Strategic Modelling and Business Dynamics: A Feedback Systems Approach

7.7. Simulation Experiments

We have now reviewed all the formulations of the market growth model and are ready to conduct simulation experiments. It is common to simulate multi-loop and multi-sector models in stages in order to build a good understanding of dynamics. In this case, we start with the sales growth loop in isolation to examine the dynamics of market growth in an ideal situation where the factory can reliably supply whatever demand the sales force generates. Then, we add the customer response loop and a factory with fixed maximum capacity (but variable utilisation) to examine the dynamics of reinforcing sales growth that eventually hits a capacity limit. Finally, we add the capacity expansion loop to arrive at the complete model and to examine the dynamics of market growth and capital investment.

Note that it is good practice to conceive partial model simulations as realistic experiments whose outcome could be imagined despite the deliberately simplified conditions. For example, a simulation of the sales growth loop in isolation shows how the business would grow (or even whether it could grow) if there were no capacity constraints. A simulation in which there is a factory with fixed maximum capacity shows how growth approaches a capacity limit. These are not simply technical tests. They are opportunities to compare common sense and intuition with simulated outcomes and to build confidence in the model's structure and dynamic behaviour.

7.7.1. Simulation of Sales Growth ...