Application of System Dynamics to Corporate Strategy: An Evolution of Issues and Frameworks

Abstract This paper discusses five landmark projects which highlighted issues and produced frameworks that became important building blocks in the application of System Dynamics to corporate strategy. The early models were primarily at the level of the firm. The first model described in the paper captures the tension among conflicting performance objectives and shows how the conflicts impact mid-term company performance. The second model represents the behavior of an R&D organization as it responds to changing pressures and direction from corporate management. Over time the focus shifted to market behavior and competition. The third model explains powerful long-term dynamics that lead to “commoditization" of products and services. Recent work analyzed the social dynamics of markets, e.g., as they affect innovation and technology substitution. The fourth model in the paper represents the fundamental dynamics of innovative industries, building on an extensive body of research and publications. The final model focuses on the market impacts of social factors, e.g., trust, fashion, the characteristics of lead users, how trends are perceived and extrapolated, the flow of information, bandwagon effects, and network effects. The progression started with classical Industrial Dynamics, models of the firm which focused on orders, production, and shipments. At each milestone more behavioral richness and complexity were recognized and represented. What do we know now that we did not know when the field was founded fifty years ago? The most important lessons are about the critical roles of organizational, social, and psychological factors in important business decisions, competitive behaviors, and the evolution of markets.