Post on 28-Mar-2023
Arnulfo Félix Campos A01280077
César García Segovia A01087439
Marco Antonio Villalobos Regalado A00812515
PhD Rafael Bourguet Díaz
System Dynamics
Final Project: Market Growth
4th July 2014
Anything that can go wrong will go wrong. – J. A Murphy
Introduction to system dynamics
System dynamics is the use of both informal maps and
formal models with computer simulation to test, uncover and
understand endogenous sources of a system behavior. We use
systems thinking to hypothesize, test and refine endogenous
explanations of a system change, and to use those
explanations we come up with to guide our policies and
decision making along the efforts of increasing both revenue
and profits. Effective learning using system dynamics will
often require training for participants in scientific
method. Along with techniques developed in system dynamics,
many tools and protocols for group model building are now
available, including causal loop diagrams, policy structure
diagrams, interactive computer mapping, and various problem
structuring and soft systems methods.
Forrester, the author of this model presented a four –
tiered hierarchy, which he considers of high importance when
studying a model such as the one described on this paper.
The following parts composed that hierarchy: the closed
boundary around the system, feedback loops as the basic
structural elements within the boundary, stock variables
representing accumulations within the feedback loops and a
rate variable representing activity within the feedback
loops. This particular tiered hierarchy can actually apply
in a generalization to any system as a whole.
An exogenous and an endogenous point of view could be
express in the next statement by Benjamin Disraeli “Man is
not the creature of circumstances. Circumstances are the
creatures of men.” Feedback loops enable the endogenous
point of view and give it structure. The endogenous point of
view is fundamental to systems thinking in the system
dynamics tradition.
Case Summary
This paper by Professor Jay Wright Forrester of
Massachusetts Institute of Technology presents the “Market
Growth Model” as an example of modeling a complex system.
The first several sections of the paper are rather an
introduction in form of a description to the structure of
systems in terms of feedback loops, levels (stocks) and
rates.
Further, the paper then proceeds to build and explain the
market growth model using both Fortran (programming
language) and Dynamo. Professor Forrester describes the
dynamics of changing the delivery delay goal of the company.
Such behavior is often referred to as “eroding goals” type
of archetype, which we saw during our summer course.
By taking a decision unwillingly or willingly the manager
changes the rules of the game by altering the policies that
guide further or future decision-making. Such systems have a
feedback loop structure that determines the growth and
stability of the enterprise. The complexity of these systems
usually needs a tremendous amount of intuition (experience)
to determine with accuracy how a policy change will affect
the total system. A simulation model of the feedback
structure and policies allows one to try policy changes to
see how the system reacts.
Growth and sluggishness of a brand new product is given as
an example to demonstrate how the ideas of a feedback
structure can explain a common event in market behavior.
Very often early sales grow rapidly, only to level off even
while the market demand continues to rise and new
competitors start to enter the growing market and capture an
increasing share of that specific market. One cause is found
in the capital investment policy of the firm, as shown in a
model involving salesmen, market reaction to delivery delay,
and capital equipment expansion.
On Market Growth and decline
For decades and decades, managers have been learning to play
by a set of rules. Companies must be flexible to respond
rapidly and mercilessly to rivalry and market changes. They
must outsource aggressively to gain efficiencies. And they
must nurture a few core competencies in race to stay ahead
of rivals. Positioning, during the past decade tended to be
insanely important, just like in the game of chess, to gain
special advantage or to tumble the concurrence. It was once
thought and taught that position and strategy had nothing to
do with one another. In the game of chess we can see how
both of them collide to become one; in our modern times it
is necessary, for business to stay on top of things and step
they game up to combine these features, that will inevitable
merge into a new concept called strategic positioning; in
other words preserving what is distinctive/different about a
company.
To fairly give the approach that this economical or
strategic theme that our work handles we will need to bare
out certain facts such as the ones portrayed in the
following books:
On Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne which
is based on a study of 150 strategic moves spanning more
than a hundred years and thirty industries, Kim & Mauborgne
argue that companies can succeed not by battling
competitors, but rather by creating blue oceans of uncontested
market space. They assert that these strategic moves create
a leap in value for the company, its buyers, and its
employees, while unlocking new demand and making the
competition irrelevant. This strikes right at the center of
our story by the fact that we are encouraging to create a
brand new submarket that will clearly distinguished our
company from the competition and give ourselves a first hand
advantage by not only opening this market rather than
putting prices according to a study that will follow.
