3 minute read
BUSINESS DYNAMICS
Traditional forecast methods are unable to predict the turning points in cyclical markets
Article by Pekka Aarnisalo, STE Analytics Ltd.
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Simulation based modelling methods offer a fundamentally new and a different view as compared to many traditional, well established, concepts. These models imitate the real market structure and decision-making. At their heart the models are based upon accurately portraying the existence and role of this dynamic structure.
Most of the operating structures in industries are formed around human decision-making. These decision-making policies and principles cover the demand chain from the producers to brokers and to end customers. In addition to the decision-making rules, the structure also includes the physical properties of the industry like production facilities, inventories, etc. The structure follows the real industry practices in every aspect which means that no economic or other theories are included in the structure, unless it can be clearly shown that both the real market and the actors in the market also behave accordingly.
In simulation modelling market forecast is derived from the industry operating structure in three steps. First, the industry structure is translated into a set of mathematical equations. Secondly, these equations are programmed as a computer model. Thirdly, simulation of the model produces numerical market forecasts. Accurate
Figure 1. The main causes for business cycles are the decision making practices. Example is from consumer board industry and represents end consumption growth rate. Market circumstances at each moment are a result of actions taken in the industry. These actions are determined by the decisions made by the industry players. The decisions are typically driven by the short-term market status.
predictions are possible due to the strong inertia that the structure forms.
TO ENSURE SMART DECISIONS IN COMPLEX SITUATIONS
Globalization, AI, ML and digital economy are now challenging the dynamics and the current earning logics in businesses and public services. The transformation in businesses may force companies to rethink and modify not only their strategies, but also the existing business models. The transformation is often based on a complex dynamic structure, with several interactions, cause-effect chains, self-reinforcing loops, time delays, constraints and spirals in it.
A NEW DYNAMIC PERSPECTIVE
With mathematical simulation models you are able to discover and visualize the structure - the true cause-effect patterns and causal loops - in your business. Models enable us to understand the complexity. They provide a framework for seeing the big picture and understand the structure that is behind all the future growth, turning points, cycles, positive multiplier effects, and also cumulative problems.
Pekka Aarnisalo, Managing Partner and Co-Founder STE Analytics Ltd.
«A visual simulation model is an effective way of communicating decision backgrounds to stakeholders.»
Pekka Aarnisalo has been building mathematical models a little short of twenty years and is the Managing partner and one of the founders of STE Analytics.
STE Analytics is a management consulting company headquartered in Helsinki, Finland. The main expertise is in solving complex business problems in industries and the public sector, utilizing mathematical models based on system dynamics and systems thinking. Company has a wide range of customers in Europe and the USA.
