change--with a very heavy inventory of finished goods and a cash deficit of serious proportions. Their price of $6.10, while still low compared with the others, was con- siderably higher than Aurora's new price of $5.50. Their failure to sell their output not only cost them profits, but seriously depleted their cash. The discussion went along these lines: "With lower material costs, everybody is going down [in price] . . . We must get under Firm #3, [Aurora], to sell units. They sold 873,000. They are probably out of inventory. If so, they can only sell what they make this time . . . and it won't be that much. If we had been low at $6.10 last time, we could have sold [that many]. We must be low man! . . . If anybody is going below $5.50, they will go to $5.25, so we should go to $5.20 this time! Next time we will have to go down even more." Turning to their marketing bedget, they decided to double their already high level of expenditure. "We must excel here. We have to take chances. We can only blow it once so we might as well go out in style." And to support 98 this general attack production was scheduled at maximum capacity with the comment, "We are either going to go broke or make a lot." In essence, the Exacta managers used the newly introduced material cost savings as a means of in- tensifying their basic low price, high volume strategy. As a result of these moves, Exacta created a much higher level of demand than it could satisfy; it sold its entire output and inventory. While the firm's cash po— sition was eased considerably, profits for the period were quite low; in fact, they were the poorest in the industry. In planning for the following period, one of the managers said, "It's time to give up trying to get in front of the rest of the industry. It's time to save the company. We are no longer in a position to face the cut-throat compe- tition of low price. We must get the company back on its feet. We must be a follower until we improve our cash‘po- sition and can be a leader again." (My emphasis.) So they raised their price to what they believed the industry average would be, reduced marketing expenditures to the previous level and again scheduled maximum capacity pro- duction. They continued this approach throughout the re- maining plays of the game. Throughout the game, Exacta focused on producing and selling as many units as possible every period. While price was initially considered the most effective instrument to accomplish these results, marketing was also emphasized at a later stage of the game. As the Exacta managers 99 approached the problem, the magnitude of both price and marketing depended on their estimates of competitive action, with emphasis on overshooting rather than undershooting the mark. They supported this attack with maximum production in all but two periods as well as with a heavy plant investment program designed to build more and more capacity. They sustained their level of plant investment even when they were in serious cash difficulties. In keeping with their low price, high volume strategy, R&D and maintenance ex- penses were held at relatively low levels. Product differ- entiation and unit costs were not of primary concern to the Exacta management; volume was. Team #6--NAMCO: The Model-Less Model The history of NAMCO's performance is detailed in Table 11. If the NAMCO management started with any kind of organ- ized conceptual model of their business situation, it was not evident. At the outset, the managers simply followed the previously established patterns of decision for the firm. Typical team comments were like these: "My strategy [is] to keep my prices a little lower than the expected average price each quarter, yet high enough to cover total costs per unit and thus allow for some profit." "I believe we should keep our price relatively stable, varying it no more than 20¢." "Marketing should be kept at an average to keep up with competition, yet because it is an expense it must be kept from extremes." 100 TABLE 11.-—Game performance--Team #6-—NAMCO. Practice Period Period 0 Price ($) 6.20 6.40 Average industry price ($) 6.29 6.40 Economic index 106 103 Seasonal quarter (months) JAS AMJ OPERATING DATA (thousands of units) Total industry sales 4,477 3,911 Market potential 540 435 Sales volume 495 435 Percent share of industry sales 11% 11% Production this quarter 430 400 Labor cost per unit ($) 1.48 1.43 Materials cost per unit ($) 1.58 1.58 Inventory finished goods 0 65 Plant capacity next quarter 430 415 INCOME STATEMENT (thousands of dollars) Receipts: Sales revenue 3,072 2,781 Expenses: Labor 626 574 Materials 679 631 Reduct. fin. goods inv. val. 196 104 Administration 333 278 Marketing 250 240 Research and development 140 150 Maintenance 85 75 Depreciation 208 200 Miscellaneous 218 230 Total expenses 2,735 2,481 Profit before income tax 337 300 Addition to income tax fund 162 144 Net profit after income tax 175 156 Dividends paid 50 50 Addition to owners' equity 125 106 CASH FLOW (thousands of dollars) Receipts: Sales revenue 3,072 2,781 Disbursements: Cash expenses 7 1,652 1,547 Addition to income tax fund 162 144 Dividends paid 50 50 Investment in plant 500 500 Purchase of materials 1,150 1,000 Total disbursements 3,514 3,241 Addition to cash assets —442 -460 BALANCE SHEET (thousands of dollars) Assets: Net cash assets 598 1,040 Inventory value, finished goods 0 196 Inventory value, materials 1,641 1,169 Plant net book value 8,593 8,300 Owners' equity 10,831 10,706 NOTE: Figures may not add due to rounding. 101 Period Period Period Period Period Period Period Period 1 2 3 4 5 6 7 8 6.20 6.20 6.25 6.30 5.50 5.60 6.00 6.10 6.32 6.32 6.39 6.21 5.77 6.01 6.19 6.19 108 98 92 98 114 121 116 108 JAS OND JFM AMJ JAS OND JFM AMJ 4.643 5.051 3.827 4.760 6.553 6.774 5.820 5.295 552 606 391 433 897 1,155 846 704 480 600 391 433 791 780 800 704 11% 12% 10% 9% 12% 12% 14% 13% 415 600 450 420 745 780 800 750 1.43 1.43 1.43 1.42 1.42 1.41 1.68 1.67 1.57 1.58 1.57 1.56 .78 .77 .77 .77 0 0 59 46 0 0 0 46 435 455 476 498 520 542 564 584 2,979 3,729 2,445 2,728 4,349 4,370 4,800 4,294 593 977 642 596 1,232 1,286 1,564 1,412 653 946 708 657 579 604 615 574 196 0 -176 39 137 0 0 -138 283 339 296 302 359 366 374 380 250 270 240 300 340 370 400 420 160 140 160 180 200 200 220 220 85 90 85 85 100 110 120 120 208 217 228 238 249 260 271 282 229 268 307 405 302 254 243 261 2.656 3.248 2.488 2.803 3.499 3.451 3.807 3.531 323 472 —43 —75 850 919 993 763 155 227 —21 -36 408 441 477 366 168 246 —23 —39 442 478 516 397 40 20 0 0 0 0 0 0 .128 226 —23 —39 442 478 516 397 2.979 3.720 2.445 2.728 4.349 4.370 4.800 4.294 1,600 2,084 1,729 1,868 2,534 2,587 2,921 2,814 155 227 -21 -36 408 441 477 366 40 20 0 ~ 0 0 0 0 0 600 625 650_ 670 700 700 700 680 1,300 1,000 1,100 0 0 300 500 450 3,695 3,956 3.459 2.503 3,642 4,028 4,597 4.310 -716 -236 —1,014 226 708 342 203 —16 324 89 —925 -699 8 350 553 537 0 0 176 137 0 0 0 138 1,817 1,871 2,263 1,606 1,026 722 607 483 8,693 9,100 9,523 9,955 10,406 10,846 11,274 11,673 10,834 11,059 11,037 10,998 11,440 11,918 12,435 12,831 102 The team members tended to approach each decision period and each decision as an isolated, independent event, except for an attempt to control total expenses by trading off funds between marketing and research and development. In going into the low January, February, March period, they decided to raise their product price. "We are going into a poor quarter. We are not going to produce as much so we should raise price to try to get a little money." At the same time, they lowered marketing. "We do not plan to advertise during this period be- cause it is going to be a very poor period." However they continued to increase their investment in plant, and in spite of the fact that they had a very large inventory of raw materials on hand, they increased their purchases of materials. As a result of these decisions, in the fourth period they found themselves operating at a loss, with a very serious cash deficit, and with an enormous supply of raw materials: enough to run for more than six months at maximum capacity. They also had a relatively large inven- tory of finished goods on hand. All of these factors com- bined to focus the managers' attention on the need to sell more goods. "We must get a market for our product. These other firms are outselling us." 103 "The figures from past periods show that we Just don't have a big enough market." "We take a very small percentage of the market It is very important to get our market higher." This led to what the team felt was a substantial in- crease in marketing expenditures. At the same time, how- ever, they agreed that "we can Jump our price up five cents and still be way below the average." They decided that no additional material was needed for the quarter, but they again raised their investment in plant. NAMCO entered the period of the materials requirement change with its cash deficit and its inventories somewhat reduced, but both were still of significant proportions. The management team's attention remained focused on in- creasing the firm's sales as much as possible. To accomplish that they decided to cut their price to $5.50 and increased their marketing budget by "redistributing the materials sav- ings." At the same time, on the strength of the forecast of improved economic conditions and an expected seasonal in— crease in sales, they scheduled production at maximum ca- pacity. This combination of moves was successful in getting them out of the difficulties they had been in; for the balance of the game they continued to focus on realizing a high sales volume through low prices and heavy marketing expenditures. Unlike the other teams, the early NAMCO decision dis— cussions showed no systematic organization or focal point. 104 Each decision was treated in more or less general terms as an independent item for discussion. Initially the team members looked to the previously established pattern of operation as a basis for their decisions. Later they looked to competitive action for guidance. Where this was not to be had, as in the case of materials purchases, their choices tended to be aimless. Their discussions only began to take form when they found themselves in difficulty; then they had something on which to focus: a problem that had to be solved. The obvious move was to increase sales by following competition in price cutting and marketing. After a falter- ing start, they pursued this approach with some success. By the end of the game their decision discussions began to have form and to make sense. Team #7--Slater Company: The Efficient Price Model The history of Slater Company's performance is detailed in Table 12. The Slater Company management started out by estimating the effects of different price levels on profits. Based on the results of the practice play, they decided to hold their product price stable for the first quarter while raising both marketing expenditures and production. Some of their comments at that time were as follows: "Let's hold to a stable price. We sold enough in the trial period." "To raise or lower price would be stupid. We wouldn't make any money." 105 TABLE l2.--Game performance--Team #7--Slater Co. Practice Period Period 0 Price ($) 6.40 6.40 Average industry price ($) 6.29 6.40 Economic index 106 103 Seasonal quarter (months) JAS AMJ OPERATING DATA (thousands of units) Total industry sales 4,477 3,911 Market potential 481 435 Sales volume 480 435 Percent share of industry sales 11% 11% Production this quarter 415 400 Labor cost per unit ($) 1.43 1.43 Materials cost per unit ($) 1.56 1.58 Inventory finished goods 0 65 Plant capacity next quarter 415 415 INCOME STATEMENT (thousands of dollars) Receipts: Sales revenue 3,075 2,781 Expenses: Labor 592 574 Materials 649 631 Reduct. fin. goods inv. val. 196 104 Administration 283 278 Marketing 240 240 Research and development 200 150 Maintenance 80 75 Depreciation 208 200 Miscellaneous 108 230 Total expenses 2,645 2,481 Profit before income tax 430 300 Addition to income tax fund 206 144 Net profit after income tax 223 156 Dividends paid' . O 50 Addition to owners' equity 223 106 CASH FLOW (thousands of dollars) Receipts: Sales revenue 3,075 2,781 Disbursements: Cash expenses 1,593 1,547 Addition to income tax fund 206 144 Dividends paid 0 50 Investments in plant 210 500 Purchase of materials 800 1,000 Total disbursements 2,809 3,241 Addition to cash assets 266 -460 BALANCE SHEET (thousands of dollars) Assets: Net cash assets 1,306 1,040 Inventory value, finished goods 0 196 Inventory value, materials 1,321 1,169 Plant net book value 8,303 8,300 Owners' equity 10,929 10,706 4 NOTE: Figures may not add due to rounding. 