Using the system to our advantage

In an age of disruptive technologies, rapid change, and interdependent global crises, a new term was coined - Polycrisis. In January 2023, The World Economic Forum (WEF) published its Global Risks report, with this new term at its center. Produced in partnership with Marsh McLennan and Zurich Insurance Group, the report highlighted multiple global risks and a call to action to prepare the world for future shocks.

It brought together leading insights from over 1,200 experts across the Forum’s diverse network, and outlined a cluster of related global risks, each with its compounding effects. It was clear that the overall impact of such crises exceeds the sum of each part. We as humans are challenged to shift our mindset when faced with multiple challenges. We recognise that the old ‘linear model’ of dealing with each challenge at a time, evaluating each cause and effect in turn, no longer works.

Central to this shift is systems thinking – understanding the intricate web of relationships that constitute our reality and recognising that the overall impact can indeed exceed the sum of each part of the system at play. Hence, a challenge which can emerge in any of these components, requires us to examine such relationships, before launching into action.

The precise origins of Systems Thinking is debated to this day. It seems to have originated, at the beginning of the 20th century, when experts in diverse fields, such as Biology, Mathematics and Computer Science, began to ‘think in systems’. The biologist Ludwig von Bertalanffy was one of the first to conceptualize the term Systems Theory in the 1920s, when he called for such a theory of living organisms to explain biological phenomenon. By the 1960's, researchers such as Prof. Jay Forrester at the MIT Digital Computer Lab, used computer models that calculated how dynamic systems behaved. His model, aimed at policymakers, showed that the dynamic system of a city cannot be understood through a linear mindset because it is counterintuitive, and therefore many policies that were set in place through a linear mindset did not create the outcomes policymakers anticipated in a long-term. Such Systems Thinking soon spilled over to ecological systems, when one of Jay Forrester's students, Donella Meadows, published her now-famous book, Limits to Growth. The idea of looking at a challenge, as a whole system, rather than distinct, narrow components, was taking hold.

It was now only a question of time before Systems Thinking was to be widely used by leaders in business. It was a question of by whom and when, rather than if and so, well known management innovator, Peter Senge, referred to Systems Thinking as The Fifth Discipline in his 1990 book. In doing so, he placed Systems Thinking at the center of long-term performance and sustainability of organisations. He stated at the time "It is a framework for seeing inter-relationships rather than things, for seeing patterns of change rather than static snapshots."

There are, of course, challenges which are simple in nature - where Systems Thinking is unlikely to yield a fundamentally improved result. However, as the world of business became increasingly connected along cross-border supply chains, globalized in new and ever-complex ways, and balancing (sometimes very delicately) the requirements of diverse, at times competing stakeholders, new applications of Systems Thinking in business began to emerge. After all, can we claim such simplicity, a linear mindset, in how organisations contribute to Diversity and Inclusion? In driving towards financial inclusion and alleviating poverty through access to opportunity? How about simplicity in instilling new forms of regulation and governance? or resolving geopolitical tensions? averting climate change? All seem to be complex challenges...

Even when the challenge seems to be located well within an individual organisation, we find many challenges are neither simple nor singular to a business entity, as initially thought. An organisation's relationships with its suppliers, for example, to decarbonise its supply chains? Rather complex. How about transforming the customer experience using new digital technologies? Shouldn't we consider the implications over time, striving towards a life-long relationship and value being exchanged in new and more efficient ways? Even technology investments, where linear cost-benefit models are widely used, is recognised as no longer a zero-sum game and demonstrates complex relationships, which can give rise to new solutions - hence the explosion in new business models and regulatory innovations.

In all of these, business ecosystems are playing a valuable role. To many of us in the field, ecosystems are expressions of systems thinking. An ecosystem aims to achieve a shared objective, through the interaction of various role players. Ecosystems therefore express Systems Thinking in their architecture. Among these:

• Interconnectedness: How parts of an economic system are connected to its other parts, is at the core of ecosystems. For every ecosystem, we can map how role players (so called market as well as non-market players) interact, what value is exchanged and between whom. Changes in one area of the ecosystem, such as a new regulation or the launch of a new customer offering, can reverberate throughout the ecosystem and give rise to new responses. In recent years, the Circular Economy is being increasingly considered. Here the ecosystem adapts to circular, as well as linear value streams, and value can be created well beyond the initial use of the product. In ecosystem language, interconnectedness is a source of value creation (as well as value destruction), and we can map out how this is most likely to happen - allowing ecosystem players to play smarter.
• Feedback Loops: At the core of systems thinking are circuits of cause and effect. For example, in a positive feedback loop, a change in one direction tends to amplify changes in the same direction. In a negative feedback loop, a change in one direction prompts a reaction in the opposite direction. These play out regularly in ecosystems. Take, for example, a financial institution, who's leaders realise the limits to the use of their customer data, generated internally. They decide to bring in new partners, non-traditional players, who can with great efficacy, leverage alternative data sources. The result are more accurate risk models and the ability to respond to customer needs in new and often surprising ways. Ecosystem players are adept at using such feedback loops to become more resilient. They can anticipate negative feedback loops, for example, from the introduction of new regulations, and how these are most likely to reverberate across the ecosystem. In Sir Roland Cohen's famous words, "anyone can anticipate the first bounce of the ball." - Ecosystem players practice anticipating the second and third bounce of the ball - more often and at better accuracy.
• Emergence: As we have seen, the idea that the whole is greater than the sum of its parts is central to Systems Thinking. Hence, when individual components of a system shift, we cannot understand the full and complete impact on the system, in its complexity. Try and curb emissions from your operations and it may result in more than just acknowledgement by analysts and regulators. Could it spur renewed interest in your company as a B Corp. organisation? How about an invitation to collaborate in green projects well beyond your internal efforts? Ecosystem players know well how emergence can surprise us - and if we become adept at responding to it, at greater speed and scale, we have reached one of the key goals of being a challenger. We would have secured our Ecosystem Advantage.

How does an ecosystem advantage play out in a complex and uncertain environment? Could it help us sustain market leadership? or perhaps gain one, if we are a new entrant, with great ambitions and foresight into how the environment is changing? More on this in our next edition of Challenger Moves.

Have a good week ahead.