Simulation and Strategic Options
2 credits
BU.610.625.XX
(Note: each section must have a separate syllabus.)
Class Day/Time & Start/End date
Semester
Class Location
Instructor
Full Name
Contact Information/Office Hours
Phone Number: (###) ###-####
E-mail Address:
Required Cases & Learning Materials
Materials and Readings Available Through Blackboard
1. Chambers, C.G. Introduction to Simulation: Random Variables and Modeling, 2010.
2. Chambers, C.G. More Advanced Decision Models & Applications, 2010.
3. Chambers, CG, EM Snir, A Asad. The Use of Flexible Manufacturing Capacity in Pharmaceutical
Product Introductions, Decision Sciences, 2009.
Materials & Readings Available Through JHU Library eReserves
4. Luehrman, TA, Investment Opportunities as Real Options: Getting Started on the Numbers, Harvard
Business Review, July-August 1998.
5. Copeland, TE, PT Keenan, How Much is Flexibility Worth, The McKinsey Quarterly, 1998.
6. Luehrman, TA, Strategy as a Portfolio of Real Options, Harvard Business Review, 1998.
Cases & Readings Available Through Study.net
7. Real Options
8. Monte Carlo Simulation in Excel Without Using Add-Ins
9. Decision Trees
10. Applichem
11. Genentech
12. Introduction of the Differential Global Positioning System
13. Eli Lilly & Company: The Flexible Facility Decision
14. IEC in Sports
15. Kony’s Inc.
16. Nucleon
17. Scor-eStore.com
Blackboard Site
A Blackboard course site is set up for this course. Each student is expected to check the site throughout the
semester as Blackboard will be the primary venue for outside classroom communications between the
instructors and the students. Students can access the course site at https://blackboard.jhu.edu. Support for
Blackboard is available at 1-866-669-6138.
Course Evaluation
As a research and learning community, the Carey Business School is committed to continuous improvement.
The faculty strongly encourages students to provide complete and honest feedback for this course. Please
take this activity seriously because we depend on your feedback to help us improve so you and your
colleagues will benefit. Information on how to complete the evaluation will be provided towards the end of the
course.
BU.610.625.XX- Simulation and Strategic Options – Instructor’s Name - Page 2 of 16
Disability Services
Johns Hopkins University and the Carey Business School are committed to making all academic programs,
support services, and facilities accessible. To determine eligibility for accommodations, please contact the
Carey Disability Services Office at time of admission and allow at least four weeks prior to the beginning of
the first class meeting. Students should contact Rachel Pickett in the Disability Services office by phone at
410-234-9243, by fax at 443-529-1552, or email: [email protected].
Important Academic Policies and Services
 Honor Code
 Statement of Diversity and Inclusion
 Student Success Center
 Inclement Weather Policy
Students are strongly encouraged to consult the Johns Hopkins Carey Business School Student Handbook
and Academic Catalog and the School website http://carey.jhu.edu/students/student-resources/universityand-school-policies for detailed information regarding the above items.
Course Description
This course introduces the concept of real options as a framework for thinking through contingencies and
strategic decisions made in the presence of risk. It uses the logic of options pricing, decision trees, and
decision analysis to position the manager to deal with risks embedded in the use of real assets. Analysis
includes the use of Monte Carlo simulation, scenario planning, and contingent claims analysis to facilitate a
rigorous approach to thinking through “optionality” in the real world. Emphasis will be placed on taking
advantage of the up-side of risks.
Course Overview
This course is intended to develop intuition regarding the management of alternatives using a variety of tools.
Session 1 revisits the topic of Monte Carlo simulation using spreadsheets. Session 2 builds on the
introduction to Decision Trees. Session 3 applies this logic to the topic of Real Options. Session 4 looks at
how to embed such options within contracts. Session 5 merges the tools of Decision Trees and Simulation
into an integrated approach. Session 6 applies this approach to a portfolio of such options. Session 7 allow
students to present a complete analysis using these tools.
Student Learning Objectives for This Course
All Carey graduates are expected to demonstrate competence on four Learning Goals,
operationalized in eight Learning Objectives. These learning goals and objectives are supported by
the courses Carey offers. For a complete list of Carey learning goals and objectives, please refer to
the website http://carey.jhu.edu/faculty-research/learning-at-carey/learning-assessment.
