Towards a New Strategic Planning Platform

White Paper

January 2008





Gideon Malherbe

Executive Simulations - Partner



Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLCTable of Contents



Executive Summary ...........................................................................................................2
Intended Audience for this Document ...............................................................................3
Leading Strategic Planning Concepts ................................................................................3
Roots in Military Strategy ..............................................................................................3
From Military to Corporations - The Foundations of Corporate Strategy .....................4
Executive Simulations' Approach and Defining the New Framework .............................8
The Executive Team as the Strategic Core.....................................................................8
So Many Variables and Options.....................................................................................9
Speed is of the Essence.................................................................................................10
Executive Simulations' Strategy Process .....................................................................11
Today's Complex Strategic Challenges...........................................................................12
About Executive Simulations...........................................................................................13
About Agent Based Modeling..........................................................................................13
Page 1 of 13

Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLCExecutive Summary

In a world where new competitive strategies and tools are critical, executives must consider the
conscious upgrading of their corporate strategy making processes. Executive Simulations offers a
platform for strategic thinking that amplifies brainpower by defining, organizing, simulating, and
producing multiple options in the same way the mechanical technologies of the Industrial Revolution
amplified muscle power. The convergence of cheap processing power with sophisticated software tools
has allowed Executive Simulations to develop this new strategic planning platform.

This paper covers the evolution of strategy making through several phases starting with military
strategy with its focus on maneuvers, and rapidly pacing through corporate strategy with its first
concepts of internal alignment through breakthrough ideas like the SWOT analyses, growth strategies,
portfolio optimization, decentralization, 7S, core competencies and stakeholder maps right up to its
current pinnacle of scenario-based planning and real options. The implementers of the strategies have
their Balanced Score Card toolset to communicate corporate performance and to shine the light on
organizations not meeting their goals.

The Paper then discusses how Executive Simulations is attempting to redefine strategy making. It
covers the concepts of leveraging new software developments as well as technical processing
breakthroughs. This new approach combines the breadth of scenario planning with the absolute
advances in mathematical and behavioral modeling to provide three advantages that include executive
involvement, complexity, and speed:
" By deeply involving the executive team in the development of the eco-system, the process
draws the best wisdom and insights into the strategy formulation process;
" By using advanced computer technology to cope with large numbers of variables manifested in
today's global competitive environment; and
" By being based upon an eco-systemic model that allows for fast cycle times and flexible
strategy management.

Executive Simulations utilizes Agent Based Modeling for most of its strategic decision projects.
Simulation is useful because it ties experience with systems-level knowledge that enables the
executive team to identify possible outcomes that are outside the range of typical thinking. Showing
the connections between different components allows executives to investigate possible interactions
and test possible interventions. It can also show the executive team how the emergent connections
between elements produce new and different outcomes. The simulation thus expands strategy making
by revealing otherwise unanticipated potential outcomes that allows the executives to make better
informed decisions.

The paper concludes that simulation methodologies combined with scenarios lead to a significantly
more robust strategy making process. As a company's strategy improves, so does its asset
performance and that will consistently generate better returns for its stockholders.
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Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLCIntended Audience for this Document

This white paper is intended for people who are accountable to make strategic corporate decisions.
This includes CEOs, Chief Strategy Officers, Chief Marketing Officers, CFOs and other executives
concerned with the long term direction of their organizations. This paper describes how Executive
Simulations leverages strategic planning methodologies on a digital simulation platform to involve
executives more deeply in an expanded strategy options map that is more flexible and faster. This
allows executives to make more informed decisions and better resulting strategies.


Leading Strategic Planning Concepts

Roots in Military Strategy

The mission of any strategic planning project is to provide clarity to the leadership team about their
best options to ensure a win. If there is no need to win, and no risk of loss, then the whole activity of
strategic planning is unnecessary. But the inverse holds as well. Many companies have fallen victim
to unplanned negative outcomes because the executive team fell asleep at the helm. Equally so, many
executive teams unwittingly bog their companies down with simply too many initiatives - all under the
determined belief that it will increase stockholder value.

