WINBSG.COM: Win the BSG Business Strategy Game

In a previous post I mentioned that when I first started playing the game, one of the websites that I initally found useful was:

http://www.corvalliscommunitypages.com/bsgimages/bsgrev2.html

After playing the game many times and after becoming a Grand Champion, my opinion about the site has changed quite a bit.   I think that much of the information there is poor advice.  I will be quoting that site under the fair use provisions of the Copyright Act for criticism, comment, and teaching for the nonprofit educational purpose of this post.

First of all, I think I should point out the most important reason why all of the recommendations on that page are not appropriate for most games today:  the advice is old, outdated and was based on a single game lasting only 6 rounds.  The game has changed substantially since that page was written and has not been adequately updated to take these changes into account.  Most games today have 10 rounds/years of decisions, not 6.   This makes a huge difference because all of the decisions must be compressed and started earlier in a shortened game.  This has a large impact on the costs of doing expansion and upgrades early instead of waiting for them to be more cost effective.

This is the advice given about finance.

THE FINANCE AND CASH FLOW PAGE: BORROWING, STOCK DIVIDENDS

This is where you will borrow money. In the first few rounds, you will borrow the maximum in long term (10 year) loans (usually $250 million). Don’t allow your fiscal conservatism to get in the way of your winning the game. By focusing on those scores which are most important, you will inevitably yield ground on credit rating in all but the late rounds to those neophytes who are focused on performing their role as conservative financial officers (CFOs), to the detriment of their team’s overall performance.

Notice the tone of the command imperative.  You will do this and you will do that.  This aren’t suggestions or advice.  The author demands that you implicitly trust what he says merely because he says it, without discussing any drawbacks and only presenting a very weak single argument later, being that the economy of scale should justify immediate large expansion of production.  Then he implicitly ridicules any failure to follow his commands as being fiscally (too) conservative as being a detriment to the team.  This is using bullying tactics and the logical fallacy of argumentum ad hominem by attacking any potential dissenters, even though he obviously doesn’t know them.

What he doesn’t provide is a reason why a fiscally conservative approach is the only reason why someone might object to his command edicts, or why this approach would prevent prudent investments.   Fiscal conservatism doesn’t prevent all investment.  It merely expects reasonable and wise justification for investing instead of relying on wild-assed guesses, irrational exuberance, or reliance on dubious purveyors of unreliable advice.

The thing is that I agree with him that investment and expansion is important and useful, but not merely for economy of scale but also to gain the power of financial leverage to gain higher returns than possible only through reinvestment of net profit for capital improvements.  I completely disagree with the timing he commands and note that he gives no justification for why the expansion must occur so heavily and quickly in the first years.  That’s because the reason is assumed based on having only 6 rounds of decisions for the game.  When that assumption is not true, the commands actually become false, misleading and detrimental for any teams following the commands without realizing the major difference about the game length.

I can give you many better reasons why teams should NOT expand and draw large loans to do so in the first few years in a 10 round game.  The cost of plant upgrades is directly based on the current size of the plant when the option is ordered, and these costs are large for the best options:  $8M/1M capacity for option B to reduce setup cost and $7M per 1M capacity for option C to increase S/Q.

Borrow the maximum in long term loans – – to start a plant in LA, and to increase your capacity in AP in Round 1, and do the setup upgrade in the AP. In Round 1, we made the mistake of borrowing early on to invest in various plant upgrades alongside expanding capacity, rather than focusing only on the latter. You can do the upgrades in later rounds, which is a better idea.

The exception is the production set-up upgrade. As plants and model numbers expand, this upgrade becomes prohibitively expensive, and yet the savings become ever more immense. Do this upgrade as rapidly as possible (see plant capacity below). By investing in it while plants are small, the benefit is inherited as plants grow and cost of the upgrade is nothing additional.

Do you see the self-contradictory advice here?  He states it’s better to do the upgrades in later rounds, except for option B.   He even notes that investing in option B while the plant is small allows the upgrade to be inherited for no additional cost.  But this is true for all of the options, and option C is nearly as expensive as option B.

