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Implementing
System Dynamics Models into Management Control Systems to support
Scenario Planning
Business plan as a planning and control tool
The business plan is a tool that managers and entrepreneurs
quite often use to envisage goals, objectives and policies,
to be shared with internal and external counterparts (e.g.,
funders, venture capitalists).
In the last decade, there has been a rising resort to business
plans by small and larger firms. However, many entrepreneurs
have viewed writing their business plans as a bureaucratic constraint
(i.e. as a duty to be fulfilled), rather than a learning tool
which may help them to be aware of the business formula that
is going to be adopted. The outcome of such a mechanistic perspective
is a static and non-systemic document emerging from the aggregation
of disparate data that does not assist decision makers in understanding
the dynamic system the firm will comprise.
Furthermore, the marginal involvement of entrepreneurs in business
plans drawing-up does not allow them to introduce in their company
a fundamental control tool to understand the strategic implications
related to the dynamics of income (e.g. break-even-analysis),
equity and financial resources (e.g. financial leverage, cash
flow). Also dynamic relationships among different business subsystems
and between the firm and its market are scarcely perceived.
The use of static and linear hypotheses often leads to values
referred to a generic perspective financial year, which are
only a projection of past results and do not allow one to outline
proactive policies to enhance business growth. Such an approach
significantly limits decision makers' attitudes to discern cause-and-effect
relationships and to envisage the likely consequences of adopted
policies in the short and long run.
This myopic view of the business system, that is more concerned
with the monetary datum, rather than the information value,
may lead to an illusory analysis of variances between actual
and budgeted figures. As a consequence of this, it often becomes
very difficult for decision makers to figure out the real causes
of such unexpected results and to implement a corrective policy.
Another implication of a bureaucratic approach to business planning
can be referred to the misperception of non-monetary values
(e.g. business image, quality/price ratio), delays (e.g. change
in market demand, competitors' reactions) and non-linearities
between relevant variables.
The above weaknesses in conventional business planning can become
a primary cause of crisis, particularly when the firm operates
in complex and dynamic systems and growth is not conceived as
a result of a learning process.
System
Dynamics Simulation Models to enhance Scenario Planning
Growth is often a significant factor of complexity leading
to business crisis. Uncontrolled decisions giving rise to higher
business assets or activity volumes may generate shortages in
available resources, in spite of increasing revenues.
Decision makers often do not take into account the evolving
structure of relationships between different functional areas
inside the firm, and between the company and its relevant environment.
Most managers never discuss the future. They are too much focused
on reducing the complexity of managing today. The implicit vision
of the future they create in their mind tends to be set and
unchanging. Human beings are subject to biases and imperfect
reasoning about uncertainty. They tend to misperceive events
that are quite unlikely and to ignore or stress other possible
unpleasant outcomes. Today, business complexity has proved to
be a primary cause of failure. Understanding complexity is not
a matter of reducing it. It is, rather, important to deal with
management complexity and unpredictability, and to foster organisational
learning.
Understanding business systems does not imply the need to draw
up detailed and long term plans. Planning does not usually mean
learning to anticipate possible futures. It is, instead, typically
seen as the work of reducing uncertainty through prediction.
Decision making based on such an approach gives an illusion
of control.
Many companies use spreadsheet simulation tools to forecast
the financial implications of plans. Quite often, such analyses
are based on simplistic and misleading hypotheses that can lead
decision makers to dangerous conclusions. In fact, usually such
tools do not make explicit interdependencies between relevant
variables, delays, non-linearities and policy levers.
Scenario analysis is a tool to support organisational learning
and decision-making during times of rapid strategic change,
when discontinuities in the business environment make extrapolation
from available historical data misleading or meaningless. Through
scenario analysis decision-makers are able to focus the relevant
environment and to generate a spanning set of alternative futures,
upon which strategic analysis and diagnosis will be developed.
Scenario planning can be successfully implemented through the
use of system dynamics simulation models, linked with spreadsheet
accounting-based tools. The system dynamics methodology allows
decision-makers to make their mental models explicit, to assess
their consistency and improve them.
Computer-aided visioning tools, based on the system dynamics
methodology, are designed to provide not accurate predictions
of the future, but a realistic and engaging vehicle to stimulate
managers into reconsidering the ways of doing things and perhaps
to adjust their mental models. Different stakeholders in the
firm can then compare and share their new emerging view of,
for example, how to prepare for major change.
Implementing System Dynamics Models into Management Control
Systems to support Scenario Planning through microworlds
Matching system dynamics and accounting models into comprehensive
interactive learning environments (microworlds) is likely to
support decision makers in implementing their own business plans
and analysing achieved performance, concerning several issues,
such as: business start-up, product portfolio management, commercial,
financial and production policies, e-commerce strategies, business
networks.
Implementing system dynamics models into management control
system through microworlds allows decision makers to link strategy
to action, thereby improving business effectiveness and entrepreneurial
learning.
The goal of the workshop is to show managers, entrepreneurs
and consultants how to introduce system dynamics modelling as
part of management control systems.
At the end of workshop it will be presented a 3-days advanced
management programme on Exploring
Business Growth through Scenario Planning - A System Dynamics
Simulation & Accounting Perspective (Date: 18-20
September 2001 - Place: Palermo - Italy)
Programme
| 8:30 - 9:00 |
Participants registration |
| 9:00 - 9:15 |
Welcome message
Giuseppe Costanzo (President of the Association of Entrepreneurs
of Palermo Province) |
| 9:00 - 9:30 |
Introductory talk
Carlo Sorci (Professor of Business Management, University
of Palermo - President of CUSA) |
| 9:30- 10:00 |
Implementing System Dynamics Models into
Management Control Systems to support Scenario Planning
Carmine Bianchi (Associate Professor of Business Management,
Universities of Foggia and Palermo, Italy; Scientific co-ordinator
of CUSA - System Dynamics Group, Palermo) |
| 10:00 - 11:15 |
Team-works on:
- business growth and liquidity dynamics;
- relationships between production and commercial subsystems;
- relationships between the business and its competitive
system;
- other issues suggested by participants. |
| 11:15 - 11:30 |
Coffee Break |
| 11:30 - 12:30 |
Team-works (continued) |
| 12:30 - 12:45 |
Team-work summary: relationships between
production and commercial subsystems;
Paal Davidsen (Professor of System Dynamics, University
of Bergen, Norway; Director of the Master Phil. in System
Dynamics, University of Bergen, Norway)
|
| 12:45 - 13:00 |
Team-work summary: relationships between
the business and its competitive system;
Graham Winch (Professor of Business Analysis, University
of Plymouth, England; Editor of the System Dynamics Review)
|
| 13:00 - 13:15 |
Conlclusions
Carlo Sorci |
Workshop venue
The workshop will be held at the Association of the Entrepreneurs
of Palermo Province, Via XX Settembre, 53 - Palermo.
The workshop
is free of charge
Please, send us in advance the
application
form via e-mail cusa-sdglist@libero.it
or fax +39.091.6254532.
For further
information
- Carmine Bianchi
Associate Professor of Management and Accounting and Control
Systems of the Universities of Foggia and Palermo; Scientific
co-ordinator of the CUSA - System Dynamics Group; bianchi@unipa.it.
- Enzo Bivona
Doctoral student in Business Management - University of Catania;
Master Phil in System Dynamics - University of Bergen (Norway);
Researcher of the CUSA - System Dynamics Group; enzo.bivona@libero.it.
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