I am the living, breathing personification of the dotcom economy. For one year, I ruled the world. But in a few swift, brutal months, my whole world collapsed.
I was the chief executive of Handheld Corp., which manufactures and markets three lines of handheld electronic devices based on the Palm OS. Four years ago, when I signed on as CEO, Handheld was a $750 million company. The previous year, two of its product lines, the X5 and X6, racked up total profits of $170 million. But its new line for the consumer market, the X7, was $10 million in the red. And the Big Three of handheld computing — Palm, Handspring, and Research In Motion (makers of the BlackBerry) — were gobbling up market share.
Handheld Corp. clearly needed a change at the top. But unlike those overvalued dotcoms, Handheld was making money. I knew I could ride that rocket to Mars.
Coming out of the gate, I made all the right moves. I slashed the X5's wholesale price (from $250 to $225) and dropped its R&D budget by 3%. I held the price steady on my upscale X6 and bumped up its R&D by 1%. And I didn't give up on the X7: I cut its price (from $200 to $180) and goosed its R&D by 3%.
Profits shot up for all three lines. By year's end, I had pushed Handheld across that magic, billion-dollar threshold ($1.4 billion in revenue, to be precise). My board went bananas. And the Street showed us the money — big-time.
Then it all came crashing down — thanks to a single mistake. The next year, I decided to milk the X5. I held its price and dropped its R&D by 5%. The result: Customers hated the new version. Sales sank; margins vanished. Our overall numbers were dismal. The Street pummeled us.
I tried to rescue the X5 — I nicked 5 bucks off the price and bulked up R&D by 8%. Too late. Once burned, customers never returned. Sales and profit went into free fall. Finally, I dropped the line. But with just two products in the market, we lost $200 million in revenue. I was relieved when the board finally axed me. Now I could get out of this nutso world and go back to my day job.
You Too Can Be Carl Yankowski
No doubt you've already figured out that I was a virtual CEO, Handheld Corp. was vapor, and I made up the stuff about Wall Street and the company's board of directors. But the numbers were real. They were calculated — based on my market moves — by PDA Sim, an online simulation exercise developed by Forio Business Simulations. Led by two MIT grads, Forio develops and uses simulations to help companies and managers nail their BHAGs — big, hairy, audacious goals.
In an email, Will Glass-Husain, Forio's CTO, explained: "Successful business people need to translate knowledge of their company's strategy into effective action. One good way to translate rules into action is to build an intuition about strategy by having fun. Having fun lets people focus less on the individual tasks and get into the spirit of the strategy. Simulations compress time and space, so that managers build an intuition about effective decision making that could take years to accumulate in real life."
Donna Dubinsky, Handspring's chief executive and cofounder, might have profited by taking PDA Sim out for a test-drive earlier this year. In mid-July, citing a slowing economy and plagued by a glut of competing products, Dubinsky said that the company would cut 9% of its workforce and slash its marketing budget in the wake of a fourth-quarter net loss more than three times larger than a year ago. Meanwhile, rival Palm was suffering its own problems, with a backlog of inventory and increased pressure from big players such as Microsoft and Nokia.
Glass-Husain and his partner, president Michael Bean, created PDA Sim as a way to demo the potential of simulations for corporate learning. "We based the sim on the Palm OS, since there has been so much news about Palm's and Handspring's strategies this year," says Glass-Husain. "And there has been a lot of discussion about the pricing difficulties that these companies are going through. In PDA Sim, you can price low and see how that plays out in terms of maintaining sales and profitability."
Forio's usage logs reveal that there are pockets of PDA Sim players all around the world. The game is "really popular," says Glass-Husain, in Japan, Turkey, and Scandinavian countries because folks in those locales are wild about PDAs. Most players closely follow the PDA market. Many are motivated by a single conviction: They can do a far better job running Handheld than CEO Carl Yankowski has done running Palm. And they are out to blister Palm's once-high-flying chief executive.
A Real-World Lesson From Cyber-World
PDA Sim loads in less than 10 seconds on a dial-up connection on Netscape or Internet Explorer 4.0 browsers (or better). It takes about five minutes to play. The game's big challenge is to manage three different handhelds in three different markets when each product is at a slightly different stage in its lifecycle.
Clearly, I wasn't up to the challenge — by game's end, I ranked in the bottom quartile of previous scores. (Hey, at least I was at the top of the bottom quartile.) So I emailed Glass-Husain: What's the best strategy?
His reply: "The key to winning PDA Sim is to think about what each of the three markets best responds to. Do customers care about price, features, or both? Also, you need to determine the right time to remove a product from your portfolio. But I don't want to give everything away here."
He needn't worry about that. Seeking a bit more insight, I checked out a page where PDA Sim posts the top 10 scores and the winners' strategies. There is also a page for the low scores, "because you can learn as much from losing as you can from winning," says Glass-Husain. "And we encourage players to see whether they can 'win' at crashing the company."
Sure enough, there was a player, dubbed "Simpleman," who followed one simplistic strategy: Do anything to please the customer. He priced each handheld at $1. And he racked up $4.4 billion in losses.
Most of the winners were similarly unhelpful ("think deeply"; "experienced with Turkish economy"). But one player, who amassed $2.7 billion in revenues, tumbled to a strategy that clearly worked — at least for him: "Milk X5 for two years; make X6 expensive and X7 cheap. Voila."
Then again, I damn near killed the company by following almost the exact same strategy.
Whatever. If there is one real-world lesson to be drawn from the virtual world of PDA Sim, it is this: Misread the handheld-computer market, and it's almost impossible to recover — no matter how relentlessly you slash prices. Hmm ... I wonder whether Yankowski has a day job to go back to?