System Archetype - 3 Limits and Overcome -...

System Archetype - 3

Limits and Overcome

忠北大學校金相郁敎授 [email protected]

Topic-11

System Dynamics

Spring, 2015

1. Limits to Growth

2. Growth and Investment

Contents

순 서

2

1. Limit to Growth

3

SK Telecom made a desperate efforts to attract new subscribers for the expansion of market-based

power. Aggressive promotions in Newspapers, TV, and Internet, and a number of customer

attraction policy such as handset subsidies proved successful. As a result, many new customers

subscribed to the SK services and SK came to believe that it could remain a market leader and

maintain a sustainable growth. (Figure a)

However, as the era of one person one cell-phone came in and the market was getting more

saturated, the number of potential customers was gradually running out. (Figure b)

In addition, paying much attention to securing subscribers at the initial stage, SK Telecom failed

to notice in advance that subscribers exceeding its service capacity would create several problems.

In fact SK Telecom was facing the service quality deterioration, and thus customer satisfaction

decline, no extra capacity to invest in research and developments, and what’s more, departure of

existing customers to other companies due to the service rate increases to make up for the

promotion costs. (Figure c).

+ + =

가입자 수

시간 (a) (b) (c)

(a) (b) (c)

1. Limit to Growth

4

Limits to Growth was introduced by Donella Meadows, Dennis Meadows, Jørgen Randers

and William Behrens in 1972 in their book of the same name. The book has spawned a

generation of “World” models that critically examine the policies that deplete natural

resources over long periods of time, arguing that we are sowing the seeds of our own

future destruction.

The theory is not without is challengers and detractors. Nevertheless, it does put forth the

premise that growth cannot continue unabated in an unrestricted reinforcing dynamic.

In simple terms, the lesson from Limits to Growth is that something always pushes back.

There is no such thing as unrestricted positive reinforcing behavior. There are always limits

that eventually make themselves known and felt.

Efforts Performance Limiting Action

+

+

+

-

Constraints

+

1. Limit to Growth

5

Dynamic Theory

This archetype states that a reinforcing process of accelerating growth (or expansion) will

encounter a balancing process as the limit of that system is approached. It hypothesizes that

continuing efforts will produce diminishing returns as one approaches the limits.

Behavior Over Time

Efforts to grow an effect are successful in

initial stages, perhaps exponentially so.

However, as the limits to growth are

approached, the growth engine begins to

lose its effectiveness and the rate of growth

begins to flatten. In the end, despite

continued pressure from the growth

engine, the rate of growth stops and then

reverses.

Story Line(1) - Imagephone’s Sales over time

Once Imagephone(IP)’s first video telephone model is available at an acceptable price

and can transmit a recognizable image, the company is off and running. Miriam and

Joe, engineering school buddies and IP’s founding partners are convinced that the

secret to bringing in sales is to maintain investment in R&D.

As long as they keep developing technological refinements and innovations to their

product line, they will have a steady stream of new products and product

enhancements, they believe, will bring in both new and old customers.

Techies and gadget lovers snap up IP products. The company acquire the reputation

for producing high quality products, and customers discover an increasing range of

uses for them, from business conferences to remote product displays to family visits.

As IP adds computer interfaces and wireless technology, sales boom.

In the beginning, Miriam had handled marketing and finance, and Joe had worked

with manufacturing and shipping. They decided to bring in Scott to manage product

innovation. Otherwise, to keep cost down and maintain a focus on R&D, the partners

use well educated staff and contractors and avoid building a large organization

structure.

6

1. Limit to Growth

However, as sales increase and the number of products grows, the pressure to restructure

the company mounts. The partners are running themselves ragged trying to manage

strategic and financial planning, marketing, sales force development, retail relationships,

purchasing, human resources, and half dozen other functions. The R&D technical staff

can no longer field customer inquiries. Product instruction booklets are either late or

inaccurate, and accessories, such as cords, plugs, and mounts, are sometimes missing

from product boxes. New products begin to reach retailer late, sometimes by a week or

more.