There is a facinating knowledge base stretching back thousands of years of thoughts around the key
aspects of strategy making. Military strategy books such as The Art of War by Sun Tzu, On War by
von Clausewitz, Niccolò Machiavelli's Dell'arte della guerra (Art of War) and The Red Book by Mao
Tse Tung stand out as the most popular military writings used to understand corporate strategy. From
Sun Tzu we learned the tactical side of military strategy and specific land-based tactical prescriptions.
From Von Clausewitz we learned the dynamic and unpredictable nature of strategy. Machiavelli dealt
with the relationship between civil and military matters and the formation of the grand strategy, and
from Mao Tse Tung we learned the principles of guerrilla warfare.

But we cannot exclude from this distinguished list the military strategist Genghis Khan who introduced
the concept of maneuver and terror as instruments of strategy. His strategy was directly focused on the
psychology of the opposing population (remember his heavily weaponized elephants). And by steady
and meticulous implementation of his strategy, he and his decedents were able to conquer most of
Eurasia.

The French Revolution and the Napoleonic Wars that followed shifted strategy making into a new
space. It was Carl von Clausewitz who said "War is not merely a political act, but also a real political
instrument, a continuation of policy carried out by other means." In the period preceding World War I,
two of the most influential strategists were the Prussian generals, Helmuth von Moltke and Alfred von
Schlieffen. Under Moltke the Prussian army achieved victory in the Austro-Prussian War and the
Franco-Prussian War. The latter campaign is widely regarded as a classic example of the conception
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Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLCand execution of military strategy. In addition to exploiting railroads and highways for his maneuvers,
Moltke harnessed the telegraph for control of large armies. He recognized the increasing need to
delegate control to subordinate commanders and to issue directives rather than specific orders. He
introduced both telecommunications and delegation as competitive advantages.

The evolution of military strategy continued in the American Civil War. The practice of strategy was
advanced by generals such as Robert E. Lee, Ulysses S. Grant and William Sherman, all of whom had
been influenced by the feats of Napoleon. However, the adherence to the Napoleonic principles in the
face of technological advances such as the long-range infantry rifle generally led to disastrous
consequences.

Making modern (post-modern) military strategy today is a very different profession. Not only did the
theaters of warfare evolve to include outer space and digital space, the strategist now also has to
consider multiple fronts of enemies who, through urban terrorism, are successfully blurring civil
policing with full frontal military might.

From Military to Corporations - The Foundations of Corporate Strategy

Corporate strategy as a discipline originated around the early 1960's when Alfred Chandler introduced
the idea of pulling all management activities under one all-encompassing strategy. With this, he also
stressed the importance of taking a long term view. This was probably the easiest way to shift the
entrenched middle managers to grasp the "big picture." Chandler showed conclusively that a long-term
coordinated strategy was necessary to give a company structure, direction, and focus; and coined
"structure follows strategy." What Chandler did was to rip a lot of frictional cost (due to conflicting
and often petty interests) out of the organization and that naturally lead to higher efficiencies.

Fixing the internal working of an organization neatly prepared the world for the work of Phillip
Selznick (1960) who introduced us to the idea of matching the organization's internal factors with its
external environmental circumstances and so established the beginnings of what we now call a SWOT
(strengths, weaknesses, opportunities and threats) analyses. Peter Ansoff took the concept of internal -
external congruency further by expanding it to market penetration strategies, product development
strategies, market development strategies and horizontal and vertical integration and diversification
strategies. He felt - like we still do - that management could use these strategies to systematically
prepare for future opportunities and challenges. Peter also introduced the popular "gap analyses"
methodology.

Peter Drucker took a step back from this and stressed the importance of business objectives. An
organization without clear objectives is like a ship without a rudder. This evolved into his
"management by objectives" theory. His second critical contribution came from identifying intellectual
capital as a competitive advantage. Key to this insight is that knowledge is non-hierarchical and team
centric with the most knowledgeable person in the team being the temporary leader.

