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WARGAMINGA short introduction

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Contents Page

A. What is strategic Wargaming? 3

B. Wargaming in practice – Roland Berger project examples 8

C. How to do it? 11

D. Why to co-operate with Roland Berger 17

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A. What is strategic Wargaming?

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CONCEPT Wargaming is a dynamic simulation of real businesssituations – providing information and experiences to shapestrategic decisions

APPROACH The game consists of– Testable hypotheses or issues to be resolved– Several teams that conduct game moves representing about

1-2 years of market development– Analysis and evaluation of major initiatives– Feedback on planned and/or not expected results

ADVANTAGES Wargaming allows– to test hypotheses and strategies at low cost– to analyze how an industry may evolve– to demonstrate how "personalities" influence decision making– to acquire an insight into implementation issues

We apply strategic ("War") Gaming to deal withhighly dynamic strategic situations

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Wargaming allows to deal with interdependentstrategic action and counteraction

• Risk of unforeseeablebehavior exists in allsituations with two ormore players

• Strategic developmentsare influenced by interde-pendent behavior of allplayers

• Strategic goals can onlybe reached if all playersand their possibleactions are analyzedsystematically in theirtimeframe

TIME

Option 1 Option 2

Option 1

Option 2

Player A

Player B

1st round

2nd round

3rd round

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In a range of real business situations, linearstrategy development has its limits…

• Telecoms licence• M&A• Vertical integration(e.g. bancassurance)

Examples

Broad StrategicInitiatives

Specific TacticalManeuvers

• Pricing changes

Bidding/com-petitive tendering

Acquisition/consolidation

Strategic movetesting

Analysis of thecompetitive land-scape

Limits oflinearstrategy

• May not reflectmotives of otherbidders

• Lack of detailedanalysis of com-petitors' reactionsand their impact/implications

• No focus on inter-dependencies ofcompetitors' moves

• More reactive thanproactive approachto competitors'strategies

• Defence contracts• Hostile takeovers• New productintroduction• Major reorgani-

zations

• Too rigid to provideinsight in highlyintuitive moves

• Limited insight in'how exactly' theythink and act

• High probability ofpaying too little ortoo much

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…which is why companies can benefit fromWargaming

SpecificBenefitsfromStrategicGaming

• Rehearsal for actualbidding process

• Gain "real" expe-rience of acquisitionprocess

• Identification of valuedrivers

• Understand barriersto entry

GeneralBenefitsfromStrategicGaming

• Involvement of both top-management andsecond-levels in the game

Create acceptance for a strategy Allow a risk-free simulation• Makes learning from mistakes easier

Bidding/com-petitive tendering

Acquisition/consolidation

Strategic movetesting

Analysis of thecompetitive land-scape

• Assess risks andgains in a dynamicenvironment

• Capture interactionwith market andcompetitors

• Optimize operationalparameters, i.e.timing, resourceallocation

• Gather competitiveintelligence and vali-date competitors'strategies

• Identify partner/target and definePMI & synergyprospects

• Take into account"personalities" ofother players

• Ascertaining "true"cost of losing (andwinning)

• Understand themoves and nego-tiation tactics andbetter anticipatecompetitive reactions

• Strategy has been "lived" in the game

• Participants are multipliers for the strategy

• Even radical moves possible – e.g. moves thatchallenge basic assumptions of an industrysector

• Reaction to different situations can be tested

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B. Wargaming in practice– Roland Berger project examples

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Roland Berger has conducted eight strategicWargames over the last three yearsRecent strategic Wargames conducted by Roland Berger

2007

2006

2005

Insurance company1

Airline simulation2

Prime contractor3

Tier 1 supplier4

Engineering company6

Aerospace equipment manufacturer7

2004 Insurance company8

Airline5

• Deep understanding of how to use Wargaming toachieve the best results, e.g.– Need to focus on one core issue (or a very limited

number of issues)– Balance between sufficient complexity to be

realistic, and too much detail– Requirement to define the boundaries of the War

Game carefully

• Detailed knowledge of the practicalities of WarGaming, e.g.– Establishment of successful teams– Set-up of dedicated IT system

RB Excellence

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We have gained Wargaming experience with avariety of business situations and industriesCLIENT Aerospace equipment

manufacturer

Large scale biddingcompetition

BInsurance company

Long term competitivemarket dynamics

A

Value chain interaction

European airline

Objective • Rehearse bidding processfor major long-term contract

• Test robustness of chosenstrategy against potentialcompetitor responses

• Decide how best to capturevalue from other industryparticipants

Outcome • Great stimulus to existingpreparations

• Business improvementinitiatives revealed

• Refinement of plan ofcampaign for initiatingchange within distributionnetwork

C

• Strategic success dependenton competitor response

• New strategy shown to berobust

• Client won the realcompetition

• Alert to threat from specificcompetitor actions

Broad StrategicInitiatives

Specific TacticalManoeuvres

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C. How to do it!