Elsewhere he states that his team did the following:

Add the maximum allowable for LA (750,000 for an existing plant of 1,500,000 in our case)

This was apparently done before the upgrades were completed.  Delaying the upgrades could cost an extra $15M in cost per million production capacity.

Most instructors make use of a bulletin board which you will find worth snickering over at the end of the game, with losing teams congratulating themselves on maintaining their superior credit rating as well as a dozen other deficiencies in their game. Borrowing heavily is essential to the winning of this game. You will NOT win this game if you your goal is an A+ credit rating. You SHOULD try to never plan for a round with a credit rating less than B+, although you may find that, in the game itself, your credit may fall even to C- on an occasion. You will not be focusing upon rational investment decisions but upon predatory ones. [diatribe omitted]

How would he know what most instructors do?  He doesn’t.  He just likes to use an invalid strawman argument to congratulate himself on winning a game with rather average to poor competition.  Having won Grand Champion status, many more games in class and practice sessions, and in coaching game winners and other teams to Grand Champion status, I can state with a high degree of confidence that his advice about credit is bad, wrong, misleading, and inappropriate.   In fact, I have seen many teams go bankrupt by making decisions that closely follow that bad information.

You don’t have to rely on me to see this for yourself.  Watch how many teams take out the maximum in long term debt in the first two rounds, then watch as their team goes down the tubes trying to pay that interest before their improvements become operational.  Even if they avoid bankruptcy, their added costs of doing expansions before upgrades will usually put them at a huge competitive disadvantage compared to teams that delay expansion until after all of the upgrades are online.  I’ve seen teams make this huge error in at least one industry in every Invitational that I’ve observed.

Having an A+ credit score in the last year is a major factor to winning the game.   Improving your teams credit score to A or A+ status in preparation for taking out a large loan is a better way to finance capital improvements that could save your team millions in unnecessary interest costs.  Reduced financing costs can greatly increase your net profit margins.  Higher interest rates divert a substantial portion of your team’s profit to the banks.  The interest only part of a payment on a $250M loan at 10% is 25M/year, which could match or exceed your entire earnings (EBITDA) for the second round.

Getting the lowest interest rate possible is worth doing, even when it means delaying upgrades and expansion.   An interesting observation I’ve made is that it’s usually possible to start the upgrades in the first round if you finance it merely by selling off part of your teams excess capacity in the A-P plant, by refinancing your existing loans over 10 years by paying them off and drawing a new loan, and by increasing your teams net profit in the first year with the capacity you have remaining.   Your team will be on track to improve your credit rating to A or A+ just in time to start expanding capacity after completing the upgrades at your existing and new plants.

Getting a large loan at the lowest interest rate will maximize your financial leverage at the lowest cost of financing.   This is not only fiscally conservative but also is a great strategic move to be more competitive than teams who carry a large amount of long-term debt at much higher interest rates.

Please note that the goal is not to maintain a high credit rating for it’s own purpose of demonstrating fiscally conservative operations.   On the contrary, an important goal during the game is to improve the credit rating to save real money when exploiting the maximum amount of leverage that’s prudent based on the effective use of capital improvements and investment in technology to gain more in earnings than the cost of financing.  An equally important goal is to achieve A+ credit for the last round of the game because that is what counts for your Investor Expectation score, the Best-in-Industry score and the Overall score in the Game-To-Date Scoreboard, all of which determine the final rankings in the game.

One lesson you can learn from that kind of bad advice is to not entirely trust anyone who merely declares themselves to be an expert, even me.  Evaluate the method of argument and the details of the advice to see if it makes sense or not.   Be sure to try alternate scenarios and build projections that will support or weaken the validity of the proposed strategies.   I don’t want you to trust me because I said so.  I want you to decide for yourself based on the sound principles and evidence I present based on my experience in consistently winning these games.

