Strategic Modelling and Business Dynamics, + Website (2^nd Ed.) A feedback systems approach

Insightful modelling of dynamic systems for better business strategy

The business environment is constantly changing and organisations need the ability to rehearse alternative futures.  By mimicking the interlocking operations of firms and industries, modelling serves as a ?dry run? for testing ideas, anticipating consequences, avoiding strategic pitfalls and improving future performance.

Strategic Modelling and Business Dynamics is an essential guide to credible models; helping you to understand modelling as a creative process for distilling and communicating those factors that drive business success and sustainability. Written by an internationally regarded authority, the book covers all stages of model building, from conceptual to analytical. The book demonstrates a range of in-depth practical examples that vividly illustrate important or puzzling dynamics in firm operations, strategy, public policy, and everyday life. 

This updated new edition also offers a rich Learners' website with models, articles and videos, as well as a separate Instructors' website resource, with lecture slides and other course materials (see Related Websites/Extra section below). Together the book and websites deliver a powerful package of blended learning materials that:

• Introduce the system dynamics approach of modelling strategic problems in business and society
• Include industry examples and public sector applications with interactive simulators and contemporary visual modelling software
• Provide the latest state-of-the-art thinking, concepts and techniques for systems modelling

The comprehensive Learners' website features models, microworlds, journal articles and videos. Easy-to-use simulators enable readers to experience dynamic complexity in business and society.  Like would-be CEOs, readers can re-design operations and then re-simulate in the quest for well-coordinated strategy and better performance. The simulators include a baffling hotel shower, a start-up low-cost airline, an international radio broadcaster, a diversifying tyre maker, commercial fisheries and the global oil industry.

"Much more than an introduction, John Morecroft?s StrategicModellingandBusinessDynamics uses interactive ?mini-simulators and microworlds? to create an engaging and effective learning environment in which readers, whatever their background, can develop their intuition about complex dynamic systems."

JohnSterman,JayW.ForresterProfessorofManagement,MITSloanSchoolofManagement

"Illustrated by examples from everyday life, business and policy, John Morecroft expertly demonstrates how systems thinking aided by system dynamics can improve our understanding of the world around us." 

Stewart Robinson, Associate Dean Research, President of the Operational Research Society, Professor of Management Science, School of Business and Economics, Loughborough University

About the Author xvii

Foreword by Peter Checkland xix

Preface to the Second Edition xxi

Preface from the First Edition xxv

How to Use This Book xxxv

Chapter 1 The Appeal and Power of Strategic Modelling 1

Introduction 1

A New Approach to Modelling 5

The Puzzling Dynamics of International Fisheries 7

Model of a Natural Fishery 10

Simulated Dynamics of a Natural Fishery 12

Operating a Simple Harvested Fishery 13

Harvesting in Bonavista, Newfoundland – A Thought Experiment 15

A Start on Analysing Dynamics and Performance Through Time 17

Saving Bonavista – Using Simulation to Devise a Sustainable Fishery 20

Dynamic Complexity and Performance Through Time 20

Cunning Fish – A Scenario with Reduced Dynamic Complexity 23

Preview of the Book and Topics Covered 25

Appendix – Archive Materials from World Dynamics 27

References 28

Chapter 2 Introduction to Feedback Systems Thinking 31

Ways of Interpreting Situations in Business and Society 31

Event-oriented Thinking 32

Feedback Systems Thinking – An Illustration 34

A Shift of Mind 37

The Invisibility of Feedback 38

A Start on Causal Loop Diagrams 39

Structure and Behaviour Through Time – Feedback Loops and the Dynamics of a Slow-to-Respond Shower 41

Processes in a Shower ‘System’ 44

Simulation of a Shower and the Dynamics of Balancing Loops 45

From Events to Dynamics and Feedback – Drug-related Crime 47

A Feedback View 48

Scope and Boundary of Factors in Drug-related Crime 50

An Aside – More Practice with Link Polarity and Loop Types 51

Purpose of Causal Loop Diagrams – A Summary 52

Feedback Structure and Dynamics of a Technology-based Growth Business 52

Causal Loop Diagrams – Basic Tips 55

Picking and Naming Variables 55

Meaning of Arrows and Link Polarity 56

Drawing, Identifying and Naming Feedback Loops 57

Causal Loop Diagram of Psychological Pressures and Unintended Haste in a Troubled Internet Start-Up 58

