Table Of ContentSterman
I ISBN : 007238915X 1
TITLE: BUSINESS DYNAMICS : SYSTEMS THINKING
t
RIAL : 291000
CLASS: BUSINESS
EXHIB :
I 1
Business Dynamics
Systems Thinking and
Modeling for a Complex World
John D. Sterman
Massachusetts Institute of Technology
Sloan School of Management
Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis
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McGraw-Hill Higher Education
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BUSINESS DYNAMICS
SYSTEMS THINKING AND MOOELINFGO R A COMPLEX WORLD
Copyright 0 2000 by The McGraw-Hill Companies, Inc. AU rights reserved. Printcd in the United '
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.h
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ISBN 0-07-231135-5
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Library of Congress Cataloging-in-PublicationD ata
Sterman, John.
Business dynamics : systems thinking and modeling for a complex world I John D. Sterman.
p. cm.
Includes hibliographical references and index.
ISBN 0-07-231135-5 (alk. paper)
1. Indusmal management. 2. System theory. 3. Management information systems. I.
Title.
HD30.2.S7835 2000
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99-056030
http://www.mhhe.com
For Cindy
A A
BOUT THE UTHOR
John D. Sterman is J. Spencer Standish Professor of Management at the Sloan
School of Management of the Massachusetts Institute of Technology and Director
of MIT’s System Dynamics Group. His research centers on the development of
practical methods for systems thinking and dynamic modeling of complex sys-
tems, with applications to organizational learning and change, operations manage-
ment, corporate strategy, and nonlinear dynamics in a wide range of systems, from
supply chains to scientific revolutions. He has pioneered the development of man-
agement flight simulators of corporate and economic systems. These flight simu-
lators are used in research to understand and improve managerial decision making
in complex dynamic systems; more importantly, they are now widely used by cor-
porations and universities around the world for teaching, problem solving, and pol-
icy design. Professor Sterman discovered system dynamics modeling in high
school, studied it as an undergraduate at Dartmouth College, and received his PhD
from MIT. He has been awarded the Jay W. Forrester Prize, given for the best pub-
lished work in the field of system dynamics over the prior five years, and has four
times won awards for teaching excellence from the students of the Sloan School.
vi
Preface
Accelerating economic, technological, social, and environmental change challenge
managers and policy makers to learn at increasing rates, while at the same time the
complexity of the systems in which we live is growing. Many of the problems we
now face arise as unanticipated side effects of our own past actions. All too often
the policies we implement to solve important problems fail, make the problem
worse, or create new problems.
Effective decision making and learning in a world of growing dynamic com-
plexity requires us to become systems thinkers-to expand the boundaries of our
mental models and develop tools to understand how the structure of complex sys-
tems creates their behavior.
This book introduces you to system dynamics modeling for the analysis of pol-
icy and strategy, with a focus on business and public policy applications. System
dynamics is a perspective and set of conceptual tools that enable us to understand
the structure and dynamics of complex systems. System dynamics is also a rigor-
ous modeling method that enables us to build formal computer simulations of com-
plex systems and use them to design more effective policies and organizations.
Together, these tools allow us to create management flight simulators-micro-
worlds where space and time can be compressed and slowed so we can experience
the long-term side effects of decisions, speed learning, develop our understanding
of complex systems, and design structures and strategies for greater success.
The field of system dynamics is thriving. Over the past decade, many top com-
panies, consulting firms, and governmental organizations have used system dy-
namics to address critical issues. More innovative universities and business
schools are teaching system dynamics and finding enthusiastic and growing en-
rollments. Hundreds of primary and secondary schools, from kindergarten to high
school, are integrating systems thinking, system dynamics, and computer simula-
tion into their curricula. Tools and methods for system dynamics modeling, the li-
brary of successful applications, and insights into the effective use of the tools with
executives and organizations are all expanding rapidly.
vii
viii Preface
FEATURES AND CONTENT
University and graduate-level texts, particularly those focused on business and
public policy applications, have not kept pace with the growth of the field. This
book is designed to provide thorough coverage of the field of system dynamics to-
day, by examining
Systems thinking and the system dynamics worldview;
Tools for systems thinking, including methods to elicit and map the
structure of complex systems and relate those structures to their dynamics;
Tools for modeling and simulation of complex systems;
Procedures for testing and improving models;
Guidelines for working with client teams and successful implementation.
You will learn about the dynamics of complex systems, including the structures
that create growth, goal-seeking behavior, oscillation and instability, S-shaped
growth, overshoot and collapse, path dependence, and other nonlinear dynamics.
Examples and applications include
Corporate growth and stagnation,
The diffusion of new technologies,
The dynamics of infectious disease such as HIV/AIDS,
Business cycles,
Speculative bubbles,
The use and reliability of forecasts,
The design of supply chains in business and other organizations,
Service quality management,
Transportation policy and traffic congestion,
Project management and product development,
and many others.
