Overview

This unique book offers an unprecedented opportunity to develop comprehensive practical skills in building models that will enhance understanding of the many problems we encounter in our complex and dynamic world.

Students, researchers, professional consultants, and managers are provided with an invaluable set of tools, techniques and system dynamics structural building blocks, which will enable them to build models of complex real-world behaviour. There is considerable utility in enabling the journey of student, researcher and professional practitioner by making proven system dynamics modules available for reuse. This is enabled through this book by explaining how to define, build and test modules and by providing a compendium of modules. These modules are the essential building blocks of structure common to many real-life complex problem situations.

A key aspect of this book, therefore, is the identification and specification of modules that represent the fundamental and re-useable building blocks of system dynamics modelling structure. The author then demonstrates how to use those building blocks as basic elements for analysis. He also explains and demonstrates how the basic modules can be assembled with other modules to produce fully functioning models.

This book is in no way intended to promote ‘recipe-book’ system dynamics modelling, however. Rather, the techniques, modules and models offered here are designed to strengthen the skills and knowledge of the modeller. They are not offered as a substitute for thinking about and analysing systemic problems in a systematic way.

The book focuses on quantitative modelling. As an enabler to quantitative modelling, systems thinking and qualitative modelling techniques are used to facilitate problem conceptualisation and the formulation of dynamic hypotheses about troublesome systemic problems.

Dr Alan McLucas is a senior lecturer at the University of New South Wales, UNSW@ADFA, the Australian Defence Force Academy. He holds bachelors, masters and doctor of philosophy degrees in engineering, management and operations research respectively.

Preface

This book is unique in that it offers an unprecedented opportunity to develop comprehensive practical skills in building models which will enhance understanding of the many problems we encounter in our complex and dynamic world. Examples of complex, dynamic problems of which we might have inadequate understanding, include:

Why projects do not go to plan and what we can do about it:

· Why software development projects take much longer than we plan, typically twice as long, and even well-managed software projects are infrequently completed on time and to budget. In their pioneering work, Abdel-Hamid and Madnick (1990) demonstrated how system dynamics modelling can be used as a powerful aid to understanding the complexity and intrinsic drivers of problems encountered in software development projects. They provided insights into why routine project management approaches can be totally inadequate. Most importantly, they demonstrated how, through use of system dynamics modelling, project managers can develop better understandings of the dynamics and so be much more effective. How to build models which reveal the secret to dynamic behaviour is demonstrated in this book.

· Why major capital acquisition projects, such as military capability projects frequently get bogged down, take much longer than intended and cost both customer and prime contractor inordinate amounts of money. An example of a major acquisition project for US Department of Defense, which ran over time and led to both contractor and customer going to court to argue their cases about the reasons for delays and cost overruns is contained in Sterman (2000: 55-66). System dynamics modelling techniques were used to demonstrate what was actually happening and what the real causes for problems encountered were. This book examines systemic problems of the type that managers of projects are likely to encounter, and explains how they can be managed more effectively.

· What the impact is of rework on cost to complete, time taken and how this impact on quality of delivery of projects. Abdel-Hamid and Madnick (1990), Ackermann, Eden, and Williams (1997: 48-65), Park and Pena-Mora (2003), Sterman (2000: 58-61), provide examples which, when examined using systems thinking and system dynamics modelling techniques, demonstrate complex interrelationships between large numbers of variables. Techniques for analysing interrelationships in complex problems, such as rework in the management of projects, are examined.

· Why supply chain management often fails to deliver goods were and when needed. System dynamics modelling, as described in this book, is a powerful tool for diagnosing supply chain management where feedback control mechanisms operate.

· Why recruiting and manpower management efforts do not deliver required numbers of staff when needed. Human resource management can be made significantly more effective when informed by systems thinking and system dynamics modelling.

· Why, despite historical examples of boom-and-bust cycles in real estate, actions of seller and buyer alike conspire to perpetuate these familiar but poorly understood cycles. System dynamics modelling can provide powerful insights into why boom-and-bust cycles are problematic and how they can be managed or, at least, how their devastating impacts can be minimised.

