Linking the Firm to Its Environment:
| A System Dynamics Approach’
L. Martin Cloutier
Steven T. Sonka
Randall E. Westgren
| Food and Agribusiness Management Program
Department of Agricultural & Consumer Economics
University of Illinois at Urbana-Champaign
1301 W. Gregory Drive, 1301 Mumford Hall
Urbana, IL 61801
__ Internet: mcloutie@uiuc.edu
1- Prepared for System Dynamics ‘96, Cambridge, MA, July 22-26
qe
ral
THREE SECTIONS WITHIN
THE PRESENTATION:
41. Environment & Dynamic Strategy
2. Organizational Learning
3. System Dynamics Case
OBJECTIVE
Explore the potential of
~+: System Dynamics as a tool
enhance strategic learning
at a time of rapid structural
change
(Section 1.1)
CASE
System dynamics
applications are developed
for the US pork industry
DYNAMIC THEORY OF STRATEGY
Strategy is the act of aligning a
company and its environment.
The environment is subject to change,
as are the firm's own capabilities.
The task of strategy is to maintain
a dynamic, not a static balance.
(Porter, 1994:426)
(Section 1.2)
(Section 1.3)
ENVIRONMENT & STRATEGY
Theoretical and empirical research
studying the firm in interaction with
its environment suffers from both:
* Overabstraction
* Conceptual ambiquity
= Research is less useful in helping
the firm learn effective strategy
(Castrogiovanni, 1991)
STRATEGY &
ORGANIZATIONAL LEARNING
Strategy making must take the form
of a process of learning over time,
in which at the limit, formulation
(Section 1.4)
(Section 1.5)
a4
THE CASE ENVIRONMENT
Js rapidly changing with...
Value-added on the farm
. *. Genetics management
* AlFin-all-out technology
Growth in demand for
specific market segments
ORGANIZATIONAL LEARNING
Requires interaction between
Individual & organizational structures
gue: (Simon, 1991)
Learning is defined as increasing the
tange of possible behaviors
(Hubert, 1991)
(Section 1.6)
(Section 2.1)
LEARNING MECHANISMS
MEASURING ECONOMIC VIABILITY
+ Consequence of learning is the increase
in the range of potential behaviors
* Transactions carry with them a measure
of information value (Glazer, 1993)
+ Achanging environment, from which firms
learn, offers future value based on a wider
range of potential behaviors
IN THE CASE APPLICATION
Congenital
. What are the effects of organizational
Experiential form on future economic viability ?
Vicarious
= Grafting + Economic viability is defined as
Search cost reduction over time of production
= and marketing activities
‘(Section 2.2) (Section 3.1)
ROLE OF TRANSACTIONS SYSTEM DYNAMICS
+ Requires explicit definition of mental maps
- Internal processes
- Environmental linkages
+ Incorporates Dynamics & Complexity
= feedback loops, time lags, and non-linearities
+ Contributes to learning by modeling
processes & discovering hidden
assumptions, that augment the
range of possible behaviors
(Section 3.2)
{Section 3.3)
EXPLICITLY MODELS
The structure of assumptions, strategies,
norms, in a system using feedback-loops,
CASE SPECIFICS
Modeling Market Structure to link firms to
the environment
+ $1 Independent pork producers
* $2 Coordinated pork production structures
2. Identify strategy responses that
reduce costs
(Section 3.8)
ol
Hy i : = backward coordination
time se en lta h - forward coordination
among transactions within eac! «networked coordination
market form using STELLA II “or combination
* $3 Vertically integrated pork production
(Section 3.4) (Section 3.5)
PROPOSITIONS EMPIRICAL ASPECTS
4. With environmental change strategic learning Four transactions of importance are
is slower in S1, than in 2 or S3 specified to study the three
organizational forms
2. With environmental change, strategic learning
is slower in S3 than in S2 because of 1. Genetics
rigidities in S3 2. All-in-altout.
3. Growth in segment markets
‘3. With environmental stability, strategic learning is 4. assimilation of innovation
‘slower in S3 because of complexity in S2
(Gection 3.6) ‘Section 3.7)
MODELING VIABILITY SUMMARY
AS OUTCOMES Paper contributes to the dynamic problem of
strategic alignment between the firm and
1. Identify conditions that lead Be environment:
to strategic learning
Organizational learning contributes to the changing
capabilities of organizations and induces economic
viability in the environment
The principles of system dynamics are applied to
alternative organizational structures in the study
of the US pork industry
