1. Business Dynamics Figures and Tables excerpted from Business Dynamics: Systems Thinking and Modeling for a Complex World Chapter 10 John D. Sterman Massachusetts Institute of Technology Sloan School of Management Figures and Tables excerpted from BUSINESS DYNAMICS: SYSTEMS THINKING AND MODELING FOR A COMPLEX WORLD John D. Sterman Published by Irwin/McGraw-Hill, an imprint of the McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020. Copyright  2001 by the McGraw-Hill Companies, Inc. All rights reserved. The contents, or parts thereof, may be reproduced in print form solely for classroom use with BUSINESS DYNAMICS: SYSTEMS THINKING AND MODELING FOR A COMPLEX WORLD provided such reproductions bear copyright notice, but may not be reproduced in any other form or for any other purpose without the prior written consent the McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

2. Business Dynamics Figure 10-1 Path dependence arises in systems with locally unstable equilibria.

3. Business Dynamics Figure 10-2 The Polya process Every period one stone is added to the total. The probability of choosing a stone of a given color equals the proportion of that color in the total population.

4. Business Dynamics Figure 10-3 Ten realizations of the Polya process

5. Business Dynamics Figure 10-4 Equilibrium distribution of the Polya process Histogram shows the proportion of black stones by decile after 500 periods in 10,000 simulations. The distribution is quite uniform: All proportions are equally likely in equilibrium.

6. Business Dynamics Figure 10-5 Phase plot for the linear Polya process The line shows the probability of adding a black stone as a function of the proportion of black stones. Every point on the line is an equilibrium; every equilibrium point has neutral stability.

7. Business Dynamics Figure 10-6 Nonlinear Polya process The probability of choosing a black stone is now a nonlinear function of the proportion of black stones in the jar. The system has three equilibria.

8. Business Dynamics Figure 10-7 Dynamics of the nonlinear Polya process The system tends toward all one color or all the other, depending on the early history of random events.

9. Business Dynamics Figure 10-8 Diffusion of VCRs in the US

10. Business Dynamics Figure 10-9 Betamax vs. VHS formats in the home VCR market

11. Business Dynamics Figure 10-10 Advertising and direct sales effort drive awareness of the product

12. Business Dynamics Figure 10-11 How word of mouth and media reports create a hot product

13. Business Dynamics Figure 10-12 Spreading fixed costs over a larger volume lowers price and leads to larger volumes.

14. Business Dynamics Figure 10-13 Scale and scope economies, learning curves, and process improvement

15. Business Dynamics Figure 10-14 Network and compatibility effects

16. Business Dynamics Figure 10-15 Product differentiation

17. Business Dynamics Figure 10-16 New product development creates new demand, boosting development resources.

18. Business Dynamics Figure 10-17 Monopoly power over customers, suppliers, and workers is self- reinforcing. Each effect creates two loops: one increases market share and one increases total demand.

19. Business Dynamics Figure 10-18 Self-reinforcing growth through acquisition. Each effect creates two loops: one increases market share and one increases total demand.

20. Business Dynamics Figure 10-19 Profitable growth leads to recruitment and retention of the best people. Each effect creates two loops: one increases market share and one increases total demand.

21. Business Dynamics Figure 10-20 Profitable growth lowers the cost of capital, stimulating further growth. Each effect creates two loops: one increases market share and one increases total demand. Comparable loops for debt financing are not shown.

22. Business Dynamics Figure 10-21 The golden rule: Whoever has the gold makes the rules.

23. Business Dynamics Figure 10-22 Floating goals and stretch objectives

24. Business Dynamics Table 10-1 Bill Gates uses positive feedback concepts to guide Microsoft’s strategy.

25. Business Dynamics Figure 10-23 Structure for a simple model of network effects

26. Business Dynamics Figure 10-24 Behavior of the logit model for market share

27. Business Dynamics

28. Figure 10-25 Simulations of the installed base model Twenty simulations are shown. At time zero the standard deviation of the random effects on product attractiveness rises from 0 to 0.01.

29. Business Dynamics Figure 10-26 Evolution of the distribution of market share

30. Business Dynamics Figure 10-27 Hypothetical phase plot showing location and stability of euilibria

31. Business Dynamics Figure 10-28 Phase plot for network effects model