Designing corporate strategy with system dynamics: A case study in the pulp and paper industry

We describe the use of system dynamics tools and processes to assist a major integrated forest products company develop its strategy. The firm had recently acquired a major pulp and paper mill and had entered a new market, the specialty paper business. However, despite substantial investment, the mill was losing money, contrary to expectations. We drew on established strategic frameworks, using system dynamics to integrate the data generated by traditional analyses. Through internal and external interviews, archival data, site visits, and analysis of the market place, we develop a representation of management's collective mental model, showing the feedback processes they believed would lead to success in the specialty market. We then develop a dynamic hypothesis, explicated in the form of causal loop diagrams, to explain the failure of the firm's strategy to yield profitable operation for the mill. We show how management underestimated a variety of side effects of the new strategy, both at the market level and in the mill. These side effect feedbacks undercut the intended effect of the new strategy. We describe the theory, data, and process, including current steps the firm is undertaking to implement the results emerging from the study.