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Intensive pre-game preparation and extensive post-game analysis is critical for successful Wargames

1 2 3Pre-game preparation Wargaming Post-game analysis

• Issue definition • Team briefing • Outcomes and winners

approx. 9 weeks 2 days withfull Executive team 1 week

Strategic Wargaming is a three stage process

• Inter-move analysis

• 3-4 moves of about 4 hourseach

• Definition of near termstrategy and implementationagenda

• "What if" analysis andgeneral introspection

– Competitor businessmodels

• Economic modeling

– Market economics

• Infrastructure planning

• Personality profiling andteam formation

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The emphasis of the pre-game process is on thedevelopment of a realistic market simulation

Pre-gamepreparation

• Market economics, e.g.- Price elasticity of demand- Advertising effectiveness- Channel dynamics

Economic modeling• Competitor business models

- Revenue and cost structures- Investment restraints- Shareholder value

• Identification of major marketparticipants requiring representation

• Character sketch of key personalitieswithin identified teams

• Assigning executives to variousteams to maximize learning

Personality profiling and teamformation

• Context – What isthe core hypo-thesis? (e.g. pricecompetition)

• Constraints – Whatproducts/marketsshould the gamebe restricted to?

Issue definition

• Site selection (off-site)• Technology support

(intranet/ telephones)

Infrastructure planning

1 PRE-GAME PREPARATION

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The Wargame itself consists of 3-4 moves whereteams interact in the process of strategy executionGame structure Team Roles & responsibilities

Customer/Market

Others(e.g. supplier)

Client

NewCompetitor

EstablishedCompetitor

ControlTeam

• Total responsibility for running theGame, and deciding on what is(and is not) allowed within theGame

• Representing other market partici-pants e.g. customers, suppliersetc…

The client • Representing the behavior of theclient during the Game

Client'scompetitor

• Likely response of the competitors

• Also played by Client employees

2 WARGAMING

GAME INTERACTION

ControlTeam

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Between moves, a control team models the impact ofteam decisions and updates the game environment

2 WARGAMING

Inter-move analysis and feedback

ECONOMICMODEL

Teamdecisions

Control Teamoutput

• Price• Marketing• Product focus

Core operating decisions

• M&A• Product innovation• Market entry/exit

Strategic initiatives

MARKETMODEL

FINANCIALMODEL

• Market size• Market share

'New' game environment

• P&L• Balance sheet• Economic value

Team-specific financials

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Understanding strategy drivers and the 'what if'analysis form the basis for strategy implementation

Which strategy led to maximum:

• Shareholder value creation

• Change in market share

• Change in share of industryprofit

Identification of key success factors

Analysis of:

• Different move permutationsand combinations

• Identification of little realisticoutcomes

• Impact of high probabilityevents

Detailed 'what if' analysis

Discussion anddebate on lessonslearned, capability

and knowledgegaps

3 POST-GAME ANALYSIS

• Definition of near term strategy and implementation agenda

• Significant knowledge transfer to the client's strategy team

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D. Why to co-operate with Roland Berger

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Two key competences, which we have, are neces-sary to conduct Wargames successfully

WARGAMING EXPERIENCE

• Real practice experience inrunning War Games to:

ECONOMIC/FINANCIAL MODELLING

• Strong modeling and industryskills to map value and costdrivers comprehensively

• Financial capabilities to buildmodels that ‘feel real‘ toexperienced industry executives

– correctly identify issuesand scope the "game"

– profile the players

– engage the clients’executives to play therelevant roles

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For further questions – contact our teams inGermany or in London

Partner

Hamburg

Hauke Moje

Senior Consultant

Munich

Philipp HattrupSenior Consultant

Hamburg

Florian Berndt

Partner

London

Robert Thomson

+49 160 7444310hauke_moje@de.rolandberger.com

+49 160 7443538philipp_hattrup@de.rolandberger.com

+49 160 7444335florian_berndt@de.rolandberger.com

+44 79 6767 4811robert_thomson@uk.rolandberger.com