In the other hand, right at the center, on top of it all,
there is an statement that came into awareness in the highly
laureate book Strategic Marketing Planning by Derek F. Abell and
John S. Hammond which talks about portfolio strategy
therefore on how, when on what cash should be invested in
the seek of added values to the company.
Product growth is usually separated into “high” and “low”
growth areas by an arbitrary, 10 percent growth line.
Similarly, relative market share is usually divided at a
relative market share of 1.0, so that “high” share signifies
market leadership/ […] (Abbel et Hammond, 176) Product
categories in the product portfolio chart are explain in the
following diagram:
Cash cows are products that characteristically generate large
amounts of cash, far more than they can profitably invest.
Typically they have a dominant share of slowly growing
markets. They are the products that provide the cash to pay
interest on corporate debt, pay dividends, cover corporate
overhead, finance R&D, and help other products to grow.
(Abbel et Hammond, 177)
Dogs are products with low share of slowly growing markets.
They neither generate nor require significant amounts of
cash. Maintaining share usually requires reinvestment of
their modest cash flow from operations, as wells as modest
amounts of additional capital. Because of low share their
profitability is poor and they are unlikely to ever be
significant sources of cash; therefore they are often called
“cash traps”. (Abbel et Hammond, 177)
Problem children or Questions marks are products with lo share of
fast-growing markets. Their low share often means low
profits and weak cash flow from operations; at the same time
because they are in rapidly growing markets, they require
large amounts of cash to maintain market share, and still
larger amounts to gain share. Hence their name, market
growth is attractive, yet large amounts of cash will be
required if they will ever gain sufficient share to be
strong members of the product portfolio. (Abbel et Hammond,
178)
Stars are high-growth, high-share products, which may or may
not be self-sufficient in cash flow. This depends on whether
their strong cash flow form operations is sufficient to
finance rapid growth. Their present, modest cash need or
throw off will change to a large cash throw off in the
future, when the growth rate if their market slows. (Abbel
et Hammond, 178)
Model’s objective
The objective of this work is to put into practice our
abilities on what refers to the usage of Vensim as software
for modeling systems. In the other hand, and speaking solely
about the software, we can acceptably conclude that we are
trying to model, predict outcomes and make changes in
policies into a fictitious environment that in reality all
enterprises in modern times have to fight against. Knowing,
beforehand that several variables intervene on outcomes like
the ones of this class we were required to enhance on
background information.
Model’s audience
We dare to conclude that our audience can range from any
other of ages between 15 and 90 whether knowing much or less
about marketing, strategic planning, entrepreneurship,
system dynamics or whatsoever. Nevertheless, we can also
argue that specialist on this area will find this work
resourcefully, innovative and unique in the near future.
Model’s restrictions
The model has several restrictions. Firstly, the economic
activity is not modeled in an ideal manner and it clearly
reinforces the markets. This is because it is modeled with a
positive and linear growth without any disturbance over
time. This is wrong and idealistic since in economy suffers
devaluations, inflation and crises among other things.
Additionally, it is difficult to model economic growth over
time because it is a difficult task to "predict" the
economic performance of a country. This is caused by the
dependency between the different economies in this
everlasting ever-interconnecting world.
