To Main Proceedings Document
A Study on the Processes and Conditions of a Business Creation Model
Using System Dynamics
Tomofumi Sumita, The Univ. of Electro-Communications, Tokyo.
E-mail: sumita@is.uec.ac.jp
Masahito Shimazaki, Akita Prefectural University.
E-mail: shima@ akita-pu.ac.jp
1. Background
In this paper we discuss a system dynamics approach for understanding the
processes leading to success or failure in business flotation.
Recently the promotion of business flotation has become one of the major goals for
ending Japan's extended recession. It has been pointed out that social customs are an
entrenched obstacle to be overcome. For example, once a flotation fails, it is nearly
impossible for a businessman to make a second attempt. In Japan, this has now become
a topic of serious study.
We consider the following two mechanisms to be necessary to support business
flotation in Japan. The first mechanism supports two prerequisites for new business
creation. One prerequisite is to clarify the conditions for a successful business venture,
and the other is to improve the draft of a business plan by adapting to the conditions
before the business is launched. By utilizing this mechanism a company can choose a
floatation opportunity which has the highest possibility of success. The second
mechanism supports the company after the business has been created. This is done to
avoid risks common to management in business ventures, such as those caused by a
shortage of funds.
We understand that Japanese government-supported activity is mainly biased
towards hardware. Therefore we proposed the necessity of a soft incubator as a
mechanism to support the flotation through software (e.g. Sumita and Shimazaki
(1999)). The success or failure of a venture business flotation is a complex phenomenon
and it is necessary to understand the adaptability in the business environment to
accurately model these mechanisms. It is such a system dynamics approach which we
discuss in this paper.
2. The difference between conventional research and the system dynamics
approach of this study
Conventional research follows a general approach in order to understand flotation.
A general action guideline is obtained by extracting common features from data on the
success or failure of business ventures in a past. The data include the ventures that have
successfully supported business flotation in our country or foreign countries. Some
research groups, such as Timmons (1999), have applied this approach to understanding
flotation. When this approach is adopted, the framework of business flotation is
assumed and every section in the framework is organized in the action guideline.
However, with this method, the relationship between agents in the framework is not
always clear. In addition, a general action guideline cannot cope with complex
phenomenon, because flotation is a problem in which every agent's behavior is caused
by complex change in the business environment.
We think that a system dynamics approach needs to be adopted in order to
understand and adapt such complex phenomena. System dynamics can describe the
probable behavior of a system through the use of computer simulation. The model is
expressed in a series of causal-feedback relationships between the purposed phenomena.
For this reason, it is not necessary to accurately understand the structural relationships
beforehand. Therefore, it can be utilized as an instrument for decision-making when
working on a policy plan for a particular social system even if the explicit structure of
that system is not clear. Recently, Sterman (2000) organized applications for business
using system dynamics. The procedure for system dynamics model is shown at Table 1
(Goodman (1974)).
Table 1. Construction procedure of a dynamic model in system dynamics
( from Goodman(1974) ).
1] The phenomenon is described in human language.
2] The description according to the language is converted into a causal loop
chart and flow diagram.
3] A DYNAMO equation in proportion to the flow diagram is written.
4] The simulation run of a computer model is carried out.
5] The result of the computer run is analyzed.
a) What kind of behavior does the model show ?
b) How has the behavior changed from the previous computer run ?
c) Why does the model show such behavior ?
4) How can the behavior be changed ?
Next we shall discuss a method for modeling the business flotation process with
system dynamics. It is difficult to model the process, because of the elusive process and
the enormous number of interrelated variables. Therefore, the following three
approaches must be considered in order to assist in the preparation of a causal-loop
chart and flow diagram:
1) Targeting only at a special case,
2) The utilization of computers for arranging the phenomenon,
3) Grouping agents in the system structure into functions.
However, approach 1) can only be used for a simulation in a special case, and it is
difficult to apply except to a similar model. In approach 2), manual control is necessary
to direct the arrangement guidelines in order to handle qualitative phenomena.
Therefore, assuming the framework of business flotation is required. This is as
disadvantageous as the conventional approach.
Finally, approach 3) is examined in order to create a flow diagram for the flotation
process. The flow chart contains a tremendous number of interrelated phenomena.