With outside help, Miriam, Joe, Scott lay out a design for the company and go out to

look for more managers and staff. Unfortunately, they underestimated the delays in

finding and training people as well as in communicating their expectations to suppliers

and contractors. Several retail outlets cut back on their orders and stop featuring IP

products in their promotions. Products move more slowly. With sales slumping, the

management team has no choice but to reduce investment. The company falls behind

the competition and eventually goes out of business.

7

1. Limit to Growth

Applying Structure to Story

R3 B4 Sales

New Products and

Accessories

R&D Investment Pressure in

Management

Customer Service

Quality

Customer

Satisfaction

Management

Capacity

+

+

+

+

+

-

+

+

- In a causal loop diagram of the ImagePhone story, management capacity is the constraint that

puts a limit on the quality of customer services.

- As we saw in the story, as sales go up, investment in R&D also rises, leading to new products and

accessories, which in turn boost sales(R3).

- But as sales go up, the growth also increases pressure on management, which reduces the quality

of customer services. As customer service worsens, customer satisfaction decreases, and so do

sales (B4).

Sales

8

1. Limit to Growth

The Storyline (2): Limits to Empowerment

This is a story of empowerment in the hotel industry. As we saw, hotels have cut back on the size of their management teams to contain costs. As a result, direct service staff handling reservations, check in, luggage, meal service, and other guest services have been given authority to offer extras and even compensation in response to guest requests or complaints. The overriding goal is to create the customer royalty.

How far can hotels go with this efforts? Image the scenario. Management believes that empowering staff members to exercise local authority to satisfy customers will increase customer royalty. More royal customers means more guests and more revenue. The success of this empowerment emphasis leads managers to encourage staff to take even more initiative at the local level.

As staffs has more authority to satisfy customers, they gain more experience about what customers really want. This knowledge leads them to recommend other changes in what services are provided and how. They might even begin to insist on more of a voice in how the hotels are run. But what happens when they reach the limits of what hotel management is willing to empower them to do?

Frustration sets in. Staff begins discourages and resentful. Some of them care less about using their authority to satisfy guests; others leave for positions where they can continue to exercise their new found authority. Returning guests notice the difference first and stop recommending hotel to their friends and colleagues. New customers find nothing to differentiate one hotel from any other. And make next reservation where they can get a good room rate.

9

1. Limit to Growth

Limit Reached

Responsiveness

To Guests

Customer Royalty

Responsiveness

to Guests

Customer

Royalty

Revenues

Mgmt's Emphasis

on Empowerment

Ability to Exercise

local Authority

Staff's Expectation

for Involvement in

Higher Decisions

Mgmt's Willingness to

Expand Involvement

Staff Cynicism about

Empowerment

Mgmt's Limit on

Staff Involvement

+

+

+

+

+

+

-

-

-

+

R5 B6

10

Applying Structure to Story

1. Limit to Growth

R&D

Budget

New

Products

Revenues

Size of Engineer's

Staff

Management Burden to Senior

Engineers

Product Development

Time Senior Engineer's Ability to Manage

R B

Growth

Promotion

Opportunities

Morale

Motivation and

Productivity

Saturation of

Market Niche

Size of Market

Niche

R B

Similar Cases

For the two CLDs tell the stories and discuss

the limits of growth.

11

1. Limit to Growth

The Systemic Structure behind “Limits to Success”

- The “Limits to Growth” archetype has a structure characterized by a reinforcing process(which

serves as the initial growth engine) and balancing process (which constrains the limits that

eventually cause growth to level off).

- As efforts increase, so does performance, which encourages even more efforts (R1). But the

performance (or growth) itself is linked to a limiting factor or action such that, as performance

increases, so do the forces slowing the success. The limiting factor then comes back around to

decrease performance (B2).

- The key thing to realize with this dynamic is that the reinforcing process dominates during the

growth period, until the balancing process becomes dominant as it cuts off further growth potential.