The learning objectives specific to this course are:
 Begin to see how to structure a decision that incorporates options to change course or direction after
receiving new information about risky outcomes
 Understand and practice generating competing scenarios that account for differing outcomes that
can result
 Use options pricing tools and methodologies to consider complex settings not perfectly captured in
capital markets
 Develop strategies that are adaptable to changing environments
 Present material in written and oral formats which includes treatment of both quantitative and
qualitative elements of risk management
Class Policies
 Submission and Format (homework and case-related question submissions)
o All assignments are due by the beginning of class.
o Links within Blackboard will be created for all submissions. This will accommodate
transmission of text, as well as simulation models, ppt slides, etc.
o No late submissions will be allowed.
o Written responses should be presented as pdf files and uploaded via Blackboard
o Models developed should be submitted as Excel files
BU.610.625.XX- Simulation and Strategic Options – Instructor’s Name - Page 3 of 16

Classes and Communication
o You are expected to read assigned material in advance.
o Class time will not be spent on learning definitions. Instead, we will spend time on
discussing implications of various issues.
o You should check Blackboard regularly to download course materials and to receive
announcements because instructors may add content as the course progresses.

Attendance and Class Discussion
o We expect you to attend all class sessions.
o Participation includes cooperation in the class discussions, lectures, and/or presentations.
o We reserve the right to randomly call on students to make sure everyone is on the same
page.

Teams
o We fully expect that students will discuss cases and readings within study groups or teams.
In fact, this is encouraged. However, individual assignments may NOT be done in teams.
o When teams submit work, please include all team members names on all submissions, but
only one copy needs to be submitted per team.
Course Requirements / Assignments
All students are expected to view the Carey Business School Honor Code/Code of Conduct tutorial and
submit their pledge online. Students who fail to complete and submit the pledge will have a registrar’s hold
on their account. Please contact the student services office via email [email protected] if you have
any questions.
Students are not allowed to use any electronic devices during in-class tests. Calculators will be provided if
the instructor requires them for test taking. Students must seek permission from the instructor to leave the
classroom during an in-class test. Test scripts must not be removed from the classroom during the test.
Class Participation
The ability to “think on your feet” and succinctly articulate your point of view about a decision to be made is
critical to any general manager. Our classroom will provide a safe place for you to develop and hone these
skills. Please note that the quality of what you contribute to class discussions (whether a thoughtful question,
some astute analysis, or some other meaningful contribution) will count far more than the quantity of your
remarks.
In addition to the group submissions on the projects, each student is asked to submit two 1 page written
documents describing their learning experience. The first deals with the group project, the second deals with
the students experience in the classroom discussions. Both submissions will be used to help determine each
student’s participation grade for the course. Rubrics for the evaluation of these submissions are shown in the
following pages.
Homework Problems
The course includes five individual submissions as homework assignments based on the cases discussed in
session 2-6. Submission of homework problems is to be done via blackboard. Each student should submit at
least one file for each assignment. The first will be a pdf file containing the related written responses. Some
assignments will also involve creation of a simulation model. When this is needed, it should be submitted as
a separate Excel file.
Late assignments will not be accepted without prior arrangement with the course instructor. Such
arrangements are reasonable for medical reasons and other emergencies. However, students should
understand that the general policy is that late submissions will not be graded. Also, any submission made
after the assignment is discussed in class is clearly inadmissible and cannot be considered.
Course Project
Students will form teams of 3-4 people and develop a complete analysis of a business case focused on using
simulation and/or scenario development to address issues in risk management. Each team will submit a
written report not to exceed 6 pages. (Exhibits are not part of this page limit.) Each team will also explain its
BU.610.625.XX- Simulation and Strategic Options – Instructor’s Name - Page 4 of 16
analysis in a 15 minute presentation to the rest of the class and deal with questions from other students
and/or faculty. Grading rubrics for the written and presentation portions of the assignment are attached.