· Why we continue (through lack of understanding of the consequences of our actions) to exploit fish stocks to the point of severe damage or even continue harvesting to the point of extinction of fish populations. Moxnes (2000) provides strong evidence that our misperception of ecological dynamics repeatedly leads to over-utilization of natural resources such as fish stocks. Systems thinking and system dynamics modelling as aids to understanding and double-loop learning can be invaluable in helping us develop strategies much more likely to produce ecological sustainability.

This book focuses on quantitative modelling. As an enabler to quantitative modelling, systems thinking and qualitative modelling techniques are used to facilitate problem conceptualisation and the formulation of dynamic hypotheses about troublesome systemic problems. It is essential that we build carefully considered and well-formulated dynamic hypotheses, encapsulating our current theories of problematic behaviour. Dynamic hypotheses then form the foundations for building system dynamics models from which we can derive powerful insights into systemic problems.

This book identifies and specifies modules which are fundamental and re-useable building blocks of system dynamics modelling structure. It then demonstrates how to use those building blocks as basic elements for analysis. It also explains and demonstrates how they can be assembled with other modules to produce fully functioning models. Through a disciplined approach, these models can be developed into necessary and sufficient representations of real-world complex problems. These enable development of our understanding and inform creation of remedial management strategies.

This book is built on an assumption that the reader has some knowledge of system dynamics modelling. The entry level of knowledge is not assumed to be high. For readers unfamiliar with system dynamics modelling, texts by Coyle (1977; 1996), Maani and Cavana (2000), or Sterman (2000) provide a sound foundation.

This book is written as a stand-alone resource. It serves a secondary but important purpose in that it is a companion to Sterman’s book ‘Business Dynamics’. It extends Sterman’s work by explaining and demonstrating in detail how to build system dynamics models. Example models have been developed using Powersim™ Studio.

A variety of qualitative modelling techniques are used. These are supported by numerous detailed examples, each of which serves to illustrate the purpose and utility of quantitative modelling, especially when combined with the extensive modelling functionality provided by Powersim™ Studio. This should prove to be of great assistance. Three main types of qualitative modelling tools are used:

·Causal loop diagrams. These take the form described by, for example, Sterman (2000) and Maani and Cavana (2000).

·Influence diagrams. These take the form described by Coyle (1996) and Wolstenholme (1990).

·Stock-and-flow diagrams. Throughout this book conventional stock-and-flow representations are used. They are frequently combined with causal loop diagrams to form stock-and-flow hybrid diagrams such as used by Levin, et al. (1975), Richardson and Pugh (1981), and Sterman (2000). Readers familiar with ithink™, Stella™, or Vensim™ should have no difficulty reading these diagrams though occasionally specific Powersim™ Studio notations appear.

Where it is practicable to do so, equivalent influence and stock-and-flow diagrams are provided.

The Reasons for Writing This Book

A number of universities around the world are now offering courses in systems thinking and system dynamics modelling. These courses are proving to be popular and are being taken at an increasing rate. This trend is driven by two factors; increasing recognition of the power of time-domain modelling using system dynamics techniques and widespread accessibility of personal computers which deliver powerful computing tools to the desktop. We now have the means which afford us unprecedented opportunity to investigate complex problems. The opportunities for experimenting and learning are simply amazing.

Teaching many students and engaging with corporate and public-sector clients in system dynamics modelling interventions has led me to appreciate the increasing need for system dynamics modelling. It is clear to me that many people now seek to access the power of system dynamics modelling and examples of how to apply it. They also seek to have access to a wide selection of system dynamics models they might adapt for re-use. This has provided impetus for the writing of this book and the development of a compendium of re-usable system dynamics modules. These modules chosen for demonstration purposes are the basic building blocks of system dynamics modelling.

The driving forces for creating this book were a mix of excitement and frustration. The excitement primarily came from my own enthusiastic system dynamics modelling students who wanted to apply their newfound systems thinking and system dynamics modelling skills. From the first time they experienced seeing the world from a completely new viewpoint, that of systems thinking and system dynamics modelling, they became excited about discovering the true dynamic nature of the problems they saw in our complex world. But, they also found that their own journeys of discovery were seriously hampered. For many, the journey was slowed to an unbearable crawling pace. While they wanted to run down the path of exciting discovery, they could only crawl or walk.

