System Dynamics Method
System Dynamics Tutorial
When building system dynamics models of a business, we follow an iterative approach that captures our understanding of the business in a business prototype that is calibrated against available data. The prototype is then used to explore potential scenarios of the future and deepen our understanding of the business.
The approach has five major steps:
- Formulate initial strategic questions. At the beginning of the process, we find an initial formulation for the strategic questions that we would like to answer using our prototype. These questions are very important because they define the scope of our prototyping project – especially when building models it is important to know where the model boundary is, i.e. which part of the business we want to model in detail, and which part of the business (and its environment) we will not model at all or only in a very simplified manner.
- Understand the business. It is now time to deepen our understanding of the concrete situation the business is and to identify and approach all of the stakeholders affected by our modeling endeavor. Together we identify all of the entities that are relevant to the business and the strategic question and we start sketching the dynamics of the business using a causal loop diagram. We mostly find that our initial formulation of the questions needs to be refined at this stage, as our understanding of the situation improves and new stakeholders come on board.
- Simulate the business. As soon as we feel confident about the conceptual causal loop model we can begin to build a detailed stock and flow model. We also need to determine the scenarios we want to investigate in order to answer the strategic questions. Based on these scenarios and our model we first identify and then gather the reference data we will need to calibrate and test the model.
- Evaluate future scenarios. Once we are confident that our reference model is valid and powerful enough to deliver answers to our strategic questions we begin to investigate the scenarios in detail.
- Make recommendations. In this step, we use our findings to make recommendations concerning future business development.
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