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A general strategic model
A systems thinking approach by the
Silver Bullet™ Machine Manufacturing Company Limited
The full content of this document is the copyright of The Silver Bullet Machine™ Manufacturing Company Limited.
None of the material may be duplicated or copied, in whole or in part, in any format, electronic or otherwise, without the written consent of the copyright owner.
© The Silver Bullet Machine™ Manufacturing Company Limited 2002
What this document is about
An important component of Silver Bullet’s approach to business planning is the use of systems
thinking, and system dynamics computer modelling, to define how:-
= a business’s set of levers, representing the decisions that can be taken (such as the staff
establishment, the assets, the product range, the chosen markets...) are linked to
= the desired outcomes, representing results such as turnover, profitability, return to
investors, market share and so on.
This document describes, in generic terms, how this can be done - the details, of course, will
be specific to any given business. This document makes extensive use of causal loop diagrams,
which show cause-and-effect relationships, as expressed in terms of feedback loops. These
diagrams are succinct representations of our mental models - our basic beliefs about how the
world works. These are inherently personal, but they can - and should - be shared. The
diagrams shown here represent Silver Bullet’s collective mental models, which might be
different from yours! If your mental models are different from those shown here, that is a
good basis for a debate; if your mental models are similar, then we are thinking along the
same lines, so maybe the ideas described here will work well for you.
1 Silver Bullet
An important lever - staff
Target Staff
headcount NS 0
Staff gap oe
Actual headcount
In causal loop diagrams: -
* The symbol S indicates that the variables at each end of the arrow move in the same direction, so, as the
magnitude of the variable at the arrow tail increases, the magnitude of the variable at the arrow head increases
also.
* The symbol O indicates that the variables at each end of the arrow move in opposite directions, so, as the
magnitude of the variable at the arrow tail increases, the magnitude of the variable at the arrow head decreases.
In this example, by definition
Staff gap = Target headcount - Actual headcount
For any given Actual headcount, the greater the Target headcount, the greater the Staff gap - hence the S.
For any given Target headcount, the greater the Actual headcount, the lesser the Staff gap - hence the O.
© The Silver Bullet Machine™ Manufacturing Company Limited 200
Desired lever settings, determined by strategy 2
The starting point - strategy and levers
The job of management is to take actions, actions based on decisions. Some of these actions
are short-term, and are designed to ensure that our business's operations are well-executed;
other actions are longer term, and represent the implementation of strategic decisions.
At Organica, the definition of strategy that we use is:-
a shared commitment to act towards a compelling goal.
This shared commitment leads to the agreement of a set of actions, and these actions
manifest themselves in the re-setting of a variety of levers - levers representing, for example,
the types of investment we have in various assets, such as business entities as a whole, or
staff, or plant and equipment, or marketing activities, and the rest.
One example of a lever is the staff establishment, as represented by the headcount, as well as
the investment in training. At any time, we have an actual headcount, and the results of our
strategy discussions might be a decision to migrate this towards a different target headcount.
This therefore gives rise to a staff gap, this being the difference between the target and the
actual.
3 Silver Bullet
Pulling the lever
Target Staff
headcount NS 0
Staff ga
5 —“ gap oe
Actual headcount
Hire, fire, es
s
Actual
headcount
Desired lever settings, determined by strategy
Target headcou nt
Time
© The Silver Bullet Machine™ Manufacturing Company Limited 200
What happens when the lever is pulled?
What action do we take when there is a gap between our target staff establishment, and our
actual staff establishment?
The action in general manifests itself as Hiring, firing or training, and the greater the gap, the
more energy and urgency we put into this action - hence the § linking Staff gap to Hire, fire,
train.
Likewise, the greater the effectiveness of our actions, the greater the impact on the Actual
headcount, hence the S here too.
This diagram constitutes a balancing, or negative feedback, loop: it describes a process in
which our actions are always such as to bring the Actual headcount in line with the Target
headcount. In practice, this may take some time, as there are inevitably some time-lags
associated with hiring, firing and training; ultimately, however, the actual will become equal
to the target, and the system thereafter maintains itself in this stable state.
This example is in fact representative of all management actions in setting targets, and taking
actions to move towards those targets. This leads to the important insight that all
management actions can be represented by this diagram.
5 Silver Bullet
Meanwhile...
Customers
Time ’
Customers
oN,
Funds for investment Sales
Ss
. Ss
Profits
The business © The Silver Bullet Machine™ Manufacturing Company Limited 200
engine
Driving the business...