 

and the BSG is keeping lots of business students warm by the heat of their computers while making hundreds of strategic decisions.  There is some shock and sadness when teams find themselves in last place or headed that direction.  So I thought I’d give a few tips that can benefit most teams right away.

When you start the game in year 11, the company already has two loans.  One loan is a 5 year term and the other is a 10 year loan that’s several years into the payments.  If you simply pay off those two loans with the proceeds from a new loan, you will increase your cash flow and credit rating.   Why?   Because a loan with a 5 year term has higher payments to principal than a 10 year term.  So you spread the principal over more years and significantly lowering the payment.  That frees up cash.  That free cash is part of your companies credit worthiness.   Now you might ask: won’t we pay more in interest by paying the loan over 10 years instead of 5?   Yes, if you actually keep paying the loan to its final payment at the end of the term.  But you probably shouldn’t or won’t do that.   You should be paying off the existing loans as you generate cash from profits, and then replacing the loan with a new one that’s smaller.

Then think about how loans are affected by the years of the game.  You are probably playing from year 11 to 20.  That’s 10 years of decisions.    If you are in year 14 and you open a new 10 year loan for 50,000, you don’t even have to ever pay back about half of that principle because the game ends after year 20, only 5-6 years into the loan.  All you have t worry about is the interest and principal payment for the years left in the game.   This is like getting money today that you’ll never have to pay in the future.   If you invest the proceeds of the loans into improvements that have high returns, then the profits can greatly exceed the cost of the loan.   The trick is to end up with A+ credit in the last year of the game while holding a significant amount of long-term debt.

Congratulations to the new Grand Champions, particularly the one I helped coach.

The tale of two contestants.

So for the December 2013 Invitational, I received two requests for assistance.  I helped one person but not the other.  The person I helped won that industry and became a new Grand Champion.  This person very likely could have won without my help, so I won’t take any credit for the achievement that this person deserves, particularly because it was one of the most competitive industries with the most good teams playing in it.

Why did I help this person and not the other?   Because that person responded quickly to my email during the early rounds in the game.  The other person waited nearly a week to respond to my email, and by that time the game was hopelessly lost for that person due to many irreversible mistakes in strategy and tactics.  This person didn’t even end up in the top 4 of the industry.

So if you ask for my help and I return your email, what’s the point of asking at all if you don’t reply to me?   Don’t waste my time or yours.   Check your email.

If you aren’t diligent and actively managing your game play, then you have no chance of winning against others who are.   You deserve to lose if you ask an expert and then don’t reply for a week.   Only serious players win this game.   You aren’t playing against stupid computer artificial intelligence competitors.   Your competition are people who really want to win, and they’re usually pretty smart people.   They have already won one game in order to be invited to the tournament.   When I played my first game in the Invitational, I had already won 5 separate games.   The competition in the Invitational is usually much more difficult than in the classroom games.

The contestants have started entering decisions and already are in the forth round.

Some teams have already crashed and burned pretty hard.   Having a $10,000 dividend for the first round was certainly the mark of teams who were the most clueless.   Lots of teams are overbidding for celebrities I see, which is another rookie mistake that should have been learned before the Invitational.

Some teams are making a lot of good decisions too.   Just remember that being at the top of your industry group doesn’t mean that you’re in the best position for long term success, and many teams can be in 3rd or 4th place and be in the middle of a better long-term strategy for success at the end.

Many teams haven’t thought out their decisions for dividends, for example.   Making use of long-term debt is usually better to expand production and avoid running out of cash.   A high credit rating may seem prudent, but not if you can improve your long-term margins and profits above the cost of financing.  Net profits can pay down debt while getting a nice tax deduction and increasing leverage for a higher return on equity.

On your Mark.  Get Ready.  Get Set.  GO!

The BSG Invitational contestants are off and running.  Already many of them have made huge mistakes, putting themselves out of contention!

There are SO MANY ways to lose this game, and the current round of contestants have found them.

