Applying System-Wide Discovery Analysis to the Market
Growth model
presented by
Annabel Membrillo, James L. Ritchie-Dunham, Conrado Garcia Madrid
The Strategic Decision Simulation Group
http://www.sdsg.com/
ABSTRACT: In the sixties, an insightful model about market growth was built by Jay W.
Forrester. A causal diagram based on this model was analyzed with the System-Wide
Discovery process. The objective was to gain deeper understanding into the market
growth structure to answer the following questions: (1) What are the variables with the
most leverage affecting and limiting market growth? (2) How should management design
the company structure to grow sales sustainably in an unlimited market? The informal
and formal goals and subgoals were analyzed along with how performance indicators
incentivize the behavior of each player. The key intervention points with the highest
leverage were identified. We studied (1) where and how the areas affect each other, (2)
how they use shared resources, principally sales and production, (3) the role
management plays and (4) the impact of the market within the system. The four sections
of the paper are: an introduction to System-Wide Discovery, an overview of the model,
the analysis process and the findings.
INTRODUCTION TO SYSTEM-WIDE DISCOVERY’
System Wide Discovery, the first phase of the Systemic Leverage process, offers a rich
approach for managers to deepen their understanding of the nature and impact of the key
cause and effect relationships driving performance in their organization, from three
distinct perspectives in the systems: global, local and integrative. The global perspective
represents the “owners” of the system - the ones held responsible for the overall global
behavior of the system and for providing corporate resources. The local perspective is
represented by the “participants” in the system - the ones that are responsible at the
tactical or local level for using local and corporate resources to get things done. The
integrative perspective is represented by the “management” of the system - the ones
responsible for designing structures that integrate the local level activities to achieve the
global goals.
In dynamically complex environments, Systemic Leverage helps managers deepen their
understanding of the nature and impact of the key cause-effect relationships driving
performance in their organization. High leverage comes from designing into the company
structure the ability to focus, consistently, the right resources efficiently on those efforts
that will allow the organization to achieve its goal sustainably.
' For more explanation, see the book Management for Clarity written by James L. Ritchie-Dunham and
Hal Rabbino, being released in 2000, http://www.sdsg.com/.
The
impr
iA
Systemic Leverage framework has three main areas of concern that we are trying to
‘ove:
our understanding of the system
2. our ability to communicate effectively this understanding in order to effect change
3. our ability to move the system in the desired direction.
Our
objectives in “System Wide Discovery,” the first phase of the Systemic Leverage
framework, are four-fold:
a
to capture knowledge of the system’s resources and their interrelationships — how
the system works
to integrate this knowledge into a single model
to analyze and understand how to leverage the resources in the system
to initiate dialog into system design
THE MODEL
The
Systemic Leverage analysis was applied to the following model. The model was built
based on the market growth model of Forrester (1975).
A long delivery delay becomes a co
‘making the product less attractive and harder to sel,
Product atrgetiveness “The present condition of
delay, as implied
MARKET ae
Orders booked
Saleg budget Salesmen salary PERCEPTION by present backlog ad
Delivery delay recognized by market present delivery rat
“DD minimum is a oxinarily does
the rato of backlog . : :
7 Sales percentage 5 Onlers backlog immediately reach the
tothemaximam Budget, attention of decision
production Delivery delay recognized by company makers within the
system” (Forrester, 1968,
p. 118, 119)
‘capacity... which DD minimum
yields the fraction eve
ofthe production Revenues
‘apacity actually MARKETING
utilized” (Forester, EFFORT
1968, pp. 121),
PRODUCTION
: CAPACITY
Prod cap fraction uilized UTILIZATION
Delivery delay traditional
“The delivery delay of a
product is given
Approximately by the ratio
‘of backlog to delivery rate
In other words, the time to
Fill an order is indicated by
Delivery delay indicated
Billing and collection
Delivery ra
CAPITAL
age investuenr / Delivery dy operating
Production apse Pressure to expand capac
DD management goal
“When the backlog is low, the delivery rate
ich that the delivery
filling and manufactur
to work its way through
the present order backlog
(Forrester, 1968, pp. 118)
“One of the most persuasive indicators of the adequacy of
‘existing capacity is the size ofthe order backlog and the
length of time the customer must wait for delivery. As the
delivery delay rises above the company’s goal, the pressure
increases for expanding capacity” (Forrester, 1968, pp. 125).
levels of as it approaches the production
capacity” (Forester, 1968, pp. 121).
