during the 2004 University of Illinois 16th
Symposium on Audit Research
Leveraging Systems Thinking and Systems Dynamics
to Better Understand Organizations Business Processes
and Business Performance Measures
D. Sterman, Jay W. Forrester Professor of Management at the MIT Sloan
School of Management, helps organizations deal with the complex challenges
that they face by employing systems thinking and systems dynamics instead
of the simplistic, fragmented mental models that most people use. Sterman
spoke about his ideas and research on system dynamics and how they have
been applied successfully in the business world at the University of Illinois'
16th Symposium on Auditing Research on October 11th.
really no such thing as a side effect, there's just effects," Sterman
tend to blame unanticipated side effects when something goes wrong instead
of looking at their policies and finding the problem there. Policy resistance
occurs when the managers of an organization face a current challenge,
apply what they believe is the best solution, and yet the problem still
is not solved or a new problem is created.
workers may relax if a new control is implemented and come to over-rely
on it; smokers may increase the number of cigarettes smoked if better
filters are invented. Sometimes traffic congestion is worse after road
construction, and all too often pathogens develop resistance to antibiotics.
are all embedded in more complex systems. In particular, your decisions
have multiple effects, all those so-called 'side effects,' that you're
not aware of because they're in the outside boundary of your model,"
Sterman said. Some steps to save money, like prescribing generic drugs,
end up costing more money over time as patients stay sick longer and more
frequently require further visits to physicians. In the end, patients
are less satisfied and less healthy and physicians' workloads become even
simplistic mental models that most people develop and use prevent them
from understanding feedback, stocks and flows that represent the structure
of a system, non-linearities, and time delays.
attendees considered how financial-statement auditors would benefit from
thoroughly understanding the dynamics of audited organizations' business
processes. Auditors who used systems-thinking likely could better incorporate
time delays. There is a delay, for example, in between the time that defective
products are shipped and customers begin requesting return authorizations.
There may be another delay in between the early product returns and slower
moving inventory items due to loss of customer loyalty. By taking these
kinds of delays into account, auditors likely can better assess whether
management needs to increase reserves for warranty liabilities or to write
down obsolete inventory.
how to think about time delays and other elements of systems dynamics,
auditors likely need to invest in courses or training as research shows
that concepts of complex, dynamic systems generally are poorly understood
by adult populations, including students in top MBA programs.
news is that systems thinking skills do appear amenable to being learned
to some extent. "Those firms that can develop this capability before
the rest of the market have a tremendous opportunity to create a competitive
advantage," said Sterman.
D. Sterman is Jay W. Forrester Professor of Management at the MIT Sloan
School of Management and Director of MIT's System Dynamics Group. His
research includes systems thinking and organizational learning, computer
simulation of corporate strategy, and the theory of nonlinear dynamics.
In addition to publishing numerous scholarly and popular articles on the
challenges and opportunities facing organizations today, he has presented
his work before corporate, financial, and government audiences worldwide.
Sterman's research centers on improving managerial decision making in
complex systems. He has pioneered the development of "management
flight simulators" of corporate and economic systems. These flight
simulators are now used by corporations and universities around the world.
Recently, in partnership with the National Science Foundation and several
leading corporations, he has been studying the dynamics of organizational
change and process improvement programs to help firms design and implement
sustainable improvement programs.
his talk at the 2004 University of Illinois 16th Symposium on Audit Research,
sponsored by KPMG LLP.