Ode to an Algorithm

Johnson’s homegrown Cornell Management Simulation, brainchild of Johnson professors Jerome “Jerry” Hass and Seymour “Sy” Smidt and given a new web format by Tom Schryver and Steve Sauer, has enthralled students for 25 years.

When Chris Pletcher, MBA ’16, decided to pursue his full-time MBA at Cornell, he had an uncommonly clear idea of how he would apply his learning from the program. He had been working in sales and marketing for Dow Chemical, and through a family connection, he was being groomed to take over not one but two related family businesses: Allegheny Coatings, which applies anticorrosive coatings to metals, and Assured Testing Services, a corrosion testing laboratory. “I always had an interest in owning and running my own company, and this was the obvious opportunity to gain experience running a business as an owner-operator,” he says.

Pletcher had already done an internship that offered an in-depth introduction to both Pennsylvania-based companies before school. He also spent his summer internship immersed in the companies, so he was looking for additional training he could apply directly to his future management roles. When he heard about NBA 5710 – Cornell Management Simulation, Pletcher thought it sounded like the perfect opportunity to hone his general management skills in a competitive but controlled environment.

At the beginning of the eight-week simulation, taught by Tom Schryver ’93, MBA ’02, visiting lecturer of management, Pletcher’s team of four developed a strategy for manufacturing and selling AC/DC power inverters and precision rotary actuators (essentially widgets). Then, each subsequent week, they fed a set of decisions into a computer-based algorithm. Throughout the course, teams competed to generate the highest total shareholder return. They adapted week by week, depending on how their decisions placed them relative to the other teams. “You had instant feedback,” says Pletcher, who got so much out of the simulation that he later asked to be Schryver’s teaching assistant (TA). “I loved the fact that I could put in my numbers and then in a day or two have feedback from the [virtual] marketplace to respond and adjust my strategy accordingly.”

For Pletcher, nothing else from his MBA curriculum had the same feeling of actually leading a business from an owner-operator’s perspective. “I think that’s where the real value of the simulation lies,” he says. “In other classes, you’re getting extremely specific. In my current role, I need to be intimate with cash flows and costs, but I don’t want to get lost in those details and lose sight of the bigger job of leading an enterprise,” Pletcher says.

Pletcher is among the latest to benefit from Cornell’s world-class management simulation class. Now in its 25th year, the course has been helping students tie together complex business concepts for longer than some full-time MBA students have been alive.

Key to its longevity and success are the 15 years its developers, the now-late Johnson professors Jerry Hass and Sy Smidt, spent fine-tuning the simulation’s algorithm to make it just as adaptable and applicable to today’s business environment as it was when it began.

An Algorithm Honed over Decades

When Hass and Smidt retired between 2005 and 2008, the simulation almost went the way of the dot matrix printer. That was, until Schryver and Steve Sauer, MBA ’01, PhD ’08, now a visiting associate professor of management and organizations, stepped in. Schryver and Sauer had met as classmates in the two-year residential MBA program and both had excelled in Hass’ simulation course. Years later, in 2009, they were to form a partnership, take the course over, license the simulation, and start a company around it. They redeveloped the software to make the user experience modern (web-based), but kept the algorithm and other fundamentals intact. Fittingly, since then, the royalties generated through the software license have sent tens of thousands of dollars back to Johnson.

Like a Johnson family heirloom, the simulation passed from one set of eager enthusiasts to the next. When Sauer came back to Johnson to earn his PhD in 2008, Hass sought him out to gauge his interest in taking it over. That’s when Sauer partnered with Schryver, an experienced entrepreneur who had been Hass’ TA.

Though he was a vocal advocate of Hass and Smidt’s work, Sauer didn’t seriously consider licensing the algorithm until he was engaged in his own PhD research and looking for a vehicle to collect data on teams. He briefly considered developing his own algorithm, then looked at a number of off-the-shelf options, but eventually landed back on the carefully developed program Hass and Smidt created and that he had completed as a student.

Modernizing the Simulation While Maintaining Its Fundamentals

Sauer was successful in applying the simulation to his research, and Schryver secured $180,000 in grant funding through the NSF’s Small Business Innovation Research Program to redevelop the simulation’s interface for the web. In 2009, the two started PI Experiential Learning, or PIXL, building undergraduate and two graduate-level variations of the simulation: one focused on core business strategy and the other that adds in more complexity around capital structure and financial management.

The different versions of the simulation serve different market needs. Instead of eight weeks, a stripped-down program takes a day and a half to complete and focuses more on team dynamics and leadership versus accounting and finance. On the other end of the spectrum, “at its most complex, we’ve got the semester-long course for MBA students, where they’re extrapolating data to figure out market trends, running regressions to determine demand elasticity, cost accounting to calculate margins, exploring dividend policy and capital structure — graduate-level business stuff,” says Sauer.

“MBA students [are] extrapolating data to figure out market trends, running regressions to determine demand elasticity, cost accounting to calculate margins, exploring dividend policy and capital structure.” — Professor Steve Sauer, MBA ’01, PhD ’08

Although the simulation is now computer-based and generates more immediate feedback (Sauer says students used to wait days for feedback when it ran on a Microsoft Access database), formulating a successful strategy for creating shareholder value still requires the same comprehensive knowledge of business disciplines it always has.

Because the simulation is a closed system informed only by the actions of its players, each team’s fate depends on the decisions made not just by themselves, but also by their competitors. Every week throughout the eight-week version of the course, teams produce a sales forecast, settle on pricing (for one, two, or three products), set production levels, determine what markets to target (North America, Europe, Asia, or all three), allocate advertising spend and the number of sales reps per region or market sector, set R&D budgets, and decide on a financing strategy and dividend policy.