Source: Forrester, .W. 1975. “Market Growth as Influenced by Capital Investment.” Collected Papers of Jay W. Forrester, Portland, OR: Product
Figure 1. Causal Loop Diagram for the Market Growth Model.
SYSTEM-WIDE DISCOVERY PROCESS
When starting a Systemic Leverage analysis, we address “the question” that challenges a
group of the client’s experts. They want to change the behavior of their system. To
achieve this change, they must first understand how the system works, and why it behaves
as it does. In this case, the question was defined based on Forrester’s article: how should
management design the company structure to grow sales sustainably in an unlimited
market?
In order to answer that question, the first step is to understand the global goal. The
following maps depict the stated system goals and subgoals network of the system,
determining the degree of structural leverage (alignment) that exists. The fundamental
goal of Maximize revenues is achieved by the subgoals Maximize sales growth through
Maximize orders booked and production (figure 2).
Maximize
salesman
Maximize
orders Adequate
booked salesman
Maximize Maximize hiring
<
revenues sales Ze
Maximize
growth _ canna
Maximize capacity
production| utilization
Production
capacity
ordering
Figure 2. Stated Goals and Subgoals for the Market Growth Model.
System-Wide Discovery includes a suite of tools and methodologies to mine information
from the model. In this case, we are only going to show the ones that we think add more
to the current findings of Forrester. Applying SDSG’s tools and methodologies (Ritchie-
Dunham, 1997) the following insights were obtained:
Archetypes”
Daniel Kim showed in The Systems Thinker (1998) that the “Growth and
Underinvestment” archetype best captures the spirit of the market growth model (see
Figure 2). In this archetype, by trying to grow demand quickly, while waiting to add
capacity, the firm’s growth is limited by its capacity.
> The archetypes and SVOM results were presented previously in a forthcoming Systems Thinker article
“A Systemic View of the Organizational Map” written by James L. Ritchie Dunham and Annabel
Membrillo.
This archetype teaches us that instead of pushing on growth (through Orders booked) to
increase revenues, the company should invest in Production capacity to meet customer
delivery requirements, and thus allow growth. In systems thinking terms, the “market
perception” balancing feedback loop limits the ability of the “marketing effort” loop to
grow. Quite simple, yet not intuitive, as evidenced by the number of firms that fall into
this systemic trap.
Orders
booked Sales effectiveness
Salesmen hiring ca
s
Marketing
Revenues Effort
Delivery rate
Orders backlog Product attractiveness
Market -
Perception
Deli
ry delay
Production capacity Pressure to expand capacity
Capital Investment,
DD management goal
Figure 3. Archetype for the Market Growth Model.
Now that we have the insight gained from the archetype, what can we do about it in the
organization? What organizational structures and incentives might be creating the
problem today?
Systemic View of the Organization Map (SVOM)
Further analysis of the causal model provides insight into the key factors that affect
performance in the system and provide a basis for reconfiguring departmental
performance indicators. The SVOM analysis, which overlays the causal model with
organizational or departmental boundaries, often highlights points of conflict where one
department has strong influence on resources affecting another department far down (or
up) the business chain. Interfaces between departments, shared resources, become
candidates for sharing or shifting responsibility for this issue or resource between the
departments.
We can identify in Figure 3 how each group within the organization has what seems to be
very rational, local goals. This diagram describes the formal and informal incentives for
each group’s behavior within the system. The double-lines represent permeable
boundaries across which groups share “common resources.”
‘This isa great moment for sales. Let's hire more salesmen!
ize sales effectiveness
scape
‘Maximize orders booed aw ae
feretereeteialea ona wfc
Sule budget MARKET
saxstnais Say Delivery delay ecopnize hy market NT auc value
‘Adequate delivery delay
company has responded quite
they
ders late,
Sales effectiveness “+f
salts percentage Orders Backlog
Budget
Delivery delay ecoghized by company
DD minimum
‘We are using all of
four eapacity and stil
‘we cannot catch up|
‘We need more
Production capacity.
Delivery delay ttonal
Taking into account the Prod cap fraction wilized
Delivery delay inated
Sivery rte
flow is es than expected due
to the constant changes in
delivery dates,
PRODUCTION
Delivery delay operating goal "aterm datvery rate
Minimize
backlog
Production capacity Pressure to expand capacity ‘Maximize capacity
MANAGEMENT. ilzation
‘Maximize revenues =
“Adequate budget distribution DD management goat
“Adequate management goal
Figure 4. SVOM Analysis for the Market Growth Model.
