Systems Thinking & Problem Solving: Understanding Our Most Important Messes

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1 ytem Thinking & Problem olving: Undertanding ur Mot Important Mee MGM315 12/17/03 Change Bob Powell, Ph.D., MBA Continuou Aociate Tel: , Web: Change "Change in't what it ued to be." Charle Handy, The Age of Unreaon Getting Quality the ldfahioned Way Change Time : Why We Favor the hortterm "Getting Quality the ldfahioned Way: elfconfirming Attribution in the Dynamic of " Nelon Repenning and John terman loan chool of Management The Road to Hell Ad Hoc Change to the hortcut R4 Double Bind Conflicting Goal B6 Quality tandard R3 Integrity Problem Introduction Training and Experimentation Problem B4 R2 elfconfirming Attribution Gro Throughput Focu on Throughput Production Preure and Worker Control Problem Correction Worker Effort B5 queeze ut lack B3 Work marter Reource to Defect Introduction R1 a Reinvet B1 Work Harder Attribution of Low Effort to Worker Defect Net Throughput Throughput Gap De'd Net Thruput R1 b Reinvet Defect Correction B2 Rework Available Reource Reource to Correct Defect Effort to Correct Defect Robert E. Powell, Ph.D., MBA Continuou Aociate 2003 T&Prob311.PRZ 12/17/03 16

2 Behavioral Biae Againt Fundamental Defect are more tangible than proce problem. People overweight available and alient feature of the environment (Kahneman, lovac & Tverky, Judgement under uncertainty: Heuritic and biae,1982 improvement take time; defect are eaily identified and repaired. Correction effort have a more certain outcome and human are rikavere. Kahneman & Lovallo, "Timid Choice and Bold Forecat," in Fundamental Iue in trategy A Reearch Agenda, Rumelt, chendel, & Teece, Harvard Buine chool Pre (1994) Eliminating a proce problem doe nothing to eliminate the tack of defect already generated. The "unk cot" fallacy reinforce recouping invetment in defective output, even though the invetment are unk cot. Exponential to Make the Inviible Viible Identify "proce complete" activitie, meaure Etimate proce technical and organizational complexity Determine Current Value and Theoretical Minimum et HalfLife Target Practice continuou improvement (w/checklit) Track progre on HalfLife plot Reward baed on performance to HalfLife goal hift primary emphai to other activitie on nearing theoretical minimum Total Quality Management & ytem Thinking Apect Type of Learning TQM ingleloop ytem Thinking Doubleloop Quality and ytem Thinking Quetion Facilitate How? Adaptation Why? Creation Change e tructure, Policie For Change in Way of doing thing Mental Model Caue & Effect Linear Cloed Loop Feedback Type of Data Hard, Meaurable oft, Quantifiable Type of Inquiry Analyi ynthei Total Quality Management & ytem Thinking Apect cope of Problem Type of Direction of People Enhance Develop Undertanding Practitioner Are TQM Iolate & olve Problem Incremental tandardized, Convergent Quality of Doing Focu and Convince Uing cience Facilitator, Trainer, Teacher, Reource ytem Thinking Undertand & Addre Mee Breakthrough Teting Aumption, Divergent Quality of Thinking Quetion and Inquire to Undertand Theory Builder, Reearcher Thinking & Learning in rganization What' Required? Learning Language Brain Thinking kill Memory Motivation & Apiration To decribe relationhip To decribe fundamental ditinction between flow & accumulation To handle dynamic complexity: multiple nonlinear feedback with long and variable delay ytem kill: dynamic, ytemacaue, foret, thinking operational, cloedloop, quantitative, & kill cientific. Practice: CLD, &F, Learn'g Lab tore & retrieve experience: ucce & failure ee relevance & utility... unleah thee qualitie Caual Loop Diagram The Archetype tock & Flow Mapping tock & Flow imulation Model Learning Hitorie, Checklit Reality concept, ladder of inference, dialogue, Mod. II ToA, group facil. grnd rule, peronal matery, winning trategy Robert E. Powell, Ph.D., MBA Continuou Aociate 2003 T&Prob311.PRZ 12/17/03 712

ound A Building Loop 1A Total Development ound B Building Unound C Building Loop 5A Loop 5B Loop 1B ound A Income Capacity Capacity Utilization Loop 5C Unound Loop 1C C Income hortfall Upgrading ound

to Improve City ervice City Employee alarie Loop 6 Loop 3 Preure for Taxe for Upgrade Preure to Reduce City Employee alarie Cot Paed on to ther Development Propect of Higher verall Tax Load Prepared

