In this article, we will be understanding the dynamics that drive a company. In particular, I will introduce two different types of models for investigating these dynamics: the Value Chain ad System Dynamics. The first concept is particularly handy when you are seeking to design continuous small improvements, the second will be helpful when you are trying to see a company from a bird eye viewpoint. Both are equally valuable, but probably for the nature of business process integration the first (value chain) is easier to map and use.

On Understanding the Dynamics that Drive a Company: Value Chain and System Dynamics
On Understanding the Dynamics that Drive a Company: Value Chain and System Dynamics

Value Chain

A value chain is a combination of the systems a company or organization uses to make money. In other words, a value chain is made up of all the various subsystems that are used to create products or services. This includes the company’s processes from start to finish.

Michael Porter developed a strategic management tool for analyzing a company’s value chain. In his book “Competitive Advantage” (published 1985), Porter laid out his method of analyzing value chains. He sought to define a company’s competitive advantage noting that it stems from the company’s processes, such as marketing and supporting activities.

All five primary activities are essential in adding value and creating a competitive advantage. They are:

Companies can harness a competitive advantage at any one of the five activities in the value chain. For example, by creating outbound logistics that are highly efficient or by reducing a company’s shipping costs, they can either realize more profits or pass the savings to the consumer in the form of lowered prices.

The use of support activities helps make primary activities more effective. Increasing any of the four support activities helps at least one primary activity to work more efficiently.

The video below introduces the value chain and discuss the benefits of this model as well as its limitations:

System Dynamics

System dynamics is a methodology and a mathematical modeling technique to frame, understand, and discuss complex issues and problems. Originally developed in the 1950’s to help corporate managers improve their understanding of industrial processes, System Dynamics is currently being used throughout the public and private sector for policy analysis and design.

System dynamics tries to understand the nonlinear behavior of complex systems over time using the following key concepts:

The video below provides an introduction to the concept:

The lecture below gives a set of examples as well as familiarizes you with the concept of System Dynamics:

I hope that these videos will serve as an introduction for understanding the dynamics that drive a company.

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