Figures and Tables excerpted from

Business Dynamics:
Systems Thinking and Modeling for a Complex World
Chapter 5

John D. Sterman
Massachusetts Institute of Technology
Sloan School of Management

Figures and Tables excerpted from

BUSINESS DYNAMICS: SYSTEMS THINKING AND MODELING FOR A COMPLEX WORLD
John D. Sterman

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Business Dynamics
 Causal loop diagram notation

Figure 5-1

Business Dynamics
 Rules of Causal or Influence Diagram
• System elements are represented by “nodes” of the influence diagram

• Influences are represented by arrows connecting the nodes

• A minus sign indicates influence in the opposite direction

• Influence diagram must contain only direct influence

• When considering one influence, all other influences must be frozen

• Define the condition for which the influence diagram is to be valid

• An odd number of minus sign reverses the feedback sense in a loop

• Feedback sense can be indicated by a plus or minus

Business Dynamics
 Link polarity: definitions and examples

Symbol Int erpreta t ion Mat hemat ics Examples

All else equal, if X increases ŽY/ŽX > 0

(decreases), then Y increases Product +
In the case of Sales
(decreases) above what it would have Quality
+ accumulations,
been. +
X Y t

In the case of accumulations, X adds Y= (X + ... )ds +Yt0 Effort Results

to Y. t0 +
Births Population

All else equal, if X increases ŽY/ŽX < 0

(decreases), then Y decreases Product -
In the case of Sales
(increases) below what it would have Price
- accumulations,
been. -
X Y
t
In the case of accumulations, X Frustration Results
subtracts fromY. Y= (-X + ... )ds +Yt0 -
t0
Deaths Population

Table 5-1

Business Dynamics
 Causation versus Correlation

Figure 5-2 Causal diagrams must include only (what you believe to
be) genuine causal relationships.

Business Dynamics
 Label link and loop polarities

Figure 5-3

Business Dynamics
 Assigning Link Polarities

Quality

Price
Product
Attractiveness
Delivery
Delay

Functionality
Figure 5-4 The attractiveness of a product as it depends on various attributes.

Business Dynamics
 Feedback loop examples
Attractiveness Cumulative
of Market Production

Number of Market Unit

Profits
Competitors Share Costs

Price Price

Pressure to Clean Bank Cash

Up Environment Reserves

Perceived
Environmental Cleanup Net
Solvency of
Quality Effort Withdrawals
Bank

Figure 5-5 Identify and label the polarity of the links and loops in the examples
shown.

Business Dynamics
Business Dynamics
 Calculating the open-loop gain of a loop

x1 Break the loop x1I x1O

at any point

x2 x4 x2 x4

and trace the effect

x3 of a change around x3
the loop.

Polarity = SGN(Žx1O/Žx1I)

Žx1O/Žx1I = (Žx1O/Žx4)(Žx4/Žx3)(Žx3/Žx2)(Žx2/Žx1I)

Figure 5-6

Business Dynamics
 All Links Should Have Unambiguous Polarities

Incorrect Correct

? (+ or -) +
Price Revenue Price Revenue
+
Sales
-

Figure 5-7 Causal links must have unambiguous polarity

Business Dynamics
 Name Your Loops

Figure 5-9 Name

and number your
loops to increase
diagram clarity
and provide
labels.

Business Dynamics
 Indicate Important Delays in
Causal Links

Price Supply

Delay +

Figure 5-10 Representing delays in causal diagrams

Business Dynamics
 Indicate Important Delays in Causal Links
Price +
Gasoline
Expenditures
Delay +

+ -
Delay Discretionary
Expected Demand for
Trips
Short-Term Gasoline
Price +
Vehicle M iles -
+ +
Delay Car Pooling and per Year
Expected
Long-Term Use of Existing - -
+ Mass Transit
Price
Delay Density of
Settlement Patterns,
Delay + Development of New
Mass Transit Routes
Efficiency of
+ Efficiency
Delay Cars on Road
of Cars on +
Figure 5-11 Market
Different time
delays in the
Gasoline Price
response of
gasoline demand
and expenditures Gasoline Consumption
to price
Expenditures on Gasoline
Time
Business Dynamics
 Variable names should be nouns or noun phrases

Incorrect Correct

+ +
Costs Rise Price Rises Costs Price

Figure 5-12

Business Dynamics
 Variable Names Should Be Nouns or Noun Phrases

Variable names should have a clear sense of direction

Figure 5-13

Business Dynamics
 Choose variables whose normal sense of direction
is positive.

