System dynamics for business strategy: a phased approach

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  • System dynamics for business strategy:a phased approachJames M. Lyneisa

    Abstract

    Detailed, calibrated system dynamics models oer an eective tool for supporting businessstrategy. They correspond to the business lines and planning approaches of theorganization, serve as an important check on the adequacy of the model as a representationof the system, provide accurate assessments of the costbenefit tradeos of alternativestrategies, and allow results to be more easily sold to others. However, detailed models alsohave disadvantages: they are complex, can be more dicult to understand, and run the riskof becoming black boxes. This paper discusses a four-phased approach to consultingthat, building from other system dynamics modeling styles (systems thinking and small,insight-based models), oers an eective means of developing detailed models whilesimultaneously educating the client. The approach is illustrated with case examples fromthe credit card and aircraft industries. Copyright *c 1999 John Wiley & Sons, Ltd.

    Syst. Dyn. Rev. 15, 3770, (1999)

    Over the past 20 years, covering more than 50 consulting engagements as theprincipal modeler, I have worked with my colleagues at Pugh-RobertsAssociates to develop a unique modeling style and approach to businessstrategy consulting. This approach is premised on what we see as the primarypurpose of our use of system dynamics modelsto aid managers inestablishing strategy and tactics. We provide tools, analysis of strategic issues,and business advice. The education of managers in the ideas and concepts ofsystem dynamics is a secondary purpose in some, but not all, engagements.Most corporate strategic analyses are episodic, often triggered by a crisis or

    the need to solve an urgent problem. The situation is analyzed, optionsevaluated, and decisions made. The result of these strategic analyses is usuallya decision to take a certain set of actions, for example, to build a new plant, toenter new markets (and/or abandon others), to introduce a new product (and/ordrop others), to engage in a price war, and so on. System dynamics models canplay an important role in understanding the problem and its causes, deter-mining the consequences of alternative courses of action, and testing alterna-tives under dierent scenarios.1

    Our approach to business strategy consulting has evolved over time. In theearly years, the approach was heavy on product and light on process. Likemany in system dynamics, and in management science in general, we took theview that as experts we would solve the clients problem for him, and presenthim with the solution. We gradually recognized that elegant solutions did not

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    System Dynamics Review Vol. 15, No. 1, (Spring 1999): 3770 Received April 1998Copyright *c 1999 John Wiley & Sons, Ltd. CCC 0883-7066/99/01003734 $17.50 Accepted June 1998

    aPugh-Roberts Associates, 41 William Linsky Way, Cambridge MA 02142, USA

    James M. Lyneis is aSenior Vice Presidentwith Pugh-RobertsAssociates, a Divisionof PA ConsultingGroup. He holds aPh.D. in BusinessAdministration fromthe University ofMichigan and was anAssistant Professor atMITs Sloan School ofManagement. He hasapplied systemdynamics to problemsof business strategy inthe telecommuni-cations, electricutility, aerospace, andfinancial servicesindustries.

  • necessarily lead to implementation, and our style of consulting changed toinclude increased client involvement (Roberts 1977;Weil 1980). At the same time,our product was evolving tomeet the needs of clients (and to take advantage ofthe increased power of computers). We evolved from the smaller, policy-basedmodels which characterized the M.I.T. approach to more detailed models, alongwith the use of numerical time series data to calibrate thesemodels (Lyneis 1981).During the 1980s, academic research began to focus more on process and

    the use of models in support of business strategy. In his papers StrategySupport Models (1984) and The Feedback View of Business Policy andStrategy (1985), Morecroft describes his view of the use of system dynamics inthe support of business strategy. He proposes that strategy models shouldsupport the development of business strategy in the same way that decisionsupport systems support day-to-day decisionsby providing appropriateinformation and analyses. He argues that the role of the model is to extendmanagement argument and debate rather than provide answers. The model isused to enhance management intuition (mental models) through an iterativeexchange between those mental models and the computer model structure andresults, with appropriate revisions to each until a consensus about strategyemerges. And he describes a two-phase process involving first, BusinessStructure Analysis, and second, Simulation Modeling, to achieve this. Addi-tional research started in the late 1980s focused on more eective ways toinvolve the client in the actual building of the model (see for exampleRichardson and Andersen 1995; Vennix 1996).More recently, process seems to have gained the upper hand over

