International Journal of Academic Research in Economics and Management Sciences

May 2013, Vol. 2, No. 3

ISSN: 2226-3624

Understanding Enterprise Behavior Using Simulation

Models
Ph.D. Student Ramona-Mihaela MATEI
Bucharest University of Economic Studies, Romania
ramona.matei1982@gmail.com

Ph.D. Professor Ioan RADU

Bucharest University of Economic Studies, Romania
iradu13@gmail.com

Abstract

The high complexity of the systems and the dynamics of the organizational environment
generated the interactions of its components requires of managers adaptable, expandable and
in real time modeling capabilities of the real state of the company in order to capture the way
in which the external and internal factors can affect enterprise behavior. Practice demonstrates
that traditional methods cannot provide this capability for quantitative analysis of behavior in a
holistic perspective. In this context, there have been developed the tools and simulation
models to provide the capability to create a virtual model that can be easily manipulated in
hypothesis testing related to the enterprise behavior and the effective assessment of the
alternatives and possible scenarios. This paper aims to provide an analysis of the Agent-Based
Modeling and Simulation (ABMS) and System Dynamics (SD) in order to contribute to a better
understanding of the enterprise behavior and to guide selecting appropriate simulation
approach for obtaining a correct analytical result.

Keywords: Enterprise Behavior, Simulation Model, Agent-Based Modeling and Simulation,

System Dynamics.

Introduction

Organizations as very complex systems require a greater capacity to adapt in order to

survive in a competitive environment. This need requires a high level of understanding and
innovation of the problem complexity. The high complexity of the systems and the dynamics of
the organizational environment generated the interactions of its components requires of
managers adaptable, expandable and in real time modeling capabilities of the real state of the
company in order to capture the way in which the external and internal factors can affect
enterprise behavior. Practice demonstrates that traditional methods cannot provide this
capability for quantitative analysis of behavior in a holistic perspective. In this context, there
have been developed the tools and simulation models to provide the capability to create a
virtual model that can be easily manipulated in hypothesis testing related to the enterprise
behavior and the effective assessment of the alternatives and possible scenarios. Managerial

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 International Journal of Academic Research in Economics and Management Sciences
May 2013, Vol. 2, No. 3
ISSN: 2226-3624

simulation of the enterprise behavior is more difficult due to the large complexity of the tasks,
the environment uncertainty in which acting and multi-scale nature of it. Due to increased
dynamics of an enterprise, using such simulation models require primarily a good knowledge
and analysis of this behavior.

In this context simulation models allow the systematic investigation and analysis of
complex processes dynamic behaviors which cannot be modeled with traditional mathematical
methods. The behavior of complex systems is not linear, but rather is the result of feedback and
interactions of internal components with external environment factors, which makes behavior
modeling to be difficult or impossible to achieve with mathematical approaches based on linear
extrapolation of the behavior. In the literature and practice it is recognized that the simulation
is a computerized tool able to incorporate the uncertainties inherent in the real complex
systems (Keskhin, Melouk, and Meyer, 2010) which leads to operational and managerial
efficiency improvement of enterprise decision-makers.

There are several types of organizational behavior simulation methodologies in the

literature (Cohen and Cyert, 1965; Macy and Willer, 2002 Burton, 2003) that differ in terms of
behavioral approaches. The disadvantage of these methodologies consists in difficulty to
provide a representative and realistic model compared to a real enterprise behavior. Another
category includes most used in practice simulation methodologies as well as models of Discrete
Event Simulation, System Dynamics, Agent-Based Modeling and Simulation capable to capture
and to simulate a specific dimension of enterprise behavior.

In this context, the paper aims to provide an analysis of the ABMS and SD simulation
models highlighting the role, the advantages and limitations of using these models. The
purpose of this paper is to contribute to a better understanding of the enterprise behavior and
to guide selecting appropriate simulation approach for obtaining a correct analytical result.

System Dynamics (SD) simulation models

Systems Dynamics (SD) is a simulation methodology that was developed by Jay Forrester
in 1950 with the aim of macro-scale industrial behavior modeling based on the study of
information feedback characteristics of industrial activities and of the demand amplification
effects on the supply chain. According to Forrester (1958), SD reveals how the interactions
between organizational structure, enhancing policies, actions and decisions delays can
influence the enterprise behavior. SD is based on cybernetics and control theory principles and
on the use of differential continuous equations combined with charts which gives the capability
to identify the causal structure of the system and its influence on behavior. SD is considered a
simulation tool capable to perform changes at the highest organizational level and to sustain
top management in solving complex problems, especially those characterized by significant
delays and feedbacks such as resource allocation and supply chain management problems.
Sterman (2000) and Fowler (2003) state that SD method can be used as a tool for organizational
learning (Senge, 1990) capable to supports managers in discovering and understanding the
specific dynamics of organizational structures.

