This edition first published 2018
© 2018 John Wiley & Sons Ltd
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by law. Advice on how to obtain permission to reuse material from this title is available at http://www.wiley.com/go/permissions.
The right of Martin F.G. Schaffernicht and Stefan N. Groesser to be identified as the authors of this work has been asserted in accordance with law.
Registered Offices
John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, USA
John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, UK
Editorial Office
9600 Garsington Road, Oxford, OX4 2DQ, UK
For details of our global editorial offices, customer services, and more information about Wiley products visit us at www.wiley.com.
Wiley also publishes its books in a variety of electronic formats and by print‐on‐demand. Some content that appears in standard print versions of this book may not be available in other formats.
Limit of Liability/Disclaimer of Warranty
While the publisher and authors have used their best efforts in preparing this work, they make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives, written sales materials or promotional statements for this work. The fact that an organization, website, or product is referred to in this work as a citation and/or potential source of further information does not mean that the publisher and authors endorse the information or services the organization, website, or product may provide or recommendations it may make. This work is sold with the understanding that the publisher is not engaged in rendering professional services. The advice and strategies contained herein may not be suitable for your situation. You should consult with a specialist where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
Library of Congress Cataloging‐in‐Publication Data
Names: Schaffernicht, Martin F. G., 1961– author. | Groesser, Stefan N., 1978– author.
Title: Growth dynamics in new markets : improving decision making through simulation model‐based management / by Martin F.G. Schaffernicht, Facultad de Economia y Negocios, Universidad de Talca, Chile, Stefan N. Groesser, School of Engineering, Bern University of Applied Sciences and Institute of Management, University of St. Gallen, Switzerland.
Description: Hoboken, NJ : Wiley, [2018] | Includes index. | Identifiers: LCCN 2017052554 (print) | LCCN 2017054563 (ebook) | ISBN 9781119118220 (pdf) | ISBN 9781119127413 (epub) | ISBN 9781119118237 (cloth)
Subjects: LCSH: Decision making. | Management. | Marketing. | Strategic planning.
Classification: LCC HD30.23 (ebook) | LCC HD30.23 .S294 2018 (print) | DDC 658.8/02–dc23
LC record available at https://lccn.loc.gov/2017052554
Cover design: Wiley
Cover image: © Leontura/Gettyimages
We are inviting you on a journey to explore the different elements of introducing a product into a new market. You will assume the role of a manager responsible for successful product introduction while a competitor strives to do the same. Your potential customers are free to choose either of the products. How should you make your decisions given that you have a direct competitor acting simultaneously? Which strategies can improve your decision making in such a dynamic situation?
Remember, not only managers have goals, make plans, decide, and execute. This is what individuals do irrespective of their profession. What follows are a few general remarks to set the stage.
Making plans requires the ability to know where you currently are, where you want to go, and how to get from here to there. Maps or diagrams are helpful tools. There are many well‐known examples of maps. For instance, explorers developed maps to navigate through a geographical area or topological space.
The map in Figure 0.1 dates back to the year 1630. It was created to help navigators cross the Atlantic Ocean (‘Mar del Norte’) to the Pacific Ocean via the Strait of Magellan. At this time, ships sailed from Europe to the New World, and since navigators always looked in the upward direction, it was useful for them to draw a map and position East at the top.
‘To navigate’ stems from the two Latin words ‘nāvis’ (ship) and ‘āgis’ (drive); it literally means to steer or drive a ship. However, that what we want to steer is not always a ship, and not all the maps are geographical ones. Architects and planners design maps of buildings or bridges. Systems engineers map information systems with databases and computer programs. Both architectural and information systems maps are construction plans for artificial, man‐made objects. Organizational consultants map, revise, and design business processes and organizational structures, thereby planning how different organizational members interact to carry out their work. In these cases, the maps represent structures, i.e. elements that are essentially static.
However, business managers are often confronted with situations, with or without a map, that defy their ability to anticipate what will happen. Imagine you are a corporate strategist. You must develop a plan for long‐term success and, thereby, need to anticipate the potential actions of your suppliers, competitors, and customers who have also developed their own plans based on their own goals and expectations about your actions. Such structurally interdependent situations are ‘dynamic systems’. A dynamic system consists of several interrelated components with different actors. The components and actors react to one another and have different reasons for influencing and altering the system.
One example of a dynamic system is the strategic planning of football (soccer) matches. The map in Figure 0.2 illustrates the movements a soccer team can perform when the opposing team’s defence players attack a player. The teams have opposing goals and the actions of one team decrease the level of goal achievement of the other team. Further, each team plans and decides its moves considering the respective previous and expected moves of the opposing team. Therefore, the soccer‐planning map not only illustrates structural elements but also considers past or expected moves.