12

1. Limit to Growth

Plateauing Performance : Behavior over time in “Limits to Growth”

이 아키타입의 행태는 지수함수적 성장임, 그 지수함수적 성장은 결국 수준이

떨어지거나 쇠퇴하게 됨. 이 수준하락이나 쇠퇴는 심지어 성과를 재창출하기 위하여

노력을 더 많이 증가시켜도 S자 모양의 커브를 보임

13

1. Limit to Growth

Efforts

Time

①

②

Performance

강화루프(R) : 선순환

균형루프(B) : 한계 수렴

강화루프(R) : 악순환

A deeper look at the “limits to success” structure

One way of looking at it is as a structure in which the accelerator is attached to the

brakes. Another way of seeing it is as a gardener who sows the ‘seeds of destruction’

while tending to the growth of the plants. Third way is to set it as similar to stuffing

an empty trash bag.

Doing the Two steps.

The first step is the reinforcing process, which produces the growth phase.

The second step is the mounting – but delayed – impact of the limiting factor: the

brakes or the seeds of destruction. One reason the second step often goes unnoticed

for a while is that it do not take effects until time has gone.

The second step has another common aspect: It often is connected with some part of

the enterprise that is remote from the engine of growth.

14

1. Limit to Growth

Managing “Limits to Success”

The highest leverage in managing a “Limits to Success” situation lies in acting early to address

limit before it starts undermining your efforts. Here are some guidelines.

Use the archetype before you hit the limit

• This archetype is most useful when used before you hit a limit.

• By tracing the implications of the pressures from growth through the causal loop diagram of the

system, identifying the limits, and working to remove them before the limit is reached.

Assume that you will hit various limits, and try to clarify which ones they might be.

• As you make plans for growth, automatically assume that something will eventually limit the growth,

and then go looking for those limits. Study other companies or groups who have embarked on similar

ventures to see what limits they may have encountered on their journey of growth.

Avoid the temptation to push the system harder once you reach a limit

• Once limits kick in and you encounter the balancing forces that are working against your engine of

growth, avoid the knee- jerk reaction of just applying more of what initially worked .

• Remind of the adage, "The harder we push, the harder the system push back”.

• The real leverage in this “Limit to Growth” situation does not lie in pushing harder on the engine of

growth, but in finding and managing the factor or factors that are limiting success while there still time

and money to do so.

• This strategy may involve taking politically difficult steps, such as investing in new capacity.

15

1. Limit to Growth

Activity

- National Courier, a package expediting company, implements a quality initiative. After

the management speeches and team meetings, both line workers and managers begin to

initiate some quality improvement projects and then an increase in actual quality of

services, especially tracking and on-time pick-ups. These improvements highlight the

importance of the quality initiative and generate motivation to do even more. The

company sets up additional quality improvement projects.

- As people get involved with the projects they realize they need more skills related to

the issues they are surfacing; for example, financial accounting concepts and

operations management. The training department goes into overdrive to find, create,

and deliver training, but their staff and their budget are too limited to meet the growing

needs for training. As a result, staff keeps falling behind in their skills.

- Eventually, people become discouraged by their inability to implement or pursue the

improvement they want to make. The number of quality improvement projects tapers

off, and enthusiasm for the whole idea just fizzles away.

16

1. Limit to Growth

- National Courier는 품질 향상을 위한 프로젝트를 시작하여 서비스의 실질적인 질이 향상되었고, 특히 제시간에 픽업 서비스를 할 수 있었다. 이러한 향상은 품질 향상의 중요성을

강조하고 동기부여를 더 추진한 결과이다. 회사는 추가적인 품질 향상 프로젝트를 수행하였다.

그러나 표면적으로 느꼈던 것들 보다 더 많은 기술들이 연관되어 있다는 것을 깨닫고 훈련이 필요하다는 것을 알았다. 그러나 예산이 훈련하기 위해 필요한 것보다 매우 부족했고

그 결과로 직원들의 기술은 감소하게 되었다. 마침내 사람들은 권한을 수행하지 못한 무능력과 이룩하고자 하는 목표추구로 인해 용기를 잃어 품질 향상 프로젝트의 수는 점점 줄어들었고 전체 아이디어는 실패하게 되었다.