106 Period Period Period Period Period Period Period Period 1 2 3 4 5 6 7 8 6.40 6.25 6.50 6.35 6.25 6.25 6.35 6.30 6.32 6.32 6.39 6.21 5.77 6.01 6.19 6.19 108 98 92 98 114 121 116 108 JAS OND JFM AMJ JAS OND JFM AMJ 4.643 5.051 3.827 4.760 6.553 6.774 5.820 5.295 532 660 470 535 692 918 740 691 515 600 470 535 658 700 700 539 11% 12% 12% 11% 10% 10% 12% 10% 450 600 513 500 650 700 700 539 1.43 1.41 1.40 1.40 1.40 1.41 1.69 1.68 1.55 1.50 1.50 1.49 .75 .76 .75 .75 O 0 43 8 O 0 0 O 430 459 487 495 495 523 585 595 3.299 3.750 3.053 3.399 4.113 4.375 4.445 3.394 666 966 757 706 1,020 1,129 1,329 905 698 903 768 747 489 530 528 406 196 O -l30 106 24 0 O O 333 337 347 356 358 359 367 337 300 275 400 350 400 400 400 450 250 400 275 275 200 200 250 250 80 85 90 90 90 95 95 95 208 215 229 244 248 248 261 292 218 250 267 218 203 256 406 211 2.949 3,430 3.004 3.092 3.033 3.216 3.637 2.946 350 320 50 308 1,080 1,159 808 448 168 153 24 148 519 556 388 215 182 166 26 160 562 603 420 233 O O O O 0 O 0 O 182 166 26 160 562 603 420 233 3.299 3.750 3.053 3.399 4.113 4.375 4.445 3.394 1,847 2,313 2,136 1,995 2,272 2,438 2,847 2,248 168 153 24 148 519 556 388 215 O 0 0 O 0 O 0 O 500 800 800 400 250 800 1,500 500 A 500 700 1,000 700 400 200 400 350 3.015 3.966 3.960 3.243 3.440 3.995 5.135 3.313 284 —216 -906 156 673 380 -690 81 1,324 1,108 201 358 1,031 1,411 721 802 O 0 130 24 0 O O O 971 769 1,000 953 864 534 406 350 8.593 9.178 9.748 9.905 9.907 10.459 11.698 11.905 10,888 11,054 11,080 11,240 11,802 12,404 12,825 13,058 107 "It always helps to advertise. The more advertising we do the more we can sell . . . But if you raise marketing expenditures too much, the law of diminishing returns sets in." While they were not unsuccessful in the first period, in the following period they elected to lower their price. "Everybody is lowering price; $6.32 was the average last quarter. Our price [which had been $6.40] has to be low enough to sell, but high enough for profit . . . But it must not be so low as to develop more potential than we have units [of finished product available for sale]. At the same time they decided to reduce their level of marketing expenditures. "With lower price we won't need as much marketing. The lower the price, the lower the marketing expense should be." They also decided to increase production. In pur- chasing materials for the next period, however, they in— advertently under—ordered, limiting the quantity that could be produced in the January, February, March quarter. The combination of an over-sold situation in the,previous quarter, an expected slow upcoming market, and limited pro- duct availability led them to increase their price again, supporting the move with a heavy increase in their market- ing budget. While their price turned out to be well above the market average price, the firm's overall results were relatively satisfactory. 108 Going into the next quarter with a sizeable finished goods inventory, the managers elected to drop their price. As one team member put it, "I feel that our firm should keep the price at about $6.35 so we stay near the average. This way we do not over- or under-price our product and will always be able to appeal to the largest segment of the market." Marketing was decreased moderately and the pro— duction schedule reduced to match the anticipated demand. This, of course, was the period when Aurora slashed its price to $5.50. The Slater Company, with its price at about average, not only managed to sell its entire pro- duction and most of its inventory, but it also realized a considerably higher profit than Aurora. Hence in receiving the announcement of the reduction in material requirements, the Slater managers were not anxious to lower their pro- duct price. "We made more money that [Aurora did] at $5.50 last quarter. The economic index is predicted to be up quite high next period so our market potential should be up. The other firms are going to cut their prices down. If we don't sell at this price [$6.25] we can get rid of the units next time. We will have inventory for the Christmas season." The material cost reduction was estimated at $.75 per unit, but the Slater Company managers finally decided to reduce their price by only $.10. They recognized that this price would probably by the highest in the industry and agreed to increase their marketing expenditures to offset 109 the lower prices of their competitors. They were in some disagreement as to whether to increase production to 720,000 or 650,000 units; they finally settled on the smaller figure. With the second highest price in the industry--a price substantially above some of their competitors--they were successful in selling out their entire production and inventory. Accordingly, they held to this general price, production and marketing pattern for the remaining plays of the game. In reviewing the history of the Slater Company's performance, one is struck by their concentration on price as the crucial variable for their operation. The team members seemed to see their central task in terms of setting a relatively high price compared to competition, but a price sufficiently low to sell an "adequate" volume: something more than one shift capacity. Only once did they indicate that they wanted to set the highest price in the industry; they usually managed to keep their price about the second highest, relying on a relatively high, constant level of marketing effort to insure the desired sales volume. Slater Company seemed to seek an "efficient" price: one that would provide a generous gross margin but also permit high volume production and sales. 110 Team #8--Universal Industries: The High Price Model The history of Universal Industries' performance is detailed in Table 13. In the Opening practice period of the game Universal Industries increased their product price substantially. They guessed (correctly) that most of the other teams would lower price. They wanted to see what would happen as the result of a move in the opposite di- rection. While the results were not entirely satisfactory, their initial test set a pattern for their operations. In their opening game decisions they again raised price, but by a lesser amount, supporting the move with a very sub- stantial increase in marketing "to help boost demand and sales of products so that we can sell what we make," and a relatively small increase in production. This move was more than successful in generating business; they repeated it in the following period but with a reduction in the mar— keting budget; the managers felt they "threw a little money away" in this area_in the previous quarter. In spite of this reduction however, they again sold out. Although they recognized that industry volume could be expected to be down in the next period--the usually slow January, February, March quarter—-the team members agreed to continue to hold their price. "Although we are 20¢ higher than the average price, there is no sense in fluctuating. The customers are used to paying this,price. If we reduce it, sales won't increase 111 TABLE 13.--Game performance--Team #8--Universa1 Industries. Practice Period Period 0 Price ($) 6.70 6.40 Average industry price ($) 6.29 6.40 Economic index 106 103 Seasonal quarter (months) JAS AMJ OPERATING DATA (thousands of units) Total industry sales 4,477 3,911 Market potential 409 435 Sales volume 409 435 Percent share of industry sales 9% 11% Production this quarter 415 400 Labor cost per unit ($) 1.44 1.43 Materials cost per unit ($) 1.57 1.58 Inventory finished goods 72 65 Plant capacity next quarter 430 415 INCOME STATEMENT (thousands of dollars) Receipts: Sales revenue 2,737 2,781 Expenses: Labor 597 574 Materials 652 631 Reduct. fin. goods inv. val. -19 104 Administration 283 278 Marketing 290 240 Research and develOpment 175 150 Maintenance 65 75 Depreciation 208 200 Miscellaneous 254 230 Total expenses 2,504 2,481 Profit before income tax 233 300 Addition to income tax fund 112 144 Net profit after income tax 121 156 Dividends paid 30 50 Addition to owners' equity 91 106 CASH FLOW (thousands of dollars) Receipts: Sales revenue 2,737 2,781 Disbursements: Cash expenses 1,664 1,547 Addition to income tax fund 112 144 Dividends paid 30 50 Investment in plant 500 500 Purchase of materials 1,000 1,000 Total disbursements 3,306 3,241 Addition to cash assets -569 —460 BALANCE SHEET (thousands of dollars) Assets: Net cash assets 472 1,040 Inventory value, finished goods 216 196 Inventory value, materials 1,517 1,169 Plant net book value 8,593 8,300 Owners' equity 10,797 10,706 A NOTE: Figures may not add due to rounding. 112 Period Period Period Period Period Period Period Period 1 2 3 4 5 6 7 6.50 6.50 6.50 6.50 6.40 6.40 6.40 6.40 6.32 6.32 6.39 6.21 5.77 6.01 6.19 6.19 108 98 92 98 114 121 116 108 JAS OND JFM AMJ JAS OND JFM AMJ 4.643 5.051 3.827 4.760 6.553 6.774 5.820 5.295 574 604 420 399 617 958 763 795 505 500 420 399 617 713 486 494 11% 10% 11% 8% 9% 11% 8% 9% 440 500 445 454 600 650 486 494 1.43 1.44 1.43 1.42 1.42 1.41 1.67 1.60 1.57 1.57 1.56 1.56 .78 .77 .77 .77 0 0 25 80 63 O O O 436 445 454 464 473 486 494 506 3.285 3.250 2.728 2.593 3.948 4.563 3.109 3.160 649 764 635 644 946 1,040 813 820 691 784 696 708 467 503 374 378 196 0 -75 -l64 51 189 O O 333 339 292 295 349 351 305 358 500 350 250 300 500 700 425 550 170 170 170 170 180 200 200 225 75 75 85 90 100 115 115 120 208 218 222 227 232 236 243 247 232 252 203 251 206 211 179 171 3,054 2,952 2,478 2,521 3,030 3,546 2,655 2,869 232 298 250 72 918 1,017 454 291 111 143 120 35 441 488 218 140 120 155 130 37 477 529 236 151 30 0 15 25 50 100 100 100 90 155 115 12 427 429‘ 136 51 3.285 3.250 2.728 2.593 3.948 4.563 3.109 3.160 1.958 1,950 1,635 1,750 2,280 2,617 2,038 2,244 111 143 120 35 441 488 218 140 30 O 15 25 50 100 100 100 620 400 400 440 400 500 400 500 2,000 O 0 1,000 0 1,000 0 0 4,720 2,493 2,170 3,250 3,171 4,706 2,756 2,984 -1.434 757 558 -657 777 -143 353 176 -394 363 921 264 1,041 898 1,252 1,428 0 O 75 239 189 0 0 O 2.478 1.694 998 1.290 823 1.319 945 567 8.713 8.895 9.072 9.286 9.453 9.717 9.874 10.127 10,797 10,952 11,066 11,079 11,506 11,935 12,071 12,122 113 that much, taking into consideration the period of the year. Market potential has been very high compared with production the last two periods. Maybe we can build some inventory." They also decided to reduce marketing and cut pro— duction back to one shift capacity on the basis that "less would be stupid; more would be expensive." In this period they sold most of what they produced and they earned considerably more money than anyone else in the industry. Only one other firm made a profit in the quarter and it was a relatively small amount; all the others suffered losses. These results tended to fortify Universal Industries' price program for the following period, but at the same time competition was forced to take aggressive action. Most of them not only dropped price--Aurora going as low as $5.50--but they also increased their marketing efforts substantially. As a result, Universal Industries' market and profit position dropped severely. Their market share went from 11% to 8% and they entered the next period—— period #5--with a large inventory of finished goods. After much deliberation about the effects of the material cost change, the management team of Universal In- dustries decided to drop their price from $6.50 to $6.40 and at the same time to raise their marketing expenditures substantially in order to get more sales volume. They also went into overtime production, planning to sell the additional output in the upcoming fall quarter if it did not move in the current period. While their price proved 114 to be the highest in the industry, they still managed to sell slightly more than they produced. In the following periods they continued to hold their price at the $6.40 level "as a matter of policy" and it continued to be the tOp price in the industry. Marketing expenditures and pro- duction schedules were varied according to their market forecasts . Throughout the game Universal Industries' operations were keyed to a stable, high price. Their price was the highest in the industry for six of the eight periods. They used marketing expenditures as the primary means of keep- ing sales volume up to at least one shift production ca- pacity. This central focus on price was dramatized in the firm's response to the changes presented in period #5. With one competitor priced a full dollar below its price and indications that other firms would follow toward that level, and with industry costs down as much as $.78 per unit, Universal Industries elected to reduce their selling price only $.10 per unit—-their only price change Of the game. Team #9--Spartan Iron Company: The Control Model The history of Spartan Iron's performance is detailed in Table 14. Spartan Iron Company's model of the situation may have developed more by accident than by design. In the opening period they chose to hold their product price to $6.40, the prior level, and to increase marketing to offset 115 TABLE l4.