LeaderMind

System Dynamics is The Best Way to Avoid Harming Your Business

Your best laid plans to increase revenues, improve profitability, outflank or outdistance the competition, and achieve almost anything else related to the success of your enterprise will always be subject to the Law of Unintended Consequences.

That means there’s no guarantee the business gambits you put in motion will play out as hoped. Waiting to bite you in the rear: various unforeseen reactions, unanticipated responses, or any number of other unpredicted developments.

Sadly, many entrepreneurs run afoul of the Law of Unintended Consequences—and do so more than once during their journey, paying sometimes stiff fines and harsh penalties for violations.

It needn’t be so. It’s possible to avoid ending up on the wrong side of the Law of Unintended Consequences.

You just need to know how to use a business strategy modeling technique known as system dynamics.

System dynamics explained

Professor John Sterman of the Massachusetts Institute of Technology, Alfred P. Sloan School of Management, introduces the concept of system dynamics with these observations:

So, the question is why…do we need something like system dynamics and systems thinking? [T]he answer is not simply that the world is changing faster and faster….It’s that despite all the tools and methods that we’ve got, all the analytic power and our cleverness, things are getting harder and harder. And more and more of the policies that we implement are failing to solve the pressing challenges that we face. [Executives tell me] it’s not just the things are getting harder and more difficult, despite our cleverness and our analytic power, but because of it. That we’re too clever for our own good.”

Meanwhile, researchers from the University of Kessel in Germany contend that system dynamics is useful for a vast array of business types. Writing in the Jan. 20, 2019, issue of the Journal of Cleaner Production, they examined system dynamics modeling in solving problems encountered within complex supply chains where it’s vital to successfully manage environmental and social impacts in accordance with the widely varying expectations of many different stakeholders. The authors concluded that “system dynamics modeling is suitable to simulate and examine complex and dynamic systems and to support long-term, strategic decision-making.”

Perhaps, though, the easiest way to explain why you need to use system dynamics is with an illustration.

Suppose you decide to offer your sales team an incentive to move more product. The incentive is a 20 percent bonus added to the usual commission, but with the proviso that it kicks in only if 100 units are sold in a defined 30-day period.

The intended consequences here are that your team will be revved up to work harder, that more product will be sold than in prior months, that your company will be financially healthier, and—to complete the loop—that your team will be happier, thus more disposed to working hard.

But what you didn’t anticipate was that something about the way you structured this incentive enticed one or more of your salespeople to engage in unethical behaviors that enabled them to shortcut their way to the bonus. That was unintended consequence Number One.

Unintended consequence Number Two was the unethical behavior ended up damaging your company’s reputation. Number Three? Customers began to abandon you in favor of competitors seeming more honest. The fourth unintended consequence is your revenue stream diminished. That produced a fifth unintended consequence—difficulty making payroll. The cascade of misfires continued with a rush among your employees to update their resumes and go job hunting.

And on and on went the unintended consequences, until, at the last, you found yourself forced to encamp at a street corner while wearing tattered, dirt-encrusted clothing and holding a cardboard sign announcing your willingness to exchange work for food.

How I came to embrace system dynamics

It was a little over a decade ago that I learned of system dynamics as a business modeling methodology for wringing out unintended consequences. At the time, I was attending M.I.T. Even though I was a student, I had by then already launched and sold two successful companies and was in the process of nurturing a third still in its infancy.

My eyes were opened to system dynamics when, one day in class, my professor announced we’d be skipping the usual lecture to instead play a game. After he split us up into five-person teams, we all huddled around a game board placed on a large table at the front of the room. I didn’t realize it at the time, but this game was meant to demonstrate a practical application of system dynamics—which, by the way, was pioneered right there at M.I.T. 10 years earlier by the very same professor teaching this class, Nelson P. Repenning.

I’ll tell you more about the game in a bit. But first let me cut to the chase and relay what I learned by playing it.

I came to understand that system dynamics makes for a powerful tool when correctly utilized. One of its primary virtues is it allows you to identify exponential leverage points. In other words, to see where processes are bogging down and what you can potentially do to unblock logjams.

I also came to understand that system dynamics acknowledges the truth that all things are connected—that actions not only cause equal and opposite reactions but also provoke collateral and tandem actions and reactions. This is the basis of the Law of Unintended Consequences.

I began to think of unintended consequences as one might think of the side effects produced by a prescription medication. You take pharmaceuticals to recover from illness. However, some drugs make you feel worse rather than better. That’s because of its side effects. So, the bigger the dose you receive, the stronger and more unpleasant the side effects.

The same applies to business models you devise to restore or enhance the health of your company. You administer a dose of your prescribed business remedy and, hopefully, it’s efficacious. But then there are the side effects. The bolder or more sweeping the remedy, the stronger and more unpleasant the side effects.