17

1. Limit to Growth

1. Summarize the “Limits to Growth” theme in this story in two or three sentences.

2. Identify the key variables in the story.

- The growth engine is when ( ) begin. As a result, ( )

increases, so ( ) goes up, ( ) then increases, which

reinforces the increase in the original factor. After a while, the ( ) begins to

grow, but it is constrained by ( ), which reduces the ( ).

- As a result, people do not develop the ( ) the projects, which undermines

further growth in improvement projects.

18

1. Limit to Growth

3. Graph the behavior over time and draw CLD for National courier’s quality initiatives.

Quality of

Services

Importance of

Quality Initiative

Quality

Improvement

Projects

Need for

New Skills

Adequacy of

Training

Ability to

Implement

Training

Capacity

+

+ -

+ + +

+

Motivation

+ +

①

②

Performance


19

The Growth and Underinvestment archetype builds upon Limits to Growth by explicitly

addressing a firm’s need to invest in its own resources, capabilities and core competencies. A growing

action seeks to stimulate and reinforce demand while the firm’s current

performance level may behave as the limit to its growth. Similar to Limits to Growth, if current

performance is adversely affecting demand, no amount of growing action will overcome customers’

reluctance to reward the organization with sales. Unique to Growth and Underinvestment is the long-

term requirement to continue to keep its capabilities and core competencies at a level that ensures its

competitive advantage. There are several characteristics of the investment balancing loop that are

critical from a managerial decision making point of view.

First, although performance standards are presented as a constant (no causal influences are

working on it), they themselves may be subject to the Eroding Goals archetype. This may be

situational or it may be a trend that has developed over long periods of time, as the organization loses

confidence in its own ability to perform at the level of customer needs and expectations.

Second, when coupled with the firm’s current performance, performance standards combine to exert a

corrosive influence on the perceived need for investment. At any given performance standard

(regardless of any declining trend it may be exhibiting over time), if current performance is falling

short, the adage, “why throw good money after bad” can gain a hearing within the organization.

Third, as confidence declines, so too may investment itself. Additionally, declining performance leads

to declining revenue which in turn reduces cash available for investment.

Fourth, even if the organization makes an investment, if it has not anticipated the delay in

bringing the increased capacity and capability on line, it may turn out to be a long run for a short

slide.


20

Dynamic Theory

This archetype applies when growth approaches a limit that can be overcome if capacity

investments are made. If a system is stretched beyond its limit, it will compensate by lowering

performance standards, which reduces the perceived need for investment. It also leads to lower

performance, which further justifies underinvestment over time.

Behavior Over Time

Data that shows declining performance and

growth at the same time that the rate of

investment is slowing or falling may signal

that this archetype is at work.

Correspondingly, it is not uncommon for

performance standards to erode as the

degree of difficulty in reaching performance

standards increases.

※ System Archetype


21

Growth approaches a limit that could be

eliminated or postponed if capacity

investment is made.

Instead, as a result of policies or delays

in the system, demand or performance

degrades, limiting further growth.

The declining demand leads to further

withholding of investment or even

reduction in capacity, causing even

worse performance

Growth Effort Demand

(Performance)

Impact of Limiting Factor

Perceived Need to invest

Performance Standard

Investment in Capacity

Capacity

S

S

S

O

R B1

B2

O

S

S

S

O

Capacity

Demand

Perceived needs

to invest

Capacity

Investment

Capacity Reductions

A B C D E

In Competitive environment, a company is not likely to be able to keep drawing customers

back each time they expand capacity to meet customer’s needs. When the demand does not

recover after time D, it cuts capacity below the demand level (time E), so demand falls even

lower, which triggers another round of capacity cuts. Downward spiral of adjustment