--Game performance--Team #9——Spartan Iron Co. Practice Period Period 0 Price ($) 6.25 6.40 Average industry price ($) 6.29 6.40 Economic index 106 103 Seasonal quarter (months) JAS AMJ OPERATING DATA (thousands of units) Total industry sales 4,477 3,911 Market potential 556 435 Sales volume 480 435 Percent share of industry sales 11% 11% Production this quarter 415 400 Labor cost per unit ($) 1.43 1.43 Materials cost per unit ($) 1.58 1.58 Inventory finished goods 0 65 Plant capacity next quarter 420 415 INCOME STATEMENT (thousands of dollars) Receipts: Sales revenue 3,003 2,781 Expenses: Labor 595 574 Materials 654 631 Reduct. fin. goods inv. val. 196 104 Administration 283 278 Marketing 300 240 Research and development 150 150 Maintenance 77 75 Depreciation 208 200 Miscellaneous 202 230 Total expenses 2,665 2,481 Profit before income tax 338 300 Addition to income tax fund 162 144 Net profit after income tax 176 156 Dividends paid 50 50 Addition to owners' equity 126 106 CASH FLOW (thousands of dollars) Receipts: Sales revenue 3,003 2,781 Disbursements: Cash expenses 1,607 1,547 Addition to income tax fund 162 144 Dividends paid 50 50 Investment in plant 300 500 Purchase of materials 1,015 1,000 Total disbursements 3,134 3,241 Addition to cash assets —131 -460 BALANCE SHEET (thousands of dollars) Assets: Net cash assets 909 1,040 Inventory value, finished goods 0 196 Inventory value, materials 1,530 1,169 Plant net book value 8,393 8,300 Owners' equity 10,832 10,706 NOTE: Figures may not add due to rounding. 116 Period Period Period Period Period Period Period Period 1 2 3 4 5 7 8 6.40 6.50 6.60 6.40 6.10 6.25 6.35 6.25- 6.32 6.32 6.39 6.21 5.77 6.01 6.19 6.19 108 98 92 98 114 121 116 108 JAS OND JFM AMJ JAS OND JFM AMJ 4.643 5.051 3.827 4.760 6.553 6.774 5.820 5.295 510 502 339 436 652 787 600 579 510 502 339 436 652 676 600 579 11% 10% 9% 9% 10% 10% 10% 11% 500 450 430 417 600 653 655 625 1.43 1.43 1.43 1.43 1.43 1.43 1.72 1.72 1.58 1.58 1.56 1.55 .78 .78 .78 .79 55 3 94 74 23 0 55 100 410 412 417 421 436 437 439 439 3.267 3.264 2.238 2.789 3.976 4.225 3.813 3.620 778 674 627 594 986 1,092 1,314 1,236 788, 709 672 648 468 512 514 491 31 157 -272 58 155 68 -164 -l37 333 331 332 283 335 339 340 340 300 300 270 300 350 380 '350 375 150 150 200' 200 150 150 150 150 85 80 78 77 85 90 9O 88 208 204 206 208 211 218 219 219 222 160 224 216 175 174 175 221 2.894 2.766 2.336 2.584 2.915 3.023 2.989 2.985 373 498 —98 205 1,061 1,202 824 636 179 239 -47. 99 509 577 396 305 194 259 -51 107 552 625 429 331 50 50 50 50 5O 50 50 50 144 209 -101 57 502 575 379 281 3.267 3.264 2.238 2.789 3.976 4.225 3.813 3.620 1,867 1,695 1,730 1,670 2,081 2,226 2,420 2,411 179 239 -47 99 509 577 396 305 50 50 50 50 50 50 50 50 100 250 300 300 500 250 250 225 1,000 0 1,700 0 O 990 0 500 3.196 2.235 3.733 2.119 3.140 4.093 3.115 3.491 71 1,030 -1,495 670 836 132 698 129 1,111 2,141 645 1,316 2,152 2,284 2,981 3,110 165 9 281 223 68 O 164 301 1,381 672 1,700 1,052 584 1,062 549 558 8.193 8.238 8.332 8.423 8.713 8.745 8.776 8.782 10,850 11,059 10,958 11,015 11,516 12,091 12,470 12,751 117 the expected competitive price reductions. They also scheduled production at a higher level than the previous one in order to build inventory for the next period. Material purchases were set at the same level as in the pre-game starting report. In entering the second quarter of the game they found themselves with much more than enough materials for period #2 but not quite enough to take them through period #3 at the desired level of pro— duction. They wanted to forego purchasing materials in period #2 in order to save the $50,000 ordering charge, but were also concerned about limiting their ability to produce in period #3. Some of their comments were as follows: "We worked ourselves into a corner last time; we are going to have to cut this 'real tight.'" "We had forecast a drOp in price, but in view of the dilemma we have gotten ourselves into, we cannot afford to drop our price at this time. We are going to have to raise our price." They resolved the problem by limiting production for both periods and increasing price in order to raise sales revenue and limit market potential. In effect they took the materials inventory as a fixed point and adjusted the other variables in the situation to accord with it. After the materials inventory problem was solved, the Spartan Iron Company management found itself with a build-up of finished goods inventory amounting to almost 100,000 units. "We have to get rid of these finished goods 118 units. But if we lower price too much we won't make enough profit. We want to sell about 500,000 units; that will let us run the plant at its one shift capacity of 416,000 units and sell out most of the inventory." After a discussion of what other firms had apparently been able to sell at different prices, the team members finally settled on a price of $6.40, a reduction of $.20 from their previous industry high of $6.60, with the comment that, "if they don't sell at that price, we'll dump them on the market." They supported this move with a sub- stantial increase in marketing. In period #4 they succeeded in reducing their inven- tory by a small amount. In facing the new conditions of period #5, Spartan Iron management decided to reduce price by a relatively small amount and increase marketing and production. Some of the discussion went as follows: "Everybody is going to have a lower price and a high economic index is predicted." "We could decrease to $5.75 and still make the same profit, but we wouldn't have the goods; we would have no carry over [of inventory] for the next period." "We don't want to go down to market average price. $6.00 is too low." "If we don't sell at $6.10, we will have inventory for next period. This will give us a chance to feel out the market." 119 "We want to build a large finished goods inventory to have enough for October, November and December." Actually Spartan Iron managed to sell out in period #5, so in the following quarter they raised their price, held marketing as before and scheduled production at full capacity. At game's end they were still concerned with building their inventory position. Unlike the other teams, the Spartan Iron Company managers were continually concerned about inventory and re- peatedly discussed their decisions in terms of their finished stock position. They looked at inventory as a kind of safety-valve, a cushion for errors in forecasting. They tended to organize their decisions around inventory targets, around either reducing or building their stock of finished goods. Thus when they had excess stocks on hand, they would reduce price and increase marketing to move more goods. But as they pictured the situation, they could afford to limit their changes because if the goods failed to move in the current period, they could take further action in the following period. And oppositely, when they wanted to in- crease inventories, they not only increased production, but they also raised price and reduced marketing efforts. It is interesting to note that while all of the other firms ran out of finished goods repeatedly, Spartan Iron sold out only once during the game. 120 Summary of Results In surveying these data one is first struck by the evidence that although these teams were all playing what to an objective observer would appear to be the same game under the same conditions, each team seemed to "see" a different set of conditions. Each one defined its situation differently and operated in accordance with that definition.l Some teams (notably #l and #3) had an external orientation: they started with the market and sought to fit their oper- ations to the conditions imposed by the market. Other teams (especially #4 and #9) appeared to start with their own operating requirements; they attempted to match their par- ticipation in the market to their own business needs. Some teams tended to vary price with the seasonal shifts in the market, increasing their price with an increase in industry sales and decreasing price on the downturns (for example, Team #2), while others moved in exactly the opposite di- rection (as Team #1 did), and still a third class (Team #8, for instance) priced without considering seasonal changes. And the teams also varied with respect to how they perceived 1The fact that decisions were based on the definitions of situations rather than the actual situations was demon- strated particularly in instances where decisions were based on erroneous information. For example, Team #2 twice scheduled production at a rate which they believed to be the firm's nomimal capacity. Actually their capacity was lower than the scheduled production rate so that overtime charges were incurred. The decision was a function of what the team members believed to be the situation rather than what the situation actually was. 121 the relationship between price and marketing——whether they should move in the same direction or opposite to one another. One can cite many such differences, but in all such cases one finds that each team's policy was supported by cogent, con- sistent and Justifiable arguments. From the standpoint of this research, the significant point seems to be that these differences were not trivial, random, "irrational" variations, but that while each team's decision behavior differed from the others, it appeared to be based on a definition of the situation. In arriving at its definition of its situation, each team appeared to select a "focal point" as a center of attention.2 While all the teams were striving for the same abstract goal--"to maximize the expected rate of return on "3—-each one tended to the capital invested in the company translate that general objective into more specific terms such as market share (Team #3) or some level of operating efficiency (Team #4) or maximum volume (Team #5) or relative price (Team #8). These more tangible, more readily defined, symbolized and communicated goals were used as surrogates for the more abstract, complex, indefinite goal of maximum rate of return. Each team appeared to organize its dis- cussions and decisions around its chosen focus of attention and it was this focus of attention which gave meaning to 2March and Simon, 100. cit., p. 152. 3See Appendix A, pp. 148-149. 122 the elements of the situation. For an extreme example, ob- serve the behavior of Team #9 at the beginning of the game. It chose to pursue an opportunity to save a materials pur- chasing charge. This game them a specific raw materials inventory figure as a "fixed point." From that, their in- dividual decisions on production, price, marketing and the rest took on meaning in terms of the inventory limitations --the amount of production it permitted, the price and mar- keting program indicated by the resulting level of product availability and so on. These limitations were, of course, self—imposed, flowing out of the original focus on a cost saving, but they served as a basis for organizing the team's decisions in a coherent meaningful, framework. Similarly Team #4 focused on efficient levels of operation--either one shift or maximum capacity-—and geared all other decisions to whichever production level it chose. Team #9 used price as its center of attention. .In all cases--finally even in- cluding Team #6, the model-less case--each team developed some kind of central direction of change which served as a means of relating the individual parts of the situation to one another and as a basis for organizing those parts into a coherent whole. To illustrate the structural aspects of the team's focus, Team #l's decisions to lower price, increase market- ing and raise production in a good market season make sense both as individual decisions and as a set of decisions when taken in the context of their focus on market 123 opportunity as the primary independent variable in the situ— ation. On the other hand Team #2's pattern of moving in exactly the opposite direction is perfectly reasonable in the context of their focus on maintaining an efficient plant load. Team #7 organized their decisions in yet another way. Where both Team #1 and Team #2 chose to raise marketing ex- penditures when they lowered price and vice versa, Team #7 would support a price increase with additional marketing effort and conversely, let a price decrease sell itself. To that team, price was the central variable; its moves make sense in that context. In all cases, the structural relation- ships of the various members of the definition of the situ- uation seem to be explainable in terms of how the members support each other in accomplishing the firm's central di- rection of changes. It is the focus of attention that gives meaning to the parts. The teams not only differed in the content of their definitions of the situation, but they also exhibited marked differences in the "style" in which they constructed and manipulated their models. Team #4--BHM Electrical--ex- hibited one extreme: a highly conservative approach. Both their discussions and their decision records reveal a cautious approach in which the range of choices considered was severely limited. At the opposite end of the spectrum, Team #5--Exacta Corporation——operated with a "go—for-broke" approach. Changes which BHM Electrical considered as highly radical were dismissed as insignificant--hardly 124 worth bothering with—-by Exacta. For example while BHM Electrical's marketing expenditures varied between $260,000 and $300,000 per period, Exacta's ranged from $280,000 to $1,000,000. And as an interesting side-light to the question of style, in estimating competitive actions each team tended to ascribe its own style and scale of operations to all of its competitors. When the industry report for the first fiscal year was issued (Table 4), the Aurora management team was shocked to find its plant capacity was not overwhelmingly greater than its competitors'; what to them had been a