BU.610.625.XX- Simulation and Strategic Options – Instructor’s Name - Page 5 of 16
Assessment
Criteria
Not Good Enough
(0 score <6)
(6
Good
score <9)
Criterion 1
Demonstrates
appreciation of
multiple perspectives
and experiences
Does not recognize
perspectives of others,
and/or dismisses them as
having no value
Recognizes multiple
perspectives and can
explain how they added to
the quality of the team’s
work
Criterion 2
Explains how new
perspective helped
team and added to
student experience
Cannot recall instances in
which other perspectives
of ideas made a positive
impression or contribution
Can identify at 2
perspectives and explain
how each added to the
learning experience
Criterion 3
Demonstrates
recognition of value of
teamwork
Undermines team
dynamics or only focuses
on how team structure
hindered student efforts
Can identify at least 2
instances of how
teamwork improved the
work product and/or
explains how student
improved team dynamics
to help the project
progress
Criterion 4
Explains insight
related to teamwork
gained through
experience with class
project
Found no insight from
experience or cannot
express it an a coherent
fashion
Can explain at least 2
lessons learned about
teamwork that will be of
value to student in future
endeavors
(9
Very Good
score 10)
Explains how exposure to
new perspectives
evidenced during project
served to change
personalities or improve
working environment.
Can highlight specific
experiences with new
perspectives that altered
student’s consciousness
regarding how to deal
with others on future
projects and work tasks.
Explains how student
showed leadership in
managing team dynamics
in a way that created
lessons that the entire
team may benefit from in
all future endeavors
Explains new insight
related to teamwork that is
not borrowed from course
readings or instructions.
Shows how this insight
will help team members in
future jobs/endeavors.
Total Score
Rubric for Written Submission on Learning Experience from Team Project
Score
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Rubric for Written Submission on Case Discussions
Assessment
Criteria
Criterion 1
Demonstrates
appreciation of
multiple
perspectives and
experiences
Not Good Enough
(0 score <6)
Does not recognize
perspectives of
others, and/or
dismisses them as
having no value
Good
(6 score <9)
Recognizes multiple
perspectives and can
explain how they
added to the quality
of the discussion
Criterion 2
Explains how new
perspective helped
improve learning
experience
Cannot recall
instances in which
other perspectives or
ideas made a positive
impression or
contribution
Can identify at least 2
perspectives and
explain how each
added to the learning
experience
Criterion 3
Demonstrates
recognition of value
of group discussion
Undermines
classroom dynamics
or only focuses on
how group discussion
hindered student
efforts to get
attention
Can identify at least 2
instances of how
information provided
in class discussion
improved the
understanding of
difficult topic and/or
explains how student
improved classroom
dynamics to help the
discussion progress
Criterion 4
Explains insight
related to business
gained through
experience in class
discussions
Found no insight
from experience or
cannot express it an a
coherent fashion
Can explain at least 2
lessons learned about
business from
discussions that will
be of value to student
in future endeavors
Very Good
(9 score 10)
Explains how
exposure to new
perspectives
evidenced during
discussions served to
change personalities
or improve working
environment.
Can highlight
specific experiences
with new
perspectives that
altered student’s
consciousness
regarding how to deal
with others on future
projects and work
tasks.
Explains how student
showed leadership in
improving classroom
dynamics in a way
that created lessons
that the entire class
may benefit from in
all future endeavors
Explains new insight
related to
communications that
is not borrowed from
course readings or
instructions. Shows
how this insight will
help student in future
jobs/endeavors.
Total Score
Score
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GRADING RUBRIC FOR PRESENTATION PORTION OF COURSE PROJECT
Analysis
1.
Was the analysis of the case complete? Max 10 pts.
_________
2.
Does the analysis properly incorporate the relevant tools? 10 pts.
_________
3.
Does the analysis show the relationships among important 10 pts
factors in the situation?
_________
Recommended Actions
1.
Is the action plan specific and complete? 10 pts.
_________
2.
Is the action plan practical (i.e., something that can be done
reasonably)? 5 pts.
_________
3.
Does the action plan recognize the importance of timing
(short-term and long-term)? 5 pts.
_________
4.
Is the plan of action integrated in a logical way and linked
to the analysis? 5 pts
_________
Case Presentation
1.
Did the case discussion stimulate interest among class
participants? 5 pts.
2.
