System Dynamics Seminar

8/3/2019 System Dynamics Seminar

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System Dynamics and its Applications

Padarabinda Maharana (10IM60R08)

Rohan Pillai (10IM60R10)



+Over view

Introduction

System Dynamics concepts

Applications of System Dynamics

Case studies

Conclusion

References



+

Introduction



+Introduction

Created in 1956 at MIT by Dr. Jay Forrester

Originally evolved from control systems and informationfeedback systems

Initially had limited application outside engineering

Currently used to model dynamics of a variety of systems



+Introduction

Highly versatile academic discipline

Can be applied invarious scenarios including social scenarios

Can be used to visualize behavior of complex systems



+

System Dynamics Concepts



+What is System Dynamics?

System: A collection of elements that interact witheach other over time to form a unified whole

Dynamics: Refers to anything that is changing over time



+

System Dynamics: A study of the behavior of a

system over time



+System Representations

Flow diagram Causal relationship



+Stocks and Flows

A stock is a representation of a quantity that accumulates or depletes

For example: money in a bank account, level of water in a tank, etc

A flow is a representation of a quantity that is flowing

Two types ± inflows and outflows

For example: deposits into a bank account, pipe with flowing water,

etc

A stock may have any number of inflows and outflows



+Stock and Flow - Representation



+Characteristics of Systems

Positive feedback Loops

Also called reinforcing loops

Cause an exponential increase in the level of the stock

Level of the stock departs from an equilibrium value

Negative feedback loops

Also called balancing loops

Cause exponential decrease in the level of the stock

Level of the stock moves toward an equilibrium value



+System Dynamics Applications



+System Dynamics Applications

System dynamics has varied application

Can be used to model nearly anything



+



+

Pricing Strategies A case study of the application of system dynamics in devising a

pricing strategy for a company with largest market share in the capitalgoods industry



+Decision Making

Computer-based information systems to support decision-making

Normative decisions

Many models currently exist

Managers follow intuitive approach in dynamic situations

Need to understand complex problems to make a decision Incorporate feedback effects into their assessment

Market entry is an example of a complex problem



+System Dynamics for Decision

Making Cognitive maps

Captures cause-and-effect of the decision-makers¶ values

Causal relationships between elements

Easier to communicate and articulate

Incorporates feedback effects



+The scenario

Major division of a European company

Oligopolistic industry

Three different product lines

Numerous sub-types

Product lines share same fundamental features, target differentmarkets

Products may be substituted, due to basic equality



+The scenario

Two product lines in medium-price sector, one in high-pricesector

Several product sub types ranging from low to highperformance

Product positioning and pricing very complicated

Every product line offers a different contribution margin

Creating a reasonable pricing system is complex



+The scenario

Company¶s competitive belief

Decision to buy a product is only 33% influenced by product specs

Greater emphasis on after-sales image and company image

Company has a high reputation

Competitors try to capture market share through discounts

Traditional pricing strategy ineffective

Cutting prices of the affected product compromises theconfiguration of the whole price system

General price reduction would erode profitability



+The model

System dynamics model employed

Interdisciplinary team from the strategic planning dept

Approx. 1000 variables

Arrays representing different geographical regions, competitors, or product types

Built using Powersim

Initially built to support decision of market entry

Used as a test environment for analyzing various policies



+ Market modelCausal relationship of the various factors influencing the ³Installed Base´variable, which represents the total number of machines that are currentlyinstalled and operational



+The model

Installed base: number of machines currently installed

One inflow ± new machines: The number of machines ordered

and installed

One outflow ± scrapping : The number of machines that havebroken down

Ignore second-hand machines that are re-installed again

Sales measured by the Investments variable

Sales generated by difference between Demand for Machine

Capacity and Supply of Machine Capacity

Variables



+The model

Attractiveness of Player affects sales (Investments)

Attractiveness of Player dependent on two factors

Sales/Service/Image

Attractiveness of Product , which is dependent onPerformance/Price/Cost

Increased Attractiveness of Player brings in new customers

Increase in Investments unbound customers

Variables



+The model

Greater Attractiveness of Player causes existing customers tostay loyal

Increase in Investments bound customers

Increases in Investments from bound and unbound customerscause increase in new machines inflow

