Graham W. Winch
Professor of Business Analysis
Plymouth Business School
. Plymouth, Devon, PL4 8AA
England
Abstract
This paper examines the role that building and using a System Dynamics
model plays in developing consensus within management teams facing key
strategic decisions. It considers the concept of the shared view that emerges within
the team as their individual views of the company, its industry, and the socio-
economic climate are articulated and compared as part of the model development
process. Examples are given based on two actual consulting assignments in which
differing views held within the team concerning the competitive environment and
the general outlook for the business initially pointed to quite different strategies.
During these studies the emergence of consensus and an agreed strategy was
considered a major benefit alongside the forecasts and quantitative evaluations the
model provided. By adding to the commitment of the team, by assisting in the
communication with others and in improving human resource management and
organisation design, the approach also offers further benefit in the implementation
phase of strategy management.
In its analysis and use of examples drawn from consulting situations, this
paper has emphasised the dual benefit of this approach in the hard sense of
providing forecasts and an objective framework for quantitative evaluations, and
the soft sense in terms of building consensus in the management team.
Introduction
This paper describes the role of System Dynamics in developing consensus
amongst a company’s senior management. Consensus on the nature of the
business environment and on the impact of future events, including their own
actions, is essential in the process of making key decisions, both to maximize the
use of the group’s knowledge and expertise, and to ensure commitment in
implementing new policies and strategies. The process of System Dynamics
modelling offers a much more powerful medium for moving towards consensus
than qualitative techniques like “brainstorming”, “executive panels”, and the “Delphi
method”.
This paper reviews how the development and use of System Dynamics
models contrasts with these other techniques in contributing to consensus in the
three phases of making key decisions:
1) The conceptualisation of the model focuses attention and draws out
a shared view on the key driving forces that determine the future
of the industry/business and the company’s relative performance.
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2) The development of a “most likely” outlook for the business and
company based on forecasts derived from the model provides a
common basis for assessing impacts of external events (e.g. in
the economy or energy prices) and of the company’s future actions.
3) Evaluation of actions and options available to the company by
scenario analysis with the model, including quantification of the
impacts, leads to an agreed strategy for the company.
The Shared View
Very few key strategic decisions are made by one manager alone; even
when one individual carries ultimate responsibility he or she will rely on colleagues
to provide inputs to the strategy formulation and evaluation process, and will rely
on the team to ensure successful implementation. Each member of the team will
start with a “view” of the situation.
A view is the knowledge, information, and data the manager possesses
about the company, its competitors, the business/industry in which the firm
operates, the economic and socio-political environment, and the future. Each
executive's view is based on and developed from his or her individual background
and experience, an individual knowledge base, personal access to information and
data, the unique interaction with others, understanding of the processes and
dynamics of the business, and the individual's selectivity in interpretation.
Each executive's view is therefore:
- different to all the others
- imperfect and incomplete.
Each view is highly complex and wide ranging and usually extremely difficult
to articulate. However a shared view of the key driving forces in the business is
essential to the management team if they are to move forward to formulate and
implement the most successful strategies.
System Dynamics Modelling within the Planning Process
The development of a System Dynamics model is a highly interactive
process between members of the planning team, experts within and outside the
company and the modeller. In the industrial situations in the author's experience
the modeller has been an extemal agent either within a corporate support function
or an external consultant. In this process the views of the individual managers are
articulated then coalesced, along with supporting views from the experts, through a
process involving:
e representation of company and business/industry
structures
e capturing of decision processes
system Dynamics ‘90 1327
e specification of best guess and alternate scenarios for
the economic and competitive environment
e simulation of the business with the model to predict
system behaviour
e reconciliation of behaviour/performance with structure
and decision processes
The richness of the interactions that take place during this process is what
makes the approach such a powerful tool. In many respects the stages in the
development of a System Dynamics model provide a language for the articulation
of views so that elements of the interaction that may be of the brainstorming or
executive panel type.The interactions between individuals within the group, and
between the group and external groups or individuals take the form of:
e interviews and discussions concerning the different views
held by team members
e highlighting of issues and inconsistencies
e review and refinement of diagrammatical representations
of structures and decision processes
e review of model generated behaviour of the business
e review of the model's predicted “most likely future”
e experimentation with structures and scenarios:
“what if ...2” questions
e developing a shared understanding of the dynamics of the
business
In the situation where it is possible to construct the model to a significant
degree from generic structures, then the mechanism exists to import the
knowledge that is already captured within those structures. in this respect the
interaction with the modeller and the incorporation of the generic elements forms
the sort of hybrid expert system described by Winch(1989).