Practice Performance or Capability

Adequacy by Equipment

Equipment Quality Standard

Perceived need to invest in better

equipment

Investment in New Equipment


22

“Growth and Underinvestment “ in Electric House


Demand for Electric House Products

Efforts to grow the Business

Order Backlog

Customer Frustration

Perceived Need to invest in Production capacity

Investment in Production Capacity

Production Capacity

Electric House Backlog Standard

+

-

+

+

-

+

+

+

- +

23

미국내 저가 항공사로 큰 인기를 얻고 있는 제트블루 항공사가 한 승객을 화장실에 앉혔

다가 12일 소송을 당했다. 지난 2월 샌디에이고에서 뉴욕으로 가는 제트블루 항공을 이

용했던 코캄 무틀루라는 승객은 약 90분 동안 자신이 앉은 자리를 승무원에게 빼앗겼으

며(?) 자신은 화장실에 앉혀졌다는 이유로 이 항공사를 상대로 이날 200만 달러의 소송

을 제기했다.

무틀루는 제트블루 항공사가 직원들에게 친지들 등에 선물, 이용할 수 있도록 하는 무료

좌석티킷을 이용해 여행을 하던 중이었는데, 갑자기 기장이 나타나 그에게 "자리를 양보

하고 화장실에서 한 시간 반 동안 머물다 오라"고 요구했다고. 기장은 승무원 좌석에 앉

아있던 한 승무원이 자기의 "자리가 불편하다"고 하자 무틀루에게 다가가 자리를 양보하

라고 지시하는가 하면, 무틀루에게는 승무원좌석은 승무원만 앉아야 한다는 이유로 이용

하지 못하게 해 그는 할 수 없이 화장실 좌석을 이용할 수 밖에 없었다는 것이다.

무틀루는 소장에서 자신이 화장실 좌석을 어떻게 앉아있냐고 항변하자 "나는 기장인데

이 비행기는 내 명령에 의해 움직인다. 당신은 이 비행기에 탄 것만도 고마와해야 한다"

고 으름장을 놓았다고 주장했다. 항공기에서는 운항시 갑작스런 난기류를 우려, 항시 좌

석벨트를 메도록 하고 있음에도 불구하고 무틀루는 좌석벨트도 없는 화장실에 승객을 앉

혀놓은 것은 승객의 안전을 포기하도록 한 것이라고 주장했다.

뉴욕주 대법원은 이날 제트 블루 항공사가 고의적으로 승객의 안전을 방조하고 안전벨트

로 없는 자리에 앉히도록 함으로써 연방법을 위반했다고 소송을 접수했다.이에대해 제트

블루 항공사측은 아무런 해명이나 논평을 하지 않았다. 【워싱턴=뉴시스】


24

25


People Express Airlines Revenue

Profit

Service Quality

Fleet

Service Capacity

26


PE Fleet and scheduled Flight

Number of Passengers

PE Revenue PE Service Quality

PE Reputation

Service Quality Standard

Addition to Service Quality

PE Service Capacity

Limits to Growth and Shift to Burden Archetype

Growth and Underinvestment = Growth to limit + Shifting the Burden

Revenue

Size of Sales Force

Number of Orders

+

+ + Size of Backlog

Delivery Time

Sales Difficulty

+ +

+

-

Perceived Need to Improve Delivery Time

Planned Additions to Capacity

Production Capacity

+ +

+ -

Delivery Time Standard

-

27


A deeper look at “Growth and Underinvestment”

To determine whether this structure is at work, look for oscillating trends in

demand (whether it is for products, time, resources, capital) and capacity

investments to meet that demand.

If the company pursue a growth strategy, consider whether the company is

planning for enough investment to sustain the eventual growth. When discussion

comes up about cost cutting, layoffs or reduced investment in response to a change

in the market or a drop in demand, explore the possible impacts of these policies

on growth.

The two balancing loops can be challenging to untangle. We can see that as the

growth encounters a limit, a healthy system would operate to anticipate that limit

and reduce its impact by adding capacity. However, many companies fail to

perceive the limit in time. Worse, as the limit begins to slow growth, the business

may respond by cutting investment even further, which pushes the overall business

downward.

