System dynamics (SD) is a discipline of modeling, simulating, and steering complex, dynamical systems.
System Dynamics is very effective in representing the dynamics of management systems. For the enterprise, SD increases the effectiveness of management, by completing and enhancing the traditional management instruments. It enables the user to develop a better understanding of the effects of changes, and supports him in designing alternative policies that result in an improved system performance. SD was developed by Jay Forrester at the MIT in the 1960´s. Since then it has been applied in many areas such as product development, project management, and supply chain management, among which is a popular explanation of the bullwhip effect.
Stronger models are necessary for the improvement of organizational management. Modeling and simulation have been basic tools in the realm of technology for a long time. In companies, qualitative models and spreadsheets from accounting are still mainly used. While these models have proven to be effective in limited areas, they do not suffice. They require completion with simulation models which can adequately represent the dynamic complexities of the real world. Simulations permit countless experiments in the computer at a low cost. This is the strongest possible way of determining the space for decision making as well as of testing and improving alternative strategy designs. In particular, assumptions which form the basis for strategic decisions can be examined thoroughly.
Finally, problematic areas and leverage effects of actions can be more easily recognized than with the means which are presently available in the domain of strategy. The interesting aspect in the turbulent environment of our time is less the often praised "optimization" of a strategy, but the determination of its robustness and the development of reliable paths for its realization.
Experts in corporate development and strategy are aware of this situation. A new study of large companies in Germany shows that the participants consider modern simulation techniques to be the success factor number one for strategy development. It is all the more amazing that less than 5% of the enterprises questioned used simulation in the conception and assessment of strategies, and only approximately 20% in strategic analysis.
This will change quickly, however, when decision makers realize what modeling with system dynamics is capable of. They will attain better thought out strategic decisions, which are more solid because they were thoroughly tested. We are presently able to create the corresponding quantitative model on a continual basis during a strategy process and to complete simulations within a very short time, with their utility exceeding the costs by a large factor. A good simulation model can return costs ten or a hundred times. Is there any better investment?
The following simulation presents the System Dynamics model of Forrester’s Urban Dynamics (1969). This computer model describes the major internal forces controlling the balance of population, housing, and industry within an urban area. Also, the life cycle of a city is simulated, with the impact of proposed remedies on the system. Startling in its conclusions, Forrester's book Urban Dynamics became the basis of a major research effort that has influenced many governmental urban policy decisions. The model enables the exploration of the effects of different policies („Start Simulation“ button under „Policies”). With „Explore Model”, it is possible to discover the causal structure of the model.