Corporate strategy soon evolved to confront the challenges of size, growth and portfolio theory. The
PIMS (Profit Impact of Market Strategy) studies started with GE which tracked corporations for 20
years. These studies showed clearly that there is a correlation between market share and rate of profit
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Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLCthrough economies of scale and as such validated the hypothesis that size does matter. Size also
provides experience and learning curve advantages. PIMS is still the best validated quantitative studies
around.

Growth strategies continued to evolve and the relative advances of horizontal integration, vertical
integration, diversification, franchises, mergers and acquisitions, joint ventures, and organic growth
were studied. Soon after Schumacher and others showed how smaller niche players obtained very high
returns. By 1980 the conclusion that high market share companies and low market share companies
were often very profitable - but companies in between were not. This was coined as the "hole in the
middle" problem by Michael Porter.

The next major break-through came in the field of portfolio theory. Analysts concluded that a broad
portfolio of financial assets could reduce specific risks. This was soon extended to product portfolio
models and operating divisional portfolios. Several techniques were developed to analyze the
relationships between elements in a portfolio like the BCG Analyses from Boston Consulting and GE's
multi factorial model. Strategists however, soon realized that these business units are frequently more
valuable as independent companies than business units in a portfolio. By the 1970s business executives
started to get scared of the Japanese successes and Edwards Demming cashed in with his superior
control techniques. But it was Richard Pascale who produced a better mouse trap with his development
of McKinsey 7S Framework: Strategy, Structure, Systems, Skills, Staff, Style and Shared Values. This
helped tremendously as American companies did not place great value on corporate culture, shared
values and beliefs and social cohesion in the workplace.

Thanks to the Japanese industrial success, US strategist developed a series of new interpretations to
gain competitive advantages. Gary Hamel and C.K. Prahalad shifted strategy from a passive back-
office function to a more active and interactive process. They were the first to move strategy from an
arm chair activity to a dynamic activity seeking to leverage the company's core competencies. It was
from this work that Executive Simulations developed its commitment to always make the
executives the company's key strategists.

Michael Porter introduced his five forces (buyers, suppliers, new entrants, substitutions and rivalry) as
a method for mapping the industry and thus gaining a sustainable competitive advantage. He follows
Chandler's earlier dictum that structure follows strategy but adds that strategy should follow industry
structure. Porter also defines three generic strategies: Cost minimization, product differentiation and
market focus strategies. Building these elements into the Executive Simulations models help to define
the optimum competitive eco-system to be simulated.

It was John Kay around 1993, which added a financial level to the concept of Porter's value stream and
introduced the notion that "adding value is the central purpose of business activity", where value add is
the difference between input costs and market prices. Kay claims that the role of strategic management
is to identify core competencies, then assemble a collection of assets that will increase value-add and
provide a competitive advantage through three types of capabilities; innovation, reputation and
organizational structure.

The 1980s also saw the widespread acceptance of positioning theory. According to Al Ries, the basic
premise is that a strategy should not be judged by internal company factors but by the way customers
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Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLCsee it relative to the competition. Crafting and implementing a strategy involves creating a position in
the mind of the collective consumer. Several techniques were applied to positioning theory, some
newly invented but most borrowed from other disciplines. Perceptual mapping for example, creates
visual displays of the relationships between positions. Multidimensional scaling, discriminant analysis,
factor analysis, and conjoint analysis are mathematical techniques used to determine the most relevant
characteristics (called dimensions or factors) upon which positions should be based. Preference
regression can be used to determine vectors of ideal positions and cluster analysis can identify clusters
of positions.

Arie de Geus played with similar concepts around the end of the 1990s identified four key traits of
companies that had prospered for 50 years or more. They are:
" Sensitivity to the business environment - the ability to learn and adjust
" Cohesion and identity - the ability to build a community with personality, vision and purpose
" Tolerance and decentralization - the ability to build relations
" Conservative financing - no surprise here!

