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2020 | OriginalPaper | Chapter
Scenario-Driven Planning with System Dynamics
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Excerpt
Mental model
How one perceives cause and effect relations in a system, along with its boundary, i.e., exogenous variables, and the time horizon needed to articulate, formulate, or frame a decision situation; one’s implicit causal map of a system, sometimes linked to the reference performance scenarios it might produce.
Product
Either a physical good or an intangible service a firm delivers to its clients or customers.
Real option
Right and obligation to make a business decision, typically a tangible investment. The option to invest, e.g., in a firm’s store expansion. In contrast to financial “call” and “put” options, a strategic real option is not tradable. Any time it invests, a firm might be at once acquiring the strategic real options of expanding, downsizing, or abandoning projects in future. Examples include research and development (abbreviated R&D), merger and acquisition (abbreviated M&A), licensing abroad, and media options.
Scenario
A postulated sequence or development of events through time; via Latin scena “scene,” from Greek σκηvή, skēnē “tent, stage.” In contrast to a forecast of what will happen in the future, a scenario shows what might happen. The term scenario must not be used loosely to mean situation. Macroenvironmental as well as industry-, task-, or transactional-environmental scenarios are merely inputs to the strategic objectives and real options a firm must subsequently explore through strategic scenarios, computed or simulated with an explicit, formal system dynamics (abbreviated SD) model of its strategic situation. Computed strategic scenarios create the multiple perspectives that strategic thinkers need to defeat the tyranny of dogmatism that often assails firms, governments, and other social entities or organizations.
Scenario-driven planning (abbreviated SdP)
To attain high performance through strategic flexibility, firms use the SdP management technology to create foresight and to anticipate the future with strategic real options, in situations where the business environment accelerates frequently and is highly complex or interdependent, thereby causing uncertainty.
Situation
The set of circumstances in which a firm finds itself; its (strategic) state of affairs.
Strategic management process (abbreviated SMP)
Geared at detecting environmental threats and turning them into opportunities, it proceeds from a firm’s mission, vision, and environmental constraints to strategic goals and objectives to strategy design or formulation to strategy implementation or strategic action to evaluation and control to learning through feedback (background, Fig. 2).
SMP-1 environmental scanning
Monitors, evaluates, and disseminates knowledge about a firm’s internal and external environments to its people. The internal environment contains strengths and weaknesses within the firm; the external shows future opportunities and threats (abbreviated SWOT).
SMP-2 mission
A firm’s purpose, raison d’être or reason for being.
SMP-3 objectives
Performance (P) goals that SMP often quantifies for some P metrics.
SMP-4 policy
Decision-making guidelines that link strategy design or formulation to action or implementation tactics.
SMP-5 strategy
A comprehensive plan that shows how a firm might achieve its mission and objectives. The three strategy levels are: corporate, business, and process or functional.
SMP-6 strategy design or formulation
The interactive, as opposed to antagonistic, interplay of strategic content and process that creates flexible long-range plans to turn future environmental threats into opportunities; includes internal strengths and weaknesses as well as strategic mission and objectives and policy guidelines.
SMP-7 strategic action or implementation
The process by which strategies and policies are put into action through the development of programs, processes, budgets, and procedures.
SMP-8 evaluation and control
Sub-process that monitors activities and performance, comparing actual results with desired performance.
SMP-9 learning through feedback
Occurs as knowledge about each SMP element enables improving previous SMP elements (background, Fig. 2).
System
An organized group of interrelated components, elements, or parts working together for a purpose; parts might be either goal seeking or purposeful.
System dynamics (abbreviated SD)
A lucid modeling method born from the need to manage business performance through time. Thanks to Forrester (Forrester 1958), who discovered that all change propagates itself through stock and flow sequences, and user-friendly SD software (iThink®, Vensim®, etc.), SD models let managers see exactly how and why, like other biological and social organizations, business firms perform the way they do. Unlike other social sciences, SD shows exactly how feedback loops, i.e., circular cause and effect chains, each containing at least one time lag or delay, interact within a system to determine its performance through time.
Variable or metric
Something that changes either though time or among different entities at the same time. An internal change lever is a decision or policy variable that a strategy-design modeling, or client, team controls. An external change trigger is an environmental or policy variable that a strategy-design modeling team does not control. Both trigger and lever variables can initiate change and be either endogenous or exogenous to a model of a system.