System dynamics enables you to figure out for your business’s health the best medicine and optimal dose. That’s because, again, everything is connected. And system dynamics provides a formulary for addressing each ailment and its proposed treatment in an holistic manner.

Another system dynamics virtue I came to appreciate after playing that game at M.I.T. is the cohesiveness it brings to teams. This is a modeling tool that only works if you don’t keep it locked away for your own private use. With system dynamics, you can show how the work of a copywriter affects the work of the marketing department, which affects the work of the salesforce, which affects the work of the people in accounting, which affects the way the company is perceived in the industry and among consumers, which ultimately affects the work of the copywriter. You can show the existence of feedback loops that prove how everybody fits together and why everybody’s work is important to everybody else.

Getting the team members to understand their place in and contribution to feedback loops is crucial because it permits identification of weak performers while also encouraging everyone to become more supportive of those who for whatever reason aren’t daily bringing with them their A-game.

Disappointed no actual beer was served

Speaking of A-games, let me offer now the details of the game we played at M.I.T. to learn about system dynamics.

Professor Repenning called it the Beer Game. When he first announced we would be playing it, I thought, great, we’re going to partake of brewed hops while tossing ping-pong balls into red plastic 16-ounce party cups, or some such. Imagine my disappointment when it turned out the game offered only a foamy head of satisfaction from successfully managing the pretend manufacture of widgets.

Not that the management of widget-making was an easy task. In the game, players were tasked with making sure the necessary raw materials arrived at the factory and were properly staged for conversion into a finished, shipment-ready product. The objective was to beat the rival teams through the various assembly, inspection, inventory, and fulfillment processes.

Each player on a team was put in charge of a specific aspect of production. It soon became apparent that disaster would result if players made decisions affecting their area of responsibility without first consulting and obtaining cooperation from the others on the team. Lack of collaboration almost always yielded bottlenecks, component shortages or overages, and angry finger-pointing. The opposite occurred when collaboration was present: bottlenecks rarely materialized (and, when they did, they were quickly alleviated); the right components were available at the right times and in the right places; and there were congratulatory handshakes and backslaps all around.

This game really drove home for me the importance of system dynamics. It taught me that system dynamics is a highly effective way to open eyes and enable an entire organization to catch the vision of its entrepreneurial leader (or leaders, plural, if there’s more than one at the helm). It also taught me that system dynamics exists to align the behaviors of all members of the team and get everyone rowing in the same direction.

System dynamics modeling can be messy

Now, a word of caution. The process of creating models with the aid of system dynamics methodology compares smartly to the process of making sausage—in a word, it’s messy. Not always, but enough so that you’ll probably want to wear latex gloves and an apron, metaphorically speaking.

The starting point for utilizing a system dynamics approach to solving the problems you face is to assemble a small group of your best and brightest people and assign them the task of conceiving ways to overcome a specific challenge. Part of the assignment you give them is to imagine the possible adverse chain of events implementing each of those proposed remedies might trigger. You’ll ask them to filter their thinking through the lens of their experiences within the feedback loop (if you need to refresh your memory about the feedback loop, scroll up eight or so paragraphs).

The purpose of this exercise is twofold. First, to develop potential solutions. Second, to get out in front of the unintended consequences—that is, to anticipate how implementing an idea to make things better could cause the opposite to result.

Notice that I haven’t used the term “brainstorm” in relation to this ideation process. There’s a reason I have eschewed it. I don’t believe brainstorming is productive in the context of system dynamics modeling. Here’s why.

When a group of people sit down to brainstorm, their minds tend to be less than fully focused on coming up with the best ideas. They tend to be more focused on producing the most palatable ideas, the ones that will make the group happy rather than the ones that will make the company healthy.

What I prefer instead of group brainstorming is sending participants for usually no more than 10 or 15 minutes to separate areas where each can think  and ideate in private. This encourages them to be freer thinkers, less inhibited about letting their inner innovator explore way outside the box.

Then, I reconvene them as a group to share their independently arrived-at solutions and anticipated consequences of same. However, it’s not actually the group they’re sharing those with. It is in fact me, the decision-making leader who wants and needs their input.

Experimentation a central facet of system dynamics

Once you’ve collected the ideas from your team, you’re ready to develop a solution hypothesis. To illustrate how this step might unfold, let’s revisit the revenue-boosting solution mentioned earlier about offering a 20 percent bonus to each rep who sells 100 units in a defined 30-day period.