Emergen: uti f Group 1
Throughout the process issues, disagreements and inconsistencies will
emerge. These issues can be broadly divided into two categories:
TYPE 1 Views held by different managers do not coincide, *
leading to different interpretations of the situation
TYPE 2 The collective views are incomplete or unrefined
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The phases of model development, and the interactions described earlier
which involve graphical presentations of the system structure (causal-loop
diagrams, flow diagrams), possibly quantitative representations of relationships
through equations and table functions, and graphic exposition of system behaviour
with Output graphs and perhaps STELLA animations provide the media for the
resolution of these issues. In the former case (Type 1) the developing of the
“shared view” within the management team and the consequent availability of a
perceived objective framework whereby impacts of the contentious features can
be assessed and debated permits issue resolution. With Type 2 model
development and runs, particularly sensitivity analysis sharpens the focus on
imperfect knowledge and data.
Examples drawn from Consulting Situations
Two brief cases are outlined here drawn from consulting assignments in
which the development of system Dynamics models was a central element. In each
case the emergence of a consensus amongst the planning team was perceived as
of major value. In each case widely divergent views were held by key members of
the team, derived from their different perspectives of the company's position and
the market prospects.
Case 1
A company producing a chemical product was evaluating a
major investment that could lead to a significant reduction in
manufacturing costs. the increased margin generated was the basis for
the justification of the investment expenditure. An alternate view was
proposed, namely that the cost saving be used to reduce price, thereby
enabling the company to “buy” market share - reduced margins but on
a larger volume potentially yielding even better returns.
A complex competitive model was constructed on a bottom-up
basis, aggregating individual competitor sectors to represent the
industry as a whole; this model was used to evaluate the project from
both perspectives. The model included representations of producers’
investment decisions, processes, technology enhancement, and
Pricing. it showed that a price cut by the client company of the size
suggested would result in sevére retaliatory price cutting by
competitors; insufficient increased volume would be achieved to
warrant the loss of margin.
Sensitivity analysis showed a policy of passing on 40% of the
cost reduction to customers to be optimum, achieving growing market
share without instigating an aggressive price war.
In the longer term this policy would generate higher returns
enabling further technical improvements to the product to maintain
competitive advantage as competitors responded in due course with
cost reduction investment of their own.
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The second case concerned a company facing a major decision concerning
its position in a business that depended on the short/medium term outlook for the
business, and how the company should position itself for the longer term.
Case 2
capacity and reduce its average unit manufacturing cost.
order to spread fixed costs and increase margin in this way.
surrendering significant market share in the shorter term.
benefit in terms of further margin.
consensus view was to dispose of the older plant.