The goal of systems thinking and system dynamics modeling is to improve our
understanding of the ways in which an organization’s performance is related to its
internal structure and operating policies, including those of customers, competi-
tors, and suppliers and then to use that understanding to design high leverage poli-
cies for success. To do so this book utilizes
Process Points that provide practical advice for the successful application
of the tools in real organizations.
Case studies of System Dynamics in Action that present successful
applications ranging from global warming and the war on drugs to
reengineering the supply chain of a major computer firm, marketing
strategy in the automobile industry, and process improvement in the
petrochemicals industry.
System dynamics is not a spectator sport. Developing systems thinking and mod-
eling skills requires the active participation of you, the reader, via
Preface ix
Challenges. The challenges, placed throughout the text, give you practice
with the tools and techniques presented in the book and will stimulate your
original thinking about important real world issues. The challenges range
from simple thought experiments to full-scale modeling projects.
Simulation software and models. The accompanying CD-ROM and web
site (http://www.mhhe.com/stermani)n clude all the models developed in
the text along with state-of-the-art simulation software to run them. There
are several excellent software packages designed to support system
dynamics modeling. These include ithink, Powersim, and Vensim. The CD
and website include the models for the text in all three software formats.
The disk also includes fully functional versions of the ithink, Powersim, and
Vensim software so you can run the models using any of these packages
without having to purchase any additional software.
Additionally, the Instructor’s Manual and instructor’s section of the
web site include suggested solutions for the challenges, additional
assignments, Powerpoint files with the diagrams and figures from the text
suitable for transparencies, suggested course sequences and syllabi, and
other materials.
I AUDIENCE
NTENDED
The book can be used as a text in courses on systems thinking, simulation model-
ing, complexity, strategic thinking, operations, and industrial engineering, among
others. It can be used in full or half-semester courses, executive education, and
self-study. The book also serves as a reference for managers, engineers, consul-
tants, and others interested in developing their systems thinking skills or using sys-
tem dynamics in their organizations.
A NOTE ON MATHEMATICS
System dynamics is grounded in control theory and the modern theory of nonlin-
ear dynamics. There is an elegant and rigorous mathematical foundation for the
theory and models we develop. System dynamics is also designed to be a practical
tool that policy makers can use to help them solve the pressing problems they con-
front in their organizations. Most managers have not studied nonlinear differential
equations or even calculus, or have forgotten it if they did. To be useful, system dy-
namics modeling must be accessible to the widest range of students and practicing
managers without becoming a vague set of qualitative tools and unreliable gener-
alizations. That tension is compounded by the diversity of backgrounds within the
community of managers, students, and scholars interested in system dynamics,
backgrounds ranging from people with no mathematics education beyond high
school to those with doctorates in physics.
X Preface
IF YOU DON’T HAVE A STRONG MATHEMATICS BACKGROUND,
F N
EAR OT
This book presents system dynamics with a minimum of mathematical formalism.
The goal is to develop your intuition and conceptual understanding, without sacri-
ficing the rigor of the scientific method. You do not need calculus or differential
equations to understand the material. Indeed, the concepts are presented using only
text, graphs, and basic algebra. Mathematical details and references to more ad-
vanced material are set aside in separate sections and footnotes. Higher mathemat-
ics, though useful, is not as important as the critical thinking skills developed here.
IF YOU HAVE A STRONG MATHEMATICS BACKGROUND, FEAR NOT
Realistic and useful models are almost always of such complexity and nonlinearity
that there are no known analytic solutions, and many of the mathematical tools you
have studied have limited applicability. This book will help you use your strong
technical background to develop your intuition and conceptual understanding of
complexity and dynamics. Modeling human behavior differs from modeling phy s-
ical systems in engineering and the sciences. We cannot put managers up on the lab
bench and run experiments to determine their transfer function or frequency re-
sponse. We believe all electrons follow the same laws of physics, but we cannot
assume all people behave in the same way. Besides a solid grounding in the mathe-
~ matics of dynamic systems, modeling human systems requires us to develop our
knowledge of psychology, decision malung, and organizational behavior. Finally,
mathematical analysis, while necessary, is far from sufficient for successful sys-
tems thinlung and modeling. For your work to have impact in the real world you
must learn how to develop and implement models of human behavior in organiza-
tions, with all their ambiguity, time pressure, personalities, and politics. Through-
out the book I have sought to illustrate how the technical tools and mathematical
concepts you may have studied in the sciences or engineering can be applied to the
messy world of the policy maker.
FEEDBACK
I welcome your comments, criticisms, and suggestions. Suggestions for additional
examples, cases, theory, models, flight simulators, and so on, to make the book
more relevant and useful to you are especially invited. I will update the website
to incorporate user feedback and new materials. Email comments to <BusDyn@
mit .edu >.
