I have not done much research to back some of my statements, so this is one of those stream of consciousness entry on System Dynamics and its application in the real world.
I am really starting to like System Dynamics as it has provide a powerful way of thinking about the dynamics of the world that we live in, and then applying the ideas and understandings in making sound strategic choices. This week in our System Dynamics class, we covered the People Express (A) case, which chronicles the spectacular rise and fall of People Express. Despite being a pioneer in some very innovative business practices in the airline industry, like deep discount airfare and no frills service, People Express no longer exists today. Since starting business in 1981, People Express had become the fifth largest airline in the U.S. the course of 5 years since and yet a year later, the business went bust. What happened? A common explanation for their demise is excessive corporate growth. I know it sounds counter-intuitive that excessive growth is seen as detrimental factor to a company's bottom line. I struggled with it initially too; but after reasoning it with System Dynjamics, the explanation makes perfect sense.
Complex systems, including business organizations, have reinforcing and balancing feedback loops that are associated to growth. For the uninitiated, these feedback loops are the cause and effect of different components of a system. A reinforcing loop refers to a cyclical series of interactions among entities that has an multiplying effect on a certain behavior, while a balancing loop is inimical to that behavior. For the engineers out there, these loops are similar to the feedback loops in Control Theory but in System Dynamics, feedback loops are often used to model complex behaviors in a social setting. Now most growths and declines are exponential in nature (compounding effect). However, in our social-physical world, nothing can grow forever as growth needs be fueled by resources. All growth processes will eventually be limited by some balancing loops due to the limits of resources. Likewise, a company that experiences tremendous growth in its early stages is likely to be slowed later by its limited resources (tangible or intangible, controlled or non-controlled). Such a phenomenon explains the shape of an S-curve. In the worst case scenario, the growth is so rapid and excessive that it overshoots its natural limits (or some people call it the tipping point), allowing balancing loops to dominate. When this happens, decline becomes inevitable and may lead to undesirable outcome. In this case, the phenomenon is characterized by a parabola (or some people call it the bell curve). The take away from this discussion is this: the recognition and understanding of key strategic assets as well as the dynamics of the limitation of growth are critical to any corporate growth strategy.
Reference: M. Salge, P. Milling, "The Pace or the Path? Resource Accumulation Strategies in the U.S. Airline Industry," 2004.