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8/3/2019 System Dynamics Seminar
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System Dynamics and its Applications
Padarabinda Maharana (10IM60R08)
Rohan Pillai (10IM60R10)
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+Over view
Introduction
System Dynamics concepts
Applications of System Dynamics
Case studies
Conclusion
References
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Introduction
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+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
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+Introduction
Highly versatile academic discipline
Can be applied invarious scenarios including social scenarios
Can be used to visualize behavior of complex systems
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System Dynamics Concepts
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+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
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System Dynamics: A study of the behavior of a
system over time
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+System Representations
Flow diagram Causal relationship
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+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
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+Stock and Flow - Representation
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+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
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+System Dynamics Applications
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+System Dynamics Applications
System dynamics has varied application
Can be used to model nearly anything
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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
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+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
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+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
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+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
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+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
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+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
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+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
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+ Market modelCausal relationship of the various factors influencing the ³Installed Base´variable, which represents the total number of machines that are currentlyinstalled and operational
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+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
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+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
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+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
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+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
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+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
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+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
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+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
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+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
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+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
Loss of ¼140 million ($187 million) in profitability
Scenario 3: Price reduction for the complete productline
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+The results
Performance enhancement for Intermediate and Top products
Price remains unchanged
Product-based perspective
Sales volume: +37%
Turnover: +30%
Contribution margin: +35%
Strategy seems reasonable
Scenario 4: Performance enhancement
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+The results
Companywide perspective
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
Loss of ¼25 million ($33 million) in profitability
Strategy 4: Performance enhancement
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+The results
Performance of Intermediate and Top enhanced
Prices increased
Product-based perspective
Sales volume: +28%
Turnover: +17%
Contribution margin: +33%
Strategy 5: Performance enhancement and increasein prices
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+The results
Companywide perspective
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
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+ The results A bar chart showing the trend in turnover and profitability after a 6 year period, after implementing each scenario
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+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
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Brand Management A system dynamics approach for decision makers
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+ 40
Outline
Definition
Key terms in brand management
The brand management model
Sector over view
Behavior of the model
The dissertation model
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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.
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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
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+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
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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)
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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.
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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%
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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.
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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
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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
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+ 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
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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
-
-
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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>
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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
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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
+
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56
The Bottom Line: Brand EquityThe Bottom Line: Brand Equity
Brand Equity
<Brand Awareness>
<Perceived Quality>
<Brand Loyalty>
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+ 57
Model Behavior Scenario- 1
Investment: 70
ATL: 0.7
BTL: 0.1
PP: 0.1
PR: 0.1
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+Model Behavior Scenario- 2
Investment
ATL: 0.7
BTL: 0.1
PP: 0.1
PR: 0.1
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The new Approach: Brand Equity asResource System
Loyal Customers 0 3 6 9 12
Inflow
Outflow
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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
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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
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+ 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
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+ 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
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+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.
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Conclusion
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+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
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+
References
Recommended