Managers are faced with even more dynamic situations: the ‘game’ they are in is not as well defined as football. Competitors, customers, and other actors are free to decide on their course of action. Let us assume there is a company: NewTel. It is about to introduce mobile phones – a durable consumer good typically used for 9–18 months – to a new market in the presence of one rival of approximately the same size. You are a top manager at NewTel and face the challenge of taking the necessary decisions to lead the product introduction to a success. Uncovering and developing a new market in parallel to your rival is the dynamic challenge at hand: both you and your competitor will strive to capture customers from the same population as quickly as possible. The customers, of course, are influenced by the actions of both companies in the market. The interdependency between you and your competitor in this limited market leads to a highly complex situation, where your decisions may easily generate undesired effects and dynamics.
Which factors should you include in your management map to successfully ‘navigate’ NewTel? How do you determine these factors? How will this map help you to make successful decisions? Since many of those factors will be changing, and at different speeds, you will need to know why and how quickly they are changing and how you can influence them through the decisions you take. What you need are tools for mapping and planning in dynamic systems. You need an approach to determine the relevant factors in messy situations, map their dynamic relationships and show immediate, as well as delayed, effects to determine their impact over time on the relevant outcome of interest. The simulation model‐based management approach will support you in this regard.
You will learn how to develop maps of dynamic systems, how to formulate candidate decision policies, and how to evaluate them based on simulations. Moreover, you will learn to elaborate and use your own computer simulations to find out what decisions you could and should make (content of the decision), when you should make them (timing of the decision), and how intensive they should be (intensity of the decision). When reaching the end of the book, you will have an intuitive understanding and skills to master dynamic business challenges such as:
Each chapter guides you through applicable content and questions enabling you to develop these insights yourself. You will first arrive at answers and then elaborate on them while going deeper and deeper into the subject. Methodological concepts such as variables, causal links, and feedback loops will become your normal language, and you will develop and experiment with simulation models. These simulation models will allow you to qualify your answers and to pose new questions. In summary, the book prepares you to approach dynamic management problems in a systematic and consistent way. Moreover, you can use simulation models to reflect upon the dynamics of business and make better grounded decisions. At the end of this journey, you will be able to develop dynamic maps and use simulation models to reflect upon the dynamics of business for designing successful business policies. Such models serve the purpose of designing decision policies. When management relies on such policies, we refer to it as model‐based management (Schwaninger, 2010). This book is designed to help build several skills that belong or relate to the system dynamics competency framework (Schaffernicht and Groesser, 2016).
The book consists of three components.
The printed text. This is the thread in your learning journey. It successively introduces you to management challenges at the company NewTel. In addition, it introduces concepts and examples of possible dynamics, poses relevant questions, guides you through model conceptualization, allows you to develop hypotheses, to test your findings through simulations, and to interpret the simulation results for decision making.
Simulation models. Each chapter is augmented by one or more simulation models. They are available from the companion website. In this cascade of simulation models, each new model builds on the previous ones. The models help you to explore the dynamics resulting from your decision. Each simulation model is explained in a video tutorial.
Business simulator ‘SellPhone’. SellPhone allows you to gain first‐hand experience in your role as a manager of NewTel. You can get a feeling for how complex your task is. After you have mastered the content chapters in the printed text, SellPhone allows to you to double‐check your learning to see how successful you have been at leading your business.
The book has nine chapters. Chapter 1 introduces you to the telecommunication case. It provides relevant contextual information and identifies the goals and decision variables you have at your disposal to achieve the goals at NewTel. SellPhone is used to provide first‐hand experience in managing NewTel. You will address the following questions: What are the relevant factors in this case? How do the factors interact with the decisions made during the simulation? The following chapters will also address these questions. In Chapter 2, you will explore the dynamics of diffusion by word‐of‐mouth. We will introduce the mapping method. Three simulation models enrich the text of this chapter. Chapter 3 adds a limited product life cycle duration to the basic situation and explores its implications for the diffusion dynamics. Chapter 4 considers the effects of advertising spend on the acquisition of customers. You will discover the fundamental effect of advertising and discover what effect advertising has on purchases and the accumulation of customers. Chapter 5 introduces financial resources to the situation through a limited life cycle duration and advertising spending. You will explore the implications of purchasing price and subscription rate for revenues, and how the changes in the life cycle duration and in advertising spend impact profits. All aspects discussed so far are integrated into one systemic simulation model about NewTel. Chapter 6 helps you to systematically optimize your decisions for NewTel. It concludes the analysis of your company, since now you have the know‐how to ideally introduce your product into the new market. However, what about your direct competitor? Your strategy needs to consider your rival in your environment. How can you optimize NewTel’s success under these circumstances? Chapter 7 introduces your rival company RivTel. You will become familiar with two types of rivalry. The first deals with competing for potential customers and the second deals with competing for each other’s current customers. The simulation models help you to clarify the interdependencies and guide you to design superior policies. To follow, you are again invited to SellPhone to demonstrate what you have learned about managing a business in highly complex environments. Chapter 8 discusses the simplifying assumptions made in the case models. Possible modifications of the assumptions are discussed and a set of scenarios provided. Chapter 9 reviews the methodology used in the book and generalizes the case of NewTel to other management challenges.