References 61

Chapter 3 Modelling Dynamic Systems 63

Asset Stock Accumulation 63

Accumulating a ‘Stock’ of Faculty at Greenfield University 65

Asset Stocks in a Real Organisation – BBC World Service 69

The Coordinating Network 70

Modelling Symbols in Use: A Closer Look at Drug-related Crime 72

Equation Formulations 75

Drug-related Crime 76

Funds Required to Satisfy Addiction 77

Street Price and Price Change 78

Allocation of Police 79

Experiments with the Model of Drug-related Crime 80

A Tour of the Model 80

Escalating Crime – The Base Case 82

Drilling Down to the Equations 84

Anomalous Behaviour Over Time and Model Boundary 86

Benefits of Model Building and Simulation 89

References 90

Chapter 4 World of Showers 91

Getting Started 91

Taking a Shower in World of Showers A 92

Taking a Shower in World of Showers B 95

Redesigning Your World of Showers 96

Reflections on the World of Showers 98

Metaphorical Shower Worlds in GlaxoSmithKline, IBM and Harley-Davidson 100

Inside World of Showers 102

A Tour of Formulations in the Comfort-seeking Loop of the Hidden Shower 102

Interdependence of Showers – Coupling Formulations 105

Simulations of World of Showers B 105

References 107

Chapter 5 Cyclical Dynamics and the Process of Model Building 109

An Overview of the Modelling Process 109

Dynamic Hypothesis and Fundamental Modes of Dynamic Behaviour 111

Team Model Building 112

Employment and Production Instability – Puzzling Performance Over Time 117

Dialogue About Production Control 120

Thought Experiment: A Surprise Demand Increase in an Ideal Factory 122

Equation Formulations and Computations in Production Control 124

Forecasting Shipments – Standard Formulations for Information Smoothing 126

Inventory Control – Standard Formulations for Asset Stock Adjustment 127

Desired Production 128

The Computations Behind Simulation 129

Modelling Workforce Management and Factory Production Dynamics 133

Dialogue About Workforce Management 133

Operating Constraint Linking Workforce to Production 135

Simulation of the Complete Model: A Surprise Demand Increase in a Factory Where Production is Constrained by the Size of the Workforce 136

Pause for Reflection 140

Equation Formulations in Workforce Management 140

Departure Rate – Standard Formulation for Stock Depletion 141

Hiring – Standard Formulations for Asset Stock Replacement and Adjustment 142

Workforce Planning 144

Chronic Cyclicality in Employment and Production and How to Cure It 145

The Curious Effect of Random Variations in Demand 145

Industry Cyclicality and Business Cycles 147

Policy Formulation and What-ifs to Improve Factory Performance 148

Modelling for Learning and Soft Systems 152

A Second Pause for Reflection: System Dynamics and Soft Systems 153

A Link to Soft Systems Methodology 156

Alternative Views of a Radio Broadcaster 159

Appendix 1: Model Communication and Policy Structure Diagrams 162

Appendix 2: The Dynamics of Information Smoothing 164

References 166

Chapter 6 The Dynamics of Growth from Diffusion 169

Stocks and Flows in New Product Adoption – A Conceptual Diffusion Model 171

The Bass Model – An Elegant Special Case of a Diffusion Model 172

The Dynamics of Product Adoption by Word-of-mouth 175

The Need to Kick-start Adoption 177

The Complete Bass Diffusion Model With Advertising 177

The Dynamics of Product Adoption by Word-of-mouth and Advertising 179

A Variation on the Diffusion Model: The Rise of Low-cost Air Travel in Europe 182

easyJet – A Bright Idea, but Will it Work? 182

Visualising the Business: Winning Customers in a New Segment 183

Visualising Retaliation and Rivalry 186

Feedback Loops in the easyJet Model 188

Strategy and Simulation of Growth Scenarios 189

Using the Fliers Simulator to Create Your Own Scenarios 193

Simulation, Predictions and Scenarios 194

Conclusion 194

Appendix: More About the Fliers Model 195

Back to the Future – From easyJet to People Express and Beyond 197

References 199

Chapter 7 Managing Business Growth 201

A Conceptual Model of Market Growth and Capital Investment 203

Background to the Case 203

Adopting a Feedback View 204

Formulation Guidelines for Portraying Feedback Structure 206

Review of Operating Policies and Information Flows in the Market Growth Model 209

