Strategic Modelling and Business Dynamics: A Feedback Systems Approach

5.1. An Overview of the Modelling Process

In system dynamics, five steps of modelling can be identified as shown in Figure 5.1. Usually there is lots of to-and-fro between the steps as understanding of the situation improves by sketching diagrams, quantifying concepts, writing friendly algebra, and making simulations. Step 1 is problem articulation. It is the most important step of all because it shapes the entire study. Here the modeller or modelling team identify the issue of concern, the time frame, the level of analysis (business unit, firm, industry, etc.), the boundary of the study and the likely scope of factors involved. Step 2 is a dynamic hypothesis, a preliminary sketch by the modeller of the main interactions and feedback loops that could explain observed or anticipated performance. Step 3 is formulation, the transformation of a dynamic hypothesis into a reasonably detailed diagram of feedback processes and corresponding algebraic equations. Step 4 is testing. The model is simulated to see whether or not its behaviour over time is plausible and consistent with available evidence from the real world. Step 4 fixes errors and begins to build confidence in the model's integrity. Step 5 is policy formulation and evaluation. By now there is confidence that the model's structure is sound and that it is capable of reproducing the dynamic symptoms of the original problem. Hence, attention shifts to policy changes intended to improve performance and to alleviate the perceived ...