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 International Journal of Academic Research in Economics and Management Sciences
May 2013, Vol. 2, No. 3
ISSN: 2226-3624

SD was used to model the behavior since its first application in modeling of production
systems dynamics and industrial supply chain (Forrester 1958). Later, the use of SD was
extended in various fields such as: the general theory creation (Repenning, 2002), systems
modeling with the goal of forecasting and developing policies (Lyneis, 2000), study of the
dynamics strategy (Fowler, 2003), and distribution supply chain simulation (Angerhofer and
Angelides 2006, Scheiritz and Grossler, 2003), simulation of product development (Ford and
Sterman 1998) or business process, economics, ecology, human resources management,
software development, competition, innovation or improving the decision making process of an
organization (Miragliotta et al, 2009).

SD can models a real system by using basic elements (input and output flows, ”stocks”,
variables and feedback loops) by combining of which it is possible to simulate more complex
elements such as delays in order to identify how the system can reach the balance state (Lattila
et al, 2010). In the SD methodology system behavior is modeled over time through feedback
and delays capturing in the process and based on the representation of resources and system
dynamics as a set of accumulation ("stocks") and flows between them. In the SD model, the
complexity is generated by the interaction of multiple feedback loops and system structure
(Maani and Maharaj, 2004).

The implementing methodology of SD illustrate the system processes and entities in

form of aggregate accumulations/"stocks"(financial resources, materials, knowledge, human
resources) represented by integral equations with inflows and outflows, with causal variables
that influence such flows and the delays between them. Accumulations are those which drive
the system model towards its balance-state. Flows are characterized by feedback and delays so
that the resulting performance of the system can be non-linear and sometimes counter-
intuitive. According to Swinerd and McNaught (2012), flows in the system can meet the average
rate of its entities state changes. Under this methodology causal dependencies within the
system are represented in the form of diagrams that can be mathematically modeled as a set of
differential equations which generate a solving solution for the base system.

Agent-based modeling and simulation (ABMS)

Agent-based modeling and simulation, “multi-agent systems” or “artificial societies”

modeling (Sawyer, 2003) is a relatively new method of simulating dynamic and complex
systems distributed in time and space (Lattila et al, 2010). ABMS represents system entities in
the form of decentralised, autonomous software agents operating in parallel and
communicating between them by means of sets of internal rules in order to produce a pattern
of behavior at the system level. This implies that the real system is modeled as a set of agents
(agents system) that interact in an environment that is defined and implemented by means of
simulation software. A system is comprised of individual agents that have specific relations
within a defined environment. In this case complexity is generated by interactions between
agents and not by the structure of the entire system (Scholl, 2001). ABMS allows connections
capturing from micro to macro level and assess how micro-level interactions may generate
behaviors at macro level.

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Axelrod and Tesfatsion (2006) assert that agents-based models are defined on the basis
of two criteria: 1) system is composed of interacting agents and 2) emerging properties of the
system are generated from the interaction between agents and properties cannot be deduced
through the aggregation of individual properties. Agents acting on the basis of an internal
schema that contains sets of rules that define the decision-making capabilities of their own,
have memory, can teach, it can adapt and can act in the simulation or by changing the status,
either by making decisions to act on the basis of inputs from their local environment. Although
they have limited capacity to recognize the system as a whole, the agents are able to
collaborate and interact between them and with the external environment in order to achieve a
certain goal. This system of sharing of information, knowledge and tasks between agents can
contribute to the creation of collective intelligence, which would not be possible only on the
basis of the internal mechanism of each agent.

In the late 1990s, researchers in the social sciences start to become aware of the
usefulness of agent-based models for modeling social systems through the generation and
validation of theories that can be applied to specific systems (Anderson and Meyer, 1999). For
many researchers in this field ABMS are the third way for theory development in addition to
the deduction and induction (Axelrod and Tesfatsion, 2006). Agent-based modeling allows
building bottom-up models of social phenomena and analysis of these patterns by various rules
for the better control of its emergent behavior. Carley (2002) argues that agent-based models
are applied in social sciences in two ways: 1) an intelectiv way, in which models are used for
testing and generating theories and 2) an emulativ way, through which the models simulate the
real organizations with complex dynamics in order to support management efforts.

Although the usefulness of agents-based models in simulation of social phenomena is

widely recognized in the literature, this methodology can also be applied in other areas. As the
SD models, the first application of the ABMS was made with the aim of studying the behavior of
complex supply chain (Akkermans, 2001; Scholl, 2001; Schieritz and Grossler, 2003).
Subsequently, as a result of the development of these models, the ABMS was used also in the
fields of production such as production chain management (Hilletofth and others, 2010), as well
as a support in the decision making process (Nillson and Darley, 2006).

