A business simulation, also known as business games are exercises in which participants in business courses, working in teams, are in charge of managing a simulated firm. This management takes place through decision making in the functional areas of the firm. The number and type of decisions depends on the objective for which the simulation was developed for. These decisions are later processed by a computerized program that generates reports for the participants and the instructor. These reports include financial statements and supplementary information. The environment in which the firms develop their operations can be competitive.

It can be said that a simulation is a dynamic case in which the participant, in addition to perform the analysis of a particular business situation and recommend courses of action has to make a decision. Furthermore, the participant will get to know the results of his/her decision. These results create different conditions which in time require more decisions. After each simulated period, feedback is provided to the participants. This process is repeated many times and can last for as much as twenty periods. Each simulated period can represent a month, a quarter, or a year depending on the simulation.

In a simulation, participants confront problems and opportunities that are present in real life. Having this in mind, only relevant aspects of a business are included in a simulation. The aspects included depend on the purpose of the simulation, which in turn depends on the type of knowledge we want to transfer and the abilities and skills that we want to develop in the participants. With this respect the market offers total enterprise business simulators in which the objective is to make decisions in all functional areas of the firm. There are also business simulations in which the decisions are centered around functional areas, i.e. marketing, operations, finance, etc.

Decisions are made in a uncertain environment comprised of economic conditions and the competition represented by the other teams in class. At the beginning of the simulation all firms have the same characteristics and financial conditions. With the objective of avoiding initial complexity, decisions at the beginning of the simulation can be restricted or kept simple. As time passes and different topics in the course are covered, the number of decisions can be increased.

The use of simulations in business education can be considered a type of experiential learning given the fact that the student applies through decision-making concepts and techniques learned in class and then has to live with the results. Recent studies indicate that more than 90% of business schools in the US include business simulations in their programs.

Benefits of Business Simulations

The following is a list of benefits of business simulations:

- It requires applications of the concepts, techniques and models presented in class.

- Participants get to know the results of their decisions and can identified the reasons for the god or bad performance of their firm. 

- The fact that the decisions are repeated reinforces the learning process.

- The decision making process requires team work. communication, leadership, negotiation, and other skills are developed or reinforced.

- The fact that students have to live with the results of their throughout the simulation (and get a grade) requires that they consider the consequences of their decisions.

- The generation of a competitive environment in pursue of the best results and the best team, is an important motivation factor that favors learning.