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System Dynamics: Managing the Future with System Modelling
Understanding how today’s strategic decisions influence tomorrow’s business. Decision-makers are confronted with increasing complexity in the organisation and in the market environment. It is difficult to answer the question of how a strategic decision and a change in variable X will affect the business. In most cases, the correlations are not obvious enough and the parameters that can and cannot be influenced are unclear.
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Valentino Wiedmer and Raphaelle Dupont discuss a customer use case
Anticipating changes and securing decisions with System Dynamics
System Dynamics is a strategic management tool that simulates the effects of strategic decisions on your business model and supports you in making and safeguarding decisions.
It aims to
- reduce the complexity of interactions and causalities within the organisation and with the market environment,
- visualise key relationships and cause/effect processes, and
- to make it possible to measure the changes that occur when the levers that can be influenced are tightened.
This enables you to recognise the qualitative and quantitative impact of a particular decision and to justify it convincingly to stakeholders.
What is System Dynamics?
System Dynamics is a practice-oriented mathematical method for the simplified representation of the behaviour of complex systems. The model was developed at MIT in the 1950s and is still taught at numerous universities today.
It differs from other methods in that it realistically depicts cause-and-effect mechanisms in the form of closed control loops (feedback loops) that influence a company’s success. Non-linear dependencies typical of systems can be captured with System Dynamics, and complex issues in social systems can be abstracted and visualised.
Delays in effects and probabilities of occurrence are also taken into account. System Dynamics takes a long-term and holistic view of systems. The dependencies (cause/effect cycles) are quantified and, supported mathematically, simulated on the computer using specialised software. Based on a starting value that defines the initial state of the system, the effects of various scenarios on the organisation can be tested “live.”
Test hypotheses, examine alternative courses of action, identify performance drivers
hpo uses System Dynamics to analyse specific issues in complex and dynamic systems, for example, the organisation and its environment. We simultaneously analyse the impact of strategic decisions and courses of action on performance. We use realistic simulations of the business model to visualise the internal and external medium to the long-term impact of an entrepreneurial decision. This makes it clear which scenarios or options are best suited to achieving the strategic goals.
Advantages System Dynamics
To summarise, System Dynamics offers the following advantages:
1. In-depth business understanding
combines qualitative and quantitative analyses. It makes complex interrelationships of your business model visible and understandable in the market environment.
2. Performance orientation
supports in identifying and managing the key performance drivers, for example in addition to the balanced scorecard.
3. Decision support
helps assess the consequences, opportunities, and risks of strategic options in the long term, check assumptions, and derive clear recommendations for action. It promotes a common understanding within the team, enables a more objective view, and thus facilitates decision-making.
4. Communication aid
creates a transparent basis for discussion and opinion-forming as well as for safeguarding and justifying strategic decisions to stakeholders.
5. Learning effect
ensures an above-average learning gain for those involved through the playful approach (computer simulation).
Areas of application of System Dynamics in practice
System Dynamics is suitable for variant testing and decision-making for all complex strategic or operational issues in both the private and public sector, for example:
- How do which investments or cost-cutting measures influence customer satisfaction in public transport?
- How can the transport of goods and passengers across company boundaries be optimised in terms of customer satisfaction, punctuality, etc.?
- What levers can be used to achieve financial targets (EBITDA margin) and secure the performance mandate (achieving minimum case numbers) in a hospital?
- Can cost savings be realised through automation while at the same time increasing customer satisfaction?
- How do regulations and changes in market dynamics affect a bank or insurance company? What countermeasures can be taken?
- How can the supply chain (material flows incl. logistics/warehouse) in an industrial company be optimised?
- Further areas of application:
- Scenario analysis, investment, and risk management
- Control of target achievement, strategy implementation/monitoring
- Further development of business models
- Effective use of resources in innovation and investments (identification of factors relevant to success)
hpo - Your partner for the modelling and simulation of complex business cases
The more accurately the business model is depicted, the greater the benefits of System Dynamics. With our holistic consulting approach to enterprise design, we have a pronounced systems thinking and in-depth understanding of the overall context of companies.
Our approach
Together with you, we clarify the issue and objectives and develop the cause/effect model that maps your strategic challenge. We then quantify the results in a data-based computer simulation model:
1. Definition and visualisation
of the relevant levers and the cause-and-effect cycles in the business model
2. Detailing the cycles
and quantifying the cycle model based on your data*
3. Preparation & analysis of the data*
for the simulation (definition of variables, equations, temporal components)
4. Simulation
of the organisation and various scenarios: Decision-makers can follow “live” the consequences of a specific decision, which controllable influencing variables need to be changed, and how in order to achieve a specific goal (KPI)
* Required data: Cost and sales data, number of employees, investments, number and composition of customers, depending on the issue, including resource requirements for a specific service
Conclusion
System Dynamics provides you with a strategic management tool for planning, forming opinions, analysing scenarios, and assessing the consequences of business decisions. This is not just for current but also future strategic challenges, as the tool can also be used for new issues. Customers who have worked with System Dynamics are enthusiastic about its use for validating strategies, prioritising measures, and for risk management.
Interested?
Make an appointment with us to find out more about the advantages of System Dynamics and how the tool can be used in your organisation. We will also be happy to present specific application examples from customer projects.
Raphaelle Dupont
Project Manager
Your strategy and organisation consultancy
Who is hpo management consulting?
hpo stands for High Performance Organisations. As experts for strategy, business processes, organisation and transformation, we have been supporting nationally and globally active clients since 1995 in releasing performance potential and transforming strategies into measurable results. With our holistic and partnership-based enterprise desing approach, we reliably lead them to their goal: a consistently designed and sustainably effective High Performance Organisation - fit for the future and with a clear competitive advantage.
hpo - unlocking performance