System Dynamics is the Best Way to Avoid Harming Your Business
Your best laid plans to increase revenues, skyrocket profit, leave your competition in the dirt, and achieve your dreams for your company have one big obstacle… the Law of Unintended Consequences.
As we know, there’s no guarantee the gambits you put in motion will play out as you planned. Unpredictable variables (like the actions and responses of other humans) are waiting in the shadows to pounce. As I write this, we’re coming to the end of 2020, a year where unpredictability has reigned supreme.
Sadly, many entrepreneurs run afoul of the Law of Unintended Consequences many times during their journey. And the Law of Unintended Consequences, like other natural laws, requires stiff fines and harsh penalties when violated.
It doesn’t have to be like this for you and your company. As daunting as it may seem, it’s possible to stay on the right side of the Law of Unintended Consequences.
The secret? An academic creation: the business strategy modeling technique known as “system dynamics.”
What is System Dynamics?
System dynamics is a way of problem solving within complex supply chains. In these real-world supply chains, it’s vital to successfully manage environmental and social impacts in accordance with widely varying expectations of all participants and stakeholders.
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, 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.
A Real-World Example of System Dynamics in Business
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.
Here’s the intended consequences, AKA what you assume will happen:
- The team will work harder
- More product will be sold
- Your company will be financially healthier
- Your team will be happier, thanks to the bonuses and success of the company, and thus they will be disposed to work even harder
However, a set-up like this could have a number of unintended consequences.
Unintended Consequence Number One: The incentive enticed one or more of your salespeople to engage in unethical behaviors to shortcut their way to the bonus.
Unintended Consequence Number Two: The unethical behavior from a few of your salespeople is discovered and damages your company’s reputation.
Unintended Consequence Number Three: Customers abandon your company in favor of competitors who seem more honest.
Unintended Consequence Number Four: Fewer customers means lower revenue, which leads us to…
…Unintended Consequence Number Five: You have difficulty making payroll, forcing your employees to update their resumes and go job hunting. Instead of working harder than ever with higher morale, your employees are jumping ship.
The consequences can keep snowballing until, in the absolute worst case scenario, you’ve lost the company, your investment, and your livelihood.
All from a new bonus structure that seemed like a good idea at the time!
With system dynamics, you and your team would have considered the real world impact of the changes. You could have predicted the unintended consequences and found ways to mitigate them, or realized the bonus structure plan was not the way to reward employees at all.
Why do we need system dynamics now?
Our new integrated world, with its 24-hour news cycle and viral spread of information, means any decision you make could have immediate and long-reaching consequences.
Gone are the days of recalling a company memo with no problem… anything you publish is out in the world for good. There is no shredder for digital documents.
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 that 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.”
It’s kind of like the iconic line from Jurassic Park… “Your scientists were so busy wondering if they could, they never stopped to think if they should.” With system dynamics, those scientists would have taken a step back and considered: But what if the dinosaurs get out of their cages?
How I learned about 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.
He told us we’d be playing the Beer Game. As a young person in college, I was very excited.
I was disappointed there was no actual beer…
When he first announce the game, I thought, “Great. We’re going to toss ping-pong balls into cups and drink brewed hops.”
Imagine my disappointment when the game really involved pretending to manufacture widgets!
The management of widget-making was not 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’ speed 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. Nothing in business happens in a vacuum. The actions of each department affect all the other departments, and your total business outcomes are greater than the sum of the parts.
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.
The best things I learned from System Dynamics
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, you can see where processes are bogged 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 formula for addressing each ailment and its proposed treatment in a 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 identifies weak performers while also encouraging everyone to become more supportive of teammates who may be lagging behind.
System Dynamics Modeling Can Get Messy
Now, a word of caution. The process of creating models with the aid of system dynamics methodology is like 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.
How to use system dynamics
- Define a specific challenge or question you want to solve.
- Assemble a small group of your “best and brightest” from your company. Make sure they come from a variety of departments, backgrounds, and skill sets.
- Assign them the challenge or question. Challenge them to come up with multiple ways of solving the problem.
- Once they have a list of possible remedies, ask them to imagine the possible adverse chains of events that might occur from any of these solutions.
- Encourage them to use their own experiences in the company and their own background to imagine these consequences.
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.
Notice that I haven’t used the term “brainstorm” in relation to this ideation process. There’s a reason. I don’t believe brainstorming is productive in the context of system dynamics modeling. Here’s why.
Why I don’t like “brainstorming” (and what I do instead)
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.
Group dynamics get in the way. They want to impress others. It’s only natural, but those natural impulses could lead groups to settle on solutions that aren’t actually the best thing for the company.
Here’s what I do instead: Send participants to separate areas for ten to fifteen minutes, where they can think and ideate in private. This encourages free thinking and helps their inner innovator drop its inhibitions in private.
Then, I reconvene the group to share their independent solutions and anticipated consequences. 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.
To make sure we capture more consequences, I ask the group to also imagine, from their perspective, consequences of the solutions from other members of the team. This allows you to see, for example, the impact of a sales-driven solution on the accounting team, and vice versa.
The Solution Hypothesis
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: a 20 percent bonus to each rep who sells 100 units in a defined 30-day period.
Thanks to your team’s input, you’ve now anticipated the Unintended Consequences of that particular solution. You’ve included a provision, stated in plain language for all employees to see and understand, that says the bonus will be nullified if the sales tactics violate the company’s code of ethics.
To make things even more clear, examples of acceptable and unacceptable behavior could be presented to the team, and they would be encouraged to ask questions and run their ideas to improve sales by their manager and the rest of the team before moving forward. This would deter an overly zealous salesperson from gaming the system in pursuit of the bonus.
System Dynamics doesn’t work without experimentation
Has your model anticipated all the possible side effects? Do you know all the ways things could go wrong, or all the possible unwelcome chain reactions? There’s only one way to know without danger to your company: conduct confined, safe-environment experiments.
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.
First, consider your existing corporate culture. Chances are it’s not amenable to 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 start shifting corporate culture toward a system dynamics outlook is spreading awareness of the benefits of the model. People won’t want to make a change unless they clearly see the benefits they will receive. Inform them of the personal and group benefits that come from system dynamics thinking.
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 hire employees who’ll be a good fit for a system dynamics-friendly culture.
Another potential 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 is on the Rise
System dynamics is an integral part of my own enterprises because it’s so good at bringing individual employees together and turning them into a true team.
More and more entrepreneurs are recognizing this about system dynamics. They also are coming 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.
How to Learn More About System Dynamics
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.
From 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 and see if it feels right to you.
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