QUERY System Dynamics for Business (SD6201)

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Posted by  "johnking" <jking at valculus.com>

I have been engaged and interested in SD for over a decade, both as a client
and as a consultant.  My focus is the use of SD in business and in
particular the role it plays in the corporate finance and value management
arena. 

As with the SD users and practitioners my starting reference point is Jay
Forrester's original work 'Industrial Dynamics'. The understanding of how
industrial success depends on 'flows of information, materials, money,
manpower and capital equipment' (quote) was, is and always will be
absolutely key to the successful application of SD in a commercial
environment. However, it is unfortunate in the modern business world that
Foresters original vision of 'designing business organisations for purpose'
seems further away than ever.  We should ask why? We should also ask why SD
has not achieved the same level of sustained success as it has in other
areas such as government policy, biological and medical modelling and
environmental/social applications?

By way of brief introduction my background is in finance, also having
extensive experience in management consulting with PricewaterhouseCoopers
(PwC) and most recently as finance director of a successful knowledge based
technology start-up. As for my introduction to SD, I first met Eric
Wolstenholme and Richard Stevenson in a mid -1990's working relationship
between PwC and Cognitus Ltd (UK system dynamics company) to support
value-based management with SD, which had some limited but encouraging
success.  I personally was inspired by the whole SD approach although the
corporate finance world was not quite ready for SD at that stage.

So what has changed? The ever increasingly global, complex, multi
stakeholder, risky, interdependent (I could go on) business world in which
we live is now simply demanding an SD approach. The timing IS now right. The
SD approach has become a little mired in the past and meets with an
uninspired response from many people in the business world.  Maybe 'systems
thinking and organisational learning' was a cul-de-sac for SD in business,
from which it has not recovered? SD must reformulate its offer to the market
and repackage its response. Let me now delve a little deeper.

The Problem with SD...

Having seen some recent correspondence in this forum regarding the slow
uptake of SD over the past 50 years, I would like to make a few
observations. The outside business world's impression of SD is that it is
(either) too simplistic or too complicated, somewhat fusty and academic,
overly concerned with 'preaching' detailed fundamentals to managers, and
(very) insufficiently business-focussed or knowledgeable.  Any potentially
large scale SD business users also view SD as highly fragmented and
unregulated - a big negative in the corporate world. By deduction it is the
current SD practitioners that are largely responsible for this state of
affairs.  

However, all is not lost. These types of problems are entirely par for the
course in bringing any new technology, innovative idea or new business
method to any commercial marketplace. The time is now right for SD to engage
in some fixing of its own house to become more successful in business - in
particular it needs to be both more aggressive, outward looking and more
self-regulating. 

Room for a More Positive SD Mindset?

Rather than bemoaning SD's 'failure to score' in business, the SD community
should be more positive.  Any sports or life coach would know what to do.
Identify some big management issues that are uniquely in need of SD, select
potential clients, examine existing and inadequate management methods that
need to be replaced, reinforced and/or linked - and then build a viable SD
process framework and a global skills base to deliver real and consistent
management propositions.

Surely that's the sort of vision that all serious SD professionals could
support?  But to create serious leverage, SD also needs to be much more
rigorous in developing and patrolling standards for practitioners.  SD can
only succeed in business with a completely new 'top-down' attitude and
approach from the entire SD community - and by integrating with the wider
business community to deliver 'solutions rather than components'.  Of course
it's not a short term fix - but surely that irony is not lost on the SD
community!

Maybe an analogy can illustrate this thinking. Nobody (except of course a
computer manufacturer - a very small number) would ever buy a microchip per
se, but millions buy home or office PCs with a reliable, quality assured,
tried and tested main component (Intel inside!).  Rather than teaching
managers to use causal loops and/or stocks and flows as building blocks (the
ideas just don't stick, and certainly do not spread), the ultimate future of
SD may just prove to be as an 'integrating toolset'  for problems that
managers already recognise - and for tools they already use.

Fortunately, there are opportunities out there that SD can exploit whilst
rebuilding its house.  But, in the absence of any central SD organising body
(such as the accounting standards bodies) it seems that some individual SD
organisations will need to establish relevant and overt standards - probably
tied to specific business applications.

Opportunities for SD in Corporate Finance

Moving on - but building on the same theme - I have recently teamed up again
with Richard Stevenson of Cognitus to develop a new integrated approach to
valuation and value management.  Our vision is to use SD not as the prime
"deliverable" but rather as the "glue" to integrate a number of disparate
valuation toolsets including scorecards, strategy maps, value chain analysis
and DCF. 

Background: Value Management Toolsets - and their Limitations.

Having worked with a range of blue chip clients in the value-management
area, I am acutely aware of the deep limitations of existing valuation
methods and value management toolsets.  Indeed the 1990's approach of
'value-based management (VBM)' acquired a somewhat tarnished reputation due
in large part to the tendency of consultants to 'bend' disparate methods and
unsuitable tools to fit preconceived and narrow management objectives.
(There were also some very unfortunate outcomes, including Enron and
Worldcom).