Having now through your team’s input anticipated the side effects of that particular solution, you formulate the bonus plan to include a provision—stated in plain language for all employees to see and understand—that calls for the automatic nullification of the bonus if it turns out the threshold of 100 sold units was reached in any of the following prohibited ways (and then those ways would be listed). Each prohibition would address each of the anticipated ways an overly zealous salesperson might potentially game the offer.

Has your model anticipated all the possible side effects, all the ways things could go wrong or could set off an unwelcome chain reaction? There’s only one way to know and that is to conduct confined, safe-environment experiments with it.

If unintended consequences turn up in the course of your sequestered experiment, you’ll be able to discontinue it and return to the drawing board—but this time you’ll be armed with the empirical insights you lacked during the ideation phase and can incorporate this newfound practical experience into the next iteration of your solution.

And, having tested the model in a safe environment, those unintended consequences won’t imperil your company as they might were you to simply implement in the wild and roll the dice.

Here again is Prof. Sterman:

[System dynamics] is about expanding the boundaries of your mental models…because all [mental] models are wrong. [The model] is not the real system. Only the reality is the reality. And everything in your head is a limited, filtered, imperfect representation. But we can do a lot better than the mental models that we have now [thanks to system dynamics, which] isn’t useful unless you can actually make things different. If you can’t catalyze change in your organizations in which you’re engaged, none of this is meaningful. You make decisions. Your decisions change the world. And then that creates new information which changes your next decision in a continual, emergent, iterative set of feedback processes. People say, I know my goals. I want better market share. I want more profitability. That’s going to motivate my decisions. And then my decisions are going to change the state of the world, state of the system, problem solved. That’s wrong. I can’t know what decisions to make just because I know where I want to be. I have to also know where I am right now.”

Challenges to implementing system dynamics

There are a few hurdles you’ll need to jump before you can make system dynamics a routine part of your business regimen.

One is the obstacle embodied by your existing corporate culture. Chances are it’s not amenable to the practice of system dynamics. Your corporate culture might be antagonistic to system dynamics if it’s inherently resistant to change and discourages team members from consciously supporting one another.

A good way to begin surmounting the hurdle of a culture in which system dynamics would likely be ineffectual is by engendering companywide awareness of how much better life can be thanks to this methodology. Basically, you stir within your people a desire to change the culture, and you do this by informing them of the personal and group benefits attainable from system dynamics.

It’s your job as the person at the top to set the tone and shape your company’s culture accordingly. However, it’s also the job of your subordinates to reflect and strive to maintain the culture you’ve established—which is why you need to be at pains to hire employees who’ll be a good fit for a system dynamics-friendly culture.

Another challenge to implementing system dynamics is the size of your company. You can use system dynamics if you’re in the earliest phases of being a startup, but it’s most useful if the company consists of more than just you and two or three others.

There’s no hard-and-fast rule as to when in your company’s lifecycle system dynamics becomes genuinely helpful, other than to say the larger you are in terms of revenues, market reach, internal processes, and employee numbers, the more valuable system dynamics will be to you.

The reason is you need to have the scale of operations necessary to conduct experiments in the real world—yet in a safe, hermetically sealed environment (one in which failure of system dynamics-generated models won’t harm your business). System dynamics lets you game-out your ideas for improving the company, but you can’t know for sure what unintended consequences will emerge until you test those ideas with a sampling of real customers under actual marketplace conditions. In this regard, size matters.

Interest in system dynamics on the rise

System dynamics is an integral part of my own enterprises because it’s so good at bringing individual employees together and getting them functioning as a true team.

More and more entrepreneurs similarly recognize this about system dynamics. They also are coming in ever larger numbers to appreciate its other benefits. As such, their embrace of system dynamics is letting them obtain better performance, more efficiency, greater agility, happier customers, higher revenues, and enhanced profitability.

They view system dynamics as medicine to help cure what ails their companies. They find it great for relieving pain and restoring vitality. But more than that they see that it enables them to stop merely treating symptoms and instead treat the disease.

They know—as do I—that it’s possible to evade the long arm of the Law of Unintended Consequences.

(If you’d like to delve into the study of system dynamics, I recommend M.I.T.’s “Introduction to System Dynamics” and “System Dynamics II” courses, both available online and taught by professors John Sterman and Hazhir Rahmandad. These intensive studies will familiarize you with the basics of system dynamics modeling for the analysis of business policy and strategy. Per the courses’ description: “Students will learn to visualize a business organization in terms of the structures and policies that create dynamics and regulate performance. The courses use simulation models, case studies, and management flight simulators to develop principles of policy design for successful management of complex strategies, and to improve our understanding of the ways in which an organization’s performance is related to its internal structure and operating policies as well as those of customers, competitors, suppliers, and other stakeholders.” Watch a video of Sterman providing a 16-minute walkthrough of the introductory course.)

Harry Schechter

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