Installed base increases

Variables



+The model

Medium product line of the company in focus

Three sub types to be newly positioned

Basic

Intermediate

Top

Cover a range from entry to high performance



+The strategies

1. Reference scenario (no change)

2. Price reduction for Basic and Intermediate

3. Price reduction for the complete product line

4. Performance enhancement for the complete product line

5. Performance enhancement and increase in prices for theproduct line



+The results

Reference scenario

No changes made in price or product performance

Used as a benchmark to compare other scenarios

Parameters measured include sales revenue and profitability

Two perspectives

Product based Companywide

Time frame: 6 years

Scenario 1: No change



+The results

Price reduced by 10%

Functionality/performance left unchanged

Product perspective

Sales volume: +61%

Turnover: +40%

Contribution margin: +27%

Apparently successful

Scenario 2: Price reduction for Basic and Intermediate



+The results

Companywide perspective

Substitution possible due to equality of products

Cannibalization of demand from high contribution margin products

Total effect

Loss of ¼50 million ($67 million) in sales

Loss of ¼70 million ($94 million) in profitability

Company loses more from its own portfolio than it gains fromthe market

Strategy good for the product; bad for the entire company

Scenario 2: Price reduction for Basic and Intermediate



+The results

Price cuts for the entire product line

Competitors likely to respond with price cuts of their own

Situation worse

Net effect

Loss of ¼170 million ($227 million) in sales


Scenario 3: Price reduction for the complete productline



+The results

Performance enhancement for Intermediate and Top products

Price remains unchanged

Product-based perspective

Sales volume: +37%

Turnover: +30%


Strategy seems reasonable

Scenario 4: Performance enhancement



+The results


Customers attracted by Intermediate and Top products usuallyexisting customers

Willingness to pay high Demand shifts from high end product line to lower end (medium-

range)

Net effect

Loss of ¼70 million ($94 million) in turnover


Strategy 4: Performance enhancement



+The results

Performance of Intermediate and Top enhanced

Prices increased

Product-based perspective

Sales volume: +28%

Turnover: +17%


Strategy 5: Performance enhancement and increasein prices



+The results


Demand shift from high end to medium range

Increase in prices makes the shift profitable

Net effects

Sales revenue and turnover maintained

Increase in profitability by ¼40 million ($53 million)

Best scenario

Strategy 5: Performance enhancement and increasein prices



+ The results A bar chart showing the trend in turnover and profitability after a 6 year period, after implementing each scenario



+The role of system dynamics

System dynamics helped to establish the companywideperspective

Feedback loops, accumulations and delays considered

New insights into pricing and strategies developed

Interactions between various system elements (differentproduct lines) captured

Helps in making right decisions in highly dynamic scenarios



+

Brand Management A system dynamics approach for decision makers



+ 40

Outline

Definition

Key terms in brand management

The brand management model

Sector over view

Behavior of the model

The dissertation model



+ 41

A Brand Marks what People Think

and Feel It is a name,sign,mark,figure or image that

represents a product and differentiates it

from other competitive product. It is a rational and emotional formula

based on the intangible sum of trust,relevance, and significance that relatespeople to a firm, a product, or a ser vicethroughout their life.



+ 42

Why Brand Management ?

To have a reputation

To have a impression of good quality

To have a preference over other brands

ultimately, to have a larger market share



+Brand Management

Some Key Terms

Brand awareness

Brand loyalty

Motivation Desire to buy brand

Perceived quality

Satisfaction

Negative pr oduct image

Positive pr oduct quality

Brand equity

43



+ 45

The Dimensions in Brand

Building Brand identity

Brand awareness

Familiarity and knowledge of the brand

Consideration to evaluate the brand

Purchase

Brand loyalty (or brand equity)



+ 46

A Managerµs Goal must be to Build

Brand Equity

A brand can only be strong if it has a strongsupply of loyal customers

Brand equity therefore can be defined as ameasure of strength of consumersµ attachmentto a brand.