I see some teams that are SELLING stock.  Oh what a terrible way to raise capital it is!  Selling stock decreases your earnings per share by diluting it over more investors.  So if two companies have the same earnings, the one with the fewest shares outstanding will have the higher EPS.  EPS is one of the most important financial indicators and the primary measure of profitability.  Selling shares reduces your profit.  Should a company want more profit or less profit?  That’s right kiddies, a company should want more profit.

When should you sell shares?  When you think that they are overvalued by the market and when you think you can buy them back in the future at a lower price.  You don’t sell shares merely to raise cash.

When should you buy shares?  When you think that they are undervalued by the market and when you don’t plan to sell them, or you plan to sell them at a high profit when you expect them to be overvalued in the future.  Your decisions and profitability affect the stock price.

So it is possible to attempt to manipulate the market by selling stock, causing the price to tank, and then buying the stock back.  But consider this question.  Where are you going to get the cash to buy the stock back if you do it?  You won’t be able to do it with profits that you reinvest in stock – since you don’t want profit is you want the stock to tank.  Do you want to do it with loans?  At the beginning of the game your credit rating isn’t A+, and you already have long term debt.  You will have to pay a premium interest rate to take out debt with sub-prime credit.  You might not be able to make as much profit as other teams who improved their credit and took out loans at lower rates to invest in capital improvements.  Besides, stock manipulation should be illegal, right?

The BSG is based on profitable production and management, not stock manipulation.  Causing your company to tank to buyback stock at a lower price will most certainly cause you to lose rounds with poor or reduced EPS, worse credit, and fail to invest in capital improvements.  Manipulate the stock at your own risk.

A note about supply and demand.

I’m surprised that so many contestants don’t observe the fundamentals of supply and demand in this game.   At the beginning, there’s a dramatic excess of production capacity relative to sales demand.  There’s too much supply for the demand.  Should you be increasing capacity at the start or decreasing capacity?  Overall, everyone should be decreasing capacity.  But everyone tends to increase capacity capacity or keep it the same, with very few players decreasing capacity.  That’s because they’re thinking of their own self interest instead of the overall affect on industry profitability.  It’s this same problem that cause rural farmers to constantly deal with low prices of grain instead of reducing production.

 

When I first started playing the game, one of the websites that I initally found useful was:

http://www.corvalliscommunitypages.com/bsgimages/bsgrev2.html

After playing the game many times and after becoming a Grand Champion, my opinion about the site has changed quite a bit.   I think the information there is useful to learn more about the game and to think about strategy, however, there is a lot of information there that is not advisable to follow, is wrong, or has more complexity than indicated in the recommendations.   I don’t want to be too negative about it, because I think it’s better than a lot of other sites.   My biggest concern is that players will take the information too specifically and too literally, following it like a strategic bible, without taking into account how the authors have their own unique perspectives that aren’t always suitable or good for many game situations.

I could probably write a whole book about what I think is wrong or misleading on that site, but I’m not sure that it’s necessary so long as the reader/player remains duly skeptical and takes the info with “a grain of salt” to recognize that the opinions there may not be as good as they seem to be.

The biggest problem with the advice there seems to be a huge overemphasis on the importance of celebrity bidding.   I studied many dozens of games by previous Grand Champions when this information was available on the BSG website.   I found that many of the winners had NO celebrities at all.  In fact, I found that it was very common for the best players not to have celebrities, and if they did have celebrities, it didn’t really affect their overall performance at all because they only had one or two that were picked up at value prices late in the game.   The International tournament is significantly different than the games played in classrooms, however, since in the classroom most of the teams have never played the BSG before while the tournament is only played by teams invited who have already won their classroom simulation first.   In other words, the classroom game is all newbies who tend to make a lot of mistakes without realizing their errors.   This is very important with respect to celebrities because it’s much more likely that at least one team will be overbidding for all of the celebrities for every year of the simulation.   When that’s the case, it’s almost always a bad decision to outbid their overbid.   You should only bid for celebrities WHEN YOU KNOW IT WILL BE PROFITABLE FOR YOUR TEAM TO WIN THE BID.   Most teams don’t seem to even know how to calculate the prospective profitability of winning a celebrity.   You MUST bid less for the contract than the EXTRA profits that the celebrity is expected to generate.   And you should be conservative to allow room for an unexpected downturn in sales.   Do not bid at all unless you create a spreadsheet model that can determine a profitable bid amount for each celebrity for your own company’s operation for the years of the contract.   Short term celebrity contracts are probably not worth bidding on at all until the last years of the simulation so that the contract doesn’t expire before the end of the game.    If in doubt, don’t bid, or bid a very low amount that should be profitable in any condition.