However, there are action subjects in every phenomenon. The action subjects can be
grouped into functions without distinction of individual, human group or organization.
Therefore, a representation is created for every function, in this way a flow diagram
between the functions can be described. This technique simplifies the procedure in
comparison with conventional methods.
The object-oriented approach for model construction is one of the appropriate
techniques to use in conjunction with system dynamics. This paper proposes that this
method be adopted for modeling a system dynamics flow diagram. The proposed model
construction procedure is shown in Table 2. Notice that 3} in Table 2, the iterative
function, includes time synchronization. A previously constructed System Dynamics
simulator offers this function. 4} in Table 2 corresponds to the DY NAMO equation of
System Dynamics, though generalization is difficult, because of the wide variation in
business conditions.
Each function is likened to an object, and the modeling is carried out by the method
detailed in procedure 1} and 2} in Table 2. It has more advantages than using the
conventional arrow diagram for the following two reasons. The primary reason is that it
is easier to handle complex phenomena and the multiple relationships in the network.
The second reason is that it is easier to group and identify similar agents and
meta-agents. As a result, it becomes possible to view the complex interaction between
agents.
Table 2. Construction procedure for the object oriented model
( Indentations in the table show the hierarchical structure ).
1} Functions of agent’s group and environmental condition are defined.
On each Functions
Input and Output are defined.
Functions between I/O are defined ( I/O functions ).
The group of resources necessary for the function is defined (structure or database),
The relationship between resources is defined as a function.
The relationship between the I/O functions and resources are defined as functions.
The delivery variables between functions are defined.
2} The operation of each function is defined as procedure.
Each generation, activity and disappearance procedure is defined.
3} Procedure definition for the system simulation ( the part which the tool of SD is in charge ).
Time synchronization.
4} The content of each defined structure, database, or functions is described in proportion to the situation.
(It corresponds to the DY NAMO equation of SD).
Grouping agents in the system structure into functions is required in order to apply
system dynamics to the business flotation process. However, it seems to be possible to
carry out an information compression that fulfills this purpose by adopting the
object-oriented approach.
Still, this approach supports one of the features of system dynamics in which is it's
adapting to change in the situations. Because the attribution of new other agents which
effect the management environment is clarified, this approach seems to be useful from
the viewpoint of the adaptation to the business environment.
3. Modeling the flotation process by using an object-oriented approach
Timmons (1999) states:
“Entrepreneurship results in the creation, enhancement, realization and
renewal of value, not just for owners, but for all participants and stakeholders."
"The result of this value creation process is that the total economic pie grows
large and society benefits." Therefore, “entrepreneurs create value with high
potential, high growth companies which are the job creation engines of the U.S.
economy."
For a flotation based on such an attitude, entrepreneurs or entrepreneurial teams
must acquire the ability to accurately catch the creative flotation opportunity and the
ability for specifying, collecting, and controlling the minimum necessary resources for
the business. The Timmons model highlights "Opportunity", "Entrepreneurial team",
"Resource Creative and Parsimonious", "Fit and Balance", and "Integrated and Holistic"
as the driving forces underlying successful new venture creations.
One of the necessary conditions for flotation is to develop a business plan. The
business plan confirms the driving forces behind the business idea. A successful
business plan should be arranged around four following points (Timmons(1999),
Parenthetic phrases are our excursus).
* A product which has commercial and/or competitive superiority (creativeness in the
flotation opportunity).
¢ Research and development for the flotation and a realistic design of the business
process (reality in the flotation opportunity).
* Calculations and a method for supplying the resources necessary for keeping the
business (operating policy of management resource).
« A calculation of the profitability of the business (validity in the flotation
opportunity).
The entrepreneurial team then judges the feasibility of the business plan. If they
decide that it is a realistic plan, they then collect the management resources, and
construct a supply chain based on the plan.
Goods and services are then sold to the target customers. However, the continuation
of business may become difficult for the following reasons; the appearance of a
competitor, a change in character of the assumed customer group, a shortage of funds,
or a deterioration in the customer's or supplier's management condition. The two
following supports are necessary in order to cope with such changes. If these problems
are simulated before the flotation, then the business plan can be made flexible enough to
cope with these results. Or, the entrepreneur or entrepreneurial team can accurately
anticipate and cope with the risk after the flotation has been launched.