Model’s variables list
Variable Exogenous/
Endogenous
Variable’s type
Salesmen Endogenous StockSalesmen hired Endogenous FlowSalesmen
Adjustment time
Exogenous Auxiliary Variable
Salesmen salary ExogenousIndicated Salesmen ExogenousBudget Exogenous Auxiliary VariableRevenue to sales Exogenous Auxiliary VariableSSW Exogenous Auxiliary Variable
SCT Exogenous Auxiliary VariableSW1 Exogenous Auxiliary VariableDelivery Rate
Average
Endogenous Stock
DRAT Exogenous Auxiliary VariableDelivery Rate Endogenous FlowBacklog Endogenous StockOrders Booked Endogenous FlowDDM Exogenous Auxiliary VariablePCF Exogenous Auxiliary VariablePC Shadow variableDDI Exogenous Auxiliary VariableSEM Exogenous Auxiliary VariableSales
effectiveness
Exogenous Auxiliary Variable
SDES Exogenous Auxiliary VariableSW2 Exogenous Auxiliary VariableSEDC Exogenous Auxiliary VariableSEDI Exogenous Auxiliary VariableSEDF Exogenous Auxiliary VariableSEDCT Exogenous Auxiliary VariableSEDM Exogenous Auxiliary VariableTime Shadow variableTDDRM Exogenous Auxiliary VariableDDRM Endogenous StockDDRC Endogenous Stock
DDT Endogenous StockTDDRC Exogenous Auxiliary VariableDDC Exogenous Auxiliary VariableDDB Exogenous Auxiliary Variable
CEFSW Exogenous Auxiliary VariableCEF Exogenous Auxiliary VariableSW3 Exogenous Auxiliary VariableDDMG Exogenous Auxiliary VariableTDDT Exogenous Auxiliary VariableDDW Exogenous Auxiliary VariableDDWC Exogenous Auxiliary VariableDDOG Exogenous Auxiliary VariablePCI Exogenous Auxiliary VariablePCRD Exogenous Auxiliary VariablePCO Endogenous FlowPC Endogenous StockPCDO Endogenous StockPCR Endogenous Flow
Story
The concept that
gets into
perspective in
this model is the
idea of sale
effectiveness so
that it is circumscribed in the bowels of our system. This
concept more or less, relates the ideas of delivery rate and
pending orders, which could be seen as exclusive events.
Salesmen and backlog stocks determine the effects in our
effectiveness to sale, produce and therefore our everlasting
goal as a company: revenues.
On June 23, 2014, Maxime Vachier Lagrave Jr., in charge
of the marketing division at Vachier Lagrave S.A stood at a
crossroad. He had to make a decision regarding whether
necessary to hire or to fire salesmen and finding a solution
to that bottleneck in production and delivery for the
company’s personalized wristwatches.
The company’s name Vachier Lagrave (client) is an eponymous for
its founder Maxim Vachier Lagrave Sr. and handles the
manufacture of top notch, high class, luxury and
personalized wristwatches. The company’s reputation is quite
respectable being qualified by specialized magazines such as
Hodinkee and Time Lords as one of the best out in the market
with a range of prices that would exclude most of us from
buying or even personalizing a watch. Nevertheless, the
company is having serious issues in what refers to the
delivery rate and the pending orders and this will be
explained further. The company sees an area of opportunity
by enhancing the understanding of how the indicator sells
efficiency works. The company wants sees plausible to fire
some salesmen without even studying the causes and effects
simply by arguing “they are taking revenue and we still
cannot find a solution to our tardiness in what refers to
deliveries”.
First of all an order is placed by any client and all those
orders are registered in the system, establishing the time
of delivery, the perception flow (how long it takes to
perceive all the data for the personalized watch). The
delivery limit connects both the known delivery rate and the
booked orders that have not been delivered yet. By using a
shadow variable (time) the company can calculate the
velocity of delivery considering facts such as the limits of
capacity of pending deliveries and compare it to the
forecast or previous experiences that apply to the same
case. There is a rate by the stock variable (backlog), which
is the remainder of out going orders and in going orders.
All this effectiveness can be compared to a standard (normal
time of delivery), which affects the effectiveness of the
sale. The sellers are the entity that interacts with the
customer and the list of brand new and therefore pending
orders.
Vachier Lagrave has a limited production capacity of 150,000
wristwatches per month and it has none of them in the
inventory due to the fact that they are personalized
including the inner parts and the fact of being string,
automatic or battery watches must be highly considered.
Right after booked the order is send and the production (art
masterpiece and meticulous care) gets started. All materials
are beforehand available and there will not be lack of them
(any kind of precious metals or pieces). Once ready the
seller will call the client and they will properly arrange
an appointment for tests and in the best of scenarios the
clients will pay and take the wristwatch with him/her. The
company has a yearly demand of 8,000,000 watches. The
estimated costs for each watch waggle around 204,000 USD and
the paid price around 222,000 USD.