During the same period, J. Moore introduced the metaphor of the strategic organization as an
ecological theory of predators and prey, a sort of a Darwinian management strategy in which market
interactions mimic long term ecological stability. This concept is widely adopted in current eco-
systemic mapping and Executive Simulations uses many of the most advanced techniques to map
industry eco-systems for their simulation projects.

To deal with change and unpredictability, Kees van Heiden 1996 introduced scenario planning to make
optimum strategic calls. Peter Schwartz claims that strategic outcomes cannot be known in advance so
the sources of competitive advantage cannot be predetermined. The fast changing environment is too
uncertain for us to find sustainable value in formulas of excellence or competitive advantage. Pierre
Wack asserts that scenario planning is about insight, complexity, and subtlety, not about formal
analyses and numbers. Executive Simulations uses scenario planning as its foundation and thus are
able to leverage both the scenario planning advantages and the analytical advantages in its strategic
planning methodology.

Global change brought the introduction of complexity theory to strategy making. Complexity theory
involves multiple agents interacting in such a way that a glimpse of structure may appear. Holland,
Kelly, Allison and others call these complex adaptive systems. This can best be done when "there are
many participants, numerous interactions, much trial and error learning, and abundant attempts to
imitate each others' successes". In 2000, E. Dudik wrote that an organization must develop a
mechanism for understanding the source and level of complexity it will face in the future and then
transform itself into a complex adaptive system in order to deal with it. Executive Simulations is the
first company expressively formed to make this concept a reality by developing the complex
systems digitally and then through "abundant attempts" of simulation discern the best strategies.

The unfolding of an information and technology driven world brought the understanding of the
importance of flexible, decentralized structures, work teams, knowledge sharing, and the central role of
the knowledge worker. Senge claimed the following characteristics:
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Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLC" People can continuously expend their capacity to learn and be productive
" New patterns of thinking are nurtured
" Collective aspirations are encouraged, and
" People are encouraged to see the "whole picture" together (called systems thinking).

Regis McKenna perhaps went a bit overboard, but he saw a world where information technology
creates an age of "real time experience." "Now" is all that matters demanding dynamic pricing,
immediate service, customized to needs, and will include premium pricing - He calls this concept time
based competition.

Sticking close to the technology sector Kaplan and others started to push for a more comprehensive
view of strategic management and introduced the balanced scorecard which measures several factors
including financial, marketing, production, organizational development, and new product development
in order to succeed.

From this set of strategic building blocks we are confronted with the simple problem of the utility
value of strategic knowledge - and thanks to Herbert Simon we understand the cost of perfect
knowledge. Bounded rationality leaves the executive team with too few and too slowly produced
strategic options and it was simply too expensive to attempt better or faster options. In this rapidly
globalized super cycle world, executives actually need options that are intelligent, fast and frequent.
The strategic space is now broad, dynamic and evolutionary (as competitors react to initial strategic
moves.)

The second challenge to overcome is the tension between the hard and soft factors of strategy. This
difference can be traced back to decision styles and personality traits. But what was defined as
quintessentially American (analytic) vs. Japanese (behavioral) is not really the case. What is known is
that overtly analytical strategy making usually removes the executive from the strategic process and
therefore the project misses the opportunity for discovering the really deep insights that come through
emersion. In general terms there are two main strategic approaches which are opposite but
complement each other in many ways.

" The Analytical Strategic Approach: This approach is based on economic theory and deals
with the strategic issues relating to competitive rivalry, resource allocation and economies of
scale. To fulfill these strategies the approach works with assumptions of rationality, self
discipline and profit maximization.

" The Intuitive Strategic Approach: This approach essentially deals with human interactions
and it uses as its base bounded rationality, satisfying behavior and is seemingly profit sub-
optimal. A good example of a company operating like this is Google.
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Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLCExecutive Simulations' Approach and Defining the New
Framework

Our approach is quite different from the past endeavors in many ways. It attempts three significant
shifts in strategy making; bringing executives into the process, increasing the breadth and depth of
options to consider, and accelerating the speed by which strategy is crafted. This section concludes
with our overall strategy process.

