A Systems Study of Policy Formulation in a Vertically-Integrated Firm

Vertically-integrated companies often provide unusual opportunities for conflicts among organizational performance measures, especially as the vertical interdependency of product flow interacts with organisational separation of profit objectives. The resulting problems and their potential resolution by policy reformulation are discussed in this paper for the case of a large manufacturer-retailer of perishable food products. The methods of Industrial Dynamics constitute the systems analysis approach employed in the described study. Emphasis is placed upon the closed-loop feedback systems that interrelate the company's divisions and that provide the conceptual basis for development of a company simulation model. Even without computer testing of the simulation model, analysis of the feedback systems structure can be used in this case to highlight the general conflict between the company's sales and profit objectives. Extensive computer simulation of the company model is utilised to test a variety of areas of possible policy change, including among others transfer pricing, market stimulation, budgeting, and performance measurement. A consistent finding from the simulations was that several sources of intensified organizational pressure (including negotiated transfer prices and ambitious budgets) contributed importantly to company growth. Although the model formulation and simulation results were accepted as valid by company managers, little implementation of the recommended policy changes has yet occurred. Instead the principal benefits in the short run are seen as largely educational in nature, with new managerial perspectives the key outcome. This result appears reasonable and possibly necessary if management is to be educated effectively for later acceptance of policy change recommendations based on sophisticated management science approaches.