Block Diagram
This diagram refers to a system and its parts, which enhance
into a production process of wristwatches. The Manager
Maxime Vachier Lagrave Jr. has the decision of elaborating a
spiel to his peers and fellow employees in order to attain
company’s pragmatic goals and at the same time reducing the
uncertainty of several countermen by the inevitable fact of
loosing their jobs. This Model represents the core value
idea that the parts compound the whole and will affect the
outcome of every single area of the company.
Graphs
It is quite acceptable to conclude that the graphs
representing the process of the client aka Vachier Lagrave
S.A lead to an inevitable affair: counterman aka salesmen
are properly and formerly doing their tasks to attain
mission and vision of the company and will stay on board. In
the other hand, contacting and hiring new elements,
capacitation, new fabrics, and new materials in order to
attend the evergreen, ever growing, demand will reduce the
portfolio but in the long and medium term will refer to us
as net profits and inevitable impulse the client into future
pursues.
Conclusions
The clear solution to this problem will be to enhance two
things in particular: communication within the departments
of the company and, of course, the upgrading of a far
better, production capacity by hiring more people in the
manufacture department rather than in the selling department
which seems to us is making a real great deal out of things.
They need to study by methods of work design factors of
recoil such as bottlenecks. This particular analysis
requires time while the production will still be working,
waiting furiously for that upgrade. In the other hand, lack
of communications between departments states for most of the
problems in every enterprise not to say it is the main
cause, in our believe, of the existence of human problems of
all kind. Seeing in retrospective this is one of the
advantages of preventive care so undervalued in our modern
times.
In an ever-evolving world with tremendous changes from time
to time, from generation to generation and an increasing
complexity accurateness and stability are quite scarce. By
pursuing the study of such a field as system dynamics
introduced by the American pioneer Jay W. Forrester our
lives as, entrepreneurs, clients, suppliers or even buyers
can find certain relief. Modeling systems can predict the
future by using a simulator. Our capacity to overcome the
problems has increased as well as the problem complexity
itself; so we as free thinkers have no excuse whatsoever not
to keep up with the work and make our society (system) a
better place.
The field of system dynamics is rather young and vast. Over
the past decades, many top companies, consulting firms, and
governmental organizations have used system dynamics to
address critical issues. More innovative universities and
business schools are teaching system dynamics and finding
enthusiastic and growing enrollments. Sooner or later after
this course our paths thru professional life will once again
meet up with this area of study knowing that we are not
alone on that one.
References
Sterman, John. Business dynamics: systems thinking and
modeling for a complex world. Boston: Irwin/McGraw-Hill,
2000. Print.
Kim, W. Chan, and Renée Mauborgne. Blue ocean strategy: how
to create uncontested market space and make the competition
irrelevant. Boston, Mass.: Harvard Business School Press,
2005. Print.
Abell, Derek F., and John S. Hammond. Strategic market
planning: problems and analytical approaches. Englewood
Cliffs, N.J.: Prentice-Hall, 1979. Print.
Forrester, Jay Wright. Market growth as influenced by
capital investment. Ithaca, N.Y.: Industrial Management
Review, 1968. Print.
Buettner, Blake. "A Week On The Wrist: The Chopard L.U.C
Lunar Twin." Hodinkee. Hodinkee, 5 Feb. 2014. Web. 2 July
2014. <http://www.hodinkee.com/blog/a-week-on-the-wrist-
chopard-luc-lunar-twin>.
