The Vital Business Acumen lesson all leaders should learn

Article by Ken Thompson, last updated May 2022

Good Business Principles versus War of Attrition (Finance Smarts)

Recently we ran the very popular, and now award-winning, COMPETE Business Acumen simulation, in its simplest form (competing coffee shops) with two very different groups and outcomes.

In the first group, made up of four teams comprising leaders of social enterprises, all teams made a pile of money each of the 4 days they traded. The second group, made up of six teams of finance graduates, all lost a tonne of money each round.

To say we were a bit surprised would be an understatement! 

The briefings, team planning and facilitation were excellent in both cases so why the big difference?

We crunched the numbers, using the action replay facility which allows us to replay each teams’ decisions in the business simulation round by round, until we found the reason. First we checked whether there was a bug in the simulation and thankfully discovered there was not. Both simulations performed exactly as they should in response to the decisions submitted to them

Then we started to look at what each team was trying to achieve in each simulation session.

In the first simulation session, the social enterprise teams, seemed to be applying simple business principles such as focussing on the customer and making sure that your pricing allows you to make money. They also each set pragmatic business goals for the 4 days trading such as make a good profit margin for each day.

In the second simulation session, the finance teams, applied what I would describe as “Finance Smarts”.  In each round at least one team priced well below cost price as they tried to buy and subsequently retain market share. These teams set very competitive business goals such as having the "largest" market share or the "biggest" profits.

However, when one or two teams bought the market in one round there was not enough market left to cover the fixed prices of the other teams who then all lost money. Even worse, the one or two teams who dominated the market lost even more money than the others as they were selling a huge volume of product all well below cost price. So a Lose-Lose all round.

So what does this all mean – its pretty simple but also quite profound.

There are two strategies you can use in business – Good Business Principles or Finance Smarts. The first strategy works in almost every case. The one exception is if the market is just too small to support all the competitors needs and some culling must happen before anyone can make money sustainably in this market. However in the simulation, and in life, quite often there is more than enough money in the market for everyone and “nobody has to fail for you to win”!

The second strategy, Finance Smarts, only works sometimes such as in the scenario just described. Finance Smarts also only works if flawlessly executed with only a minority in the market using it and only if you have the deepest pockets to carry your losses! The reason it is so high risk is that you have to assume that the other players are not as smart as you are because if they are and use a mirror image of your strategy against you then you both end up in mutual assured destruction in a race to the bottom as you drive the value out of the market.

The Finance Smarts strategy is also based on the dangerous assumption that you can reasonably predict what the other teams will do which with more than two competitors is the height of arrogance and foolishness!

So the bottom-line seems to be that the new graduates who arrive fresh from university are likely to adopt Finance Smarts in their business strategy decisions as they grow into positions of leadership in your company UNLESS you teach them otherwise very early in their careers.

They need to learn that Finance Smarts, where you try to out-think (and even destroy) the competition, is incredibly high risk and can only work in very limited scenarios  whereas Good Business Principles works out better almost every time.

One good way to think about the difference is in terms of primary business focus:

Finance Smarts focusses on your competitors but Good Business Principles focusses on your customers (those whose money you are taking) and your shareholders (those whose money you are investing).

The good news is this particular group of finance graduates have now learned, in the safe environment of a simulation, the consequences of a Finance Smarts strategy and that having financial knowledge and operating with business acumen are two very different things.

I wish someone had taught me this back in 2004 before I learned it the hard way in a very expensive but ultimately unsuccessful high-tech business start-up!

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Ken Thompson

Ken is a practitioner, author and speaker on Leadership, Collaborative Working, High Performing Teams, Change Management, Project Management and Business Acumen. His work has featured in major publications including The Guardian , Wired Magazine, The Huffington Post and The Henry Ford Magazine. Ken has also spoken at many international events including TEDx, the Institute for Healthcare Improvement (IHI), Learn Tech (London) and NASA.

Ken is Founder of Business Simulations Ltd.

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