This feedback loop is a generic representation of driving a business.
In general, businesses seek to build a Customer base by manufacturing a product or providing a
service (or elements of both). This then provides a basis for Sales, which generate a stream of
Profits (or losses). These profits are the basis of our Funds for investment, the ultimate
purpose of which is to build an even stronger Customer base.
This is, of course, a (very!) highly simplified picture, and the details of how this actually
happens will be specific to any given business. The simplicity of the picture, however, does
not deny its fundamental truth, and we can always increase the detail for any specific
circumstances when we wish to.
This feedback loop - which contains all S’s - is known as a growth. or positive feedback, loop.
The behaviour of this loop is continuous, exponential, growth - customers generate sales and
profits, so providing funds for investment, which can be used to capture more customers,
creating more sales and profits...
All businesses seek to drive a growth loop of this type.
7 Silver Bullet
... back in the business...
Sy Customers
—_ sy
Funds for investment Sales
7
Profits
The business ) 5 © The Silver Bullet Machine™ Manufacturing Company Limited 200
engine Return to investors
8 Desired outcomes, the objectives of strategy
...to achieve desired outcomes...
If this growth loop can be made to spin and spin, then you will achieve the objective of
growing not only the Return to investors...
9 Silver Bullet
...our objectives are these
Customers
°
s
Market share Ss
(°)
Funds for investment y Sales
s Market size
; Ss
Profits
The business ) 5 © The Silver Bullet Machine™ Manufacturing Company Limited 200
engine Return to investors
10 Desired outcomes, the objectives of strategy
... across the piece
... but also Market share.
At first. when the market share is small, the action of the growth loop is to drive market share
exponentially. Most markets, however, have a finite Market size, and as the share of that
market increases, sooner or later, it becomes progressively more difficult to attract new
customers. This is represented by the link from Market share back to Customers, with the
associated O, so introducing a negative feedback loop, constraining the number of customers
to be within the total Market size.
Market size
Progressive saturatign
Market share
i Silver Bullet
So, how are the two bits linked?
Target Staff
headcount _, io
Staff gap
se ae
Actual headcount
Hire, fire, train
NO
Sy Customers
° C
Ss
Market share s
(°)
Funds for investment Sales
s Market size
; Ss
Profits
The business ) 5 © The Silver Bullet Machine™ Manufacturing Company Limited 200
engine Return to investors
Desired lever settings, determined by strategy 12 Desired outcomes, the objectives of strategy
But there’s a big problem
The facing page brings the two diagrams together.
At the top left is the management control loop, where we take action; at the bottom centre,
the business growth loop, which achieves the outcomes we desire.
There’s a big problem, though: the two diagrams are not connected!
This is, in fact, the diagrammatic representation of a fundamental management truth:
No outcome is connected, directly, to any lever.
Rather, all levers are separated, both in logic and time, from our desired outcomes.
We know, however, that the levers are connected to the outcomes, even though these
linkages are indirect, and may be associated with time lags.
How, then, can we connect them? How can we better understand how our actions actually
deliver the results we want?
13 Silver Bullet
Firstly, by this...
Target Staff
headcount NS io
Staff gap
se i
Actual headcount
Hire, fire, es
s
Ss
Attractiveness
of business
attributable to
good staff
S
s
Customers
° C
Ss
Market share s
(°)
Funds for investment y Sales
7 Market size
Ss
Profits
The business ) 5 © The Silver Bullet Machine™ Manufacturing Company Limited 200
engine Return to investors
Desired lever settings, determined by strategy 14 Desired outcomes, the objectives of strategy
The first link...
is shown on the diagram on the facing page. Yes, it’s something we can call the
Attractiveness of [our] business attributable to good staff.
Mmm. That sounds rather strange, doesn’t it? And it certainly isn’t the kind of item we would
see as a row on a spreadsheet. But stop and think for a moment. Why do you want good staff
in your business? Is it to do a good job, not to make mistakes? Surely not: merely to do a good
job and not to make mistakes is not an end in its own right - the end you seek is to create
splendid products and provide excellent service so that your customers are completely
satisfied. So, maybe the concept of the Attractiveness of [our] business attributable to good
staff is not so peculiar after all. Maybe it is quite fundamental.
The Attractiveness of [our] business attributable to good staff is an example of what in
systems thinking is known as a fuzzy variable: a variable which is important, but often rather
difficult to measure and pin down. But maybe that says more about the weaknesses of our
ways of measuring things than about the nature of the variable.
