Slide 1

Slides 11Modelling and

Simulation (for SC and...

Business Strategy in general)

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IT & Strategic Decision Making

1. Interaction between in IT and Business 2. Software for Strategic Planning 3. Executives and Managers 4. Setting the Stage 5. The Paradigm of

Systems Thinking 6. An IT Tool for

Systems Thinking

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1. Interaction IT and Business

Main Developments and Trends – IT: more processing power and connectivity

– Business: more and global competition

Interaction ? – Business is ‘demanding’ IT developments.

Example: businesses demand better networksRelated to Efficiency - do the things right

– IT developments present opportunities to business. Example: new ways of doing business through internetRelated to Effectiveness - do the right things

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New role for IT in Business New opportunities for IT Can we gain a competitive advantage ? Examples:

– Otis Elevators, with Otisline– Compaq, had ‘best practices’ but was challenged– Amazon Bookshop, new kind of player

IT not just for more efficiency, but for rethinking the whole process of doing business

application of IT today focuses more at strategic issues – for effectiveness, for competitiveness

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Levels of Decision Making

Strategic, e.g. mergers, R&D planning Tactical, e.g. budget control, sales analysis Operational, e.g. accounts, orders, invoices Data or transaction processing

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IT Application in BusinessIssues Focused over Time

Strategic issues Tactical issues Operational issues Data processing issues

Trend

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IT Application in BusinessFeatures of Bottom and Top FROM: Features of structured, data and transaction

processing: facts, many data, internal, history, where processes/procedures are certain

TO: Features of unstructured, management decision

making: estimates, few data, external, future, where processes/procedures are uncertain

THEREFORE: New kind of ‘qualities’ in IT are required

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2. Strategic Planning Software Market growth:

– about 50% annual growth

– acceptance of computer-based technology

– recognition strategic planning force in creating growth

More intelligence is being built into software– Complicated functions more accessible. More

processing power, so more complex software can run. This complex software is easier for the user !

Change in the kind of packages– Spreadsheets, mapping tools, dynamic mapping tools

Slide 9

3. Executives and Managers Managers are typically dealing with resources, their

planning and control: people, money, time Often related to a certain functional area and

involved with TQM issues. Sometimes also dealing with (cross functional) projects

Executive: decisive, a policy maker, appropriate term given changes within/between organisations

Executive is outward, future oriented and often involved with BPR issues

We will address both executives and managers 

Slide 10

4. Setting the Stage

Daily, worldwide, millions of executives and managers use spreadsheets - for strategic planning– It seems an intellectual exercise, but is stretching the

fingers more than stretching the mind

– Spreadsheets: a data focus, not a concept focus

– They reduce the apparent complexity of problems

– They put all complexity into abstract formulas

– The ‘what-if’ cannot be performed to the formulas

Spreadsheet make us feel very comfortable

Slide 11

Spreadsheets and What-if Analysis Risk management by spreadsheet is tricky

– Playing with numbers can be done in spreadsheet, but how can we play with the real assumptions - with the formulas - the processes, the procedures ?

– We need to explore real risk in a visible manner – Spreadsheets mainly show numbers and often we take

the spreadsheet formulas for granted. – But: the processes higher in our ‘pyramid’ are harder to

be represented by formulas Spreadsheets are not wrong, they are just less

suitable for issues at the top of the business

Slide 12

“There’s nothing wrong with yourspreadsheet planning model.

You just don’t have any money.”

© Ted Goff

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5. Systems Thinking Paradigm The game is getting tougher – a world wide game The very sustainable competitive advantage is the

ability to learn faster than the competition. Businesses are often only using tactics:

– Examples: Proprietary Technology, Privileged Access to Raw Materials, Pricing Tactics (e.g. undercutting competitor), Advertising (e.g. outspending small competitors), Benchmarking, Best Practices, Etc.

Often they do not know why they use the tactics ! Real winners are the ones that know

what is really going on, that learnedhow to learn …and change

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Co-operation Within Customers do not anymore just look for

‘functionality’, they look for all-in-all solutions, including all the services

Not only each piece of a business should become smart, more important is that all pieces have to co-operate, that business have to cooperate across

We need to offer complete solutions, functional pieces within the organization will have to make music, like an orchestra or a football team

This is new and tough for large organizations

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Co-operation Across We must reach out to customers, suppliers

and even to our competitors (business webs) Strategic alliances are needed and being formed.

Think of the airline industry You may end up with strange “bedfellows”:

– Examples are HP/Compaq and Philips/Sony, – The game is not within function but with world: our

customers, our government, other businesses Supplier networks are developed (VMI) We have highly interdependent realities and we

must learn how to operate in these new realities

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Main Barriers to Learn

Two barriers to learning (learning how to compete effectively) are:– a local spatial orientation (Local in Space)– a local temporal orientation (Local in Time)

Those orientations, today more than yesterday, prevent us from learning

An example of local (or spreadsheet) thinking is the case of the Dutch Railways

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Example: Dutch Railways Before: students in Holland had paid about HFL 60

per month on average for train transport After: student train travel was free: the grant to

students went down from Euro 300 to 250 per month, the government paid Euro 45 per student per month to the railways

Goals: improve finances of government and railways, reduce hitch-hiking, make students get to know Holland, make universities compete fairly, boost popularity of train with new generations

What did really happen ?