Appendix I
(01) Accumulation of watches booked= INTEG (INTEGER( Watches booked-Delivery rate),
8000)Units: ordersorders
(02) CEF = WITH LOOKUP (DDC,
([(0,-0.07)-(2.5,0.15)],(0,-0.07),(0.5,-0.02),(1,0),(1.5,0.02),(2,0.07),
(2.5,0.15) ))Units: **undefined**
(03) CEFSW=IF THEN ELSE(SW3=0, 0, CEF )
Units: **undefined**
(04) Countermen= INTEG (INTEGER(Salesman hired),
10)Units: personspersons
(05) Countermen Adjustment Time=20
Units: monthsmonths
(06) Countermen Salary=2000
Units: dollars/Monthdollars/ salesman
(07) DDB=0.3
Units: **undefined**
(08) DDC=(DDRC/DDOG)-DDB
Units: **undefined**
(09) DDI=Accumulation of watches booked/Delivery Rate
AverageUnits: orders/months
(10) DDM=Accumulation of watches booked/PC
Units: **undefined**
(11) DDMG=2
Units: **undefined**
(12) DDOG=(DDT*DDW)+(DDMG*DDWC)
Units: **undefined**
(13) DDRC= INTEG ((DDI-DDRC)/TDDRC,
DDI)Units: **undefined**
(14) DDRM= INTEG ((DDRC-DDRM)/TDDRM,
DDRC)Units: **undefined**
(15) DDT= INTEG ((DDRC-DDT)/TDDT,
DDRC)Units: **undefined**
(16) DDW=0
Units: **undefined**
(17) DDWC=1-DDW
Units: **undefined**
(18) Delivery rate=PC*PCF
Units: ordersorders
(19) Delivery Rate Average= INTEG ((Delivery rate-Delivery Rate Average)/DRAT,
Delivery rate)Units: monthsMonths
(20) DRAT=1
Units: **undefined**
(21) FINAL TIME = 100Units: MonthThe final time for the simulation.
(22) Indicated Countermen =Portfolio/Countermen Salary
Units: peopleSalesman
(23) INITIAL TIME = 0Units: MonthThe initial time for the simulation.
(24) PC= INTEG (PCR,
PCI)Units: **undefined**
(25) PCDO= INTEG (PCO-PCR,
PCO*PCRD)Units: **undefined**
(26) PCF = WITH LOOKUP (DDM,
([(0,0)-(5,1)],(0,0),(0.5,0.25),(1,0.5),(1.5,0.67),(2,0.8),(2.5,0.87),(3
,0.93),(3.5,0.95),(4,0.97),(4.5,0.98),(5,1) ))Units: **undefined**
(27) PCI=150000
Units: **undefined**
(28) PCO=PC*CEFSW
Units: **undefined**
(29) PCR=DELAY3(PCO, PCRD)
Units: **undefined**
(30) PCRD=12
Units: **undefined**
(31) Portfolio=Revenue to Sales*Delivery Rate Average
Units: $/Month$/month
(32) Revenue to Sales=50
Units: dollars/ProductDollars/ Product
(33) Sales Effectiveness=SDES*SEM
Units: orders/(salesman*Month)orders/salesman*month
(34) Salesman hired=(Indicated Countermen-Countermen)/Countermen
Adjustment TimeUnits: persons/MonthSalesman/month
(35) SAVEPER = TIME STEPUnits: Month [0,?]The frequency with which output is stored.
(36) SCT=60
Units: dmnl
(37) SDES=
IF THEN ELSE(SW2=0, SEDC , SEDM )Units: dmnl
(38) SEDC=IF THEN ELSE( Time>=SEDCT , SEDF , SEDI )
Units: **undefined**
(39) SEDCT=36
Units: **undefined**
(40) SEDF=0
Units: **undefined** [0,1,1]
(41) SEDI=1
Units: **undefined** [0,1,1]
(42) SEDM = WITH LOOKUP (DDRM,
([(0,0)-(10,1)],(0,1),(1,0.97),(2,0.87),(3,0.73),(4,0.53),(5,0.38),(6,0.25
),(7,0.15),(8,0.08),(9,0.03),(10,0.02) ))Units: **undefined**
(43) SEM=400
Units: **undefined**
(44) SSW=IF THEN ELSE( SW1=0 , SCT , Countermen )
Units: dmnl
(45) SW1=1
Units: dmnl [0,1,1]
(46) SW2=
0Units: dmnl [0,1,1]
(47) SW3=1
Units: dmnl [0,1,1]
(48) TDDRC=4
Units: **undefined**
(49) TDDRM=6
Units: **undefined**
(50) TDDT=12
Units: **undefined**
(51) TIME STEP = 0.5Units: Month [0,?]The time step for the simulation.