3 ound A Building Loop 1A Total Development ound B Building Unound C Building Loop 5A Loop 5B Loop 1B ound A Income Capacity Capacity Utilization Loop 5C Unound Loop 1C C Income hortfall Upgrading ound B Income verload, Degradation, & Upgrade Backlog $$$ Available to Upgrade Loop 2 Loop 4 Quality and Quantity of City ervice Taxe Cot to Development Taxpayer Willingne to Pay Taxe for Upgrade Preure to Improve City ervice City Employee alarie Loop 6 Loop 3 Preure for Taxe for Upgrade Preure to Reduce City Employee alarie Cot Paed on to ther Development Propect of Higher verall Tax Load Prepared for CARD by Continuou Aociate 9/20/ Return on Each Individual Development 6 Direction of effect: "" = ppoite "" = ame Reinforcing Loop Balancing Loop Iue Cluter Iue Cluter Iue Cluter Learn to Move From Iue to Action Iue Problem/Iue Problem/Iue Cluter Controllable and Uncontrollable Variable People Expre Management Flight imulator 100 amount amount Qualitative Model $$$ 0 0 time 10 Behavior over Time Chart w_lic_ale_pct ale ector Intalled_Bae_pct Intalled_Bae init_bae w_lic_ale w_lic_lo trategycenario Matrix IN Conidered trategie Conidered cenario Reult of "Mental" imulation cenario to Examine Controllable Variable Robut trategie Uncontrollable Variable UT Mental imulation taff lic_bae_wom_mult lic_life ale_p_taff erv_wom_mult bae_ale_p_taff Perc_erv_Qual Quantitative Modeling and Analyi Action Reference: "People Expre Management Flight imulator" intruction by John D. terman, loan chool of Management, MIT, Cambridge, MA People Expre imulation People Expre High Level Map Each imulation lat up to 10 year. Each quarter year you have the opportunity to make five deciion. Competitor Fare ervice cope Quality Financial Fare Balance heet Income tatement Cah Flow, external financing tock Price Cutomer Demand & Market hare Perception of ervice cope & Quality Reaction to Relative Fare Repone to Marketing Fleet Aircraft Acquiition Capacity Paenger Flown Load Factor Fleet perating Cot People Expre ervice Hiring Employee, turnover Productivity of CM Quality of ervice Cot of ervice Fleet Capacity Fleet Capacity (cont.) Paenger Capacity: Average 210 million eat mile per aircraft per year. Improve flight hr/day from indutry average = 7 to 10 hr/plane reduce maintenance downtime eliminate firt & buine cla to increae avail. eat/aircraft. Aircraft Acquiition: Plan to add high quality, economically efficient aircraft. Average cot i $10 million / aircraft, include aircraft itelf and total upporting capital invetment to place each aircraft into ervice (gate, terminal pace, pare part, upport equipment). perating cot for each aircraft = $5.5 million / year include fuel, aircraft maintenance, and facilitie not including depreciation or interet to ervice debt. Capacity / Cutomer available capacity = # available eat mile in any period potential cutomer = # propective paenger wihing to fly PE paenger carried = # revenue paenger mile actually flown during each time period Load Factor = paenger carried / available capacity Indutry average load factor i about 58%. Potential cutomer will exceed total paenger carried. Initial breakeven load factor at anticipated fare level i about 60% (generate profit w/o relying on overbooking more than the indutry a a whole). Robert E. Powell, Ph.D., MBA Continuou Aociate 2003 T&Prob311.PRZ 12/17/

4 Load Factor Graphical Function Human Reource Management No Frill ervice ervice cope will be.60 of the full ervice indutry tandard wnerhip every employee i an owner and participate in profit haring turnover will be reduced by the ownerhip ytem Croutilization and job rotation for higher productivity elfmanagement few layer of management & fewer employee / aircraft average CM will review their own performance and et their own goal CM recruitment, hiring, and training The PE learning curve hire people who fit the viion and direction of People Expre PE Learning Curve Cot tructure Total operating cot: fleet operation, ervice, marketing, and interet. Fleet cot: fuel, maintenance, airport fee, etc. $5.5 million per aircraft per year. ervice cot (human reource): wage, benefit and taxe, related facilitie (computer, telephone, etc.) = $42,000 per employee / year. Marketing expenditure: a fraction of revenue. Interet: Paid on debt = 10 %/yr. Earned on aving = 5%/yr. Depreciation: a noncah charge, aircraft depreciated at 6.25 %/yr. Capitalization and Finance Capitalization and Finance (cont) Balance heet: Aet Value of fleet ther capital equipment Liabilitie Debt Equity External Financing Debt = 75% tock hare = 25% No dividend... retain earning to finance growth Cah Flow: Revenue Cot of fleet operation Cot of ervice (employee) Marketing expenditure Interet Net Cah Flow before financing hare Price (market value of hareholder' equity)/(# outtanding hare) Valuation depend on aet & debt, preent value of the profit tream premium for growth baed on expected future profit During tartup market will expect and dicount initial loe Robert E. Powell, Ph.D., MBA Continuou Aociate 2003 T&Prob311.PRZ 12/17/