Incorrect Correct

+ -
Costs Losses Costs Profit

+ -
Criticism Unhappiness Criticism Happiness

Figure 5-14

Business Dynamics
 Figure 5-15 Make intermediate links explicit to clarify a causal relationship.

Business Dynamics
 Tips for Causal Loop Diagram Layout

1. Use curved lines for information feedbacks. Curved lines help the reader
visualize the feedback loops.

2. Make important loops follow circular or oval paths.

3. Organize your diagrams to minimize crossed lines.

4. Don’t put circles, hexagons, or other symbols around the variables in causal
diagrams.

5. Iterate. Since you often won’t know what all the variables and loops will be
when you start, you will have to redraw your diagrams, often many times,
to find the best layout.

Choose the Right Level of Aggregation

Don’t Put All the Loops into One Large Diagram

Business Dynamics
 Figure 5-16 Make the goals of negative loops explicit.

Business Dynamics
 Distinguish between actual and perceived conditions.

Figure 5-17
Business Dynamics
 Figure 5-19
Reference mode
for the ant
strategy

Business Dynamics
 Figure 5-20
Reference
mode for the
grasshopper
strategy

Business Dynamics
 Assignment + -
Work
Rate Completion +
Assignment
Calendar Backlog Rate
Time - - +
B2
+ Time
Corner
Remaining - + Cutting

Work
Pressure
Due Effort Devoted Productivity
Date to Assignments
-

B1

Midnight
Oil

Figure 5-21 Basic control

loops for the assignment
backlog +
Workweek

Business Dynamics
 Assignment + -
Work
Rate Completion +
Assignment
Calendar Backlog Rate
Time - - +
B2
+ Time Corner
Remaining - + Cutting

Work
Pressure
Due Effort Devoted Productivity
Date to Assignments +
-

B1

Midnight
R1 Oil
Burnout

Figure 5-22 The

burnout loop Energy
+ Level
-
Workweek Delay

Business Dynamics
 Assignment + -
Work
Rate Completion +
Assignment
Calendar Backlog Rate
Time - - +
B2
+ Time
Corner
Remaining - + Cutting

Work
Pressure
Due - Effort Devoted Productivity
Date to Assignments +
- R1

B3 Burnout B1
Grades Quality Midnight
Control Oil
+
+
Quality of
R2
Work
+
Too Tired
Figure 5-23 The “too to Think
tired to think” loop Energy
+ Level
-
Workweek Delay

Business Dynamics
 Limitations of the Causal Diagram
Assignment + -
Work
Rate Completion +
Assignment
Calendar Backlog Rate
Time - - +
B2
+ Time Corner
Remaining - + Cutting

Work
B4 Pressure
Due - Effort Devoted Productivity
Date My Dog Ate to Assignments
My Homew ork +
+ - R1
Requests for B3 Burnout
+ B1
Extensions Grades Quality
Control Midnight
+ Oil
+
• the diagram does not distinguish Quality of
Work
between stocks and flows R2 +
Too Tired
• some loops could be specified in more detail to Think
Energy
+ Level
-
Workweek Delay

Figure 5-24 My dog ate my

Business Dynamics homework—Parkinson’s Law
 Figure 5-25 Making the goal of a loop explicit. Adding the desired GPA and its
determinants.
Business Dynamics
 ADAM SMITH’S INVISIBLE HAND AND THE
FEEDBACK STRUCTURE OF MARKETS

Figure 5-26 The invisible

hand: the feedback structure
of markets

Business Dynamics
 Figure 5-27 Feedback structure of non-price-mediated resource allocation
systems

Business Dynamics
 EXPLAINING POLICY RESISTANCE : TRAFFIC CONGESTION

Mental Models of the Traffic Problem

Figure 5-30 More roads, more traffic

Sources: Historical Statistics of the US; Kurian (1997).

Business Dynamics
 Figure 5-31 Open-loop view of traffic congestion

Business Dynamics
 Figure 5-32
Determinants of
travel time

Business Dynamics
 Figure 5-33
Congestion leads to
political pressure to
build more roads,
congestion via the
negative Capacity
Expansion feedback.