+ 47

Brand Equity

Source: Interbrand 1999, The World Biggest Brands

Brand Name Industr y Brand Value

($US m)

Brand Value as

a % of Market

Capitalisation

Coca-Cola Beverages 83,845 59%

Microsoft Software 56,654 21%IBM Computers 43,781 28%

General Electric Diversified 33,502 10%

Ford Autos 33,197 58%

Disney Entertainment 32,275 61%

Intel Chips 30,021 21%

McDonald's Fast Food 26,231 64% AT&T Telecom 24,181 24%

Marlboro Tobacco 21,048 19%



+ 48

Purpose and Goal of the Model

Brand equity is a complex system and difficult tomanage and understand.

A simulation model will be used, to identify keyleverage points to understand the behavior of thesystem, thus reduce uncertainty in decision making.



+ 49

Brand

loyalty

Perceived quality

Satisfaction

Negative product

image

+

++

R

-

+/-

Quality is

Job One

-

Product

attractiveness

+

Brand

Management A ConceptualizedSector Over view

Brand

Management A ConceptualizedSector Over view

The Brand

Awareness/Effectiveness

Sector

The BrandAwareness/Loyalty

Sector

The Brand

Loyalty /Quality

Sector

Brand

Awareness

Motivation

Desire to

choose brand

Brand

loyalty

+

+

+

+

R

It's What theCustomer Wants

RSnowball

Attractiveness of

other brands

-

-

Brand

Awareness

Competitive

pressure

Effectiveness

Investment

-

+

+

B

BCompetition

Inf luences

Investment

Inf luences

+-

Knowledge+

+Knowlege

is good

R



50The BrandThe Brand Awareness/Effectiveness Sector Awareness/Effectiveness Sector