The Executive Team as the Strategic Core

The advantage of an intuitive strategic approach is that executives join in a conversation that
essentially is visionary yet it seeks to map the competitive eco-system. This involvement draws upon
the deep wisdom and insights of the most experienced and accomplished persons in the organization.
The disadvantage is that the planning process is often short on factual rigor - many times it seems that
the participants do not want facts to spoil their positive aspirations. Obviously the advantage of a
deeply factual discussion is just that - the necessary analytical work has been done, and the
management team can evaluate and compare their company's performance from a reasonably objective
standpoint. But there is also a dark side to an overly analytical strategic process. In these planning
sessions the executive team has all the pertinent information at hand, but it is usually so dense that
little if any strategic insights can be drawn from it. In fact, most of the planning time is spent
challenging, verifying and explaining data and not on divergent, creative thinking.

Executive Simulations facilitates the collaborative development of intelligent strategy making. It works
as follows: The construct of the eco-system (the world in which the company operates) is developed
with participation from the executive team and in the background, a support team. A simulation model
is developed with the "agents" behaviors derived from both the executives' insights and supporting
research. It is the engagement and interaction of the executive team with the dynamics of the model
that gives us a much higher fidelity end-product. The executive team actually becomes the de-facto
strategists with the simulation platform as their "chess board."

So the first layer represents a systemic linking, or weaving together, of executive insights and
computational processing power to rapidly hypothesize and test potential value accretive or value
destroying choices. From previous strategic work we learned that people are different and base their
decision making on different types of patterning. The work Executive Simulations are now doing
represents the next level of understanding the economic and strategic systems within which executives
make decisions. The work is very much focused on "humans in the loop" kind of simulations. Our
work is often used when strategic choices become so intertwined and complex that it is virtually
impossible to separate fact from fiction. By developing "agents" from the foundation - up, we are able
to rationalize strategic options and simulate many-many possible outcomes. This provides the
executive team with a much clearer picture of what outcomes may be expected based on what strategic
decisions. Changes in the real world are also easily integrated into a model to cause a continuous "real"
strategy play.

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Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLCGiven that business systems are dealt with by all sorts of decision-makers, each person with his or her
own biases, preferences and beliefs, this kind of simulation based planning is proving to be a powerful
tool that brings the whole senior team together in a common understanding of the opportunity and the
outcome of a particular strategy. The executive team is able to easily value business strategies in
different scenarios much more carefully than any non-simulated attempts. This makes the strategic
planning process a to-the-point and robust executive activity.

To achieve this participation, we link agent based modeling and simulation with conversational
modeling and use fast simulations to run live interactive tests of proposed strategies in real time during
strategic planning meetings. Agent based modeling and simulation is imminently useable because of
this very iterative model construction process.

The Executive Simulation process starts with mapping an initial description of the eco-system or
environment with all of its significant players (agents) and their behaviors. This causal map is then
converted into a functioning model that can be run over and over again. The model is tested and
calibrated by running it a few times and then the results are compared with real world facts. The
behavior definitions of the agents are then updated, and the model is rerun. This progressive
refinement process is continued until the model reproduces both the behaviors and results of the target
system. Once this is complete, we can use the model to answer the executive team's strategic
questions. Not only is the model of utmost value to the executive team, but building the model also
greatly increases the team's understanding of the eco-system in which they must lead, plan and
manage.

Allowing the executive team to work with the growing model also encourages early and regular
feedback. This informed feedback allows the development process to be both dynamic and very much
focused. Insights gained from model development can be immediately applied to future development.
This ability to adapt the models fast is essential as the world often changes before the model is
complete. Applying insights discovered during model development to future strategies are equally
critical since agent based modeling intentionally involves learning about the system being modeled. In
addition, receiving feedback allows executives to ensure that the model development process is always
on track for success.