mas- sive investment program had been matched and even exceeded by other firms who had invested at a comparable rate as a matter of course. A factor of major importance for further research is the inertia which the teams exhibited in both the absolute and relative elements of their decision behavior. The term absolute elements of decision behavior is used to refer to the teams' specific decisions: its tendency to carry for- ward and repeat the same or a large portion of the same de- cisions from period to period, or considered oppositely, the teams' reluctance to change from past decisions. This was exhibited in the general acceptance and use of the re- port of the prior decisions provided at the start of the game (Table 1). For the most part they were accepted as "correct;" the team's decisions were not new decisions, but continuations or deviations from the given model. Hence the bulk of the old decisions seem to be carried 125 forward; the variations——the new information--are a rela- tively small part of the total. This same tendency is also exhibited in those decision areas which are considered of secondary importance to the team's main direction of change. For example in considering the level of maintenance, time and again the expressed comment was something like "we seem to be doing all right; let's leave it alone." Thus a large portion of a team's decision behavior can be accounted for in terms of default, in terms of the tendency to repeat what has gone before. The term relative decision behavior is used to refer to the way in which a team relates different decisions to one another and to the team's central focus. The research indicated that when a team has created a particular form of model, it continues to use that same general form, even though it may change the content quite drastically. This was illustrated most vividly in the case of Aurora, Inc. The managers started out with a definition of the situation centered on some ideas about the importance of market share. Their general plan of attack proved unsuccessful and was abandoned. But in developing a new approach, the team mem— bers continued to focus their attention on market share. The basic system of relationships that made up their model remained. They no longer equated the biggest share of the market with the goal of maximum return on investment, but they built their new plans around a concept of a "right" share of the market rather than around some totally new 126 focal point. They continued to organize and evaluate their individual decisions in relationship to the effects of those decisons on their share of the market. Conclusion The findings may be summarized as follows: 1. Each team appeared to develop its own unique pattern of decision-making. 2. The evidence at hand indicates that differences be— tween teams' decision behavior correspond with differences in their stated beliefs about the environment and their re- lationships with it, or, to express the same idea in differ— ent words, team decisions appear to correspond with their expressed definitions of the situation. 3. In dealing with the complex, ambiguous and un- certain situation presented by the business game, each team exhibited a tendency to center attention on some particular focal point: a central direction of change which it deemed to be desirable and feasible. In essence, the team's focus was its translation of the general game goal of "maximizing the rate of return" to an action objective around which it could organize its model of the situation in meaningful terms. 4. Each team tended to organize its concepts of the elements of the game around its particular focus in terms of how the individual variables were believed to contribute to or detract from the desired direction of change; in 127 other words, each team structured its conceptual model of the situation around its focus. The variables in the situ- ation took on meaning, importance and value on a basis of how they related to the team's focus. 5. The team's conceptual model of the situation-- its focus and the supporting structure built around that focus--tended to persist. It was initially constructed from certain "givens," including not only the explicit statements about the game and the implicit relationships revealed by the starting information, but also the whole system of linquistics, cultural factors, past experience, etc., etc., which the team members brought to the game, all of which lies beyond the scope of this study. What is significant to this study is that the team model was constructed from "available data," regardless of source, and once constructed, it provided the framework for selecting and organizing new information. It was treated as the "accepted facts" of the situation. Changes were introduced in terms of departures from the original construct. When experience with the "real world" of the game indicated that the conceptual model held by the team members was not fully adequate, the model was not destroyed and replaced by a new one; it was adjusted and modified to accommodate the new knowledge. Structural re- lationships--for example, the effect of marketing on sales volume--tended to be modified to agree with experience, but with as little change to the total structure of the model as 128 possible; to use Festinger's term, the models were changed only to the extent necessary to reduce dissonance. Thus while a team's model of the situation changed over a series of decisions and results, it changed as an evolutionary pro- cess, carrying certain basic characteristics with it from change to change. 6. Each team also exhibited a "style" of change most markedly revealed in the number and size of its changes. Some teams were ultra-conservative, making very few, rela- tively small changes. Others were gamblers, making many large changes. These patterns of behavior appeared to per- sist throughout the game. The students who participated in this study were not businessmen, the situations were not typical of a real busi- ness situation, and the conceptual models they created are not intended to represent the kinds of models that business- men build of their own business situations. However, the results of this research raise the question of whether or not business managers do have some kinds of models with characteristics such as those described above, whether there are the same kinds of relationships between their models and their decisions as these data reveal, and if this is the case, whether or not one can discover those models and use them to explain and predict decision behavior. The fore- going data indicate that these possibilities are worth in- vestigating. CHAPTER VI CONCLUSIONS General Conclusions This research set out to explore the feasibility and utility of a phenomenological approach to the study of busi- ness decision-making. The study rested on the premise that business decisions are based on the decision—maker's con— ceptual model of the business situation: his structure of ideas and beliefs about how the business's environment: operates and how that environment can be expected to change, about how the business itself Operates and how it relates to the environment, about alternative actions the business might take and what outcomes can be expected from such actions, and about the relative desirability of various possible future states. While these ideas, beliefs and goals may not be consciously held in the form of a single, explicit, well—articulated model, it is believed that they function as a more or less consistent, enduring conceptual structure for selecting, organizing and evaluating infor- mation about the business's present situation and its future possibilities. Thus the decisions that determine the busi- ness do not reflect raw data of the environment, but selected, 129 130 codified information organized in the framework of the decision—maker's ideas, beliefs and goals. And hence to understand, explain or predict business decision behavior it is necessary to know something about the decision-maker's model of the business situation. The model of the business situation is seen as a cod- ing system, a conceptual device constructed by decision— makers to enable them to handle large quantities of—infor- mation.l It serves to simplify and order the complexity of the "real" environment by reducing the number of variables in a given situation to some manageable number. One way it does this is by simply ignoring or suppressing data by classi- fying them as unimportant. Another way is to categorize data, grouping large numbers of different variables under a common name as we do in everyday language. The number of possible combinations of variables can be reduced by con- sidering relationships between variables to be fixed "for all practical purposes." Still another technique—-and one of particular importance to this study-~is to hold the en- tire simplified representation of reality constant, and test different combinations by permitting only one variable to change at a time. All of these strategies are made possible by the use of contrived symbols which can be used to repre— sent various facets of the neal situation. The net result 1Miller, loc. cit. 131 appears to be that in assessing the situation, evaluating alternatives and arriving at his choice of action, the decision-maker deals not with all possible forms of reality but a highly simplified, limited representation of reality and that he deals with that representation in a highly stylized way. The model of the business situation, whether mani- fested in words or numbers or communication systems or pro— grammed behavior patterns, appears to be a heuristic device created by men to offset human limitations and serve human purposes. Although his physiological, cultural, social and organizational background provides certain model-building tools and rules which may limit the characteristics of his model (language, for example), the individual tends to build his own models for his own purposes on a basis of his own perceptions and his own needs and to modify them as his own experience dictates. If this is so, then in so far as he bases his actions on his own model of the situation, it is necessary to understand his model and its limitations in order to understand his choice of action. The basic purpose of model building and model manipu- lation—~the minimization of variables-~makes useful study of the process possible. All of the techniques indicated above serve to minimize change and set up "constants" so that the decision-maker can focus on those variables of the situ- ation which he considers to be important in terms of his definition of the situation. Where he has a number of such 132 variables, he may be able to manipulate them in sequence or in limited combinations. But this appears to be possible only if he can conceptually hold large segments of the situ- ation constant; otherwise, the information in the system out- runs his channel capacity. Thus the very nature of the model of the situation requires it to be a stable structure. Al- though the model itself is a vehicle for working with change and variations, its primary virtue is as a device for pro- viding a background for change by holding other things con- stant and as a means of limiting the number of changes that must be considered at any one time. Insofar as it has this characteristic and performs this function, the individual's model of the business situation should be useful for explain- ing and predicting his behavior. Thus, if business decisions are grounded in the de— cision-maker's model of the business situation rather than in the "real" situation, if the model of the business situ— ation contains large elements of "constants" and is limited in its rate of change, and if one can discover and recon- struct a decision-maker's model of the business situation, then it should be possible to understand and explain the set of alternatives which he would consider and to predict the direction and relative magnitude of action he might take in a given situation. In a very tentative and general way, the research tends to answer these "ifs" positively--at least to the extent of indicating that further research in this direction seems to be justified. The general approach 133 of making comparative studies in depth appears to be a pro- ductive avenue of approach not only for laboratory work but also for field research; at least it provides a means for generating a variety of specific hypotheses which can be tested empirically. However, a great deal of exploratory work remains to be done before the concept can be reduced to a useful, measurable, clearly-defined "definition of the situation." Specific Conclusions One of the primary problems of using the general con- ceptual framework described in this thesis is that of dis- covering and describing a business decision-maker's model of his business situation. Just as most of us are unaware of how the structure of our language limits our view of the world, so the business decision-maker is often unaware of how his model of the business situation determines what "facts" he sees and what ones he ignores. However, even though he is unaware of it, the model is uniquely