The need and opportunity for more suitable, transparent and integrated
valuation methods and tools is greater than ever.

An Issue-based Approach in Capital Industries

For example, companies in capital industries with long asset life cycles
(e.g. pharmaceuticals, energy, utilities etc..) face huge new challenges in
rapidly globalising, yet fragmenting and increasingly regulated
environments.  Managers, investors, analysts and regulators alike all
struggle to understand how to create and to share value in the rapidly
changing world - the new need to become 'green' and environmentally friendly
also adds significantly to these challenges.

Further, in these capital industries managers plan, operate and are rewarded
on much shorter time scales than the normal cycle of investor returns and
/or regulatory horizons. Such time-based disjoints create further tensions
between different management groups and between managers, regulators and
investors - as each group seeks (often contradictory) strategic goals and
financial objectives.

The critical issue here is communication...

In these capital industries the existing tools and methods of value analysis
are limited, opaque and sometimes conceptually dubious.  Add to this problem
that much of the value of all capital industries is increasingly tied up in
'intangible assets' such as know-how, intellectual property and
relationships! Despite all the prognostications from the accounting
profession, nobody has yet even come close to cracking the code for
determining the impact of investment in intangible assets on corporate
value.

New and more transparent approaches to strategic and financial value
planning are urgently required.

Some tools are already available.  Value chain analysis, balanced scorecards
and most recently 'strategy maps' provide a conceptual framework.  DCF
tools, though imperfect, provide the basis for quantified value analysis.
But all of these tools are fragmented and rarely linked together.  A wider
value-management framework is required.

SD has long promised to provide such a planning framework.  But now new
web-based and SD-driven tools provide the capability to glue together a new,
integrated framework for value analysis and communication, building on and
greatly enhancing what is already there.

Let me just illustrate my proposition by way of a prediction from an eminent
corporate finance guru cum 'thought leader' in a recent book ("CFO
Perspectives; Creating Value in a Regulated World";  CC Read 2006).

"In the next five years the systems used for developing, resourcing and
managing strategic and operational plans will change beyond all recognition.
They'll be focussed on supporting strategy; be dynamic and continuous in
operation; show cause and effects of one KPI on another, and the impact of
one end user's activity on another"

The writer does not use stock and flow/causal loop speak, but in his own
accountant speak he is saying 'the business world needs systems dynamics
type tools to understand, plan and manage the complex industrial
corporations of the modern day.

A New Market Focus for SD - the CFO

These days, the Chief Finance Officer (CFO) is the natural custodian of
strategic planning, value management and decision support in the majority of
large corporations.  The 'Financial Controller/Bean Counter' days are long
gone. In particular, the CFO is in the front line on most of the critical
issues of the day in capital industries; balancing short/long term thinking,
reconciling the interests of different management groups and stakeholders,
dealing with regulation (both forward and retrospective) and the vexed issue
of measuring (and managing) the value of the company's intangible assets.
And as regulation ever tightens, the CFO's role gets ever tougher.

So I sense that the SD approach is an idea 'whose time has come' in the
value management arena. However (and it is a big however) the approach must
be packaged and tailored to the needs of that CFO market.  

A New Technical Opportunity and Challenge to SD - the Web

As Richard Stevenson recently commented in this forum, the future is not
just about pure SD, but in using SD to enhance and integrate existing
toolsets (e.g. scorecards, strategy maps, resource-based strategy, DCF
valuation etc.) to solve specific 'issues of the day', particularly in
capital industries with value and value management is the common thread.

To meet this vision SD needs to become enshrined in, and wrapped around,
existing recognised toolsets in the form of end-user, value-based
applications.  The technical key to this vision is certainly web-based SD
application integration rather than traditional 'stand-alone' SD modelling
toolsets.  But it is a lot more than putting pretty web interfaces on SD
models. Indeed in the valuation field, we probably need MUCH simpler SD
tools and MUCH more flexible, web-based interface tools that will integrate
different applications.  This will include not only data applications but
mapping, creative and other visualisation tools.

Collaboration and Idea/Opportunity Sharing

Although we have founded a new organisation (Valculus Ltd) to progress these
ideas, we are not arrogant enough to think that we, or anybody else, can do
this alone.  So rather than trying to develop an 'empire' we will be looking
to build relationships and partnerships with recognised leaders and
practitioners in SD, web technology, strategy, performance management and
corporate finance. 

In the process, we hope we might help to push SD beyond its current,
slightly defensive posture in business, towards Jay Forrester's original
vision of 'designing organisations for purpose'.  And, of course, the
purpose of all business organisations is value creation for its
stakeholders.

 

John F King
Richard W Stevenson
Valculus Ltd
January 2007
Posted by  "johnking" <jking at valculus.com>
posting date  Sun, 21 Jan 2007 21:13:46 -0000