This Class explains the principle that resources accumulate (fill up) and deplete (drain away) over time – customers are won and lost, staff hired and fired, products launched and dropped, cash generated and invested. This behaviour has a deeply fundamental impact on organizations’ performance over time.

The class describes the 'stock-and-flow' framework that captures, numerically, how resources accumulate – exactly as we already do for cash with the Balance Sheet and Cash-Flow statements. It explains the relationship between performance measures, which relate to whole periods of time and quantities of resource, which are measured at points in time, typically start or end of a reporting period.

We give practical examples of how this mechanism works, in manufacturing, business services, airlines and Facebook, and make the case that we should "account" for customers, staff and other resources, just as we do for cash. The class also explains why resource-accumulation makes it impossible to use statistical methods to find reliable explanations for performance (though they do have a role to play in part in the strategy dynamics method, covered in class 4).

Although the framework is a vital part of a wider strategy analysis, it can be very powerful when used on its own, as shown with examples from pharmaceuticals and Coca-Cola.

Key issues addressed

• The inescapable and critical behaviour of resources – how they build up and drain away over time
• Understanding the math of how resource flow-rates determine resource levels
• How accumulating resources devalue correlation analysis

Other resources and links

Books

Sterman, J. (2000) Business Dynamics, Irwin/McGraw-Hill, New York.