Business Dynamics and System

Modeling
Chapter 3: Modeling
Process
Pard Teekasap
Southern New Hampshire
University
 Outline
1.Purpose of modeling
2.The client and the modeler
3.Steps of the modeling process
4.Modeling is iterative
5.Overview of the modeling process
 Purpose of modeling
• Who are the most important people
in the safe operation of an aircraft?
• Designer OR Pilot
• Too many managers spend far too
much time acting as pilots rather
than creating an organizational
structure consistent with their
vision and values
 Small or Big Problem
• Solutions to small problems yield
small rewards
• Focus your model on the important
issues, on the problems where your
work can have lasting benefit, on
the problems you care most deeply
about
 Client and Modeler
• Clients = people you must influence
for your work to have impact
• Purpose is to help the clients solve
their problem. If the clients
perceive your model does not
address their concerns or lose
confidence in it, you’ll have little
impact
Clients are not always right
• Modelers have a responsibility to
require their clients to justify their
opinions, ground their views in
data, and consider new viewpoints
• When the clients ask for something
you think is unnecessary or
misguided, you must work with
them to resolve the issue
Steps of the modeling
process
1. Problem Articulation
(Boundary Selection)

5. Policy
2. Dynamic
Formulation
Hypothesis
& Evaluation

4. Testing 3. Formulation
Iterative with real world
Real
World

Decisions
Information
(Organizational
Feedback
Experiments) 1. Problem Articulation
(Boundary Selection)

5. Policy
2. Dynamic
Formulation
Hypothesis
& Evaluation

4. Testing 3. Formulation

Strategy, Mental
Structure, Models
Decision of Real
Rules World
 Problem articulation
• What is the issue the clients are most
concerned with?
• What problem are they trying to
address?
• What is the real problem, not just the
symptom of difficulty?
• What is the purpose of the model?
 Can I model the whole
world?
• Is it useful to have the map as
detailed as the territory?
• To be useful, model must address a
specific problem and simplify
• Usefulness of models lies in the fact
that they simplify reality, creating a
representation of it we can
comprehend
• The model should be simple enough
so the assumptions could be
examined
 Methods for articulate the
problem
• References Modes
• Time Horizon
 Reference Modes
• Set of graphs and other descriptive
data showing the development of
the problem over time
• You and the clients must identify the
time horizon and define variables
and concepts you consider to be
important for understanding the
problem and designing policies to
solve it
 Time Horizon
• How long should I collect the data?
• It should far enough back in history
to show how the problem emerged
and describe its symptom
• How far should I simulate to?
• It should far enough into the future to
capture the delayed and indirect
effects of potential policies
US Energy market is stable
18
Consumption

Million Barrels/Day
12 Imports

6 Alaska

Production,
Lower 48 States
0
1986 1988 1990 1992 1994 1996
30

25

20
1990 $/bbl

15

10

0
1986 1988 1990 1992 1994 1996
Are you sure it is stable?
18
Consumption

Million Barrels/Day
12 Imports

Alaska

6
Production,
Lower 48 States

0
1870 1890 1910 1930 1950 1970 1990
50

40
1990 $/bbl

30

20

10

0
1870 1890 1910 1930 1950 1970 1990
 Or it is stable?
Fossil Energy Production

-10000 -5000 Iron 0 5000

Age Industrial First Oil
Year Revolution Shock
 So how long should I
simulate
• A good rule of thumb is to set the
time horizon several times as long
as the longest time delays in the
system, and then some
 Formulating a dynamic
hypothesis
• Develop a theory to account for the
problematic behavior
• Dynamic because it must provide an
explanation of the dynamics
characterizing the problem in term of
underlying feedback and stock and
flow structure of the system
• Hypothesis because it’s provisional,
subject to revision or abandonment
• Goal is to help the client develop an
endogenous explanation for the
problematic dynamics
 Endogenous Explanation
• An endogenous theory = the
dynamics of a system through the
interaction of the variables and
agents represented in the model
• A exogenous variables theory
explains the dynamics of variables
in term of other variables whose
behavior you’ve assumed
• From the beer game, who generates
the system behavior
Exogenous is still important
• Focusing on endogenous
explanations does not mean never
include any exogenous variables in
the model. But the number of
exogenous inputs should be small
and carefully scrutinized
• If there are any important feedbacks
from endogenous elements to that
exogenous input, the model should
expand and that input must be
modeled endogenously
 Tools for mapping system
structure
• Model boundary chart
• Subsystem diagram
• Causal Loop Diagram (CLD)
• Stock and flow maps
• Policy structure diagrams
 Model boundary chart
Endogenous Exogenous Excluded
GNP Population Inventories
Consumption Technological change International trade
Investment Tax rates Environmental
Savings Energy Policies constraints
Non-energy resources
Prices Interfuel substitution
Wages Distributional equity
Inflation rate
Labor force
participation
Employment
Interest rate
Energy production
Benefits of model boundary
chart
• Alert the clients to a questionable
assumption so they could evaluate
what the effect of the missing
feedback might be
• Without a clear understanding of the
boundary and assumptions, models
constructed for one purpose are
frequently used for another for
which they are ill-suited,
sometimes producing absurd
 Subsystem diagram
• Convey information on the boundary
and level of aggregation in the
model by showing the number and
type of different organizations or
agents represented
• Should not contain too much detail
• Multiple subsystem diagrams can be
used to convey the hierarchical
structure of large models
 Subsystem diagram for
corporate growth model
Sales Effort
Product Suitability
Delivery Delay
Quality
Price
Delivery of Product
Company Market
Payment
Orders
Mkt. Response to Price
Mkt. Response to Quality
Mkt. Response to Delivery Delay
Mkt. Response to Suitability
 CLD, Stock & Flow, Policy
structure diagram
• CLDs are useful for diagramming the
feedback structure of systems
• Stock and flow diagrams emphasize
their underlying physical structure
and track accumulations of material,
money, and information as they move
through a system
• Policy structure diagrams focus on the
information cues the modeler
assumes decision makers use to
govern the rate of flow in the system
 Formulating a simulation
model
• Transfer from conceptual model to
formal model
• Formalization helps to you to
recognize vague concepts and
resolve contradictions that went
unnoticed or undiscussed during
the conceptual phase
 Testing
• Not only to replicate historical
behavior, every variable must
correspond to a meaningful
concept in the real world
• Every equation must be checked for
dimensional consistency
• Sensitivity of model behavior and
policy recommendations must be
assess in light of uncertainty in
assumptions
• Test for extreme conditions
Policy design and evaluation
• Policy design is more than just
changing the value of parameters.
It includes the creation of entire
new strategies, structures, and
decision rules
• The robustness of policies and their
sensitivity to uncertainties in model
parameters and structures must be
assessed, including their
performance under a wide range of
alternative scenarios