Can SD models be validated without being run?
Posted: Thu Jan 08, 2004 12:03 am
Content-Transfer-Encoding: quoted-printable
=20
Please forgive me if the following question is na=EFve - my math is very =
rusty!=20
=20
I am currently struggling to persuade colleagues in my field (strategic =
management) of some serious implications arising from an SD view of how =
the real world functions. To convey this simply, I try to explain that =
the general specification of an SD model, comes in three parts ...=20
o The value of all variables at any specific moment is =
instantaneously estimable from the then-current level of all =
asset-stocks (if you could instantaneously halve customer-numbers, for =
example, sales would halve, ceteris paribus)
o The value for each asset-stocks in the next period is its =
value in this period, plus what is added, minus what is lost (customers =
next year =3D customers this year, plus those newly won, minus those =
lost)
o ... and crucially ... those rates of change in asset-stocks =
are themselves, like all other variables, dependent upon the current =
level of existing asset-stocks (new-customers this year =3D fn. of =
current remaining potential customers, size of sales force etc.)
=20
Feedback is merely an unavoidable artefact that results from these =
relationships
=20
I further suggest that, though this appears to result in a closed =
system, certain stocks will typically be exogenous to the system under =
study, e.g. the number of potential customers for a new product will be =
a function of such factors as general levels of spending power etc. that =
are nothing to do with the business system under study. This contrasts =
strongly with conventional views of strategic performance - that it =
depends largely on exogenous factors (market growth rates, numbers of =
rivals etc.)
=20
An important implication of this SD perspective (if I understand it =
correctly) is that regression-based estimations of performance outcomes =
are doomed to failure - if todays customer-base is identically equal to =
the sum of all customers ever won since time=3D0, minus all historic =
customers ever lost, then there is no possibility that todays customer =
numbers can be well-explained by todays marketing efforts, todays =
price or indeed any other variable at a specific moment. If todays =
stock-values cannot be well-explained by any current values of other =
variables, then neither can the values of any item that depends on those =
stocks, which include sales revenues, profits and all other financial =
performance outcomes ... which is rather a shame, since multi-variate =
regression analysis forms the basis of the vast majority of empirical =
research in strategy (?and other social sciences)
=20
All of which makes me wonder ... surely it must be possible to validate =
an SD model without ever running it ...=20
- the stock accumulation relationships with flows are totally =
deterministic - todays customers =3D yesterdays, plus those won, minus =
those lost
- all other relationships, being instantaneous, must be taken =
to be constant through time (or at least the time-horizon over which the =
simulation is taken to be valid)=20
- ... and these other relationships must include the current =
rate of flows (i.e. ... todays rate of customer acquisition =3D a =
function of todays potential customers, sales force, product =
functionality etc. )
- if those current relationships are valid, they should be =
discoverable and verifiable from regression analysis of the real-world =
situation ( although regression is unsafe whenever it crosses one or =
more stock/flow boundary, it could be safe wherever no such boundary is =
crossed)
- such relationships should apply with confidence not only for =
todays flow rates, but for the same flow-rates over all of the relevant =
history (if not, then something else must be varying through time, which =
implies we must have missed an accumulating stock)
- if all this is so, then the model must be valid if the =
equations determining every stocks in- and out-flows conform with these =
statistical findings ... all of which can be confirmed without ever =
running the model
... or have I missed something?
=20
Kim Warren
=20
From: "Kim Warren" <Kim@strategydynamics.com>
=20
Please forgive me if the following question is na=EFve - my math is very =
rusty!=20
=20
I am currently struggling to persuade colleagues in my field (strategic =
management) of some serious implications arising from an SD view of how =
the real world functions. To convey this simply, I try to explain that =
the general specification of an SD model, comes in three parts ...=20
o The value of all variables at any specific moment is =
instantaneously estimable from the then-current level of all =
asset-stocks (if you could instantaneously halve customer-numbers, for =
example, sales would halve, ceteris paribus)
o The value for each asset-stocks in the next period is its =
value in this period, plus what is added, minus what is lost (customers =
next year =3D customers this year, plus those newly won, minus those =
lost)
o ... and crucially ... those rates of change in asset-stocks =
are themselves, like all other variables, dependent upon the current =
level of existing asset-stocks (new-customers this year =3D fn. of =
current remaining potential customers, size of sales force etc.)
=20
Feedback is merely an unavoidable artefact that results from these =
relationships
=20
I further suggest that, though this appears to result in a closed =
system, certain stocks will typically be exogenous to the system under =
study, e.g. the number of potential customers for a new product will be =
a function of such factors as general levels of spending power etc. that =
are nothing to do with the business system under study. This contrasts =
strongly with conventional views of strategic performance - that it =
depends largely on exogenous factors (market growth rates, numbers of =
rivals etc.)
=20
An important implication of this SD perspective (if I understand it =
correctly) is that regression-based estimations of performance outcomes =
are doomed to failure - if todays customer-base is identically equal to =
the sum of all customers ever won since time=3D0, minus all historic =
customers ever lost, then there is no possibility that todays customer =
numbers can be well-explained by todays marketing efforts, todays =
price or indeed any other variable at a specific moment. If todays =
stock-values cannot be well-explained by any current values of other =
variables, then neither can the values of any item that depends on those =
stocks, which include sales revenues, profits and all other financial =
performance outcomes ... which is rather a shame, since multi-variate =
regression analysis forms the basis of the vast majority of empirical =
research in strategy (?and other social sciences)
=20
All of which makes me wonder ... surely it must be possible to validate =
an SD model without ever running it ...=20
- the stock accumulation relationships with flows are totally =
deterministic - todays customers =3D yesterdays, plus those won, minus =
those lost
- all other relationships, being instantaneous, must be taken =
to be constant through time (or at least the time-horizon over which the =
simulation is taken to be valid)=20
- ... and these other relationships must include the current =
rate of flows (i.e. ... todays rate of customer acquisition =3D a =
function of todays potential customers, sales force, product =
functionality etc. )
- if those current relationships are valid, they should be =
discoverable and verifiable from regression analysis of the real-world =
situation ( although regression is unsafe whenever it crosses one or =
more stock/flow boundary, it could be safe wherever no such boundary is =
crossed)
- such relationships should apply with confidence not only for =
todays flow rates, but for the same flow-rates over all of the relevant =
history (if not, then something else must be varying through time, which =
implies we must have missed an accumulating stock)
- if all this is so, then the model must be valid if the =
equations determining every stocks in- and out-flows conform with these =
statistical findings ... all of which can be confirmed without ever =
running the model
... or have I missed something?
=20
Kim Warren
=20
From: "Kim Warren" <Kim@strategydynamics.com>