It was Sterman’s (2000) book entitled Business Dynamics: Systems Thinking and Modeling for a Complex World that introduced the term “business
dynamics.” Business dynamics is concerned with learning in and about complex systems. Effective decision-making by growing dynamic complexity
requires executives to become systems thinkers—to expand the boundaries
oftheir mental models and develop ways to understand how the structure of
complex systems creates behavior.
In the context of system dynamics, a system might be a manufacturing company, a consulting ﬁrm, a government organization, an industry, or some other
part of the real world that has cause-and-effect relationships to be understood
for decision-making. While in the context of systemdynamics an information system has a different meaning, a system here is a set of organizational
relationships to be explored as different system structures create different
While the structure of a system can be illustrated by a causal loop diagram,
the behavior of a system can be illustrated by a reference mode, as was illustrated in the preface. This will be furtherexplained and explored in this
Dynamic Business Performance
Business dynamics can be understood as the evolution of one single business
as well as the evolution of businesses in an industry or in a region. In the latter
meaning, OECD (2004) studied business dynamics in terms of the creation
of new businesses and the decline or market exit of less productive ﬁrms.
The creation andgrowth of new ﬁrms and the decline or market exit of old
ﬁrms are often regarded as key to business dynamism and economic growth
in OECD economies. New ﬁrms are thought to be especially innovative and
to play an important role as job creators. Based on these ideas, policy makers
often believe that institutions, which foster ﬁrm entry, may ultimately enhance
the overall economic performanceof their country (OECD, 2004).
According to OECD (2004), it is frequently reported in the ﬁrm demographics
literature that most new ﬁrms do not survive for long. Chances of survival
are especially low for ﬁrms that start small, as they usually do. Two-year
survival rates for ﬁrms born in 1998 do conﬁrm that there is a high risk of
newly created ﬁrms being forced to exit the marketrapidly. Survival rates
correspond to the number of ﬁrms of the same cohort that have survived
a given number of years as a percentage of all ﬁrms that entered the same
year with them. In Europe, between 12 and 38 percent of all new ﬁrms had
failed already after the ﬁrst two years, as the survival rates varied roughly
between 62 and 88 percent.
Firm survival can also be assessed on the basisof hazard rates, which correspond to the conditional probability of leaving the market after a certain
life span. These are calculated as the share of exiting ﬁrms in the number
of survivors of the same cohort as of the previous year. While survival rates
decline with ﬁrm age by construction, a priori there is nothing that precludes
hazard rates from being comparable at differentdurations. One- and two-year
hazard rates reveal that while entry rates tend to be higher in services than
in manufacturing, the risk that these new ﬁrms have to exit the market early
in life is higher in services, as well (OECD, 2004).
Similar to the study by OECD (2004) is the study by Callejón and Segarra
(1999) on business dynamics and efﬁciency in industries and regions in
Spain. Theystudied business dynamics in terms of ﬁrm births and deaths.
According to their approach, new ﬁrms are seen more as users of innovations than producers of innovations. The results showed that both entry and
exit rates contribute positively to the growth of total factor productivity in
industries and in regions
Business dynamics as the evolution of one single organization is the perspective...