Garro and Russo (2010) consider the ABMS methodology as an iterative process consisting
in seven subsequent phases:
 Analysis of the system: this phase involves setting simulation goals and preliminary
understanding of the system and its components
 Conceptual system modeling: allows the system definition in terms of agents, classes of
agents and societies
 Simulation design: this phase suppose the construction of system abstraction model as a
framework which will be exploited in the simulation
 Simulation code generation: the simulation code is generated for proposed simulation
based on the model resulted in the previous phase

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May 2013, Vol. 2, No. 3
ISSN: 2226-3624

 Establishing scenario simulation

 Simulation execution
 Simulation results analysis by comparing them with the objectives established in the
initial phase
Based on the results obtained in the previous process it can be found a further
implementation of the process described above or only of the certain phases within it with
purpose to identify objectives for a new simulation or to achieve the objectives which have not
been achieved.

The advantages of using SD and ABMS models

Advantages of using the SD models are reflected by the fact that this methodology
allows the modeling of the enterprise behavior at top-level decision-makers through the
capture of the dynamic system at the macro level. SD provides an overview of the system and
use causal diagrams to represent the model created. Another advantage is that the simulation
SD can also be used as a model for decision support, because it allows parameters and
performances model adjustment through a real time analysis. The causal structure of the model
allows decision-makers to quickly identify key variables and decision-making options that can
be used to control the behavior of the system.

ABMS represents the only simulation methodology capable for rational behavior
shaping at the locally level based on bottom-up approach in the context of systems with local
entities distributed. ABMS is also a flexible, efficient and adaptable methodology which by using
artificial intelligence allows bottom-top capturing of the dynamics generated by the
interactions of autonomous agents and the way in how they respond to the environment. Due
to the characteristics they possess (autonomy, self-orientation, precise direction toward a
certain goal, flexibility) agents can be modeled with a high fidelity and without rigid
assumptions as in mathematical modeling which allows a realistic representation of the actors
responsible for decision-making processes (Sawyer 2003).

ABSM can be used in different contexts and allows modeling of systems composed in
both homogeneous and heterogeneous entities. Classes of agents with different characteristics
can interact within the same model because they are designed to self-evolving and to self-
adjusting structure during the model execution. Agents are used for exploring space problems
by developing a exploration structure on the basis of schemas incorporating intelligent
heuristics algorithms search (Scheritz and Größler 2003). This capability allows simulations
creation without a prior knowledge of the system macro-structure. Agents also integrate the
heuristics and genetic operators used for uncertain environments exploring in order to new
objectives discovering. Based on micro to macro level approach, the methodology enables both
hypothesis and different scenarios testing and different rules and parameters establishing
(Guyot and Honiden, 2006).

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The limitations of using SD and ABMS models

The main limitation of SD methodology is reflected by the fact that it uses only
aggregated terms in structure and behavior modeling – all people and resources are treated as
a single homogenous resource that vary continuously. This issue can be approached as an
advantage for the model computerization, but also as a disadvantage in applying the model to
simulate heterogeneous systems. Because the terms aggregation design facilitate
implementation of systems with a high level structure, it is recommended that the SD to be
used for modeling dependencies and dynamics of enterprise macro-level.

A major disadvantage of ABMS is represented by the high difficulty to verify and to

validate the behavior models simulated and the relationship between the agents micro level
schema and macro system resulted behavior. According to Rahmandad and Sterman (2004) the
difficulty of the model testing and evaluation is generated by the use of a high number of
agents which requires increasing the number of parameters used.

Another limitation of ABMS model consist on the fact that its methodology cannot be
applied to those organizational problems with routine and non-deterministic character (like
processes) which do not exhibit a top-down behavior and to organizational issues such as
computer systems, processes, strategic planning and resource allocation. In this case processes
modeling and simulation can be done better using DS methodology.

Because ABMS is based on the complex schemes that include memory and artificial
intelligence, these models can become very complicated and computer resources intensive
consumers compared to other simulation techniques and models.

Conclusions

Based on the previous discussed issues, we consider that although each methodology
captures a certain dimension of system behavior, none is able to capture all aspects that
characterize the enterprise complex behavior. In this context, the selection of a suitable
methodology can be achieved depending on the nature of the problem to be simulated and
considering the advantages and the limitations of specific methodologies, and also the factors
such as analytical ability, difficulty of implementation and ease of communication to
stakeholders and to the model end-users.

ABMS methodology is recommended for modeling systems with the micro to macro
level behaviors or to those which require the model adaptation during simulation. For many
macro level systems, the selection methodology is still unclear, although the most viable
approach is considered to be intelligent ABMS and SD equations based.

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May 2013, Vol. 2, No. 3
ISSN: 2226-3624

Although there are no specific tests for determining the optimal methodology for
simulation of a particular issue or its dynamics, this article can provide a guide for choosing the
appropriate simulation approach for obtaining a correct analytical result.

Due to differences in the simulation methodologies and to limits in individual uses,

recent researches in this field aim to study the opportunity of combining them and to develop
hybrid simulation models.

Acknowledgments

This work was co-financed from the European Social Fund through Sectorial Operational
Programme Human Resources Development 2007-2013; project number
POSDRU/107/1.5/S/77213 „Ph.D. for a career in interdisciplinary economic research at the
European standards”.

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