Customer Ordering 209

Sales Force Expansion 210

Budgeting 211

Capital Investment 212

Goal Formation 214

An Information Feedback View of Management and Policy 215

Information Available to Decision Makers and Bounded Rationality 217

Nature of Decision Making and the Decision Process 220

Policy Structure and Formulations for Sales Growth 222

Sales Force Hiring – Standard Stock Adjustment Formulation 223

Sales Force Budgeting – Revenue Allocation and Information Smoothing 223

Order Fulfilment – Standard Stock Depletion Formulation 225

Customer Ordering 226

Policy Structure and Formulations for Limits to Sales Growth 226

Customer Response to Delivery Delay – Non-linear Graphical Converter 228

Customers’ Perception of Delivery Delay – Information Smoothing 229

Order Fulfilment and Capacity Utilisation 229

Policy Structure and Formulations for Capital Investment 231

Assessment of Delivery Delay 232

Goal Formation – Weighted Average of Adaptive and Static Goals 232

Capacity Expansion – Fractional Asset Stock Adjustment 233

Production Capacity – Two-Stage Stock Accumulation 236

Simulation Experiments 237

Simulation of Sales Growth Loop 238

Strength of Reinforcing Loop 241

Simulation of Sales Growth and Customer Response Loops 242

Simulation of the Complete Model with all Three Loops Active – The Base Case 246

Redesign of the Investment Policy 250

Top Management Optimism in Capital Investment 251

High and Unyielding Standards – A Fixed Operating Goal for Delivery Delay 253

Policy Design, Growth and Dynamic Complexity 256

Conclusion 257

Overview of Policy Structure 257

Growth and Underinvestment at People Express? 261

More Examples of Growth Strategies that Failed or Faltered – and One that Succeeded 262

Growth Strategy for New Products and Services in a Competitive Industry 264

Appendix – Gain of a Reinforcing Loop 266

References 268

Chapter 8 Industry Dynamics – Oil Price and the Global Oil Producers 271

Problem Articulation – Puzzling Dynamics of Oil Price 272

Towards a Dynamic Hypothesis 274

Model Development Process 275

A Closer Look at the Stakeholders and Their Investment Decision Making 278

Investment by the Independent Producers 279

Development Costs 280

Policy Structure and Formulations for Upstream Investment – Fractional Asset Stock Adjustment 282

Oil Price and Demand 284

The Swing Producer 286

Quota Setting 288

The Opportunists 290

The Rise of Russian Oil – Incorporating Unforeseen Political Change 291

The Shale Gale – Incorporating Unforeseen Technological Change 292

Connecting the Pieces – A Feedback Systems View 294

Two Invisible Hands and More 295

The Visible Hand of OPEC 297

Webs of Intrigue – Inside OPEC’s Opulent Bargaining Rooms 297

A Simple Thought Experiment: Green Mindset and Global Recession 300

Using the Model to Generate Scenarios 301

Archive Scenario 1: 10-Year Supply Squeeze Followed by SupplyGlut 301

Archive Scenario 2: Quota Busting in a Green World 306

Scenario from the Mid-1990s to 2020: Asian Boom with Quota Busting, Cautious Upstream Investment and Russian Oil 309

A High Price Scenario from the Mid-1990s to 2020: How to PushOil Price Over $60 per Barrel 314

A 2010–2034 Scenario: Subdued Global Oil Economy with Shale Gale and OPEC Supply Boost 317

Modified 2010–2034 Scenario: Subdued Global Oil Economy with Shale Gale and Punitive Saudi Supply Control 322