So Many Variables and Options

Turning back to the intellectual challenge for us humans - bounded rationality - we just cannot process
all available data. At best a person can process about seven variables simultaneously - on average we
can manage three. Strategic crafting includes hundreds of variables that need be balanced, optimized,
weighed against each other and so on. To top that, strategy happens in a real world environment, not
some static war room environment. Every day the competitors, the stock market and the global playing
field shift. The successful strategy has to include these variances in its construct even under the
external pressures of daily production pressures and quarterly financial reporting. The Executive
Simulations' platform helps overcome the deepest barriers to strategy making - it leverages the best
brains in the company, it casts the strategic options' net much wider, and it does that faster than any
other methodology yet invented. This new platform provides the user company with a definitive
competitive advantage.
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Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLCExecutive Simulations essentially extends the approximately seven variables that the individual can
simultaneously process to several hundred elements within the problem statement's space. So, the
second advantage of agent based simulation is simply that it enhances the executive's pattern making
capability by including a wider network of forces and stakeholders. The simulations do not see the
patterns, it merely plays out the future many, many times over which allows the executives to see the
patterns clearer, or perhaps reveal patterns that were never visible before. This changes the odds for a
decision maker from randomly being lucky to consistently being better than average. In popular music
the random lucky ones are referred to as "one-time-wonders." Anybody can be smart once, it's about
the repeat game and staying ahead that every CEO is concerned about.

Speed is of the Essence

The significant contribution of Executive Simulations' work to strategic planning is that the
simulations allow executives to imitate one (real and very slow) system with another (synthetic and
very fast) system. So instead of hoping to grasp full value of a decision sometime in the future, we
bring those futures forward for valuation and implications studies. If a manager with 10 years of
strategic planning experience is good, what then is the value of a manager who has experienced say, a
hundred years worth of simulated strategies?

Simulations are played out in near-real time thus making this process the highest speed strategic
making process available. A little understood feature of our agent based modeling is that the agents are
programmed to learn, adapt, and get smarter with every iteration. So the overall robustness and
collective "intelligence" of a simulation model is not confined to the best thinking of the executive
team and model builders. It is enhanced with each iteration as the agents learn what works and what
does not work in terms of value creation. This cuts out a multitude of unnecessary loops and makes the
work purposeful and fast.

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Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLCExecutive Simulations' Strategy Process

Our process to assess, develop, and implement Executive Simulations' leading edge strategy platform
is shown below. Throughout the process we involve executives to capture their insights and to develop
a platform that will become embedded in the company's strategy planning culture.

We begin with identifying the pertinent issues and key drivers used to define and develop the overall
eco-system and resulting simulation model. This includes defining the significant industry players
(agents) and their specific parameters that affect their behaviors and ability to adapt and learn.

We also discuss the pertinent strategic options and corresponding hypotheses to test. Once developed,
we interact collaboratively with executives to run the model, and identify those options that are optimal
in terms of socio-economic and political viability - at a tolerable degree of risk. The most feasible
options are selected to develop the resulting business model, strategies, and organizational structure.
Corresponding change management and implementation plans are then developed and implemented.

As market conditions, competitors, and current company conditions change, the model is easily
updated and rerun. Executives can then routinely use our new strategy platform to outmaneuver the
field and gain a lasting competitive edge.





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Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLCToday's Complex Strategic Challenges

Simulation-based strategy making is essential because the current commercial challenges are so much
different than a few decades ago. Make no mistake - globalization has increased the complexity of
strategy making far beyond the most optimistic projections. A few examples may include the fact that
our "free market" system is now the playing field for centralized governments like China, pseudo-
corporations, fronts for nationally/politically managed companies/funds and very ambitions new
ideologues from Venezuela and Russia flush with energy and resources cash. The free market system
based predominantly on a profit motive has now become very veiled.

Another dynamic unfolding is simply the vast numbers of first generation players entering the market.
Think of it; from one billion people participating in the global free market a decade ago, to more than
four billion players expected to enter over the next few decades. The complexity of this expansive
growth is beyond the capability of any traditional strategy formulation as regions, industries, markets
and finances shift and migrate continuously seeking the best economic (and political) constructs.

