System Dynamics


System Dynamics, originally called Industrial Dynamics, was developed by W. Jay Forrester in the mid-1950s at the Sloan School of Management at MIT. It is a methodology for the comprehensive analysis and simulation of complex-dynamic systems. Through an analysis of system structure and the patterns of behaviour that arise from it, System Dynamics allows the formation of effective decision-making and strategy for the long-term.

This methodology became famous in 1972 in the simulation model of the world, World3, which was conducted in the study The Limits to Growth by Club of Rome. Equally legendary was the MIT's National Model, which shows the macro-and micro-economic development in the U.S. based on empirical data. Nowadays there is hardly a topic or an issue where this modeling technique has not been successfully applied. In particular, Management Flight Simulators for the Executive Management have been established.


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Highly aggregated view of the World3 model by Dennis Meadows

Methodology

A characteristic of system dynamics is the identification of and investigation into the effect of closed chains (feedback loops). A distinction is made between loops with positive feedback (reinforcing loops) and negative feedback (balancing loops). Positive feedback strengthens dynamics, negative feedback diminishes dynamics.

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Illustration of a model for diffusion in a product market

The illustration of a system in diagrams (mental maps) and their simulation through System Dynamics allows a very deep understanding of the system. Stocks and flows are used to describe the basic system relationships, the balance sheets. With guidance arrows and additional elements (auxiliaries), the feedback mechanisms of the system are formulated. The simulation of different scenarios cultivates the understanding of system behavior and of the sensitivity to parameters and initial conditions.

The recurring behavior patterns of complex-dynamic systems are based on certain structures that can be represented as a simplified model, called a system archetype. Currently, ten different archetypes can be distinguished, for example "shifting the burden", "fixes that fail" and "eroding goals".

Classic questions of Executive Management

Typical questions of Executive Management that are addressed via the methodology of System Dynamics in real world entrepreneurial context, are, for example:

  • Scenario analysis and technology
  • Sustainability considerations
  • Strategic business planning
  • Strategic asset management
  • Decision support in the field of strategic and operational management, illustration and optimization of processes in the field of quality management
  • Risk assessment
  • Innovation, production and project management

Typical fields of application of System Dynamics

Today, typical application areas for System Dynamics are, for example:

  • Macroeconomics
  • Financial and energy markets
  • Commodity markets of all kinds - from Airplanes to Zinc
  • Ecological systems
  • Urban and population dynamics
  • Political Systems
  • Supply chain management and production systems

Advantages of Management Flight Simulators

Simulation models that are based on the methodology of System Dynamics have the following advantages for Executive Management in increasingly dynamic markets of the future:

  • Holistic capturing and transparent presentation of highly complex decision situations for industry or market development
  • Avoidance of tacit misunderstandings by disclosing the different perceptions of different decision-makers
  • Development and simulation of scenarios to make uncertainty about the future tangible
  • Identification of the levers for value-enhancing corporate governance in the face of high uncertainty and risks
  • Modeling of alternative strategies and testing by simulation before implementation in the business
  • Evaluation of sustainable business strategies in the context of innovation and technology changes and in competitive situations
  • Implementation of early-warning systems to indicate market changes, market position, to monitor strategic decisions and operational actions in real time
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