2010–2034 Thought Experiment: Subdued Global Oil Economy with a Shale Gale and Mooted US Supply Control – The ‘Saudi America’ Hypothesis 324

Devising New Scenarios 327

Effect of Global Economy and Environment on Demand 327

Cartel Quota Bias 327

Opportunists’ Capacity Bias 328

Oil Price Bias 328

Capex Optimism 328

Time to Build Trust in Russia (in Oil World 1995 and 2010) 329

Endnote: A Brief History of the Oil Producers’ Project 329

References 331

Chapter 9 Public Sector Applications of Strategic Modelling 333

Urban Dynamics – Growth and Stagnation in Cities 334

Urban Model Conceptualisation 335

Medical Workforce Dynamics and Patient Care 340

Background 341

Medical Workforce Planning Model 342

Quality of Patient Care 346

Base Run – Changing Composition of the Medical Workforce 348

Base Run – Quality of Patient Care 350

Intangible Effects of the European Working Time Directive 351

Modelling Junior Doctor Morale 351

Overview of the Complete Model 353

The Formulation of Work–Life Balance and Flexibility 354

Simulations of the Complete Model 355

Conclusions from the Medical Workforce Study 359

Fishery Dynamics and Regulatory Policy 361

Fisheries Management 361

A Simple Harvested Fishery – Balancing Catch and Fish Regeneration 363

A Harvested Fishery with Endogenous Investment – Coping with a Tipping Point 366

Simulated Dynamics of a Harvested Fishery with Endogenous Investment 369

Control and Regulation – Policy Design for Sustainable Fisheries 371

Formulation of Deployment Policy 373

Stock and Flow Equations for Ships at Sea, Ships in Harbour and Scrap Rate 375

Simulated Dynamics of a Regulated Fishery – The Base Case 375

Policy Design – A Higher Benchmark for Fish Density 379

Dynamics of a Weakly Regulated Fishery 381

Policy Design – Lower Exit Barriers Through Quicker Scrapping of Idle Ships 383

Sustainability, Regulation and Self-Restraint 387

Conclusion 387

Appendix – Alternative Simulation Approaches 388

From Urban Dynamics to SimCity 389

Discrete-event Simulation and System Dynamics 390

Conclusions on Alternative Approaches to Simulation Modelling 396

References 398

Chapter 10 Model Validity, Mental Models and Learning 403

Mental Models, Transitional Objects and Formal Models 404

Models of Business and Social Systems 406

Tests for Building Confidence in Models 407

Model Confidence Building Tests in Action: A Case Study in Fast-moving Consumer Goods 410

Soap Market Overview 410

The Modelling Project 411

Model Structure Tests and the Soap Industry Model 412

Boundary Adequacy and Structure Verification Tests Applied to a Simple Soap Model 413

A Refined View of the Market 416

Boundary Adequacy and Sector Map of the Complete Soap Industry Model 417

Managerial Decision-making Processes in the Old English Bar Soap Company 419

Managerial Decision-making Processes in Global Personal Care 420

Managerial Decision-making Processes in Supermarkets 421

Equation Formulation Tests and the Soap Industry Model 422

Substitution of Bar Soap by Shower Gel 423

Brand Switching Between Competing Bar Soap Products 424

Model Behaviour Tests and Fit to Data 428

Tests of Fit on Simulations of the Soap Industry Model – The Base Case 432

Tests of Learning from Simulation 436

Comparing Simulations with Expectations and Interpreting Surprise Behaviour 436

Partial Model Simulations to Examine Pet Theories and Misconceptions 437

Family Member Tests 438

Policy Implication Tests 439

Understanding Competitive Dynamics in Fast-moving Consumer Goods 439

Summary of Confidence Building Tests 441

Conclusion – Model Fidelity and Usefulness 444

Endnote: The Loops of Feedback 447

References 449

About the Website Resources 451

Index 452

John Morecroft is Senior Fellow in Management Science and Operations at London Business School where he has taught system dynamics, problem structuring and strategy in MBA, PhD and Executive Education programmes. He served as Associate Dean of the School's Executive MBA and co-designed EMBA-Global, a dual degree programme with New York's Columbia Business School.