How effectively did the presenting team lead the discussion? 5 pts
3.
How good was the timing of the case presentation? 5 pts.
_________
_________
_________
Class Handouts
1.
Were the class handouts effective in communicating
information? 5 pts.
_________
2.
_________
Did they help to clarify some of the detailed points of
the case analysis? 5 pts.
Overall Criteria
1.
How well organized was the presentation? 10 pts.
_________
2.
_________
What was the level of clarity and cogency of presented
arguments? 10 pts.
BU.610.625.XX- Simulation and Strategic Options – Instructor’s Name - Page 8 of 16
GRADING RUBRIC FOR WRITTEN PORTION OF COURSE PROJECT
Analysis
1.
Does the paper contain analyses of the major issues? 10 pts.
_________
2.
Does the analysis properly incorporate the relevant tools? 10 pts.
_________
3.
Does the analysis show the relationships among important
factors in the situation? 5 pts
_________
4.
Are assumptions made in the analysis stated explicitly? 5 pts
_________
5.
Does the analysis isolate the fundamental causes of problems
in the case? 5 pts.
_________
Recommended Actions
1.
Are the criteria for selecting recommendations stated? 5 pts.
_________
2.
Is the plan of action integrated in a logical way and linked
to the analysis? 5 pts.
_________
3.
Does the action plan recognize the importance of timing
(short-term and long-term)? 5 pts.
_________
4.
Is the action plan specific and complete? 5 pts.
_________
5.
Is the action plan practical (i.e., something that can be done
reasonably)? 5 pts.
_________
6.
Is the action plan effective (i.e., does it resolve the problems
and achieve the desired results)? 5 pts.
_________
7.
Is the action plan efficient (i.e., does it make good use of
the available resources)? 5 pts.
_________
Exhibits
1.
Are analyses in the exhibits done correctly? 10 pts
2.
Do the key exhibits support and add to the text on key points? 10 pts.
Overall Criteria
1.
Is the paper logically consistent and effectively structured
so it sells its recommendations? 10 pts.
_________
_________
_________
BU.610.625.XX- Simulation and Strategic Options – Instructor’s Name - Page 9 of 16
Final Exam
Session 8 of this course will be set aside for an in-class exam. Exam questions will be drawn from class
notes, cases covered, homework problems, and/or a case distributed in advance of the exam time.
Evaluation and Grading
Assignment
Participation
Homework #1
Homework #2
Homework #3
Homework #4
Homework #5
Course Project
Final Exam
Learning Outcome
1–5
1–5
1–5
1–5
1–5
1-5
1-5
1–5
Weight
15%
10%
10%
10%
10%
10%
15%
20%
Important Notes about Grading Policy:
The grade of A is reserved for those who demonstrate extraordinarily excellent performance. The grade of
A- is awarded only for excellent performance. The grade for good performance in this course is a B+/B.
The grades of D+, D, and D- are not awarded at the graduate level.
Please refer to the Carey Business School Student Handbook for grade appeal information
http://carey.jhu.edu/students/student-handbook-and-academic-catalog/
Tentative Course Calendar*
*The instructor reserves the right to alter course content or adjust the pace to accommodate class progress.
Week
Session 1
Content
Intro to Simulation
Reading
Readings 1 & 8
Due
N/A
Session 2
Session 3
Session 4
Session 5
Session 6
Session 7
Simulation & Decision Trees
Decision Trees & Real Options
Option-Based Contracts
Portfolio of Real Options
Scenario Planning
Group Presentations
Readings 2 & 9
Reading 4 & 7
Readings 5
Reading 6
Session 8
Final Exam
HW #1
HW #2
HW #3
HW #4
HW #5
Group Report &
Presentation
N/A
Reading 3
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DETAILED SCHEDULE
Instructors reserve the right to alter course content or adjust the pace to accommodate class progress. Note
(BB), (ER), & (SN) refer to Blackboard, e-Reserves, and Study.net respectively.
SESSION 1:
SIMULATION OF ALTERNATIVES
In this session we launch our exploration of issues involved when decisions can be adjusted in response to
real events.