The SVOM analysis shows clearly that the Sales group is paid to maximize the Orders
booked, which makes sense, it’s their job and what they do well. The Production group is
paid to maximize capacity utilization and thus delivery rate, within their capacity
constraints. Again, this makes sense, since they are very good at optimizing their
utilization. However, when we connect the two local perspectives, in the system, we see
that the long delays and resource allocation to the groups based on the department
performance exacerbate the differences among the capacities of the groups, affecting
directly the global performance. Different groups control these strategic resources in the
system. Let’s look more closely at these relationships and how each group perceives
them.
SVOM Relationship Assessment
Relationships between the main actors in a system include multiple facets, from supplier
to customer, from independent to shared resources, and from alliances to conflicts. The
SVOM Relationship Assessment describes the relationships that exists between the
different actors in the system, from each of their perspectives.
Most relationships between departments or subsystems are reciprocal. In some cases, I
am the supplier and you are the client. In other aspects of our relationship, you are the
supplier and I am the client. An initial assessment of these relationships provides insight
from three perspectives:
1. What each group thinks they are trying to achieve (their Objectives and main
Problems)
2. How each group sees their relationships with the other groups in the system
(Supplier and Customer relationships)
3. The differences in perception from one group to another, on the same supplier and
customer relationships.
We have found, in organizations, that blame for problems often accompanies misaligned
perceptions. This exercise makes those relationship perceptions explicit so that they can
be examined, and so that we can analyze the effect those differences have on the behavior
of the overall system. This provides a crucial step in the design of effective systems. In
the market growth model, we can see that great differences exist amongst the perspectives
each has on the relationships they have with the other groups (see Table 1).
Actors Salesmen. Production group Management group Customers
Salesmen O: sell as much as I | S: gives orders S: none S: customer
can. C: late deliveries C: receive sales relationship
M: orders booked SR: orders budget and salesmen | C: orders, sales
P: insufficient salary effectiveness
product to deliver SR: budget SR: orders
and demand decline
Production S: orders fulfillment | O: maintain delivery | S: none No relationship
group C: they sell more delay close to the C: receive production
than we can management goal budget to increase
produce M: DD indicated capacity
Z ers P: undercapacity SR: budget
Management | S: sales budget S: production budget | O: maximize No relationship
group assignment assignment revenues
C: cash flow C: orders to bill and M: revenues
generation collect P: sales decline
SR: budget SR: orders and
budget
Customers S: orders No relationship No relationship O: buy the best
C: product product to fill my
awareness need
SR: orders M: product value
P: delivery delay
increase
O: Objective, M: Measure, P: Problem, S: Supplier, C: Client, SR: Shared Resources
Table 1. SVOM Relationship Assessment for the Market Growth Model.
As a conflict, we discover that the local objective of salesmen, sell as much as I can,
affects the ability of the production group to achieve their local objective with the
available capacity, maintain delivery delay close to the management goal. The
misalignment of this goals bring in problems for both actors, blaming each other for their
problems. The Sales group perceives that, as a supplier, they provide Production with
orders and that, as a client, late deliveries from Production affect their ability to sell more
orders. On the flip side, the Production group perceives that they have to fulfill the
orders, and that, as a client, they receive more orders from Sales than they can deliver on
time. This misalignment ensures that there are probably very weak communication
channels between Sales and Production, even though their relationship directly affects at
least two key resources — “capital invested in capacity” and “customer base.”
Global Goal Analysis
Analyzing the stated goals we defined at the beginning of this section, now we can
determine the degree of structural leverage (alignment) that exists. The actual goals tell a
complete different story than the stated goals (figure 5).
Minimize Maximize Maximize
sales le—| delivery |<] orders
growth delay booked
long range
Minimize
revenues an
Maximize Maximize
. i<—_—_—_———_
sales production
growth
short range}
Figure 5. Actual goals and subgoals for the Market Growth Model.
We see low structural leverage because the subgoals do not enable the system to achieve
the global goal. Maximize orders booked provokes a greater delivery delay, over time.
