System dynamics for market forecasting and structural analysis

Forecasts of demand, revenues, profits, and other performance measures are a common input to managing a business. And, while managers intellectually appreciate the difficulties with forecasts, the use of assumptions about the future is inevitable and necessary. Since the forecasts that come from calibrated system dynamics models are likely to be better and more informative than those from other approaches, especially in the short- to mid-term, we must educate our clients to make proper use of them. This article stresses three points: (1) system dynamics models can provide more reliable forecasts of short- to mid-term trends than statistical models, and therefore lead to better decisions; (2) system dynamics models provide a means of understanding the causes of industry behavior, and thereby allow early detection of changes in industry structure and the determination of factors to which forecast behavior are significantly sensitive; and (3) system dynamics models allow the determination of reasonable scenarios as inputs to decisions and policies. The paper illustrates these points with examples from a model of the commercial jet aircraft industry. It shows how the model was used to identify important structural changes in the industry, to avoid unnecessary capacity expansion, and to identify strategies to best “bridge” a business downturn. The results presented update and significantly expand upon work presented earlier. Copyright © 2000 John Wiley & Sons, Ltd.