Systems thinking, and the related computer modelling technique known as system dynamics,
are both very tolerant of fuzzy variables, and actively encourage them. They are real, and
important, and they underlie many of our mental models. Systems thinking helps to make
these explicit, and to encourage us to understand them more rigorously.
15 Silver Bullet
A clearer picture
Sy Customers
°
s
Market share s
1°)
Funds for investment y) Sales
8 Market size
SI
Profits
The business ) s ©The Silver Bullet Machine™ Manufacturing Company Limited 200
engine Return to investors
Desired lever settings, determined by strategy 16 Desired outcomes, the objectives of strategy
Keeping things simple
Systems thinking encourages you to keep things as simple as you can, as exemplified by a
variable such as the Attractiveness of [our] business attributable to good staff. Here are some
other examples of similar variables:
= The effect of advertising on sales.
= The effect of maintenance on extending plant reliability.
= The effect of the reward structure on staff morale.
= The effect of staff morale on quality.
= The relative attractiveness of our product compared to the competition’s.
Maybe these variables aren’t so ‘simple’: they often encompass enormously important
concepts. The apparent ‘simplicity’ is a consequence of using a single variable; in fact, the use
of such variables is highly sophisticated. Also, they reflect reality in a truly profound way:
many managerial decisions are taken on the basis of our judgements concerning these very
variables. By making them explicit, systems thinking helps people share their mental models,
and throws the spotlight on the key areas.
Causal loop diagrams can also become quite complex, even though any one segment may be
relatively simple. To help make complex diagrams more intelligible, it is often helpful to use
colour, as shown opposite: the blue is for staff, the lilac for the business ‘engine’.
17 Silver Bullet
...but the money has to come from somewhere...
‘» Customers
°
s
é Market share Ss
Funds for mnuesinerit ‘° Sales
2 Market size
Profits
The business ) s ©The Silver Bullet Machine™ Manufacturing Company Limited 200
engine Return to investors
Desired lever settings, determined by strategy 18 Desired outcomes, the objectives of strategy
..,and a second link...
The link represented by the Attractiveness of [our] business attributable to good staff isn’t the
only link between the two parts of the diagram.
A second is the link from Funds for investment to Hire, fire, train: the money for our action
has to come from somewhere!
This link, in fact, replaces that from Funds for investment to Customers, the now-replaced old
link being shown by the dotted line.
The logic shown by the diagram now is:
= Funds for investment provide the cash for Hiring, firing and training.
= This, in turn, enhances the capability of our Actual headcount.
= Then, as a consequence of the Attractiveness of [our] business attributable to good staff,
we attract more Customers.
= So generating more Sales, Profits and further Funds for investment.
The two parts of the picture are now becoming linked...
19 Silver Bullet
..and let’s not forget the costs...
f s
7 oO
Funds for investment Sales
2 Market size
= SI
Profits
The business ) s ©The Silver Bullet Machine™ Manufacturing Company Limited 200
engine Return to investors
Desired lever settings, determined by strategy 20 Desired outcomes, the objectives of strategy
.and a third...
The Actual headcount is not a free good - we have to pay salaries, benefits, taxes...
21 Silver Bullet
..,all the costs...
Market size
Profits
(0)
The business ) s ©The Silver Bullet Machine™ Manufacturing Company Limited 200
engine Return to investors
Desired lever settings, determined by strategy 22 Desired outcomes, the objectives of strategy
...which feeds into Profits...
...all of which contribute to the Total HR costs, which itself feeds back into Profits.
But since, as Total HR costs increase, Profits decrease, there is an O, showing that this is a
negative feedback loop.
We now see that linking the two parts of the diagram has done two things: firstly, we have
identified the positive feedback loop through Actual headcount, which acts to grow Profits; at
the same time, though, we have identified a negative feedback loop, through the Total HR
costs, which acts to deplete Profits.
These two feedback loops operate simultaneously and in opposing directions. Whether or not,
in the end, Profits actually increase or decrease will depend on the specifics of the each
situation.
The simultaneous operation of two, counter-acting, feedback loops is very much a feature of
real life, and is the recognition within systems thinking that ‘there is no such thing as a free
lunch’. Systems thinking helps make both loops explicit: something that can easily be
overlooked when we are intoxicated by the euphoria of our pet positive loop. The failure to
recognise the simultaneous negative loop is the reason why ‘quick fixes’ can often backfire.