Required Readings
1. Introduction to Simulation: Random Variables and Modeling (BB)
2. Monte Carlo Simulation in Excel without the Use of Add-Ins (SN)
Submission Due
None
Simulation Exercises 1, 2, and 3 from the 2nd reading
This session introduces the use of simulation approaches using
spreadsheets to explore the ranges of outcomes brought about by the
realizations of random variables. In this introductory session we will
consider several class models including waiting lines, and inventory
management. We will also build a more complex model in class looking at
a real-world problem in financial services.
Discussion questions
1.
Create a model of an M|M|1 queueing situation. Discuss how
long the system takes to reach steady state and what this implies
for managers of service delivery systems.
2.
Consider the Newsvendor problem given 4 levels of demand, 0, 1,
2, and 3 units. Find the order quantity that maximizes expected
profit. How does this compare to the order quantity that minimizes
the likelihood of a bad outcome?
3.
Consider the check-sequencing problem described in the
reading. How would you model such a problem. What problems
do you anticipate having in creating such a model? You need not
build a complete model of this problem. We will do this as an inclass exercise.
BU.610.625.XX- Simulation and Strategic Options – Instructor’s Name - Page 11 of 16
SESSION 2:
SIMULATION & DECISION TREES
In this session we continue our discussion on the use of simple tools by combining the logic of decision trees
with the power of simple simulations
Required Readings
1. More Advanced Decision Models & Applications (BB)
2. Decision Trees and Decision Making (SN)
Homework Due
Respond to question 1 shown below.
IEC in Sports (SN)
The case highlights an instance of decision making in the face of
uncertainty. Proper analysis involves a combination of a decision treebased analysis and simulation of a variety of outcomes
Discussion questions
**1.
Describe the uncertainties in this problem
2.
Do the EMV calculations by multiplying probabilities by revenues,
etc. to help address the key managerial concern.
3.
Why would simulation be useful in working out this problem?
4.
In light of the simulation results, what can IEC management do to
mitigate the chance oflosing money if it were to renew the Liga
Zon Sagres broadcasting rights for the upcoming season?
BU.610.625.XX- Simulation and Strategic Options – Instructor’s Name - Page 12 of 16
SESSION 3:
DECISION TREES AND REAL OPTIONS
In this session we continue our exploration of issues involved when decisions can be adjusted in response to
real events.
Required Readings
1. Investment Opportunities as Real Options: Getting Started on the
Numbers (ER)
2. Real Options (SN)
Homework Due
Respond to question 1 shown below.
Introduction of Global Positioning System (SN)
The Introduction of the Differential Global Positioning System – This case
considers managerial options in managing a risky, ongoing project that
includes the option to delay a go/no go decision awaiting better
information. The case introduces the concept of a Real Option by using a
Decision Tree centered analysis of a dynamic situation. This exercise
introduces a powerful concept using a very simple analytical tool that
students were introduced to in prior Managerial Economics coursework.
Discussion questions
**1.
What does Crossair’s “decision tree” look like? That is, try to
determine the sequence of investment decisions that need to be
made, when they are made and what information Crossair will
likely have when they are made.
2.
What do you think of Waser’s analysis in Exhibit 6? Does it
appropriately evaluate the project’s attractiveness? If not, what
specific characteristics of the project does it ignore?
3.
Why would Crossair apply a discount rate of 15% to projects such
as this? What does this discount rate reflect?
4.
How would the value of the project be affected if the competitive
damage may be anywhere from 2.5 and 10 M SFr? How would
the value be affected if there was a possibility of quality problems
with the SNS system, causing additional maintenance costs after
installation?
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SESSION 4:
OPTION-BASED CONTRACTS
In this session we look at using spreadsheet models to explore value and use of managerial flexibility as a
strategy for managing risks.
Required Readings
Submission Due
1. How Much is Flexibility Worth (ER)
Answer to part A of the case assignment
Konys, Inc (SN)
This case explores the use of an options based contract to facilitate a
response to the resolution of risks. The most frequent source of risk is
that we cannot perfectly predict demand. This has major implications for
scheduling, production, and sourcing of supplies. One approach with
potential value in such settings is contracts that create the right but not
the obligation of exercise contingent on the realization of demand
information.
