Crisis and Consumption Smoothing
Crisis and Consumption Smoothing: The simulation is an exercise in forecasting financial crisis, as well as about making pricing decisions and managing inventory during a crisis. It is targeted at a broad audience which includes senior leaders who are in charge of overall strategy, as well as middle managers responsible for strategy execution.
Areas: Marketing, Macroeconomics, Strategy, Operations and Supply Chain Management.
Authors: Pushan Dutt, Associate Professor of Economics, and V. Padmanabhan, Professor of Marketing, INSEAD
Minimum time required: 1/2 days
Financial crisis, currency crisis and sovereign debt crisis have become increasingly common in the recent years. With the world bound together by flows of goods, services, and capital (especially financial capital) across borders, such crises have morphed from isolated single-country cases into ones that are regional and even global in their repercussions. For instance, what started as a problem in the mortgage industry in the US, quickly escalated into a crisis has left virtually no sector and country untouched.
Making informed decisions and responding to a crisis in an appropriate manner is the upper most concern for firms today. Hasty decisions that damage during normal times can create havoc and ruin during a crisis. In developing a response plan, firms need to identify wether a country or region is vulnerable to a crisis. The second, and more critical action item is an assessment of the likely impact of a crisis on the firms' business. This, in turn, implies a fundamental understanding of the impact of the crisis on the consumption decisions of the firm's consumers. It is the consumers' decisions on consumption spending and allocation of this spending that translates into demand for the firm, and thereby determines how badly a crisis will hurt the firm.
In this simulation, participants will be playing the role of a firm operating in a specific product category across two countries. One of these is a developed economy while the other is an emerging market. They will be given data on macroeconomic, industry and firm performance indicators. As decision makers, they will have to decide on production and pricing strategies over a series of time periods, some of which are crisis years. In each time period, they have to forecast the likelihood of a crisis, estimate how severely the impact will be on their particular sector in their country of operation, and take pricing, production and inventory decisions accordingly. Participants will be playing against a virtual competitor in each of the two markets with the winner decided on the relative ranking of cumulative profits over the entire time horizon.
The goal of the simulation is to develop a fundamental understanding of the causes of a crisis and how a crisis, by affecting the spending decisions of consumers affects firms' sales, profit margins and market shares. It highlights the subtle and sophisticated changes that consumers make with regarding to their spending decisions in the context of an economic crisis. The simulation will also develop an understanding of how the impact varies across countries, sectors, and crisis-type.
The crisis simulation is targeted at a broad audience which includes senior leaders who are in charge of overall strategy, as well as middle managers responsible for strategy execution.