The BrandThe Brand Awareness/Effectiveness Sector Awareness/Effectiveness Sector

Brand

Awareness

Competitive

pressure

Effectiveness

Investment

-

+

+

B

BCompetition

Inf luences

Investment

Inf luences

+

-

Knowledge+

+Knowlege

is good

R



+ 51Vensim® Brand Awareness/Effectiveness Sector

Brand

Awareness

Competitive

pressure

Decrease in

awarenessIncrease in brand

awareness

Fraction of potential

BA reached

Net effect of BA

Loyalty factor

Initial

Investment

Above-the-lineinvestment

Price promotion

investment

Below-the-line

investment

Public relations

investment

Weight on

above-the-line

investment

Weight on price

promotion investment

Weight on

below-the-line

investment

Weight on public

relations investment

Effect from investment

in Price Promotion

Consumer

k nowledge

about brandKnowledge gain

<Brand Awareness>

Effect on gaining

knowledge

<Brand Loyalty>

Forgetting rate

Forget impact

on awareness

Awareness

investment

Awareness

multiplier



52The BrandThe Brand Awareness/Loyalty Sector Awareness/Loyalty Sector

The BrandThe Brand Awareness/Loyalty Sector Awareness/Loyalty Sector

Brand

Awareness

Motivation

Desire to

choose brand

Brand

loyalty

+

+

+

+

R

It's What the

Customer Wants

RSnowball

Attractiveness of

other brands

-

-



53VensimVensim®® BrandBrand Awareness/Loyalty Sector Awareness/Loyalty Sector

Motivation

Attractiveness to

choose other brands

Brand

Loyalty

Increase in brand

loyalty

Pressure on

loyalty

<Brand Awareness>Effect on brand

choice

<Perceived

Product Quality>

<Competitive

pressure>

<Perceived Product Quality>

Investment effects on brand loyalty

<Public relationsinvestment>

<Below-the-lineinvestment>

<Price promotioninvestment> Desire to buy

brand

Increase in desire

<Brand Awareness>

Factors to

increase desire

Loosing interest

<Desire to buy brand>



54VensimVensim®® BrandBrandLoyalty/Quality Sector Loyalty/Quality Sector

Perceived

Product

QualityPressure on

PQ

PQ net

increase

Negative product

image

Satisfaction

<Brand Loyalty>

PQ multipliers

Relative delivery

delay

Product

Attractiveness

Effect of price on

attractiveness

Effect of quality on

attractiveness

Effect of delivery delay

on attractiveness

Actual product

quality

Relative

Price

Price

Acceptable price

Delivery delay

Acceptable

delivery delay

<Effect frominvestment in Price

Promotion>

Th B dTh B dTh B dTh B d



55The BrandThe BrandLoyalty/Quality Sector Loyalty/Quality Sector

The BrandThe BrandLoyalty/Quality Sector Loyalty/Quality Sector

Brand

loyalty

Perceived quality

Satisfaction

Negative product

image

+

++

R

-

+/-

Quality is

Job One

-

Product

attractiveness

+



56

The Bottom Line: Brand EquityThe Bottom Line: Brand Equity

Brand Equity

<Brand Awareness>

<Perceived Quality>

<Brand Loyalty>



+ 57

Model Behavior Scenario- 1

Investment: 70

ATL: 0.7

BTL: 0.1

PP: 0.1

PR: 0.1



+Model Behavior Scenario- 2

Investment

ATL: 0.7

BTL: 0.1

PP: 0.1

PR: 0.1



+ 60

The new Approach: Brand Equity asResource System

Loyal Customers 0 3 6 9 12

Inflow

Outflow



+ 61

Objectives

To gain insights in how to control a desired level of loyal customers, thus support resource allocationdecisions of a firm

To test and compare alternative strategies toimprove the management of brand equity



+ 62

What is the contribution to the body

of knowledge?Theor y:

By creating a generic model to investigate the effect

of resource allocation which influences the brandequity of a firm

Praxis:

Providing recommendations for improving brandstrategies

Causal Loop Diagram



+ 63Causal Loop Diagram

Competitive

pressure Brand awareness

Familiarity &knowledge of the

brand

Consideration to

evaluate brand

Desire to buy

brand

Purchase

Brand loyals

Investment

+

Evaluation of

alternatives

+

+

+

+

-

+

+

+

+

Word of mouth

+

+

+

Attractiveness of

products

Perceived quality

of brand

+

+

+

-

Quality Price

R 2

R 1

R5

B1

R 3-

R4

Effect from invstment

Competitor determins choice

Awareness from Investment

Word of mouth effect

Effect from pricevalue relation

Investment control

Stock and Flow Structure



+ 64Stock and Flow Structure

Unaware Aware Familiarity &

Knowledge

ConsiderationDesire to buy

Loyalty

Potentials Becoming aware Gaining knowledge

Attractiveness

Purchase Evaluation

Potential

customers

Population

Investment

Word of mouth

Relevance (advantage

over competitor)

Evaluation of

alternatives

Attractiveness of

other brands

Price sensitivity

Satisfaction rate in

categoryAttractiveness of

product

Preceived quality

Ownership

experience

Loosing awareness

Loosing interest



+References

Aaker, D. A. (1991). Managing Brand Equity. New York: FreePress.

Farquhar, P. H. (1989). Managing brand equity. Journal of Marketing Research, 53(September), 24-33.

Grover, R. (1992). Evaluating the multiple effects of retailpromotion on brand-loyal and brand-switching segments.Journal of Marketing Research, 56(February), 76-89.

Lynch, J. E., & Hooley, G. J. (1990). Increasing sophistication in

advertising budget settings. Journal of Advertising Research,30(1), 67-75.

Sterman, J. D. (2000). Business Dynamics: Systems Thinkingand Modeling for a ComplexWorld. Boston: Irwin McGraw-Hill.



+

Conclusion



+Conclusion

Helps to understand dynamic systems

Complex processes can be easily visualized

Helps us study the behavior of systems

Interaction between system elements can be identified

Can ser ve as a tool for decision makers

System dynamics is highly versatile Evident from the case studies shown earlier



+

References

System Dynamics Seminar

Documents

Transcript of System Dynamics Seminar