5 Caual tructure of Market Growth Marketing Effectivene Potential_Cutomer marketing coverage advertiing required to reach target market o adoption_rate marketing effectivene marketing expenditure word of mouth Cutomer Given expected load, ~10% of revenue hould provide a ufficient longrun marketing budget. Fraction may be increaed during tartup to provide a marketing 'kickoff' before word of mouth become effective Fraction can be varied to meet competitive challenge or financial preure. target market ize route & fleet ize Market Diffuion Dynamic Market egment & Attractivene egment New Traveler Etablihed Traveler Market attractivene Route and chedule: competitive on route flown Relative fare: PE profitable at $.09/eat mile v. indutry average of $.16/eat mile cope of ervice" 60% of indutry average reduce attractivene 20% among EtablihedTraveler but only 5% among New Traveler ervice Quality Different for each market egment Attractivene from Relative Fare Attractivene from cope of ervice Robert E. Powell, Ph.D., MBA Continuou Aociate 2003 T&Prob311.PRZ 12/17/

6 Attractivene from Quality of ervice Competition Deregulation ha ubtantially increaed the competitivene of the airline indutry. People Expre will be going head to head with major carrier who currently dominate the market PE' competition will not it idly by while PE ucceed. PE' cot advantage will create a window of opportunity of up to everal year during which PE can grow and etablih itelf before competitor catch up. Competitive Factor Dynamic of Competitive Repone Current Indutry Fare tructure: Indutry average fare i currently $.16/eatmile. PE cot are low; PE profitable at $.09/eat mile (w/lf = ~60%). A large advantage that the competition will not be able to match by cutting their profit margin alone. To match PE, the competition will have to lower their breakeven point. To do o will be painful, difficult, and time conuming. Long Run Indutry Fare tructure ver time competitor will probably be able to lower their cot (e.g., wage conceion and efficiency improvement). Competitor will imitate ome of our human reource policie. However, it will probably take at leat two year to cloe the gap. If PE ucceed, we can expect other new airline to be formed. A long a People Expre i only a mall player in the market, we do not expect the competition to repond. While PE i mall, the cot to the competition of lowering price will be prohibitive: to punih PE by cutting their price will reduce revenue acro their much larger cutomer bae. However, a PE market hare increae, we expect the competition to intenify cotcutting effort. The larger PE' market hare, the fater we expect competitor to repond (at the fatet ~2 year). Hap Pareti' trategy Don Burr' trategy "We thought we'd tart by leaing three little DC9' and flying them for a few year until we made enough money to buy a plane of our own." HBR Cae tudy Pareti' trategy mean no addition to the fleet or taff, low price and moderately aggreive marketing. Run imulation of Pareti trategy Price low at $.09/eatmile from the beginning. Target cope of ervice at Expand the fleet aggreively (about 100%/year), hiring people at a comparable rate. Market aggreively, particularly in the beginning (12% of revenue at the beginning, falling to 10% a load factor rie). Note reult of Burr' trategy. Robert E. Powell, Ph.D., MBA Continuou Aociate 2003 T&Prob311.PRZ 12/17/

7 Deciion for Don Burr' trategy People Expre Hitoric Capacity Don Burr imulation Capacity People Expre Hitoric Revenue People Expre Hitoric Profit Don Burr imulation Revenue Robert E. Powell, Ph.D., MBA Continuou Aociate 2003 T&Prob311.PRZ 12/17/

Competitive Repone Don Burr trategy Run imulation Experiment()

8 People Expre Hitoric tock Price Don Burr imulation Don Burr trategy ummary Report Don Burr trategy Market hare & Competitive Repone Don Burr trategy Run imulation Experiment() Robert E. Powell, Ph.D., MBA Continuou Aociate 2003 T&Prob311.PRZ 12/17/

The Process-Value Model: A Systems View of the IST Value Chain

The Process-Value Model: A Systems View of the IST Value Chain Aociation for Information Sytem AIS Electronic Library (AISeL) SAIS 2007 Proceeding Southern (SAIS) 3-1-2007 The Proce-Value Model: A Sytem View of the IST Value Chain William L. Lomeron lomeronw@nula.edu