The unfortunate reality is that to build models of complex problems is intellectually challenging, if for no other reason than complex problems seriously challenge both our ways of thinking and our intellectual capability. It takes time to build robust models that facilitate insight and understanding. It is particularly demanding to build models of the real world that are completely logical and error-free. Here I must emphasise the term verified, that is, the models we build must be tested to assure that they perform according to functional requirements identified during the problem conceptualisation phase. In this book, verification is used in a strict sense and taken to mean exactly what it does in systems engineering and software engineering, that is, we need to make sure that our model works the right way.

It takes considerable skill and knowledge to build models that are sufficient representations of real-world problems without being overly ambitious or complicated. Here I must emphasise the term validated (as far as system dynamics models can be definitively validated). We validate a model to determine the extent to which it maps the analysed (solution) space onto the problem space in a way that is most appropriate: validation involves assuring that we have addressed the right problem.

Having to build every model from scratch is not a bad thing. However, many students find that re-inventing the most basic of models may have been necessary, say, at the formative stages of their education, but unnecessarily time-consuming now when they want to experience, or demonstrate, the true power of systems thinking supported by system dynamics modelling.

We would not expect a structural engineer to make ab initio the detailed loading, shear force and bending moment calculations for every truss used in roof construction. However, we do expect that every roof truss specified for a building will be strong enough for the intended purpose. When designing a truss-supported roof, there are finite sets of well-understood design parameters that need to be incorporated to ensure that the final design is sound. There is a plethora of information about, and extensive experience in, designing roof trusses.

For the experienced engineer, if the design looks right, it probably is. Well before Roman times, structures such as bridges were being built to designs which re-used modular design concepts and modular structural components. These modular designs exploit familiarity with modular structural components. The resulting structures proved to be both strong and fit for purpose. Many bridges built by the Romans still stand after more than two thousand years.

It takes time and effort to develop the skill to be able to look at a structure and judge that it is sound. Of course, during his or her education the engineer repeatedly made the basic design calculations and made them correctly (and has the essential skills as a result). Developing such skill and knowledge does not come without considerable effort. So, once sound structural modular components and structural designs have been developed, it is both economical and practical to re-use them. Even for the most complex structures our engineer uses modular design and construction techniques to produce trusses of appropriate structural strength. Judiciously employed, the modular design approach can be effective and efficient, whilst delivering designs that are eminently fit for purpose.

There is considerable utility in enabling the journey of student, researcher and professional practitioner by making proven system dynamics modules available for reuse. This is enabled through this book by explaining how to define, build and test modules and by providing a compendium of modules. These modules are the essential building blocks of structure common to many real-life complex problem situations.

We can reuse these modules with confidence; they are based on considerable research and practical application and are known to work. However, just like modular designs for roof trusses, our system dynamics modelling modules must be used within their design limits; we must understand those limits and take considerable care to work within them. We must also be able to verify our designs through comprehensive testing (and that testing must be based on the originally defined functional requirements).

Correctly chosen and carefully assembled, these modules will facilitate building of the most robust models. Like the modular elements of our engineering structures, these modules will not have to be re-invented each time they are needed; the design of each modular component does not have to be re-created each time. Rather, by making these essential building blocks accessible, the modeller is free to concentrate on the critical systems thinking and creative modelling to which human intellect is best applied. The journey of exploration can be made more productive and exciting. Further, the journey will become accessible to anybody who chooses to take it.

This book is in no way intended to promote ‘recipe-book’ system dynamics modelling. Rather, the techniques, modules and models offered here are designed to strengthen the skills and knowledge of the modeller. They are not offered as a substitute for thinking about and analysing systemic problems in a systematic way.