his; it only exists (if it exists at all) in relationship to his infor- mation handling; it is a construct that is only useful in relationship to his behavior processes. The problem is how to get at it, how to get it expressed and how to translate those eXpressions into behavior-relevant terms. This research had three major features: (a) a multi- dimensional depth approach, (b) crystallized around series of sets of decisions, and (c) in a controlled situation that 134 afforded comparisons of different models of the same basic environment. The recorded decision explanations and dis- cussions combined with other data provided a wide array of comments and statements about various aspects of the situ- ation from each decision-maker. The actual decisions pro— vided a focal point around which these bits and pieces of information could be organized into a coherent pattern. Finally, the use of a common controlled environment provided a basis for comparing and contrasting expressions of ideas and decisions with one another and against a common back- ground. While at this stage the approach (it could hardly be called a methodology) was largely based on extempor raneously fitting bits and pieces together as they developed, the results indicate that once the problem has been defined, a more orderly procedure can be developed. The data accumulated in the actual play of the game—- the input information, the recorded discussions, the strategy statements, and the actual decisions--indicated that each team did tend to develop and work with its own model of the situation. Although the teams were working under the same conditions with the same information toward the same general objective, each one tended to select different variables for primary consideration, organizing them differently to achieve different operational goals. In a sense, each team created its own environment and proceeded to operate according to the rules they ascribed to that environment, even though their models sometimes differed significantly from the 135 "reality" they were supposed to represent. The use of the model as a basis for decision was most vividly demonstrated in those instances where the model was clearly "wrong" (in the sense of the decision-maker's ideas about some of the game relations being directly at variance with the actual game program) but yet was the decisive factor in the actual decision. The individual teams' models of the situation ex- hibited internal consistency both vertically and horizon- tally: vertically in the sense that the members of the set . gramm-mamml of decisions made at each period were mutually complementary and not contradictory with respect to the team's general framework and horizontally in the sense that decisions from period to period exhibited continuity, fitting into an over— all pattern. While each team changed its model with every new set of results, in general it held the overall structure of its model relatively constant, confining its changes to individual relationships within that structure. Even when making a drastic reappraisal of their model, the teams seemed to work from their existing set of ideas to a new structure, rather than abandoning the old model and construct— ing a totally new one. The concept of the model as the basis for decision coupled with the above stability characteristics provided a basis for explaining and predicting how the individual teams would react to a severe change in environmental conditions. 136 While the results left a great deal to be desired, they did indicate that the general approach may be capable of pro- ducing useful results if it is further developed. The business game proved to be a useful research tool in that it provided a well—defined, controlled, common situ- ation somewhat similar to actual business situations, but I' l . ”win-£- vastly simplified, thus enabling the researcher to concen— trate his attention on the decision-maker as the primary variable. The team decision discussions served to bring out the reasoning behind the decisions; the recordings of 3 these discussions provided the wide variety of statements that are needed to reconstruct the team members' models of the situation. The decision requirements of the game forced the participants to resolve differences and crystallize their models and the feedback of results provided a basis for ob— serving change and evolutionary development of the models. The primary weakness of the approach is that the game is just that; unlike a business, it is basically a closed system, a zero—sum game operating in the context of a fixed set of rules. The over-simplification of the situation coupled with the naivete and disinterest of the subjects provided a model quite remote from actual business conditions. While this has its disadvantages and dangers, it does serve to provide some research advantages. The overall experience indicates that, while this approach may not produce results directly applicable to business situations, it can not only generate hypotheses but also point the way to the testing of such 137 hypotheses; in other words, it can itself serve as a model of the decision situation--with all the limitations of such a model. Future Possibilities: Laboratory Studies Considerably more laboratory work will be required to identify and measure consistency characteristics both in the so—called vertical and horizontal directions. In working with a set of decisions at a point in time, how many factors are permitted to vary? How much uncertainty can be tolerated? What strategies are used to increase the number? (For example, arbitrarily dividing the set into independent sub-sets or treating variables sequentially are techniques which appear to be used to reduce the number which must be handled at one time.) How are conflicts and contradictions resolved? And in working with successive decisions, how is new information introduced? What factors or relationships are relaxed and what ones held constant? What are the limitations on number and extent of change and how do they operate? What "coding systems" are developed to increase the tolerance for change? How do these systems develop over time? These and other dimensions might be fruitfully studied by the use of the artificial situations made possible by the game, not so much for definitive answers to these questions as for indications of how the conceptual framework might be applied to business situations.3 3See James G. March and Herbert A. Simon, Organizations =:* 138 Future Possibilities: Business Studies The initial problem which must be solved if this con— cept is to be usefully applied to actual business situations is that of determining what a business manager's model of his business situation is. As suggested in the foregoing, many of its elements are so thoroughly internalized that they are of the nature of automatic responses, completely beyond the consciousness of the actor; they are only to be discovered by observing his responses to a variety of specific situations and inferring the common underlying con- cepts which appear to tie those responses together. Using the research experience as a guide, if a means can be de— veloped by which a manager's responses to a large number of different but related specific business problems could be accumulated--say, by an extended, open-ended interview or observation program centered on specific business practice and business decision questions—-one should be able to re— construct his general model of the situation by a process of induction and test those results against his actual prior and subsequent decision behavior. (Some preliminary experiments in this direction indicate that such an approach is feasible.) Another approach is through the use of the equivalent of "personal documents": The records of past decisions. Again, it appears that one would require an (New York: John Wiley and Sons, Inc., 1958), pp. 156-158, for other related propositions which might be tested in such studies. 139 extensive variety of decisions in different situations to build a reliable model of the decision-maker's model. Another feature of the research program that was useful in reconstructing the team members' model and which could prove useful in business research not only for model building purposes, but as an end in itself, was the com- parison of different people's models of the same situation. These comparisons not only helped to reveal the reasons for differences in decisions, but also brought to light some significant ideas and beliefs which otherwise might have been overlooked. Comparisons of the models of the business situation held by members of the same organization could conceivably provide important insights into the overall operation of that organization, showing not only the roots of conflict, but the bases for cooperation and the sources of dynamic growth. An investigation of similarities and differences between competitors' models of their common business situation could also provide important understand- ing of business operations at another level. While the question of why people tend toward one focus of attention or one style of model-building rather than another opens up vast fields of inquiry far beyond anything considered here, the identification and characterization of these differences is a necessary first step. As such, it leads to such in- triguing possibilities as that of exploring the basic 140 differences between the marketing man's model and the accountant's model.” If techniques can be develOped for understanding people's models of their business situations, such knowledge should prove to be highly useful in managing a business with respect to its internal operations as well as its external transactions. A commonly shared definition of the situation is essential to coordinated, integrated action within an organization; techniques for understanding the viewpoints of the members of the organization and for identifying specific areas of difference and disagreement can bring this phase of the management problem into sharp focus. At the same time, differences and change in people's conceptions of what is possible and what can be accomplished is the key to develop- ment and growth; the stimulation of controlled departures from the commonly held system of ideas and beliefs is also a critical management problem. Both consistency and incon- sistency, the "this is the way it is" and "this is the way it could be," are required for organizational growth and both must be expressed in relationship to a common framework: the model of the situation. One can conceive of a study of the members of an organization designed to reveal the commonly held ideas and beliefs that guide their actions uDeWitt C. Dearborn and Herbert A. Simon, "Selective Perception: A Note on the Departmental Identification of Executives," Sociometry, 21 (June, 1958), pp. 140—145. 141 and decisions and at the same time to reveal the individual variations from the common conception. It would take the form of a number of different pictures of the same subject, all showing common aspects and all showing areas of differ— ences. Such an analysis, even in crude form, should pro- vide the manager with a much deeper understanding of that part of his task having to do with integrating different people's efforts in a common undertaking. The same basic problem exists in the firm's relation- ships with its environment. Consider, for example, a manu- facturer marketing his products through a number of distri- butors of a particular class. While nominally they are all in the "same" business, adhering to the same standards and following the same practice, each one tends to see his particular situation in a different light; he may have differ— ent goals or he may define the functions of his business differently or he may perceive his environment in some special way. If the manufacturer bases his predictions of distributor behavior on a viewpoint which he assumes to be common to all distributors, his predictions may be subject to error to what- ever degree the individual distributor's definition of his own situation varies from that which was ascribed to him. Oppo- sitely, if the manufacturer would predict his distributor's behavior, he needs to understand the distributor's own model of his business situation. 