Sunday, 17 March 2024
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In the first chapter we learn about elements, interconnections, purpose, stocks, flows, and feedback loops.

Elements are the distinct objects or actors that make up a system. Elements are not only tangible things, like a human or a house, but can also be an intangible concept. Things that only exists in social reality, such as the prestige attached to a job title or the reputation of a company.

Interconnections are what makes a set of elements become a system rather than just a bunch of things. Interconnections, flows of information between elements, make the elements become a system by serving a purpose/function together. For example, grossly oversimplified, the brain is made up of cells (neurons) that interconnect by chemicals (neurotransmitters) to bring about the functions of the brain. A system could also be a company, where the stakeholders (e.g. owners, directors, employees, customers, suppliers, regulators,) are the elements, each interconnected in various ways, like the operation and management processes of a company. 

The behavior of a system (e.g. a company) stays relatively the same if elements are replaced (e.g. repeat customers, employees). Of course it will have some effect on the system (e.g. employee's productivity, customer's spending power), but changes in interconnections (e.g marketing, onboarding), will have a greater effect. But ultimately, the purpose of the system will have the greatest effect on the behavior (e.g shareholder value). 

It's important to note that the purpose of a system doesn't have to be explicitly stated, and if it is stated, it may be false. Therefore, it's best to induce the a system's purpose from observing its behavior overtime. 

Systems are complex and can have many subsystems within the system, that each have their own specific purpose (e.g. customer service, employee wants salary, shareholder wants profit). The ability to achieve the stated purpose of a system, depends on the harmony of its sub purposes, and the efficiency of the mechanisms or rules that govern the interconnections. For example, if the purpose of a company is shareholder value. All things being equal, if employee salaries increase, then shareholder value or/and customer value will decrease. But if employee value increases relatively more than employee expenses, then shareholder value or/and customer value increase.

A system has stocks and flows. A stock is quantifiable, like a company's inventory of goods or cash reserves. A flow, is either an inflow that increases a stock or an outflow that decreases a stock. Production of goods increases the company's inventory while sale of goods decreases the company's inventory. You can think of a stock as a snapshot at a given moment for the history of inflows and outflows. A stock acts as a buffer between short-term changes to inflow and outflows. It allows the rate of inflow and outflow to decouple.

To regulate the stock level, a system has mechanisms to manipulate the flows. If the level of stock affects flow a feedback loop forms. In feedback loops, inflow can affect outflow, and outflow can affect inflow. The book mentions two types of feedback loops. A stabilising loop and a reinforcing loop. 

With a stabilising loop, the higher discrepancy, the more it will manipulate flows. E.g. if sales increase, production is increased to meet demand.

With a reinforcing loop, the higher the stock lever, the higher inflow rate. E.g. reinvesting capital to increase output, which increases inflow of capital that gets reinvested, so on.
This results in exponential growth of the stock. The time to double current stock level is 70 divided rate (approximately).