The Daily Deal, July 31, 2000
Judgment Call Management

Playing for Keeps

by Susan Webber

In his new book, Michael Schrage illustrates how computer models, prototypes, and simulations help companies succeed in the market

You may believe that modeling, prototypes, and simulation are irrelevant to your professional life. Unless you work in a low-tech field like psychiatry or headhunting, however, Michael Schrage's "Serious Play: How the World's Best Companies Simulate to Innovate" will likely prove you wrong.

Modeling is pervasive. You've probably been using models and simulations every day without realizing it. Generally speaking, a model is an abstraction. Spreadsheets, role-playing, , business simulation games, rehearsals, and the computer-generated and physical models used in product development are all models.

The decline in computing cost has made simulations cheaper and greatly increased their use. Those who remember the Stone Age of finance, before computer spreadsheets, may recall how painful and time-consuming it was to prepare a single financial projection. The development of VisiCalc not only made it vastly easier to build models, but also made running numerous scenarios a trivial task. Investment bankers used them not only to optimize financial structures but also to sell deals to clients and lenders. Traders would devise and hedge complex instruments like derivatives.

But the models could become divorced from reality, and the consequences have threatened the financial system. Examples include the failure of many LBO loans in the early 1990s, and the near-collapse of Long Term Capital Management in 1998.

Schrage, a Fortune columnist and MIT Media Lab research associate (and an acquaintance of mine), is above all interested in behavior. He argues that new and presumably better tools change human interactions. In mergers and acquisitions, witness how much of the discussion revolves around the projections. Similarly, improved design media helped the Japanese auto industry devise better procedures. Traditionally, American automakers used clay models. These models were hard to change in a meaningful way, producing conflict between the designers and engineers, who often found the beautiful clay model wildly impractical to build. Toyota and Nissan used computer-aided design and engineering to enable the two sides to communicate early in the process, generating a more cooperative relationship, faster speed to market, and better products.

Schrage points out that new approaches create winners and losers, and managers need to anticipate and forestall internal jockeying. Just as financial models are often massaged to produce a desired answer, so too are simulations distorted to serve political ends. For example, in war games during the 1980s, the Navy refused to allow aircraft carriers to be pretend-sunk, despite real-world evidence of their vulnerability. Yet what could be more important than knowing the impact of the loss of a major weapons platform?

Schrage also stresses that executives need to manage their prototyping cultures, an area in which most fail. Most companies aren't clear about what they want to optimize — cost? speed to market? ease of use? reliability? — and few measure the results of their prototyping. Very few corporations use "post mortems," a standard analytic device in fields as diverse as medicine and sports.

Organizations fail to see the danger in locking themselves into assumptions. He cites the example of Apple's Newton, a handheld computer whose key selling point was handwriting recognition, a feature that never worked. Palm, by contrast, learned from the failure of its first product, saw its Pilot as a computer peripheral, and won in the marketplace.

"Serious Play" is lucid, lively, and thought-provoking and its examples are varied and unfailingly engaging. Although it asks many questions, it provides a list of suggestions about how to deal with prototypes as well.

Nevertheless, "Serious Play" has its shortcomings. Schrage, seeking to impress technologists, tries too hard in the first few chapters. He assumes, perhaps wrongly, that the generalist reader is more familiar with his subject.

The author views too many phenomena through the lens of prototyping, particularly its impact on the financial services business. His often myopic view raises questions about his understanding of the industry. For example, Schrage states, "Spreadsheets became the analytical and operational media for designing, negotiating, and closing deals." Anyone who has worked on a deal knows that considerations beyond the projections, such as market reaction, synergies, legal structures and social issues, often determine a transaction's success. Or take, "A charismatic spreadsheet could prove quite as charming as the most charismatic investment banker." Chase Manhattan Corp., which spent $500 million to obtain the services of M&A star Geoffrey Boisi, would surely beg to differ.

Finally, Schrage curiously omits some important topics. He barely mentions the Internet, a rich source of material. After all, building web sites is a design process. What tools and techniques have proven most effective in turning concept into reality? He also gives short shrift to collaboration on prototypes across firm boundaries, when outsourcing and reliance on industry partnerships are becoming more common.

"Serious Play" is a useful work, one likely to get you to view the process of innovation afresh.