(52) Watches booked=Sales Effectiveness*SSW
Units: units/Monthorders
(01) Backlog= INTEG (INTEGER( Orders booked-Delivery rate),
8000)Units: ordersorders
(02) Budget=Revenue to Sales*Delivery Rate Average
Units: $/Month$/month
(03) CEF = WITH LOOKUP (DDC,
([(0,-0.07)-(2.5,0.15)],(0,-0.07),(0.5,-0.02),(1,0),(1.5,0.02),(2,0.07),
(2.5,0.15) ))Units: **undefined**
(04) CEFSW=
IF THEN ELSE(SW3=0, 0, CEF )Units: **undefined**
(05) DDB=0.3
Units: **undefined**
(06) DDC=(DDRC/DDOG)-DDB
Units: **undefined**
(07) DDI=Backlog/Delivery Rate Average
Units: orders/months
(08) DDM=Backlog/PC
Units: **undefined**
(09) DDMG=2
Units: **undefined**
(10) DDOG=(DDT*DDW)+(DDMG*DDWC)
Units: **undefined**
(11) DDRC= INTEG ((DDI-DDRC)/TDDRC,
DDI)Units: **undefined**
(12) DDRM= INTEG ((DDRC-DDRM)/TDDRM,
DDRC)Units: **undefined**
(13) DDT= INTEG ((DDRC-DDT)/TDDT,
DDRC)Units: **undefined**
(14) DDW=0
Units: **undefined**
(15) DDWC=1-DDW
Units: **undefined**
(16) Delivery rate=PC*PCF
Units: ordersorders
(17) Delivery Rate Average= INTEG ((Delivery rate-Delivery Rate Average)/DRAT,
Delivery rate)Units: monthsMonths
(18) DRAT=1
Units: **undefined**
(19) FINAL TIME = 100Units: MonthThe final time for the simulation.
(20) Indicated Salesman =Budget/Salesman Salary
Units: peopleSalesman
(21) INITIAL TIME = 0Units: MonthThe initial time for the simulation.
(22) Orders booked=Sales Effectiveness*SSW
Units: units/Monthorders
(23) PC= INTEG (PCR,
PCI)Units: **undefined**
(24) PCDO= INTEG (PCO-PCR,
PCO*PCRD)Units: **undefined**
(25) PCF = WITH LOOKUP (DDM,
([(0,0)-(5,1)],(0,0),(0.5,0.25),(1,0.5),(1.5,0.67),(2,0.8),(2.5,0.87),(3
,0.93),(3.5,0.95),(4,0.97),(4.5,0.98),(5,1) ))Units: **undefined**
(26) PCI=100000
Units: **undefined**
(27) PCO=PC*CEFSW
Units: **undefined**
(28) PCR=DELAY3(PCO, PCRD)
Units: **undefined**
(29) PCRD=12
Units: **undefined**
(30) Revenue to Sales=
50Units: dollars/ProductDollars/ Product
(31) Sales Effectiveness=SDES*SEM
Units: orders/(salesman*Month)orders/salesman*month
(32) Salesman Adjustment Time=20
Units: monthsmonths
(33) Salesman hired=(Indicated Salesman-Salesmen)/Salesman Adjustment
TimeUnits: persons/MonthSalesman/month
(34) Salesman Salary=2000
Units: dollars/Monthdollars/ salesman
(35) Salesmen= INTEG (INTEGER(Salesman hired),
10)Units: personspersons
(36) SAVEPER = TIME STEPUnits: Month [0,?]The frequency with which output is stored.
(37) SCT=60
Units: dmnl
(38) SDES=IF THEN ELSE(SW2=0, SEDC , SEDM )
Units: dmnl
(39) SEDC=IF THEN ELSE( Time>=SEDCT , SEDF , SEDI )
Units: **undefined**
(40) SEDCT=36
Units: **undefined**
(41) SEDF=0
Units: **undefined** [0,1,1]
(42) SEDI=1
Units: **undefined** [0,1,1]
(43) SEDM = WITH LOOKUP (DDRM,
([(0,0)-(10,1)],(0,1),(1,0.97),(2,0.87),(3,0.73),(4,0.53),(5,0.38),(6,0.25
),(7,0.15),(8,0.08),(9,0.03),(10,0.02) ))Units: **undefined**
(44) SEM=400
Units: **undefined**
(45) SSW=IF THEN ELSE( SW1=0 , SCT , Salesmen )
Units: dmnl
(46) SW1=1
Units: dmnl [0,1,1]