Discussion questions
1. Respond to the questions listed under Parts, A, B, and C of the case.
2. Be prepared to discuss approaches to part D. We will develop the
needed model as an in-class exercise.
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SESSION 5:
OPTIONS BUNDLES AND STRATEGIC RISKS
This session deals with categories of risk that most managers ignore when making large deals. Proper
analysis involves multiple methodologies and proper management involves extending beyond the obvious
choices.
Required Readings
1. Strategy as Portfolio of Real Options (ER)
Submission Due
Response to question 2 shown below
SCOR-eStore.com (SN)
A potential investor in a new on-line sheet-music business is ready to
deny funding based on simple expected monetary values. Further
reflection identifies potential downstream options that have been
previously overlooked. Understanding the opportunity fully, requires
exploration of each of these options as a portfolio of strategies rather than
a simple go-no go decision.
Discussion questions
1.
What value does each of the four ideas offered by Lance
Bernard’s friends have, over and above the value of the original
opportunity?
2.
Are there other contingent opportunities that would add value to
this business?
3.
Should Bernard invest in this business?
4.
Perhaps not all the uncertainty is considered in the base model of
Exhibit 2. Think about what the addition of more uncertainty
would do to the values found in question 1.
5.
Does Bernard have reasonable cutoff levels to trigger action on
each of the ideas in question 1?
BU.610.625.XX- Simulation and Strategic Options – Instructor’s Name - Page 15 of 16
SESSION 6:
REAL OPTIONS & SCENARIO PLANNING
In this session we introduce several issues involved in the management of Supply Chains. Elements of
systems engineering and economics will be used to lay a foundation to understand the dominant behavior of
these serial systems in dynamic environments.
Required Readings
None
Submission Due
Simulate the variety of outcomes discussed in the case to show expected
values linked to the options presented there.
Applichem (SN)
This case provides us with detailed data on costs, material, and labor
resources, capacity output rates, and international exchange and inflation
rates to compare the performance of 6 plants which manufacture
Release-Ease (a chemical additive to molding compounds) in 6 different
countries. It introduces us to the problems and opportunities entailed in
managing a multi-plant network.
It raises the opportunities for
coordinating among plants as well as for rationalizing capacity. It helps
us to understand the role of operational flexibility in managing in the
presence of exchange rate uncertainty.
Discussion questions
1.
How would you explain the large differences in the performance of
the plants making Release-ease??
2.
As Joe Spadaro, what would you do given the current over capacity
situation? In doing so approach the problem in two ways: first
assume that exchange rates stay as they are when the case is
written. Second, include fluctuating exchange rates.
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SESSION 7
STUDENT PRESENTATIONS
Session 7: Student Presentations
In this sessions student groups will present a complete analysis of a business case that focuses on decision
making in an environment that includes high levels of risk in a way that leverages the material covered
throughout the course. Each team will select one of the three cases listed below as the focus of their
analysis.
Eli Lilly – this case considers the use of flexible production capacity in the face of technical uncertainty. The
main uncertainty in place here involves FDA approval for experimental drug based products about the start
their life cycle. The required analysis involves extensive use of spreadsheet modeling and Decision trees.
Genentech – this case deals with capacity management decisions for a large Biotech firm that must respond
to very high levels of uncertainty when capacity decisions must be made for a longer term and associated
capital expenditures are quite large. The required analysis uses spreadsheet modeling and simulation of
outcomes.
Nucleon - This case looks at a very small biotechnology company whose first product almost ready to be
tested in human beings. The company has been entirely focused on R&D up to this point but must now think
strategically about production capabilities, licensing alternatives, and the complexities of contract design
under great market and technical uncertainty. The case involves application of the ideas behind Options
Pricing and applying that to Real operational problems.
SESSION 8
FINAL EXAM
THE EXAM WILL COVER CLASS DISCUSSIONS, HOMEWORK ASSIGNMENTS, AND MAY INVOLVE A CASE
STUDY TO BE HANDED OUT AT THE END OF SESSION 7.
Copyright Statement
Unless explicitly allowed by the instructor, course materials, class discussions, and examinations are created
for and expected to be used by class participants only. The recording and rebroadcasting of such material,
by any means, is forbidden. Violations are subject to sanctions under the Honor Code.