Examples of poor modelling practices can be found if we look hard enough. Lazy people, whether modellers or not, will always find and exploit shortcuts. Shortcuts taken in ignorance will result in erroneous or misleading models. To build the ‘right’ models (i.e. are validated) that work the ‘right’ way (i.e. are verified) demands both effort and discipline. Even armed with the modules and models detailed in this book, a lazy modeller may be able to produce poor, misleading, and inappropriate models. The point of caution here is simple… ‘A fool with a tool is still a fool!’ This book, by itself, will not correct foolhardy practices.

This book is an artefact of my commitment to making system dynamics modelling much more accessible to all who want to develop in-depth understandings of the complex, dynamic world in which we live. The end product is just one more valuable tool available to system dynamics modellers, whether they are novice students, researchers doing advanced work or professional practicing consultants.

Students, business executives, decision makers and strategy developers reasonably expect to have confidence in the models they build or use. Models can provide valuable bases for developing remedial strategies to address wicked problems (McLucas, 2001; 2003: 103-124 and McLucas and Linard, 2000). The term wicked is most appropriate here and is often used to characterise complex problems and distinguish them from tame problems (Rittel, 1972; Mason and Mitroff, 1981). Such problems frequently involve feedback mechanisms and delays resulting in their time-dependent behaviour being difficult to predict and their response to remedial strategies being almost always counter-intuitive (Meadows, 1989; Forrester, 1968; 1971; 1975; 1987 and Nuthman, 1994). Other authors (Ackoff, 1981; Checkland, 1981; 1990; 1993, Checkland and Scholes, 1999, Eden, et al., 1983; Bryant, 1989 and Vennix, 1996) use the term messy instead of wicked.

Regardless of how powerful or insightful they are, models that cannot be built in timeframes consistent with business decision-making imperatives are of little or no value. As system dynamics modellers we owe it to those we set out to support, by providing powerful insights into the causes of dynamic behaviour, to build verified and validated models and to build them in a timely manner.

It is noted that system dynamics models cannot be fully validated. Models will always be simplifications of the real world, and as such will involve assumptions and approximations. However, I do suggest that we can validate models within the bounds of the specific problematic behaviour we have observed. Such models can be necessary representations and just sufficient for their purpose, and hence can be very useful.

The first purpose of any system dynamics model is to support analysis of statements of dynamic hypothesis about the problem being examined. These statements can be communicated most effectively through well-designed and constructed models. Dynamic hypotheses can be scrutinised through the simulations that models enable. So, it is most important to get a preliminary model working as soon as possible, only adding details as necessary. This is the firm view of both Forrester (1968: 3-5) and Sterman (2000: 81). Albert Einstein made a similar observation noting that a theory [and any model we might build to demonstrate or explain that theory] must be just sufficient for its purpose, and no more. I am convinced that this book will help in delivering that important outcome.

The purpose of this book, therefore, is to provide to students and researchers, professional consultants and managers an invaluable set of tools, techniques and system dynamics structural building blocks, which then will enable them to build models of complex real-world behaviour. These models, necessary and sufficient representations of the dynamic real world in which we live, when properly constructed, will provide unprecedented levels of understanding of complex behaviour and will enable the design of highly effective management interventions.

Acknowledgements

Many people have contributed to the system dynamics modelling modules and example models contained in this book. Special mention must be made of my teacher Keith Linard who not only introduced me to system dynamics modelling, but also taught me much of what I know about this fascinating discipline. Keith developed many example models to foster students’ learning. These models were very generously offered to all who undertook his system dynamics modelling courses. A number of those models have served to aid my learning and through various iterations have evolved into the example models explained in this book.

David Paterson, one of my Masters research students, repeatedly questioned and shook the foundations of my thinking about model building, and I thank him for that. I thank countless postgraduate students for their often unwitting, but important, contribution to development of my own knowledge and system dynamics modelling skills.

The initiative of Dr Jim Hines of Sloan School of Management at Massachusetts Institute of Technology, Dr Bob Eberlein of Ventana Systems, Professor George Richardson of the Rockefeller College of Public Affairs and Policy, University at Albany; the late Dr Barry Richmond of High Performance Systems, and others in compiling their ‘Molecules of Structure: Building Blocks for System Dynamics Models’ is applauded. Their work was both an inspiration for the writing of this book and a challenge to the comprehensiveness of its content. This book builds on their important work.