142 Future Possibilities: Education Studies If education for business is concerned with the ability to make business decisions in one form or another and if business decisions are considered to be rooted in one's model of the business situation, then perhaps the educational process should concern itself with the indivi— dual's ability to build models: the ability to recognize and develop significant focal points in a given situation, to discriminate between important and unimportant infor- mation, and to structure his model of relevant relationships. The research described in the foregoing provided some in- sights to the ways in which a small number of undergraduate students constructed their models of a situation and how their ability to use their models changed during the play of the game. While no special effort was directed toward study- ing this aspect of the data, it appeared evident that the general technique of putting subjects into situations where they are forced to make and explain reasoned decisions based on complex, ambiguous data provides a basis for understanding and comparing different "model building processes." If this can be done, then perhaps some understanding of the techniques and skills involved can be developed by comparing subjects with different backgrounds as, for example, undergraduate. students and experienced businessmen. Similarly, if such comparisons can be made, then the effectiveness and effici- ency of different educational techniques can be tested. Given common data about a business situation, one would 143 expect a student trained in marketing, for example, to con- struct quite different and presumably more powerful models than one not exposed to such training. He would be expected to perceive different focal points, to select different vari- ables for attention and to organize his model of the situ- ation differently. Better understanding of the nature of these differences might provide a better focus for educational efforts. The feedback and correction aspects of the game also provide some understanding of how peOple modify and adjust their models in response to discrepancies between their en- visaged and actual experiences as well as in response to new information. As indicated, these processes seem to be sub- ject to certain constraints which could be usefully studied. Future Possibilities: Business Theory Perhaps the most interesting aspect of this general concept, however, has to do with its implications for busi- ness theory generally and for a theory of management in particular. If one supposes that the decision-maker's model of the business situation is the crucial element in the decision process (and hence in the determination of what the business is) and if one further supposes that the model of the business situation is a conceptual structure created by the decision-maker as his means of dealing with the situ— ation as he perceives it in terms of his knowledge and goals, then this structure, this set of ideas, beliefs and values, 144 however they are generated or rooted, becomes the central "independent variable" of the business system. If we con- sider the business as a system of activities or a pattern of humanly-determined, purposeful behavior, each element of the system takes its meaning and value on a basis of the conceptual model that determines the system. Events which may appear to "exist" in some objective sense to outside parties may not be recognized and hence may not "exist" as far as the decision-maker is concerned--and hence may not "exist" in any meaningful way as far as the actions of the business are concerned. But, oppositely, the decision— maker's beliefs, although completely unverified and un— verifiable, may have a very real effect on the determination of the activities that are the business. The difficulty of business theory--from that of the classical economists to that of the new school of behavior- ists5--seems to center on an insistence on some kind of independent, non—human, "objective" grounding. The formulae and the rules all seem to depend on the existence of some kind of external, objectively demonstrable goals which can be used to give meaning and order to the relationships they describe. Although the terms of such goals have gradually shifted from sharply defined profit dollars to vaguely 5For example, see Cyert and March, op. cit., and particularly Chapter 9, "A Model of Rational Managerial Behavior," by O. E. Williamson. 145 defined signs of status and power, nevertheless they con- tinue to be considered somehow as knowable goals. In the final analysis, the approach discussed here suggests the abandonment of the concept of the objective, knowable goal as the foundation of business theory. Rather than start with the assumption of some fixed base or some ultimate value scheme, it proposes to start with uncertainly —-to start with the individual's infinite capacity to create values and goals beyond his past or present experience. Starting at that point, the structure which he builds must be understood in terms of its relevance for him in terms of his definition of his own situation. This suggests that the teachings of economics and business theory are basically relative; they take on meaning only with respect to the in- dividual. They say, not that this tool is good and that one is bad, but merely this tool can be used for one purpose and that another purpose requires another tool. This does not make for neat and complete theories of business nor for autonomous self-regulating computer programs, but it may make for more useful and powerful understanding. T APPENDIX A INSTRUCTIONS FOR THE GAME Before the first play of the business game, each student was given a copy of a paper1 describing the game and providing instructions for the participants. As this was the subject's single most important source of infor- mation about the game--how it Operates, how the elements relate and how performance is measured--the descriptive and instructional portions of this paper are reproduced below. Management's job in the Executive Game is to employ its company's resources (i.e., cash, plant, employees, inventories of finished goods and raw materials, etc.) in such a way as to maximize the expected rate of return on the capital invested in the company (owners' equity). Efforts to increase sales should be properly related to costs and ex— penses, in terms of reduced margins and enlarged budgets, and must be correlated with changes in plant capacity and production volume. Investment programs and dividend policies must be geared to profits and available funds. All these factors must be balanced in the face of continually chang- ing competitive and general economic conditions. The necessity for planning is emphasized by the fact that congruous decisions generally produce more profitable results than erratic ones. Infor— mation given in the next few paragraphs will be helpful in formulating a profitable course of action. lHenshaw and Jackson, loc. cit. 146 147 The Market. Total industry market potential is affected by general economic conditions (economic index), seasonal demand, and by the industry wide constellation of policies embracing pricing decisions and expenditures for marketing and research and de- velopment. Each firm's potential share of the market is determined primarily by the relationship of its policies to those of its competitors. The channels of distribution to the final pur- chaser in the domestic market are via wholesalers to retailers or direct to large retailers and to the foreign market through exporters. The final pur- chasers are fairly sensitive to price differentials at the retail level which makes wholesale, export and large retail distributors sensitive to price changes made by the manufacturers. Demand is also much influenced by marketing effort and by product improvements made possible by research and develop- ment expenditures. Marketing budgets primarily finance direct selling expenses such as advertising and salesmen's commissions. They have relatively intense effects in the quarter in which they are spent and progressively less effects in subsequent quarters. As one would expect, research and develop- ment expenditures have little effect in the quarter in which they are spent but a strong cumulative effect in subsequent quarters. Operating Costs. Production at or below the "capacity" figure listed in Operating Statements is accomplished at nearly fixed direct cost-per- unit, relatively small reductions being a result of vigorous research and development programs. Inadequate maintenance programs lead to an increase in manufacturing costs per unit. Production volume up to an additional 50 percent of capacity can be scheduled in games utilizing Model 1 but at approxi- mately one and one-half times direct labor cost-per- unit plus an increase in overhead administration ex- pense. Normally the largest non-budgeted, indirect costs are those which are fixed and those, such as depreciation, which depend roughly upon plant size. (The paragraphs on plant expansion and on finances point to possible exceptions.) Marketing, research and development, and maintenance are costs as budgeted. Maintenance, like marketing, and re- search and development, has effects which extend into subsequent quarters. For good results the maintenance budget should be appropriately geared to the production schedule. Since maintanance 148 costs are affected by the volume of production scheduled, it is important to be certain that there is sufficient raw material on hand to actually pro- duce the amount of production scheduled. Because of fixed costs, large volume operations tend to have a moderate advantage on a total cost-per—unit basis. Expenses depending upon plant size may levy large penalties for over—expansion. Under-production (in relation to market potential) results in loss of revenue through lost sales, rather than in added costs. Competitors may capture part of the firm's lost sales but, ceteris paribus, approximately 50 percent of a firm's customers whose orders cannot be filled due to stockouts will reorder in the next period. Over—production leads to excessive inven- tories and correspondingly large carrying charges. Raw materials must be ordered at least one period in advance; sufficient raw material must be avail- able at the beginning of agperiod to support the production volume scheduled for that period. An ordering expense is incurred each time raw materials are purchased and should be compared with carrying charges for storing raw materials over and above the amounts actually required in the next period in order to devise an Optimal ordering policy for raw materials. Plant Expansion. Plant and equipment depreci- ate at a rate of 2.5 percent per quarter (approxi- mately 10 percent per annum), and this depreciation is reflected immediately in reduced capacity. To maintain a given capacity it is necessary to re- invest accordingly. Reduction in capacity can be achieved by allowing depreciation to take its course, without reinvestment. New capacity is obtained by investing $20 in plant and equipment for each unit of quarterly capacity desired over and above the sum needed to Offset decreases due to depreciation. Miscellaneous expenses associated with the purchase of plant and equipment are negligible for moderate rates of expansion, become significant when as much as one million dollars is invested in plant and equipment in a single quarter, and grow signifi- cantly with larger investments. Plant and equip- ment, whose purchase is budgeted at the beginning of one quarter, are not available for utilization until the subsequent quarter. Finances. When net cash assets fall below zero, expenses are incurred for loan negotiation, interest, factoring, etc. Such expenses are in- significant with shortages Of a few hundred thou- sand dollars, but grow to hundreds of thousands 149 of dollars per quarter if shortages reach the order of magnitude of one million dollars. If the cash deficit exceeds $3,000,000 the company may be deemed to be insolvent and immediately declared a bankrupt. Goals. Maximization of the rate of return earned on the beginning owners' equity is the recom— mended goal for which each team is expected to strive. Different teams may take different tacks--one may concentrate on growth and increased equity, another may be concerned mainly with a large and steady stream of dividends, while a third team may adapt a relatively conservative line as a hedge against possible economic recession. When play begins, each team should determine what course it wishes to pursue, and through what general policies and overall plans. As play proceeds it may seem ap- prgpriate to revise concepts of goals; policies and plans. For post game purposes, each team is ex— pected to keep an informal record of the basic guidelines adopted for its firm, and the changes through the successive periods of play. The discounted rate of return earned on beginning owners' equity will be calculated for each team and used as an objective measure of each team's performance. OPERATING STATEMENTS. The basic statements [Table l] are condensed, and in order to understand them and to forecast prOperly, further explanation is required. A. PERIOD AND ECONOMIC INDEX. First is in— dicated the period number and the (quarter) of the year (abbreviated) to which these operating state- ments pertain. Also on the first line is the actual economic index for the period. The economic index forecast is the same for all teams (firms) and made by the Game Administrator. B. INFORMATION ON COMPETITORS merely lists competitive information of the type that is readily available in financial papers and the marketplace. These data are useful in analyzing results and formulating decisions to counteract and take ad— vantage of good and bad competitive strategies, respectively. C. MARKET POTENTIAL is the total orders (in Widgets, i.e., physical units) received by the firm during the period. In the event of a stockout, 150 market potential will exceed sales volume; in such cases the market potential is the maximum number of units of product which the company could have sold during the period. The total industry market po— tential is determined by the interaction of the average industry price, the total industry market- ing effort (expenditures), the total industry re- search and development expenditures, the economic index, and the seasonal demand. Then the indivi- dual firm's market potential is a function of (de- pends upon) the individual firm's pricing policy as compared to those of its competitors, the indi- vidual firm's R & D expenditures compared to those of its competitors and the individual firm's market— ing effort (outlays) compared to its competitors' outlays for marketing. D. SALES VOLUME is the actual sales (number of units sold) during the period. In forecasting it would on the surface generally appear unwise to make decisions creating a larger market potential than the firm can fulfill. E. PERCENT SHARE OF INDUSTRY SALES is self- explanatory. F. PRODUCTION THIS QUARTER is the actual production achieved and may be less than what was scheduled if raw materials on hand were insufficient to produce the scheduled amount. G. INVENTORY FINISHED GOODS is the current number of units on hand at the end of the period. H. PLANT CAPACITY NEXT QUARTER is based upon plant size—(plant net book value) and states the number of units of product that may be produced during the next period without incurring extra "above capacity" expenses (see "Operating costs" above and "expense-labor" below). INCOME (& EXPENSE) STATEMENT A. RECEIPTS (TOTAL). SALES REVENUE = Sales Volume in Units of Product TIMES Sales Price per Unit. B. EXPENSE l. Labor--at around $1.43 per unit of output (depending on R & D and main- tenance policy) within the range of plant production capacity, and around $2.15 per unit at overtime rates. 