    product. Following the publication of Peter Senges The Fifth Discipline(1990), the use of systems thinking, archetypes, and organizational learningby consultants, with little if any computer modeling, seems to have growndramatically.2 In some of these uses, the product seems to be an afterthought.This paper describes our approach to business strategy consulting. The

    approach strikes a balance between product and process that producessuccessful change in business strategy. The approach is an extended andrefined version of that described by Morecroft (1985) (and of that of Richmond1997). It contains four phases:

    1. Business Structure Analysis.3

    2. Development of a Small, Insight-Based Model.3. Development of a Detailed, Calibrated Model.4. On-going Strategy Management.

    The approach builds on the strengths of three styles of system dynamicspractice that have evolved over the years: (1) systems thinking and the

    38 System Dynamics Review Volume 15 Number 1 Spring 1999

  • archetypes; (2) small, insight- or policy-based models; and (3) large, decision-oriented models.4 The successful application of this approach is illustratedwith two case studies.

    A phased approach to successful implementation

    I define a successful consulting engagement as one in which the client imple-ments a solution to the problem, and that solution works. To achieve suchsuccess, the consultant must achieve the right mix of product and process.Four outcomes are needed:

    1. An eective understanding, structuring, and analysis of the clients problem.2. Education of the client in the dynamics of their business, so as to obtain

    their active and knowledgeable participation in the structuring of theproblem and in the analysis and interpretation of results (and avoid theblack box syndrome).

    3. Selling of others within the company, but not involved in the project, on therecommended course of action.

    4. For long-term success, providing the means for ongoing learning andplanning with the model (strategy management).

    The four-phased approach discussed below is designed to accomplish theseobjectives.In the ideal situation, we work with a small client team that owns the

    problem and is responsible for making the required decisions. However, this isnot always possible and often we must instead work either with a team ofadvisors to the key decision maker(s) or with a support unit such as strategicplanning (drawing in functional expertise as needed). In these less optimalsituations, while we try to engage the real decision-maker(s) along the way withregular briefings, the need to sell the results of the analysis becomes muchmore important (see Graham andWalker 1998 for a more detailed discussion ofthe consulting process in this type of situation).At the beginning of the project, a project plan and timeline describe the

    phases of work, the objectives of each phase, and planned meeting dates anddeliverables. Expectations for client participation in the project are described.We have found that setting expectations regarding participation and deliver-ables at the beginning makes for a smoother project, and reassures clientsanxious for bottom line results. They know when they will be getting insightand when they will be getting accurate assessments of expected performanceimprovement.

    Lyneis: System Dynamics for Business Strategy 39

  • Phase 1. Business structure analysis

    The purpose of the first phase of analysis is to clearly define the problem ofinterest, the likely causes of that problem, and any constraints that may arise inimplementing a solution. It identifies the performance objectives of theorganization and possible solutionsall to be rigorously tested in later phases.During this phase, the consultant team reviews company documents, the

    business press, and available company data. It interviews company managers,and possibly customers and competitors. It identifies the key drivers ofbusiness performance: what compels customers to buy this product, whatcompels them to buy from one supplier rather than another, what drives theinternal acquisition and allocation of resources. It identifies where majorexternalities aect the business (e.g., the economy, regulations, etc.).Phase 1 builds heavily on the tools and techniques of what is now commonly

    called systems thinking:

    . behavior-over-time graphs (reference modes);

    . causal-loop and mixed causal, stock-flow diagramming;

    . system archetypes;

    . mental simulation.

    Graphs of problematic behavior over time, often with objectives for futureperformance highlighted, focus the model design discussion. Figure 1 illustratesthe behaviors of interest in the two case studies presented below. In the firstcase, the client, a major associ