A petrochemical company produced a commodity product on two
sites, and was in the process of reviewing these operations. In
particular it was examining a significant investment to reduce energy
costs at one plant which used an older and less efficient process. This
strategy would maintain the company’s “nameplate” productive
An alternate view was expounded that with plant production at
below full utilisation, and a general over-capacity in the industry, any
increased margins would not be significant and could be wiped out by
any further reduction in utilisation. Further it did not give sufficient
flexibility to increase market share and hence to improve utilisation in
The decision indicated by this view was to shut down the older
plant. This would reduce the overall cost of this commodity product by
eliminating the higher unit costs at the older plant. It also enabled the
company to push up utilisation in the newer plant to around the 100%
mark, further enhancing the margin. This would lead to a more
profitable but, in the short term, a smaller business. This could provide
the springboard for future expansion, either through incremental
capacity building or new lines. In either case the expansion would be
based on the newer, more efficient process. It would, however, mean
Model analysis suggested that industry over-capacity would
persist, maintaining downward pressure on plant utilisations and
prices. Keeping both plants open would hold up the company’s market
position but even with some reduction in average costs would lead to a
poor performing business, and longer term a possibly worsening
competitive position. Ironically, shutting down one of the plants would
alter the supply/demand balance ‘sufficiently to produce increased
utilisations and margins. This would enable all competitors to operate
slightly more profitably, and the company itself would share in this
Initial leaning was towards investing in cost reduction to attempt to
maintain competitiveness and market share, but eventually the
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The Model as an Ald to Implementation
The role of a System Dynamics model has so far been considered in terms
of aiding the planning process. In this respect its role has been to help managers
understand the dynamics of their business, to resolve issues that emerge, and to
quantify the effects of environmental events or their own decisions. However the
model can make a contribution in a further dimension, namely in aiding the
implementation process. It makes this contribution in three ways:
1) the process of decision making through consensus helps
develop the commitment that the team will draw upon in the
implementation phase, issues and differences being largely
dealt with before their effects became evident in the real world;
2) the tools developed and utilised during strategy evaluation -
causal-loop diagrams, output graphs, and possibly animations
- form useful visual aids to assist the communication of strategy
to managers outside the team. Indeed, simulations may be run
to clarify reasoning;
3) the “shared view” may be used in conjunction with other tools
to improve the human resource management and
organisational design within the organisation in line with the
demands of the new strategies.
Expanding particularly the last point, this benefit can be achieved through
the following mechanisms:
e Human Resource Management
Specification of new staff can become a function of:
- Sympathy with the shared view
- Potential contribution to refining/expanding the shared view
The existence of the model, with associated diagrams and graphs,
can assist in articulating the existing view to new managers and
provides a mechanism for their further knowledge and information to
be incorporated
The ‘shared view’ would sharpen the position of managers out of step
with the rest of the team
e Management Development
Focus moves towards the needs of the individual in terms “of
appreciating the shared view and ability to contribute effectively to its
objectives, rather than correcting “deficiencies”:
System Dynamics '90
- Expanding individual knowledge base regarding other
company functions .
- Improve abilities to access and use information and data
- increase understanding of market forces and buyer behaviour
~ Develop awareness of forces within the the economic and
socio-political environment
e Organisational Design:
A continual process of internal scanning takes place as the shared
view is being developed, whereby the potential role and contribution
of each function is clarified. Deficiencies in the organisation are
highlighted:
- involvement of the right people
2 weakness of particular functions, e.g. market /economic
. intelligence, information systems
- integration and communications between functions
Structures inappropriate for the new strategies
Conclusions
The value of the System Dynamics approach as an aid to learning and
understanding has been long recognised. This paper has demonstrated its
particular value in helping members of management teams to come to a consensus
view when facing key strategic decisions. The two cases briefly described
illustrated typical situations where the different perceptions or “views” of the
business held by different team members, lead them initially to propose quite
- different strategies. The process of building a System Dynamics models, in each
case ostensibly as a forecasting and evaluation tool, enabled the managers
eventually to develop a “shared view” which formed the basis on which to formulate
and agree a strategy.
The value of this approach was further considered in terms of the role of the
model and the shared view it encapsulates in the implementation phase of strategy
management, pointing to the beneficial role it can play in human resource
management, including management development, and in organisational design.
This paper has thus used examples based on two consulting assignments to
demonstrate the value of the System Dynamics approach in both the hard sense of
providing forecasts and an objective framework for quantitative evaluations, and
the soft sense in terms of building consensus in the management team. ,
Reference
Winch, G.W., 1989 “Tomorrow, Today: System Dynamics or Expert Systems”,
in Computer-based Management of Complex Systems
ed Milling, P. & Zahn, E., Springer-Verlag,
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