151 2. Materials--from stocks on hand--A NON-CASH expense--at around $1.58 per unit of output (depending on R & D and maintenance policy): 3. Reduction Finished Goods Inventory Value-—a’NON—CASH expense--Sales Volume in Units of Product MINUS Production Volume in Units of Pro- duct TIMES Standard Cost per Unit (83 . oT—o -_ 11 4. Administration--a relatively fixed cost, with slight variation depending 5 upon plant size plus overhead cost 8 for overtime operations. 5. Marketing --as budgeted. 6. Research & Development (R & D)--as budgeted. 7. Maintenance--as budgeted. 8. Depreciation--a direct reflection of deterioration of plant and equipment—- a NON-CASH expense = Plant Net Book Value Times 2.5% (per quarter). 9. Miscellaneous--includes all of the following: a. Inventory carrying charges on raw materials; b. Inventory carrying charges on finished goods; 0. Incidental expenses connected with plant investment; d. Financing charges related to cash- deficit operation; e. Ordering cost for each raw material purchase; f. Expenses dependent on Plant size (fixed and semi-fixed; sundries). PROFIT BEFORE INCOME TAX, which may be negative = Total Receipts MINUS Total Expense. ADDITION TO INCOME TAX FUND, which gél be negative in case of loss = Profit Be- fore Income Tax TIMES 48% (corporate tax rate). 152 NET PROFIT, AFTER INCOME TAX—~Profit Be- fore Income Tax MINUS Addition to Income Tax Fund. DIVIDENDS PAIDe—as budgeted. As of period 0 the retained earnings of the firm amounted to $706,074 and the book value of the capi- tal stock was $10,706,704 for the Model 1 version. Maximum allowable divident de- clarable in any period is limited to the current value of the owners' equity MINUS $10,000,000 (i.e., the current amount of r1 the retained earnings). ADDITION TO OWNERS' EQUITY, which may be negative—-the net amount of change in the value of the Owners' Equity, or stockholders' interest, as a result of the current period's operation, i.e., the RETAINED portion of the NET PROFIT after dividends have been paid = : Net Profit after Income Tax MINUS Dividends 1: Paid. ""‘ .‘3-1flgmz CASH FLOW STATEMENT A. RECEIPTS (TOTAL). SALES REVENUE--Same as item A, above (Gross Income)--Cash Inflow. DISBURSEMENTS-—Cash outflow, or outlay. 1. Cash Expense includes: Labor expenses; Administration expenses; Marketing outlay; Research & Development (R & D) expenditures; e. Maintenance expenses; f. Miscellaneous expenses. CLOUSD 2. Addition to Income Tax Fund--same as item D above. 3. Dividends Paid——as budgeted-—same as item F, above. 4. Investment in P1ant--as budgeted. 5. Purchase of Materials--as budgeted-- must be adequate to support the planned output of finished goods for the period. Materials whose purchase is budgeted in one quarter are not available for pro- duction until the succeeding quarter. 153 C. ADDITION TO CASH ASSETS, which may be negative. 1. This Addition to Cash Assets figure also represents the net amount of change in the value of the Cash Assets as a result of the current period's operation--it is computed as follows: Total Receipts (Cash Inflow) MINUS total Disbursements (Cash Outflow) = ADDITION TO CASH ASSETS. 2. This Addition to Cash Assets figure also represents the actual cash re- sidual resulting from business oper- ations for the period. BALANCE SHEET (FINANCIAL CONDITION STATEMENT) A. ASSETS 1. Net Cash Assets: Beginning Cash Balance (Net Cash Assets in the previous period) PLUS Addition to Cash Assets = Ending Net Cash Assets. A negative figure in— dicates a cash deficit. (It may be worth remarking again that a cash deficit is costly and that financing normally will be unavailable in the Executive Game for cash deficits in excess of $3,000,000 at the discretion of the Game Administrator). 2. Inventory Value, Finished Goods (Current) = Current Inventory Quantity of Finished Goods TIMES Standard Cost per Unit ($3.00). 3. Inventory Value, Materials (Current): Beginning Inventory Value, Materials MINUS Materials (Expense) PLUS Purchase of Materials = Ending (Current) Inven- tory Value, Materials. 4. Plant Net Book Value (8 Plant Capacity Next Quarter): a. Beginning Net Book Value of Plant MINUS current Depreciation PLUS current Investment in Plant = Ending Net Book Value of Plant;—-and/or b. Plant Capacity Next Quarter TIMES $20 (Standard Capital Evaluation Basis per Unit of Quarterly Output Capacity) = Plant Net Book Value; Flt... II. III. IV. 154 0. Plant Capacity Next Quarter = Be- ginning Plant Net Book Value MINUS Depreciation Expense PLUS or MINUS Addition to Owners' Equity = Ending Owners' Equity. Summary of Instructions for Players The TOTAL INDUSTRY MARKET for the product is a function of the following five factors--and their interaction: A. ECONOMIC INDEX——an indicator (or barometer) of general economic conditions throughout the nation; B. SEASONAL movements--the usual situation of highest business activity in the October-November-December quarter and lowest business activity, generally in the January—February—March quarter, etc. C. AVERAGE industry PRICE; D. TOTAL industry MARKETING effort (expenditures); E. TOTAL industry R & D expenditures. The individual FIRM'S MARKET position is a function of the following three factors-—and their interaction: A. The FIRM'S PRICING policy; B. The FIRM'S R & D expenditure; C. The FIRM'S MARKETING effort (outlay). If the FIRM runs out of INVENTORY, it will lose some of its potential share of the INDUSTRY MARKET to its competitors. However, normally about 50 percent of the customers will reorder in the subsequent quarter. The rate of return from business operations--QI§— COUNTED RATE OF RETURN EARNED ON INITIAL OWNERS' EQUITY--will be calculated for each team (firm) and will be used as: A. An objective evaluation of each team's overall management performance. B. An equating of the initial owners' equity with the ending owners' equity (including all dividends paid during the entire 2—year operating period)—- per the following equation: O.E. Where: r D3, 155 D1 D2 = —————— + —————— + 3 —————— + (1+r)l (1+r)2 (1+r)3 D 0 D7 + D8 + O.E.8 7 . 8 (1+r) (1+r) discounted rate of return on Initial Owners' Equity. O.E.O Initial Owners' Equity. etc. Dividends Paid, by quarters (subscripts); O.E.8 Owners' Equity, end of 8th quarter; 1 Present Value of One Dollar ($1.00) due (l+r)n at end of n periods, at compound discount. NOTE: The aggregate change in the components of the OWNERS'EQUITY-—i.e. Net Cash Assets, Inventory Value, Plant Net Book Value--plus DIVIDENDS PAID (which comprise a "paid out" portion of earnings) represent the RETURN ON INITIAL OWNERS' EQUITY, i.e. the gross change in the value of the business through the employment of its ASSETS. All earnings are based on (made possible by) the resources of the firm, i.e. the CAPITAL VALUE (investment capital plus working capital) of the firm at the start Of its operations--in this case, at the end of period "0" or the beginning of period "1". Steps in Playing the Executive Game and Note: Steps Formulae for Making the Calculations See Table l for numbers in the formulae with "t" representing the forecase period. Thus "t-l" represents the most recent actual period, etc. #1 Examine results of last period Operations on sheet from computer. #2 #3 #4 #5 #6 #7 #8 156 COpy these results in proper "actual" column of your big work sheet.2 Compare "actual" with your "forecast" and make further tentative plans. Fill in following blank spaces in your "actual" column: Ot-l' Dot-1' OOOt-l' lt-l' 2t-l' Compute 00 2 [See Table 1.] t-l' t-l' Fill in corresponding spaces in "forecast" column. In spaces OOt and 2t enter your best predictions after considering the seasonal, economic index and your estimate of total industry marketing and R & D expenditures. Compute: 7at_1, Labor cost per unit 7bt—l’ Materials cost per unit. Done by the computer (12t— and 13t— ) but you should know how. Ordinarin to obta n the labor cost of production per unit, divide labor expense by production (l2t-l % 6t_1). To Obtain materials cost divide materials expense by production (l3t_1 % 6t_1). However, if you have been pro— ducing beyond normal plant capacity, at overtime wage rates in a game utilizing Model 1 this calculation gives you an erroneous answer for labor cost per unit. It is too high because the labor expenses include overtime for the extra production. Hence, to obtain straight time labor cost per unit divide labor expense by production at plant capacity plus 1 1/2 times production in excess of plant capacity. Re—examine your general plan--firm image, policy, etc. Remember you are top management making major plans and decidions. Think! Your next jobs are (l) to make eight new major decisions and two major estimates and, (2) to make forecase calculations resulting from these decisions and estimates. 2 This refers to a work sheet on which the students recorded their forecasts and results each period. The general format was the same as that of Table l. The item numbers referred to in the following are the same as the. line numbers shown in Table l. #9 #10 #11 #12 #13. #14 #15 157 Enter your decisions, estimates, and calculations in the proper spaces in the "forecast" column. Proceed as follows: (Steps #9 and on). Your next decisions should be the price you are going to charge; how much you are going to spend on marketing, R & D, and maintenance; how many widgets you hOpe to sell; and how many you will have to produce, in addition to the inventory of finished goods now on hand, to do this. (Steps #10 to #15 inclusive). Decide price, Consult OOt-l- Note your sales volume and profits at your last price, market— ing and R & D expenditures. Demand is quite elastic. At high prices sales fall off sharply. A low price may not cover total cost per unit. Compute your margin. Enter in space Ot’ Decide marketing expenditure. It is an expense, so don't waste your money. But remember it is a major weapon in fighting competition for your share of the market and to bring your product to the attention of the public. But don't go to extremes. Law of diminishing returns applies. Large expenditures may bring less than proportion- ate increases in sales while marketing costs go up proportionally. Beware of a profit squeeze. Enter in space l6t. Decide R & D. Also an expense. But you must keep your product modern and well-designed; your production and sales techniques efficient. SO do research and development to keep costs down and quality up. Enter in space l7t‘ Decide maintenance expense. You must keep your plant operating efficiently. Otherwise labor and materials cost per unit will rise. Corre- late maintenance expenditures with charges in production. Enter in space 18t' Estimate, (a) expected market potential and (b) sales volume. It is expensive to create a great- er market potential than the volume you can sell. Sales cannot be greater than finished goods on hand plus production. Enter your estimates in spaces 3t and 4t. Compute your hoped for Percent Share of Industry Sales. (4t 2 2t)° Enter in space 15t. #16 #17 #18 158 Decide proposed_production. Enter in space 6t. In Model 1 games production cannot be larger than the smallest of: (l) 39t-1 % 7bt-1 or (2) 1 1/2 x 9t-1- That is, you can't produce more than to use up the raw materials you now have on hand at the beginning of this quarter. Purchases made during the next quarter can't be used until the following quarter. Also, you cannot work your plant farther into overtime