Post-flotation behavior must be described along with the creation of the supply
chain in order to accurately model the flotation process. It is necessary to group not only
management resources, but also the ability and flotation opportunity of the management
group for every function.
In consideration of the above, we try to model the general flotation process based on
"The Business Plan Guide" by Timmons (1999). At first, a model is created using the
plan in Table 2 in which "1} Functions of agent's group and environmental condition are
defined" is applied to the supply chain. A summary is shown in Figure 1. Porter (1998)
is the main reference for the framework of the supply chain. "2} The operation of each
function is defined as a procedure" in Table 2 is necessary to improve the design of the
business plan as it applies to the supply chain. An outline of the functions in the
Business Simulation Model is shown in Table 3.
By making these two diagrams, it is possible to show the functions based
interrelationships. For the actual simulation, a detailed flow diagram will be constructed.
However, handling will be easy, because the phenomena are grouped with the function.
ExternalEnvironment | | 7000
of the management Legend
A Organization Market Info.
+ Sale Quantity
Ze!
B
Relational
Database
Functions
Exec.} Pur | Manu .
aio Fune. chase | facture Ship | sale service ——o"—1
ty N Goods&Service) Sam |! -----------
Hval| Pe Mem I + Material
Fr2r | eta | faci | ShiD | sale. [service | dntunaalon
*The infinite loop from the business generation to "the total evaluation = bankruptcy".
The contents of each database are made to synchronize in time “t".
Figure 1. The outline of business simulation model by the object oriented approach
Table 3. An outline of the business simulation model function composition
(Indentation in the table shows the hierarchical structure).
Business Environment
Organization Procedures
Business Creation Procedures (generation of the business object)
Business Planning
* The preparation of an initial idea.
* The substitution of a resource called "Internal Resources DB" at present.
* Schedule and cost estimate for planning
* Decision and evaluation of the goods strategy.
* Schedule and cost estimate of research and development.
* Deciding on the supply chain.
* Schedule and cost estimate of the supply chain set-up.
* An evaluation of validity in the flotation opportunity
Business Creation
* Research and development.
* Setting up the supply chain.
* A Business Management Procedure is formed in the Business Environment.
Business Management Procedure( business activity function group : Omission )
Business Withdrawal Procedure ( business dismantlement function : Omission )
Market Behavior( Omission )
Extemal Resources Behavior ( Omission )
Outside Environment ( Omission )
4. Conclusion
This paper proposes that an object-oriented system dynamics approach be adopted
for model construction to aid in an accurate understanding of the numerous variables in
the flotation process. Our model of the general flotation process has been based on this
proposal. In order to more precisely understand the phenomena by using system
dynamics, the function must be considered as a group of causal relationships. This
clarifies the area of influence of the phenomena as an object.
By applying data from actual cases of success or failure to this model, we can view
this problem from a higher perspective to gain a greater understanding of its adaptability
to the business environment.
And, a better grasp of impacts which changing situations and combinations cause
on business flotation can be expected by developing a system dynamics approach based
on this model. In addition, it is assumed that information gathered from an
internet-linked database will supply the "External Resource" and "External
Environment" components of Figure 1. Thus a simulation adaptable to the business
environment will become possible.
Acknowledgements
The authors wish to thank the contribution of S. Shucart, Associate Professor, Akita
Prefectural Univ., who had checked and given many comments in this paper.
Afterwards, we completed this paper.
Reference
[1] Goodman, M.R. (1974): Study Notes in System Dynamics, Wright-Allen Press.
[2] Porter, M. E. (1998): On Competition, Harvard Business School Press.
[3] Sterman, J.D. (2000): Business Dynamics: System Thinking and Modeling
for a Complex World, McGraw-Hill.
[4] Sumita, T. and Shimazaki, M. (1999): "On Soft-Incubator as Collaboration
for Technology Management," Portland International Conference on Management of
Engineering and Technology, Portland, USA.
[5] Timmons, J.A. (1999): New Venture Creation (5th Edition), McGraw-Hill.