The underlying algorithm of this simulation’s competitive marketplace consists of a set of governing rules that determine how each team’s decisions influence each other and the overall market. After creating the initial algorithm that governs the game, Hass and Smidt made fine adjustments to it over 15 years, aimed at rewarding certain behaviors over others and encouraging the most active student engagement. The trick, says Sauer, is to dial in those sensitivities so that when a team makes one level of investment in advertising, their reward remains relative to what the other teams spend on advertising or innovation, for example.

In other words, there’s not a perfect set of decisions resulting in a team’s “win,” but rather a set of dependencies and elasticity curves built into the algorithm that determine the team’s eventual success in creating shareholder value relative to the others. “Other [simulations I’ve experienced] aren’t as sophisticated,” says Sauer. “This one is dialed in to deliver a realistic set of outcomes. That’s where it gets really complex in terms of designing these games, and that’s what Jerry and Sy developed over all those years,” he says.

Carrying on a tradition begun by Hass, who used the simulation as a capstone for Johnson’s first Executive MBA program (launched in 1999), Schryver and Sauer also use the simulation as a capstone for Johnson’s Cornell Executive MBA Americas and Cornell Executive MBA Metro NY programs. Sauer, who also teaches at Clarkson University in Potsdam, N.Y., uses it there and has used it at HEC in Paris; Koc University in Istanbul, Turkey; the University of Virginia’s Darden School of Business; and the University of California at San Diego, in addition to non-degree executive education programs at Johnson and other schools.

Learning Team Dynamics While Applying Business Lessons

Sauer and Schryver have found willing and creative groups of students in every circumstance in which they’ve taught the simulation. And even though many aspects are very nuts-and-bolts, participants often find the team dynamics as instructive and useful as the business decision making. “Part of the simulation is not just teaching how functions work together, but also about good organizational behavior,” says Eric Feinstein, MBA ’14, director of investments at the corporate venture capital arm of Northwell Health. “How does the team function together? How do you divide the roles and responsibilities within the team while promoting good team dynamics? That’s just as much a learning experience as how well you do in the simulation,” Feinstein says.

“Part of the simulation is not just teaching how functions work together, but also about good organizational behavior.” — Eric Feinstein, MBA ’14, director of investments at the corporate venture capital arm of Northwell Health

Feinstein, who got exposure to high-level business decision making through his work in venture capital, private equity, and consulting, says his own team pushed the boundaries of the software — and of the risks they’d take in the real world. “We actually tried to break the algorithm,” says Feinstein. “The objective measure was driving earnings per share, so we were looking at doing a leveraged recapitalization of the business to do a huge dividend payout,” he says.

A focus on the nuances of family business plus the dynamics affecting global businesses characterized Pletcher’s team’s unique dynamics. “Of the four of us, three had some family business connection globally and all had some background in considering running a global enterprise. Having to make decisions from a very high level really helped the team to mesh; we had some fascinating dialogues,” says Pletcher.

When he became TA for the class, Pletcher says most Johnson students he talked to hadn’t heard of it. He says he suspects the simulation gets underplayed because, for many MBAs looking to land jobs in banking, tech, or the services sector, manufacturing widgets can seem old-fashioned. But once he explained to classmates the dynamic, engaging experience the course offers, Pletcher says it quickly became oversubscribed.

Business simulations like Cornell’s have come a long way and are particularly effective at helping executives develop and hone some of their most important skill sets, says Michael Nowlis, Cornell’s associate dean for Executive MBA programs. Where many companies used to pay only lip service to the importance of developing executive-level talent, most high-performing companies now realize that keeping people up to date on business skills is key to staying competitive, Nowlis says.

Take the 2008 financial crisis, for example. When it hit, Nowlis was running a month-long executive education program at London Business School for C-suite executives from 35 countries. “Everyone expected the executive education market would be decimated, but it was not,” Nowlis says.

Surprisingly, the opposite was true; companies started sending more executives on management development programs. “They realized that the paradigm had shifted, and the traditional reaction to cut costs or increase marketing spend were not going to save the ship this time,” Nowlis says. Forty years ago, companies said people were important, but when there was a downturn, the first thing that got cut was training and human development. “Today’s enterprise leaders understand that investing in executive training like our management simulation is critical to establishing sustainable competitive advantage,” he says.

Real-World Lessons for the Future

In Sauer and Schryver’s experience, the simulation offers a firsthand look at the dilemma many entrepreneurs face: scaling up. Given their competing priorities — which include research, teaching, advisory roles with private companies, and administrative responsibilities — it’s hard for the two faculty members and business partners to find the time to actively grow PIXL. “To be candid, we’re not out there trying to pitch this,” says Sauer. “Neither of us makes our living teaching this simulation, and that’s kind of a shame, since we’ve never really exploited the commercial potential.”

Both Sauer and Schryver believe that potential is big, especially within the corporate training market, which Training Industry magazine estimates at $360 billion. “What we lack is that one catalyst, that salesperson who is going to go out and eat what they kill or that entrepreneur who will take this business to the next level,” adds Sauer.

While they may not know how to build an algorithm that gets the simulation implemented in every MBA program across the country, “we do know we’re the beneficiaries of some awesome work from a couple of pretty legendary Cornell faculty members,” says Sauer. And even as they enthrall students as they apply the skills gleaned in management education programs, Sauer and Schryver say they hope an eager student like Pletcher — or themselves — will come along and turn Cornell’s successful simulation into the homegrown business success story that propels students forward for another quarter century.