The extensive explanations of systems thinking and system dynamics modelling by Professor John Sterman of the Sloan School of Management at Massachusetts Institute of Technology, contained in his seminal work ‘Business Dynamics’, provide the theoretical underpinnings of many of the modules and models contained in this book. Sterman’s explanations of system dynamics modelling theory and practice are exemplary, and I have not attempted to emulate his excellent work (though I make repeated reference to it).

Special mention must also be made of Professor Geoff Coyle, now Visiting Professor of Strategic Modelling at London’s South Bank University. Geoff’s unique contribution to the system dynamics discipline has been recognised through the System Dynamics Society Lifetime Award. Geoff’s advice to me, his guidance, teaching, and uncompromising insistence on discipline and rigour have been strong influences on my thinking about system dynamics modelling, my own research and teaching. Without Geoff’s influence at the formative stages of my system dynamics modelling career, this book would not have seen the light of day.

Alan C. McLucas
Canberra
February 2005

Table of contents

CONTENTS
1	COMPLEXITY AND DYNAMIC BEHAVIOUR	1
1.1	About Complexity and Complex Problems	1
1.2	What Complex Problem Examples Have in Common	12
1.3	Thinking About and Modelling Naturally in the Time Domain	14
1.4	Overcoming Our Sometimes Constrained View of the World	15
1.5	About System Dynamics Modelling	16
1.6	A Systems Engineering Approach to Model Requirements and Model Building	18
1.7	The System Dynamics Modelling Process	20
1.8	Top-Down Compared to Bottom-Up Approach to Problem Solving	21
1.9	Integrating Soft Systems Methodology, Systems Thinking, System Dynamics Modelling and Systems Engineering	23
1.1	The Systems Engineering ‘Vee’ Model Applied to System Dynamics Modelling Projects	24
1.11	Group Model Building	25
1.12	Summary	27
2	WHY MODULES ARE IMPORTANT	29
2.1	Models and Modelling Building Blocks	29
2.2	Modelling Methodology	30
2.3	Taking Action to Remedy the Problem Situation	32
2.4	Model as a Necessary and Sufficient Representation	34
2.5	Necessary and Sufficient Representations—A Human Resources Management Example	35
2.6	The Need for Structural Building Blocks—Modules	39
2.7	Communicating Ideas About Dynamic Hypotheses	40
2.8	Importance of Structure—Models and Real-World Problems	43
2.9	Systems Engineering—Component and Module Re-use	43
2.1	Modules to Deliver Specific Functionality	44
2.11	Combining Modules—Essential Considerations	45
2.12	Array Modules	46
2.13	Module—Expanded Definition	46
2.14	Module Descriptions	48
2.15	Summary	48
3	BUILDING A BASIC POWERSIM™ STUDIO MODEL	49
3.1	Background	49
3.2	Summary	72
4	BUILDING A MODEL TO ANALYSE FEEDBACK DYNAMICS	73
4.1	Quality Thinking First	73
4.2	Outline of Remaining Steps—From Conceptual Model to Analytical Model	87
4.3	Summary	111
5	BUILDING AN ARRAY MODEL STEP-BY-STEP	113
5.1	Background to This Chapter	113
5.2	Summary	148
6	VERIFICATION AND VALIDATION	151
6.1	Verification—Building the Model Right	151
6.2	Validation—Building the Right Model	151
6.3	Verification—Considerations for Design of Testing	151
6.4	Validation—Considerations for the Design of Testing	152
6.5	Summary	165
APPENDICES
A	CAUSAL LOOP DIAGRAMMING CONVENTIONS	167
B	STOCK-AND-FLOW DIAGRAMMING CONVENTIONS	171
C	INFLUENCE DIAGRAMMING CONVENTIONS	173
D	INFLUENCE DIAGRAMS AND STOCK-AND-FLOW DIAGRAMS	175
E	GENERIC MODULE DEFINED	179
F	MODULES	181
	GLOSSARY	233
	REFERENCES	245
	INDEX	253

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