28


Managing “Growth and Underinvestment”

To avoid “growth and underinvestment” trap, you need to develop the ability to

anticipate and choose limits rather than letting the system do it. The ability to find

ways to remove limits by investing in needed capacity in a timely manner.

Accompanying this is made difficult because this structure contains two sources of

significant delay, perception delay and capacity acquisition delay, either of which

can derail your efforts.

How to manage the two sources of delays: Perception delay and capacity acquisition delay

Capacity Acquisition delay

Once a decision is made to invest, a second delay - in capacity acquisition - means

that additional time is required for the decision to translate into tangible increases

in capacity. In many cases, things may even get worse before they get better.

Underestimating this delay may lead you to take premature countermeasures that

may only aggravate the situation.

29


Perception delay

• Take time early in the growth phase to identify potential limits to growth, especially capacity limits.

- Ask yourself, “ If we succeed in growing our sales, what will happen? How much production, customer service, or delivery capacity will we need to respond to higher sales? What will be the impact if we have lower sales? Studying the market responses and the characteristics of target customers during an upswing can help you anticipate these future capacity need.

• Make sure that internal systems are set to respond to growth

- if you have an aggressive strategy and a sluggish internal system for responding to performance shortfalls, you may have created a structural inability to handle continued growth. For example, how much lead time does your manufacturing team to beef up production? If your salespeople increase sales by 40% in a quarter and your plant can expand production at the rate of 20%, you can expect a backlog to build up quickly.

• Explore the assumptions driving capacity investment decisions

- past performance may be a consideration but should not dominate decision. Instead, identify the market factors that drive growth. Otherwise, you may make investment decision that are too dependent on past experience and not sufficiently linked to present or future desires and needs.

• Ensure that everyone involved has a well informed set of assumptions (mental model) about the size of the total potential market.

30


Summary

Growth and underinvestment is a relatively complex, composite archetype. This

contains a number of dynamics, including an engine of growth, a constraint, and a

balancing process with a goal. In essence, we can see it as a coupling of the “limit

to success” structure with the “drifting goals” structure.

It is relevant for many areas of an organization from sales to marketing to

production, because it graphically shows the interrelationship between their

individual growth efforts and investment decisions.

31


ExpressTech

• This company has taken the lead in the US mail-order PC business by combining low

production costs with a customer base of small businesses and technically knowledgeable

users.

• Low taxes and cheap labor at its midwest headquarters, plus a ‘no frills’ corporate style,

have allowed ExpressTech to keep its production costs low relative to competitors.

• Consequently, the company can offer its customers a low-cost, high quality product with

dependable customer service. With all these advantages in place, ExpressTech has

experienced phenomenal growth.

• One day ET reaches a critical point at which it has to keep its revenues growing strongly

while maintaining quality and service and not losing control of costs. For the first time the

company experiences a drop in sales. The CEO attribiutes the decline to a backlog of

orders from the previous year that have inflated first-quarter results. Continuing sales

drops indicate a larger problem-declining customer-service quality.

• But finding and training technical and assembly-line workers in the company’s rural

setting quickly enough to keep up with customer demand is difficult and time-consuming.

Staff shortage increase customer complaints about delayed deliveries and lead to long

waits on customer service lines.

Activity

32


Customer Base Promotion

Revenue 지각품질 (Percieved Quality)

기대품질 (Expected Quality)

Q = E - P

서비스 개선 투자

(Investement

in Service)

서비스 능력 (Service Capacity)

S

S

S

O S

O S

S S

S

R B1

B2

33

고객서비스

(Customer Services)

대 고객 서비스 투자 (Investment in Services)

매출(Revenue)

Time

Inflection points


3. Graph the behavior over time and draw CLD for the story.

34


Let’s go back to slide 4. And draw CLD.

+ + =

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시간 (a) (b) (c)

(a) (b) (c)

System Archetype - 3 Limits and Overcome -...

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