Now think innovation: Every new entrepreneur comes to the market believing he or she has a new or
better way of delivering products or services. And the fact that most new entrants are first generation
means that there are many, many more new ideas coming to market - none bounded by traditional
western "rules of business." The risk is more than just innovation, it is the fact that vested players are
usually less likely to adapt and will more likely attempt to hold on to their established competitive
advantages. This known conservative play by current incumbents is the behavior that accelerates
change as it leaves a strategic vacuum for new entrants to develop their skills and business acumen. It
is no surprise that a generalized view will show repeatedly that vested incumbents loose much more
than just their relative market share during any industry-wide growth spurt.

Business transparency brought about by Sarbanes Oxley in the U.S., information technology in
general, the diligence of the press, the curiosity of our business schools and the exhibitionism of
corporate executives is rapidly leveling the playing field between the old and experienced players, and
the new global entrepreneurs. The new organization, according to Manual Castells, is characterized
by:
" Globalization
" Organizations structured as a network
" Instability of employment
" Social divide between those with access to information and those without

These characteristics of a networked organization certainly do not represent most large corporations of
today. The challenge facing every executive team is how to link the external changing and complex
world with the internal capability of the company. This paper attempts to show that the first step in
adapting any company is through a coherent strategy. Using a simulation platform is shown to be the
most advanced method in developing such a strategy as it leverages both the business leaders and
technology in a new symbiotic relationship developing robust and fast strategies.

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Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLCAbout Executive Simulations

Executive Simulations is a consulting firm specifically focused on bringing the best and most advanced
strategic planning methodologies to the board room to provide executive teams with the ability to stay
ahead the of their industry's growth curve.

Executive Simulations is specifically geared for executives to help define strategic options and to
improve their confidence in strategic decisions. We take the guesswork out of strategy by modeling
real life situations with a suite of tools and techniques including agent based modeling. By observing
the outcomes of these models, executives are able to better understand the behavior of their eco-system
including competitors, markets, regions and socio/political groups.

Executive Solutions offers a unique solution that enables executives to define strategic options and
improve their confidence in strategic decisions to gain a competitive advantage and increase corporate
value.

Executive Simulations was founded by three senior strategy consultants - Gideon Malherbe, Peter
Bryant, and Alan Klein. Each partner has over 25 years of experience ranging from strategy
formulation and execution to change management and innovation services. Executive Simulations is
headquartered in New York, and has offices in New York, Denver and Detroit. We also have a
network of senior practitioners located around the world, and strategic relationships with high
technology solution providers. To learn more about Executive Simulations, please visit our web site at
http://www.executive-simulations.com

About Agent Based Modeling

Agent-based models are computer programs that simulate various complex behaviors via virtual
"agents" that represent the components of a business system. The behaviors of these agents are
programmed with simple rules. When put into motion, the models realistically depict how business is
conducted through "emergence".

Programming approaches can range from the use of "if-then" rules as in expert systems to sophisticated
machine learning algorithms such as neural networks that allow agents to learn and modify their
behavior during the simulation. Parameters of the model are set to represent a situation of interest, and
the model is run for thousands of iterations.
Our Agent-Based Models are calibrated against validated data to ensure the model is accurately
replicating the behavior of the real system. Agent-based models provide valuable information about the
dynamics of the real-world system that they emulate. As widely varied individual agents interact in the
model, the simulation shows how their collective behaviors govern the performance of the entire
system. One example is the emergence of a successful product or competitive responses to entering a
new country. These simulations are powerful strategic tools for scenario analysis: as the executive
team changes agent characteristics or "rules," the impact can be easily seen in the model output.
Perhaps most important, the computer can generate patterns and options that the user might never have
considered.
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Executive Simulations LLC | 705 The Crescent, Mamaroneck, NY 10543 | www.executive-simulations.com
© 2008 Executive Simulations LLC