than 1 1/2 times normal plant capacity. Note: you have now made all the major decisions and estimates necessary for this quarter's oper- ations. Two of the three remaining decisions, viz. new investment in plant and purchase of materials, prepare for next quarter's Operations. The last, yig., dividend, you may wish to decide after you see how large your expected profits after taxes are and how much cash you have on hand. From now on your work is mostly making computations. Compute, Inventory_of Finished Goods at end of forecast period as follows: Beginning inventory plus planned production minus expected sales. (8t-1 + 6t — 4t). Enter in space 8t' Compute 9t Plant capacipy next quarter (in widgets). This is a big one bacause in this one operation you will also get forecase figures for depreciation, new investment in plant and the net book value of the plant. First compute plant value next quarter. Then divide this by $20.00 to get plant capacity be- cause it takes $20.00 of plant value to produce one unit of plant capacity. Plant, net book value, next quarter (40t) is equal to what it was at the beginning of the quarter (40t_l), less the amount it depreciated during the quarter (l9t), plus your new investment in plant (32). In short, beginning plant minus depreciation plus new investment. ' The Calculation: Compute 19t: Depreciation (2 1/2% of 40t_l). Enter in space 19t- Next decide on your new investment in plant. Enter in space 32t- Note: In deciding how much to invest in new plant remember that it must make up for the quarter's depreciation of 2 1/2% plus whatever #19 #20 #21 #22 159 expansion in plant capacity you may wish to make. Better also take a look to see if you have the cash. It would be expensive to borrow it. Now compute Plant,ynet book value, next qparter. Enter in space 40t. Formula: 40t = 4Ot_1 - l9t + 32 01" t' beginning plant - depr. + new investment Finally you are ready to compute Plant capacity next quarter. Formula: 9t = (40t_l - l9t or = 401: 2 $20.00 + 32t) % $20.00 or = Plant value % $20.00 Enter in space 9t‘ You have now complated the preliminary calculations dealing with operations in general. Next compute the entire "income and expense" statement which includes the profit you expect to make. Do this as outlined in steps #20 to #33 inclusive. Compute your expected receipts, sales revenue first. You have only one source of income which is receipts from sales of widgets. Price times expected sales volume. 0t x 4 . You decided on price in step #10 and estimated expected sales volume in step #14. Enter in spaces llt and 28t' Now compute all your expected expenses: steps #22 to #27 inclusive. Labor expense a. If no overtime is used multiply labor cost per unit (7at) times production during the quarter (6t). t t b. If you go into overtime at wage rates of time and a half the formula is: Formula: 7a x 6 . Enter in space l2t' (7at x 90—1) + (1 1/2 x 7st) (6t - 90—1)° #23 #24 160 Read it in words as follows: Labor cost per unit (7at) times plant capacity at the be- ginning of the quarter (gt-l) plus 1 1/2 times labor cost per unit (1 1/2 x 7at) multiplied by the amount you produce in excess of plant capacity (6t - 9t-1)' Enter in space 12t- Materials expense: 7bt x 6t- Enter in space l3t. Note: However the figures in steps #22 and #23 give us the labor and materials expenses of the . widgets produced during the three months period. Em] This is not what we want. We should have the labor and materials expenses of widgets sold during this period. If production and sales are equal during this period, there is no problem. But two other possibilities exist and are very probable: .... ..' 1.12. ‘ ‘uy ‘- A. Sales may exceed production and the extra 0” widgets taken out of inventory. B. Production may exceed sales and the extra widgets put into inventory. Hence the next expense item "Reduction Finished Goods Inventory" is included to correct this situation. Reduction finished goods inventory value expense (Positive or negative) A. If sales are greater than production, our labor and materials expenses figure which includes only goods produced understates the labor and materials expenses of those sold. It does not include the labor and materials costs of the widgets taken out of inventory and sold. These costs must be added. To correct multiply standard cost of $3.00 (4 - 6t)° Thus here "Re— duction Finished Goods Inventory" is a positive number. Enter in space l4t. B. If production is greater than sales our labor and materials expenses figure overstates the labor and materials costs of widgets sold since it includes the labor and materials costs of the widgets taken out of inventory and sold. These costs must be subtracted. To correct multiply standard cost of $3.00 per widget times amount by which production exceeds sales and subtract from expense (or #25 #26 #27 161 add as a negative number). $3.00 (6t — 4t). Thus here "Reduction Fisished Goods Inven— tory" is a negative number. Enter in space 14 . t Note I: These extra unsold widgets are put into "finished goods inventory" and carried as an asset at $3.00 each until they are sold in a later period when sales exceed production. See item 38. Note II: Make sure when you get to step #41 that your asset, viz., "Inventory Value of Finished Goods" was reduced (if sales exceed production) and increased (if production exceeds sales) by this same amount of dollars. That is, reduced or increased from what it was at the end of the previous period. Also check that in step #17 your inventory of finished goods was changed by the corresponding amount of widgets. Administrative expense: Same as "actual," f $50,000 if a change in overtime is involved. Enter in space 15t° Your next four expense items, yi§., marketing, R & D, maintenance, and depreciation were com- puted in steps #11, #12, #13, and #18 and entered in spaces l6t, l7t, l8t, and l9t, respectively. Misc. expense: Add the following and enter the total in space 20t- A. Sundries: $l0,000 plus 18 cents per unit of present plant capacity. $10,000 + .18 (9t_1). B. Carrying charge of raw materials inventory. 5% of such inventory value at beginning of period. 5% of 39t-l' C. Carrying charge of finished goods inventory left at end of forecast period. 50 cents per unit. '5(8t)' D. Incidental costs connected with plant in- vestmeht. 1 2 10,000,000 ‘ (32t) Formula: E. Cash shortage costs. 3 x - 20,000,000 (370—1) Formula: #28 #29 #30 #31 #32 #33 #34 #35 #36 #37 #38 #39 162 F. Ordering charge: $50,000 if materials are purchased during forecast period. Add all your expenses (12t to 20t) and enter in space 2lt° Subtract total expenses (21t) from total receipts (llt) and enter in 22t' This is your gross profit before income tax. Compute your tax (Model 1 use 48% of gross profit l’h or loss before tax). It is a negative number if there is a loss. Enter in space 23t and 30t' Subtract tax to get net profit after taxes. Remember when you subtract a negative number you add. Enter in space 24t. 71..., I ‘ Decide on the dividends you are going to pay to your stockholders and enter in space 25t and 3lt° Watch your cash. Dividends are limited to excess of owners' equity over $10,000,000. Compute "addition to owners' equity" by subtract— ing dividends from profits after taxes. (Enter in space 26t‘ It may be negative). You have now completed your "income and expense" statement (see step #19). Next compute your cash flow statement, most of which is already done. Steps #35 to #38. Compute cash expenses: Sum of l2t, l5t, 16t: l7t, l8t, and 2Ot' Enter in space 29t' Decide on "purchase of materials." This is your last major operating decision. Enter in 33c. You are now ordering for period t + l — See l3t_1 material expense, for the amount you have been using up per quarter. Add up all cash disbursements (29t than 33t) and enter in space 34t. Compute "addition to cash assets" by subtracting total disbursements from cash receipts and enter this figure in space 35t (may be negative). This cpmpletes your cash flow statement. 28t — 34t. Make out your balance sheet, first the assets. Steps #40 to #44. #40 #41 #42 #43 #44 163 Net cash assets equal the cash you had on hand, (from previous "Actual") plus (or minus), addi- tion to cash assets. 37t_1 : 35t° Enter in space 37t' ‘ Inventory value, finished goods: number of units of finished goods on hand x $3.00 (Standard cost per unit). $3.00 x (8t)' Enter in space 38t° Inventory value, materials. Computation: Value of materials on hand at beginning of forecast period less materials expenses plus purchase 39t-1 — l3t + 33t‘ Enter in space 39t‘ Plant net book value. Computation: Its value at beginning of the period less depreCiation (2 l/2%) plus new investment in plant. This was done in step #18. Next add all your assets and since you have no listed liabilities (debts), this is your Owners' Equity. Enter in space 41t. Formula: 37t + 38t + 39t + 40t Also: 4lt_l + 26t should give the same results. Check it. Your job should now be done. Study it. If your ex- pected profit is not as large as you would like it to be, possibly you may wish to make some changes in your decisions and calculate their effects. APPENDIX B MANAGEMENT 101 WINTER TERM - 1966 PROJECT PYGMALION Richard A. Norman We would like your help in a special research project. We want to find out some things about how business decisions are made and we need your OOOperation. The project will not require any significant amount of work beyond the normal course requirements, but we think it will make the course much more interesting and meaningful to you. Here is what we want to find out: In operating a business a manager is continually faced with highly complex situations which require immediate decisions, but about which he has only incomplete, ambiguous, ill- structured information. Somehow he must pull that information together as a basis for his decisions. We are interested in how he does this. Here is our approach to thepproblem: The business game presents you with the same kind Of a problem. We want to find out how you organize the information you are given in the game in arriving at your decision recommendations. Here is what must be done: 1. As a part of the normal play of the game, you will pre— pare a forecast for your team's firm each week on your COpy of the game work-sheet. We would like you to make a copy of those figures to turn in at class each week. (They will give us a summary of your analysis of the situation each week). 2. Time is provided at class each week for you to meet with the members of your team to arrive at team decisions. We would like those meetings to be organized so that each member of the team has an opportunity to explain the reasoning be- hind his decision recommendations before the team decision is reached. We want to record those discussions on tape. (They will provide information about the way in which you have organized the available information for decision pur- poses). 164 165 We plan to analyze these data in such a way as to shed some light on how people approach these kinds of problems. We are trying to find out something about what the process ip, rather than what it should be. We are ppp trying to evalu— ate your decision processes or to differentiate between "good" or "bad" decisions. As a practical matter, we don't even know what a "good" or a "bad" approach is. SO don't worry about how "good" or "bad" your analyses of the game situations may be. Just play the game in the way that seems best to you. ’a Lug-a... _. 166 MANAGEMENT 101 - WINTER TERM - 1966 PROJECT PYGMALION R. A. Norman PROCEDURES 1. Each class member will be furnished with: a. An 18 column work sheet to be used for accumulating team results and for preparing his own forecasts and decision recommendations for each period. b. A supply of "Forecast and Decision Recommendation" forms for submitting his own forecasts at class each week. The instructor will assign each class member to a team. At the initial class meeting the team members will meet to select a firm name and a firm secretary. He will be responsible for: a. Chairing the team meetings. b. Operating the tape recorder. c. Recording and entering team decisions at class meetings. d. Distributing team results at lecture each week. (He will be furnished with the team decision sheet.) At subsequent class meetings: a. A period of time will be set aside at the end of the class period for team meetings. Space will be provided so that each team can get together separ- ately with its own tape recorder. b. The firm secretary will identify the tape reel and will Open the meeting so that the team, the date, and the team members can be identified in playing the tape. c. The discussion will start with one of the members identifying himself and then stating and explaining his decision recommendations. (For example, if he recommends a price reduction, he should so state and then indicate what he expects to happen as a result and why he expects these results. d. After all the team members have explained their recommendations, a team decision should be discussed and developed. The secretary will enter the decision on the team decision sheet and deliver it to the in— structor. 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