23 Silver Bullet
.. including the costs of change too
Ss
Sales
Market size
Profits
(0)
The business s ©The Silver Bullet Machine™ Manufacturing Company Limited 200
engine Return to investors
Desired lever settings, determined by strategy 24 Desired outcomes, the objectives of strategy
..,and that’s not the only one...
The negative feedback loop from Actual headcount through Total HR costs to Profits isn’t the
only negative feedback loop we need to take into account.
Another recognises that the change programme itself, the act of Hiring, firing, training, also
costs money, so adding to Total HR costs and further depleting Profits.
25 Silver Bullet
And the change programme itself may not be so easy...
Ss
Sales
Market size
Profits
(0)
The business s ©The Silver Bullet Machine™ Manufacturing Company Limited 200
engine Return to investors
Desired lever settings, determined by strategy 26 Desired outcomes, the objectives of strategy
...and another
The diagram opposite shows the introduction of a further negative feedback loop, linking Hire,
fire, train to Attractiveness of [our] business attributable to good staff.
What does this mean?
It captures the possibility that a change programme itself might - inadvertently - actually
damage the Attractiveness of [our] business attributable to good staff. How might this happen?
Possibly a retraining exercise might disrupt customer service; perhaps those who perceive
themselves as disadvantaged by the programme might be involved in a labour dispute.
Systems thinking encourages you to think of this as a possibility, and this itself raises visibility
and might enable such potentially damaging events to be anticipated and managed.
27 Silver Bullet
And let’s not forget the competitors...
Ss
Sales
Market size
Profits
(0)
The business s ©The Silver Bullet Machine™ Manufacturing Company Limited 200
engine Return to investors
Desired lever settings, determined by strategy 28 Desired outcomes, the objectives of strategy
Meanwhile, what are the competitors doing?
One way of taking into account the action of competitors is to recognise that, amongst other
things, competitor activity acts to diminish the Attractiveness of [our] business attributable to
good staff.
In fact, this is not the only effect of competitor activity, and we’ll pick up some others
shortly: at present, we are dealing with only one management lever, that concerning staff...
29 Silver Bullet
..,and the fact that there is more than one lever
—~ 2
Staff gap 8 Asset La
a i, headcount Competitor Actual assets —
Hire, fire, train activity Build, scrap, maintain
s
\ syy¥o o yys } s
Staff Fixed assets
Attractiveness Attractiveness
_Funds for of business of business Funds for
investment © attributableto attributableto © investment
s good staff good assets ~ s
Costs of change 3 : . . Costs of change
progrearninc Actual staff Actual assets T
\ costs 5.» Customers costs
. to)
s re j C » 8 =
Ss Ss.
Total HR Sw q Market share Total costs of
costs ae to) fixed assets
Funds for investment y Sales
= Market size
Profits
(0) (0)
The business ak Thelsiver Bullet Machinel™ Manutacturing Company Limited:2t
engine Return to investors
30 Desired outcomes, the objectives of strategy
What about a second lever?
The diagram on the facing page shows, in the pale yellow zone, the action of a second
management lever: the policy decisions associated with the investment in fixed assets.
Generically, this behaves in exactly the same way as the ‘staff’ lever: the key differences lie
in the details of the Attractiveness of [our] business attributable to good assets as opposed to
the Attractiveness of [our] business attributable to good staff, and in the specifics of the
behaviour of the various types of cost.
31 Silver Bullet
And so we have a generic strategic model!
~~; 2
Staff gap 8 Asset Lan
a i, headcount Competitor Actual assets Fo
Hire, fire, train activity Build, scrap, maintain
s
\ S to) (0) Ss fs
Staff Fixed assets
Attractiveness Attractiveness
_Funds for of business of business Funds for
investment © attributable to attributable to © investment
s good staff good assets ~ s
Costs of change 3 : . . Costs of change
progrearninc Actual staff 2 Actual assets T
costs wwe Customers costs
. to)
re . .
Ss Ss.
Total HR Sw q Market share Total costs of
costs ae to) fixed assets
Funds for investment y Sales
= Market size
Profits
C0) (0)
The business ob The Silver Bullet Machine™ Manufacturing Company Limited 20(
engine Return to investors
32 Desired outcomes, the objectives of strategy
And all the others too
All management levers can be treated in exactly the same way!
That leads to a highly structured, modular approach, in which the complexity of quantified
strategic planning is well and truly tamed. This also addresses the issue of many of the main
ways in which competitor activity takes place.
We have solved the problem of how to connect the levers to the outcomes, of how to
understand to true dynamics of our business.
33 Silver Bullet
