Systems Thinking Progression Bob Landel October Fall 2009 Systems Design and Business Dynamics Class #2 and #3

Systems Thinking Progression in SD & BD Course Step 1 Identify Performance Patterns (Past or New -Behavior over Time Graphs) Why the observed path? What is preferred? What do you fear? Step 2 Build an Hypothesis Map (S-F Structure) What are the key stocks? What are the inflows/outflows? What are the interrelationships and delays? What are the decision policies influencing the rates? Step 3 Test Hypotheses Face Validity (Map) Pattern Validity(Model) Step 4 Identify Leverage Points: Systems Design Step 5 Communicate and Build Understanding

Step 1 – Identify Performance Patterns Start with the behavior over time performance patterns that reveal a problem or an opportunity. (BOT –historical or creation of future) Assemble key parties to talk about views of performance, the issues and settle on a focus for the systems study and design activities. Begin to open up people to thinking about where the organization will be headed with the current decision policies and delays that govern the actions in the system. Goal: to build dynamic familiarity among parties

The Business Dynamics of Performance - Key Questions Why is our performance following its current path? How can we design resource decision policies to radically improve this performance into the future? Where is it going if we carry on as we are? Strictly, the financial measure we should be after is ‘future free cash flows’ – the rate at which the firm will be able to generate surplus cash, after it has reinvested in its own growth. Firms may, of course, have other objectives in addition to earnings, but rarely in stead. Comparable challenges arise in non-commercial situations – charities and other non-profit cases, Government and other public policy issues. The only difference is that the y-axis is less obvious – what is the performance outcome that management is striving to achieve. The details of a strategic challenge may, however, focus on a non-financial measure (as the example on the next chart show), though this will nearly always be with an ultimate concern for financial results. Source: Kim Warren, Strategy Dynamics

Step 2 – Build Hypothesis Map Next, develop a map, usually very simple, of the stocks (accumulations) and flow rates which capture the essence of how the business works and what could drive the performance patterns. We sometimes call this the “physics of the business”. One can also begin with a CLD or an archetype hypothesis Use Team meetings to gather views on key resources, rates and explanations of interdependencies and decision policies (rate influencers). Use stocks and flows to represent how things might really work! Get others to validate Talk to others about what influences actions that govern the inflows and outflows Talk about the ways that decisions are actually made and get others to validate Must Create FACE VALIDITY

Key Stocks…..(Accumulations in the BathTub) --Resources Items that we need in order to generate the performance we seek … that we own or to which we have access … that we seek to collect and keep hold of … those that characterize ourselves and/or others … and that range from tangible to intangible. Source: Kim Warren, Strategy Dynamics

Resource stock types and examples customers capacity staff products cash customer-size staff experience product functionality staff morale market-reputation investor support tangible attributes [‘qualities’ of tangible items] intangibles This is not exactly a check-list, though these are very common resources. Other items arise in specific cases, e.g. Airlines [routes] Retail [stores] Media [advertisers vs. viewers/readers] Demand Forecasts [installed-base] Professions [staff are capacity] Source: Kim Warren, Strategy Dynamics

Step 3 – Test Hypotheses in Map/Model Ask experts or very experienced managers—is this how you see things? mix of tangible and intangible resources architecture of stocks and flows and interrelationship FACE VALIDITY of physics and decisions? Be ready to cycle back through Steps 1 and 2; then Step 4: Design (May chose to move on or to develop a simulation model) Turn the map into a simulation model with defining equation representing how the rates are changes Business system parameters are estimated (a significant challenge!) Test model configurations of your map to see if the performance patterns of interest are developed (Pattern Validity)

Step 4 – Identify Leverage Points: Systems Design Developing possible scenarios and look for leverage points to improve performance by changing structuresby * posing system redesigns or new structures process flows delays information flows decision policies that govern the quantity and timing values of the inflows and outflows to core resources. * Each new scenario consideration is linked to the performance pattern in Step 1; thus it should be evaluated on a set of metrics that are meaningful to the performance pattern situation.

Step 5 – Communicate and Build Understanding Start with the belief that many other stakeholders will have a different mental model of the past system structure and future preferences/fears. Always reveal the views of performance, the business issues and clearly identify the focus for the systems design activities. Develop a Story –including the performance patterns your will use as your “reference” and how the CLD or stock flow map could be causing the patterns. Reveal the current decision policies of various stakeholders and delays that govern the actions in the system. Unfold a structure –one chunk at a time Create a Decision-focused Control Panel supported by a simulation model Goal: to build stakeholder familiarity