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Local in Space Operating reality in business (and government) is often

a stove pipe or fire house. Communication -if at all - occurs mainly at the top. There is functional, but no cross-functional co-operation.Decisions are taken with a local perspective

Examples:– Stock markets worldwide (USA, Asia)– Use of resources like water (Central Asia)– National policies on drug use (USA, Netherlands)– Research and development (Philips speech technology)

Our actions can have consequences for others. And that again can affect us negatively, later on

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Local in Time We often operate as if the “next quarter” is the finish

line. Our perspective is local in time Examples:

– Investment in education (Philippines, Russia)– Effects of a marketing campaign - can be long term– Politicians and business leaders often get the blame for the

mess that others, before them, have created– It can take days before raw materials are being delivered

and assembled into finished goods The (unintended) consequences of our actions come

later and are often opposite of what we want So: look around in the world, and in the future

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Need for New Paradigm In the global economy there are less space limits,

less time limits. A local orientation in space and time inhibits business to learn how to compete !

Proposed is a change in habits of thought– think “dynamic”, not “static” (not local)– think “operations”, not “correlations”

This paradigm is called Systems Thinking, it can enable us to see relationships between things and not just see the things themselves

It will be hard to leave the old paradigm of (Laundry or Shopping) List Thinking

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Moral 1: think dynamic not static The example Dutch Railways shows us

Moral 2: think operational not correlational An example to illustrate this is a recent

article in a prestigious economics journal reporting on a model designed to forecast annual milk production

From Factor Thinkingto Systems Thinking (1)

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From Factor Thinkingto Systems Thinking (2) Model statistical methods Find link between milk production and economy Annual milk production is dependent Macroeconomic variables (such as GDP, interest rates,

agricultural commodity prices and inflation) are the independents

Est(MP) = 5 + 3*GDP - 2*IR + 5*ACP - 7*IN This model was good and quite precise….. Now suppose that you would like to take action (new

strategy) and increase milk production? This is a real operational question !

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Slide 24

6. A Tool for Systems Thinking Now we have a new paradigm. How can we be

successful with the new paradigm ? Technology of the former century does not help Spreadsheets are List Thinker’s Dream Machines The bottom line is what matters – revenues/profits,

but how can we be certain that the planned “bottom line” has been calculated according to the right processes and assumptions?

Better is a process oriented approach Spreadsheets show the numbers, but

the processes deserve most attention

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Dynamic Mapping (1)

Dynamic mapping tools have become available to replace spreadsheets for top decision making. They can be useful in a discussion about business processes:– They show and analyze how processes work– How are different elements of a strategy related– And how these forces work out over time  

• Note: some tools do not have that last feature

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Dynamic Mapping (2) A tool that stimulates fruitful discussion about

how a strategy will work out should have the following three characteristics:– clear set of symbols and easy to understand/maintain– able to show and integrate elements across-functions

and across businesses (SPACE)– include dynamics: what will a certain process cause to

other processes and the system over time (TIME) Note: structure laid out in a map alone is NO

guarantee that you will be able to deduce the dynamic behaviour !

Slide 27

 The Tool ithink

Process language called ithink The ithink language has 4 symbols

– We will see this in the next 2 slides

We can illustrate this with a very simple and structured example from HR - will be shown in the slides later, first the symbols

Slide 28

 Symbols of the tool ithink (1) 1. stocks

– Stocks represent accumulations. For an organisation these can be: raw materials, work in process, finished goods, labour, knowledge,people, policies, cash

2. flows– Flows (pipes) are the changes of the

stocks over time. For an organisation these can be: deliveries, production, consumption, learning, hiring of staff, revenues, expenses, payments

Stock

flow

Slide 29

3. converters – these are numbers, formulas or graphs

4. connectors– these are information flows (indicated with red arrows)

We can use a simple and structured example from Personnel Management (Rookies and Pros) that can evolve into a model for Order and Inventory Management – a general planning model, for example for Supply Chain Management

converter

 Symbols of the tool ithink (2)

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Pros

quits

quit rate

Rookies

hires new pros

– Initially we have 100 Pros and 0 Rookies– Every year 20% of the Pros quits– It will take the Rookies 2 years to become Pros

– > To compensate we hire as many as are quitting– > How does the # of Pros develop over time ?

Slide 31

Malt Beverage Game

You are a Malt Beverage retailer and are ordering from a manufacturer.

Play the Corresponding Beergame: – try to satisfy demand from your customers

In the meantime – try to keep stock at a ‘safety level’ of 12

cases……

What is the problem ?

Slide 32

Order Model

You see a single player in the supply chain, run the corresponding order model

You see two players in the supply chain, run the corresponding order model

What is the problem ? Think of adequate order strategies !

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Building a Supplies Planning Model

Build the Rookies-Pros Model Change it to a Supplier-Buyer Model Build an interactive game on top of the

model What is the influence of

– Lead time ?– Demand uncertainty ?

Slide 34

ithink revisited

Revisiting the 3 characteristics– Clear set of symbols and easy to understand – We can show elements across; we can let a

result of a process flow from one sector or function/department/company to another;the space element is present

– The model can be ‘run’;the time element is present

Slide 35

Role of IT in Planning

Human beings are good at understanding thestructure of relationships that make a system work

We are not good at intuiting how the dynamics generated by the relationships will play out.

Computers are good at simulation. Software ‘ithink’ helps linking the structural relationships to dynamic behaviour – it is easy/cheap to apply

‘ithink’ can play plays a role in learning. Learning - modelling and simulating business

processes: here IT can play a great role!

Slide 36

Thanks for your attention !

TheEnd