Business Dynamics
 Compensating Feedback: The Response to Decreased Congestion

Figure 5-34 Traffic

volume depends on
congestion, closing
several negative
loops that cause
traffic to increase
whenever new roads
are built.

Business Dynamics
 Figure 5-35 Reduced
travel time and an Road +
expanded highway
Delay Construction
network increase the
size of the region
accessible from the +
B1 Pressure to
center, which Highway
Reduce
expands the Capacity Capacity
population and leads Expansion Congestion
to still more traffic.
R1 + -
-
Open the Travel Desired
Hinterlands Travel Time
Time
+

B2 - +
+ - -
Discretionary Adequacy of
Size of Region Traffic Trips Attractiveness Public Transit
Within Desired Volume of Driving +
B5 +
Travel Time +
Move to
+ Trips per
Delay the Burbs Day +
Delay
+ B3
Public
Population Extra Miles Transit
B4
and Economic Fare
Activity of Take the Average
Bus? Trip Length +
Region -
Public
Cars in Transit
Cars per
Region Ridership
+ + Person -

Business Dynamics
 The Mass Transit Death Spiral
Road +
Delay Construction

+
B1 Pressure to
Highway
Reduce
Capacity Capacity
Expansion Congestion

R1 + -
- Delay
Open the Travel Desired
Hinterlands Travel Time
Time
+ B8
MT Capacity
B2 - + Expansion
+ - -
Discretionary Adequacy of + -
Size of Region Traffic Trips Attractiveness Public Transit Public
Within Desired Volume of Driving +
+ Transit
Travel Time B5
+ + Trips per R2 Network
Move to -
Delay the Burbs Day + Route
Delay Expansion +
B3 R3 Delay
+ Public Public
Population Extra Miles Choke off Transit + B6Transit
B4 Ridership
and Economic Fare Costs
Activity of Take the Average Cost
Bus? Trip Length + Cutting
Region - B7
Public
+ Fare Public
Cars in Transit Increase
Cars per Transit
Region Ridership Public
+ Person - Deficit +
+ + Transit
Revenue -

Figure 5-36 The high fixed costs of mass transit lead to a death spiral.

Business Dynamics
 Road +
Delay Construction

+
B1 Pressure to
Highway
Reduce
Capacity Capacity
Expansion Congestion

R1 + -
- Delay
Open the Travel Desired
Hinterlands Travel Time
Time
+ B8
MT Capacity
B2 - + Expansion
+ - -
Discretionary Adequacy of + -
Size of Region Traffic Trips Attractiveness Public Transit Public
Within Desired Volume of Driving +
+ - Transit
Travel Time B5
+ + Trips per R2 Network
Move to -
Delay the Burbs Day + Route
Delay Expansion +
B3 R3 Delay
+ Public Public
Population Extra Miles Choke off Transit + B6 Transit
B4 Ridership
and Economic Fare Costs
Activity of Take the Average Cost
Bus? Trip Length + Cutting
Region - B7
Public
+ Fare Public
Cars in Transit Increase
Cars per Transit
Region Ridership Public
+ Person - Deficit +
+ + Transit
R4 Revenue -
Can't Get There
on the Bus

Figure 5-37 You can’t get there on the bus.

Business Dynamics
 Compensating Feedback: The Source of Policy
Resistance

Policies directed at alleviating the symptoms of a problem usually fail because they
trigger compensating feedbacks, feedbacks that undercut the intended effects of the
policy. The compensating loops arise because other actors, with their own goals,
respond to changes in the state of the system in such a way as to offset the intended
effects of the policy. While each individual loop may be weak, the combined effect can
often compensate completely for any policy directed at a symptom of a problem.

Business Dynamics
 “In the complex system the cause of a difficulty may lie far back in time from
the symptoms, or in a completely different and remote part of the system. In fact,
causes are usually found, not in prior events, but in the structure and policies of the
system . . . Conditioned by our training in simple systems, we apply the same intuition
to complex systems and are led into error. As a result we treat symptoms, not
causes. The outcome lies between ineffective and detrimental . . . If the attempted
solution intensifies the problem, wrongly attributed to another source, the organization
likely will redouble its “corrective” action, producing more difficulty and pressure
for still more remedial action. A destructive spiral becomes established.” – Jay Forrester

Business Dynamics