As a result, the means objective or goal of Maximize orders booked maximize sales in the
short range, but in the long run it is minimizing sales! The misaligned goals, as analyzed
in the actual and stated system goals networks, will not allow us to achieve our goals,
consistently and sustainably.
Influence/Exposure analysis
The variables with the most leverage were Production capacity, Orders booked,
Production capacity fraction utilized, Orders backlog, Delivery rate, Delivery delay
indicated, Pressure to expand capacity and Delivery delay recognized by company.
Almost all the high-leverage variables are the responsibility of one department,
Production. Most of them have long delays. Production capacity is the main limit to
Sales growth, and Orders booked is the main driver pushing or depleting growth. The
question that arises here is how to involve all the parts of the company to control
deliveries, delays and backlog accumulation? The following analysis goes deeply into a
potential answer to this question.
Performance indicators
The following table summarizes the traditional performance indicators for each group
within the model, the proposed performance indicators based on the current analysis, and
core competencies developed as a result of the proposed indicators.
Functional Performance Indicators Proposed
‘Area Traditional Proposed Lagging Proposed Leading Core Competencies
Indicators Indicators
Sales Orders ‘Average orders booked per % Change of orders backlog | On time deliveries
booked salesman % Change of orders backlog Sustainable sales
Average orders booked per per salesman growth
salesman hired Delivery rate
Orders backlog Time to recognized delivery
delay
Production | Delivery rate | Average delivery delay Time to extra capacity Lack of capacity
% Utilized capacity delivery prevention
Orders backlog % Change delivery delay
Production capacity remained
DD minimum
Finance Revenues % Change of revenues % Sales budget Efficient budget
Total sales per collect % Capacity expansion budget | allocation
% of sales collected per Collection delay Collection
period % of orders backlog collected | effectiveness
per period
Customer Product Customer satisfaction order Average time to deliver Customer retention
Service attractiveness | Product attractiveness index Time to recognized delivery
delay
Table 2. Performance Indicators for the Market Growth Model
With the traditional indicators, the Sales group’s incentive is measured by salesmen
performance with orders booked. Therefore, each salesman sells as many orders as they
can to improve performance and remuneration. Production gets in trouble because they
deliver as much as they can with the production capacity, however, the fact that orders
backlog is increasing and delivery rate stated remains the same, affects production
performance.
Since salesmen determine the flow that accumulates orders, they need to be aware of
actual production and backlog changes to avoid over sales and deliveries out of schedule.
Also they need to monitor sales efficiency and how these efficiency changes with each
new salesman improve hiring decisions. Production needs the information to determine
when extra capacity will be needed, taking into account the time it will take to bring on
the capacity. Even management needs to follow sales and backlog to improve investment
decisions. To give excellent service requires customer information, as well as careful
monitoring of delivery times. The proposed lagging and leading indicators imply more
and better information available for decision makers within the system, leading to
different core competencies within the company.
HOW TO DESIGN A BETTER STRUCTURE?
System-Wide Discovery helps design structure to get the results we want. Through the
System-Wide Discovery, we increase our understanding of the system by increasing our
understanding from the global, local and integrative perspectives. Developing a single,
integrated causal diagram, we increase our ability to communicate the understanding.
Moreover, looking at the results of the Systemic Leverage analysis, we increase our
ability to move the system.
The importance of management’s role arises when we think about designing the
company. The existing organizational design has a great impact on our ability to achieve
local and global goals. Management needs to be aware of how the rational, local
perspectives create serious communication barriers between groups, and how the structure
and incentives in a system promotes locally rational behavior often to the detriment of the
whole system. Understanding the goals, incentives, and culture each area has and how
they affect their behavior, the inherent dynamics and the available resources we have, the
task of designing a better company is just getting started. Once we understand deeply
where the leverage points are, potential unintended consequences of our actions and how
we affect others and others affect us, we are on the right path for starting organizational
design.
REFERENCES
Forrester, J. 1975. “Market Growth as Influenced by Capital Investment,” Collected
papers of Jay W. Forrester, Portland, OR: Productivity Press, 11-132.
Kim, D. 1998. “Introducing the Systems Archetypes: Growth and Underinvestment,” The
Systems Thinker, 9(8), 8.
Ritchie-Dunham, J. 1997. “Initiating Management Dialog with a Summary Presentation
that Integrates Findings from Multiple SD Analytical Tools,” Proceedings to 1s"
International System Dynamics Conference (Istanbul), 521-524.
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