A
CKNOWLEDGMENTS
This work benefited immensely from the advice, criticism, and encouragement of
many colleagues, students, and friends. I owe an immeasurable debt to my first
system dynamics teachers, Dana Meadows, Dennis Meadows, and Jay Forrester,
for their integrity, high standards, and passionate commitment. I’m particularly
indebted to the exceptional students of the MIT Sloan School of Management.
They constantly challenge me to make the discipline of system dynamics relevant,
Preface xi
useful, and exciting; I hope they’ve learned as much from me as I’ve learned from
them. In addition, I thank my colleagues at the Sloan School and in the system
dynamics community around the world, who helped by providing data and exam-
ples, reviewing the draft, testing early versions in their courses, and in countless
other ways. This group includes (but is not limited to) the following folks and
institutions:
Tarek Abdel-Hamid (Naval Postgraduate School); David Andersen, George
Richardson (SUNY Albany); Ed Anderson (Univ. of Texas); Carlos Ariza, Sharon
Els, Ken Cooper, Jim Lyneis, Hank Taylor (Pugh-Roberts Associates); George
Backus (Policy Assessment Corporation); Bent Bakken (Norwegian Defense Re-
search Establishment); Yaman Barlas (Bogazici University, Istanbul); Michael
Bean (Powersim Corp.); Eric Beinhocker, Damon Beyer, Andrew Doman, Usman
Ghani, Maurice Glucksman, Paul Langley, Norman Marshall (McKinsey and
Company); Laura Black, John Carroll, Vanessa Colella, Ernst Diehl, Steve Ep-
pinger, Charlie Fine, Mila Getmansky, Paulo Goncalves, Janet Gould Wilkinson,
Jim Hines, Nan Lux, Brad Morrison, Tim Nugent, Nelson Repenning, Ed Roberts,
Scott Rockart, George Roth, Ed Schein, Peter Senge (MIT); Allen and Jane
Boorstein; Steve Cavaleri (Central Connecticut State Univ.); Geoff Coyle (Royal
Military College of Science, UK, retired); Brian Dangerfield (Univ. of Salford);
Pi1 Davidsen (Univ. of Bergen); Jim Doyle, Mike Radzicki, Khalid Saeed
(Worcester Polytechnic Institute); Bob Eberlein, Tom Fiddaman, Dan Goldner,
David Peterson, Laura Peterson (Ventana Systems); David Foley and Judy Berk;
Andy Ford (Washington State Univ.); David Ford (Texas A&M University);
Nathan Forrester (A. T. Kearney); Rich Goldbach (Metro Machine Corp.); Chris-
tian Haxholdt, Heather Hazard (Copenhagen Business School); Jack Homer
(Homer Consulting); Jody House (Oregon Graduate Institute); Bill Isaacs (Dia-
logos); Sam Israelit (Arthur Andersen); Nitin Joglekar (Boston Univ. School
of Management); Drew Jones (Sustainability Institute); Christian Kampmann,
Erik Mosekilde (Technical Univ. of Denmark); Daniel Kim, Virginia Wiley
(Pegasus Communications); Craig Kirkwood (Arizona State Univ.); Elizabeth
Krahmer Keating (Northwestern Univ.); Don Kleinmuntz (Univ. of Illinois,
Urbana-Champaign); David Kreutzer (GKA, Inc.); Robert Landel (Darden School
of Business, Univ. of Virginia); David Lane (London School of Economics); Erik
Larsen (City University, London); Winston J. Ledet, Winston P. Ledet (The Man-
ufacturing Game, Inc.); Ralph Levine (Michigan State Univ.); Angela Lipinski
(Society for Organizational Learning); Martin GroBmann, Frank Maier, Peter
Milling (Univ. of Mannheim, Germany); Ali Mashayekhi (Sharif Univ. of Tech-
nology, Teheran); Nathaniel Mass (GenCorp); Paul Monus (BP/Amoco), John
Morecroft, Ann van Ackere, Kim Warren (London Business School); Erling
Moxnes (Norwegian School of Economics and Business Administration); Rogelio
Oliva (Harvard Business School); Mark Paich (Colorado College); Steve Peterson,
Barry Richmond (High Performance Systems); Greg Petsch (Compaq Computer);
Nick Pudar (General Motors); Jack Pugh, Julia Pugh, Roberta Spencer (System
Dynamics Society), JQrgen Randers (World Wildlife Fund International); Nancy
Roberts (Leslie College); Jenny Rudolph (Boston College); Jorge Rufat-Latre
(Strategos); Anjali Sastry, Marshall van Alstyne (University of Michigan); Bob
Stearns; Susan Sterman; Jim Thompson (Global Prospectus, LLC); John Voyer