Within the book, a number of icons are used.
The more active you are, the more you will learn. Throughout the journey, new questions arise. If you reflect on them and develop your own answer before you continue reading, your mind will be best prepared for the upcoming content. Therefore, throughout the book we will frequently ask questions or suggest specific activities for you to ‘Do It Yourself’ (DIY). These places are marked with the icon shown to the left. For many DIYs, there are worksheets you can download from the companion website; they guide you through the steps you are asked to do on your own. You will also find a discussion of each DIY on this website. | |
In many stages of our analysis, specific concepts and tools are useful. Each time these occur, there is a ‘Toolbox’ marked with the icon shown to the left. Here you will find an explanation of concepts and tools. | |
At the end of each chapter, you are invited to assess your understanding and ability to use the new concepts and tools by answering a set of questions. | |
This book provides you with an introduction to the management of products and services in new markets using a simulation modelling‐based approach to management. Of course, these initial learning steps can be deepened. Going further requires additional learning engagement from you. For this, we have provided additional challenges; the icon to the left signals them. |
In many places in the book, systems insights (SI) and management insights (MI) about the dynamics and structure of the business case can be gained. These SI and MI are relevant because they can be transferred to similar cases you encounter in your work. We also identify a series of principles (P) of dynamic systems that are not bound to the business case but which are fundamental concepts and relationships valid and applicable in any dynamic situation. Whenever appropriate, we have inserted Guidelines (G) as practical recommendations to help you develop good practices as a business modeller.
If you are an undergraduate student (sophomore, senior; major as well as non‐major) or a graduate student (master, executive MBA, Ph.D.) in business administration, strategic management, management science, business engineering, industrial engineering, marketing, decision making, economics, public policy, or public management, you will benefit from this book.
The book can also serve as a self‐directed learning journey supported by e‐learning components: an online simulator, video tutorials and worksheets for the DIYs. It is self‐contained and does not require other technical training or theoretical knowledge. Therefore, you can familiarize yourself with the approach, develop intuitive insights concerning the principles of diffusion for durable products, and you will enable yourself to work with specialized consultants.
The book invites you to be active. While you progress through each chapter, we strongly recommend that you replicate the simulation models and experiments and continue to perform your own experiments. As a guideline, you will find video tutorials for each experiment on the companion website. We encourage you to develop the book’s models on your own. Moreover, at the end of each of each chapter, you will find questions and further challenges for self‐study.
If you are interested in lecturing in business administration, strategic management, management science, business engineering, industrial engineering, marketing, decision making, economics, public policy, or public management with a new and engaging approach, the book is beneficial to you. You can implement the material in undergraduate or graduate courses immediately. The book is purposefully short but is a comprehensive story on growth dynamics in business under rivalry conditions in new markets. Our approach offers a pragmatic and systematic method for studying management challenges and prepares your students for future courses in dynamic systems. Moreover, the book offers value by introducing a visual mapping approach that enables interdisciplinary thinking. The book has the potential to motivate students to follow‐up with more detailed studies on their own. The material accompanying the book requires no further preparation. It can be used directly off the shelf. We suggest using the book in one of the following ways:
If you are a lecturer, and you have questions, ask us: martin@utalca.cl and stefan.groesser@bfh.ch (www.stefan‐groesser.com).
We hope that you will gain as many dynamic insights while studying the book as we had while writing it. Moreover, we hope that the book helps you to train your disciplined, systemic, and dynamic thinking skills. Enjoy the time you spend developing hypotheses, formulating simulation models, and experimenting with them to solidify your understanding of management challenges and to develop your decision‐making capabilities in dynamic systems.
This book would not have come into existence without the contribution of many people. Over the past years, several generations of MBA students at the Universidad de Talca, Chile, and those following the European Master in System Dynamics programme at various institutions have worked their way through previous versions of what is now in your hands. Conversations about management books using simulation modelling with Kim Warren and George Richardson reinforced the idea that such a book has an important role to play in management education. We would like to thank many people from Wiley for their vital support in developing this book. We wish to thank Graham Winch.
And most importantly, we thank our partners. Thank you, Paula, for your patience while I (Martin) was sitting in front of the screen and for your encouragement. And thank you, Saskia and Finn, that you have given me (Stefan) the time to work on this book.
This book is accompanied by a companion website:
http://www.wiley.com/go/Schaffernicht/growth‐dynamics
The website includes:
Scan this QR code to visit the companion website