In the 1960's, MIT developed System Dynamics as an offshoot of the broader discipline of Systems Thinking. Systems Thinking detected structures underling complex problems and allowed individuals to become aware of the mental models they used to perceive reality.
System Dynamics simulated interactions between objects in dynamic systems in order to understand how complex systems changed over time. Its modelling technique was based on two building blocks:
1. STOCKS that could be thought of as a bathtub where flow accumulated;
2. FLOWS that could be thought of as a faucet that filled or a drain that emptied the stock.
In the business context, a stock is a balance sheet and a flow is a profit and loss sheet.
Central to System Dynamics are feedback loops that allow nonlinear behaviour. Feedback refers to factor A affecting factor B and B affecting A through a chain of causes and effects.The system as a whole must be studied in order to determine the effects of a change in one variable: if A = B then A means B and B means A making it impossible to determine the cause from the effect.
System Dynamics can be used as a modelling technique as well as a metaphor for organisational development. As a technique, it modelled two aggregation levels: the market and the organisation. Its common applications are:
- market behaviour;
- supply chain optimisation;
- logistics and material requirements planning;
- business planning;
- project planning.
As a metaphor, System Dynamics maintained that feedback in the form of external financial audits, customer surveys and personal performance reviews helps companies adjust appropriately and improve their performance.