Another problem with that site is the poor discussion and use of the number of models produced, particularly in reference to the plant upgrades.   In most cases, it will be better to reduce the number of models produced in the early years until a plant has upgrade option B.   Option B is the most important upgrade because it reduces the setup cost – which is the most important cost for producing a large number of models.  It’s also the most expensive plant upgrade – for a reason – it can be the most profitable by reducing production costs the most.   The cost of the upgrade is based on the size of the plant, so it’s much cheaper to start this upgrade early before expansion, and often it’s worth selling off capacity to reduce the size of the plant – and decreasing the cost of this upgrade.

You should also know that it’s possible to produce 500 models in one high capacity plant, and produce a smaller number of models in another plant, then combine the output that you distribute to get a higher average number of models that are sold in a region.  For example, you could produce 500 models in Asia, and 100+ models in Latin America, and still end up with more than 350-450 models sold in America by distributing them there with a mix from the two plants.    You probably shouldn’t have two plants that have the same upgrades and that have the same capacity, since it will be more cost effective to have only one large factory, reducing the fixed costs.   But this scenario isn’t discussed.

These are just two example of strategic problems with that site.  There are a lot more.  So take the info with a large degree of skepticism.

 

 

 

When I first was learning the Business Strategy Game, I did a lot of research to see what strategy tips were available to try.   Unfortunately, I found that a lot of the information available was wrong and misleading.   So I thought I’d post some of my strategies here because they were so successful.

I’ve observed that a large percentage of teams focus on the bidding for celebrities, usually with a couple of teams bidding the maximum in the first years.   This is crazy and foolish.    I looked at dozens of game reports for the BSG winners of the Best-Strategy Invitational in my research before playing the first round.  Many of the winners HAD NO CELEBRITIES AT ALL, for the whole game.  That’s because they calculated a bid that would be profitable if it won, but some other team would win the bidding process and lose money.  That’s winning a battle while losing the war.  Nearly all of the lowest ranked teams HAD LOTS OF CELEBRITIES at high prices.   The easiest way to lose this game is to overbid for celebrities.  I recommend that you do NOT bid for celebrities until you learn how to submit a bid that ensures that you make a profit on any bid that gets accepted.   Since other teams are basically guessing about how much to bid, usually the WORST TEAM with the craziest bid will “win” the celebrity.

This is like an auction for a $10 item where most of the bidders have no clue about how much the item is worth, and they’re all bidding with monopoly money that has no real value to them.   If all the bidders are given $10,000 to bid in the auction, there’s a big chance that some of them will bid $10,000.   One of them will win the auction without realizing that they just bought themselves last place and they will probably never be able to recover from that mistake.   In this case, anyone who bids more than $9.99 is making a bad decision, since that’s the highest possible bid that will be profitable, since you would at least make one penny if the bid is accepted.   Bidding $10 for a $10 item is not profitable, and any penny bid above that is a guaranteed loser.

So to make a profitable bid, you must first calculate how much the celebrity is worth in increased revenue and then bid something lower that includes a safety margin plus a profit margin.   At the start of the game, the good players will probably not win a single celebrity.  That’s OK.  The main reason to bid in the first rounds is to merely ensure that no other player will win a more profitable bid than you, and if they do win the auction, their bid will cost them more than the celebrity is worth.