Why do we need Systems Thinking as a management approach?

What is Systems Thinking?

How many times do we see business decisions or actions producing results that were counterintuitive and unintended? For instance:

? Picking a cheap shipping vendor to improve the bottom line ends up affecting sales in the long run and thereby hurts the bottom line (Deeb, 2020).

? Continuing to increase marketing efforts to improve sales ends up reducing sales after a point (Kim).

? Continuing to invest in established product lines while helping retain market share in the short run ultimately ends up causing a loss in market share (Gustin, 2013).

? Expediting customer orders to improve customer satisfaction ultimately ends up causing missed delivery dates and more customer complaints (Kim).

What do all these cases have in common? The business thinking across these scenarios is linear, based on the assumption that we are operating in a deterministic world where a specific intervention or strategy would produce a desired effect. However, reality is far more complex where businesses are "neither fully controllable nor predictable" (Reeves & Levin, 2017). The complexity stems from the very nature of the business and the environment it operates in, which contains a large number of diverse interacting parts impacting each other. The higher the complexity, the better equipped management thinking needs to be to deal with the complexity. This is exactly what Systems Thinking allows us to do by providing a holistic approach to understand business complexity as an outcome of the interconnected relationships and dynamic interactions between constituent parts of a business (Merall & P.M.Allen, 2011). To put it simply, Systems Thinking is the art and practice of seeing the whole. (Arnold & Wade, 2015). Systems Thinking as a management discipline has existed for more than 70 years (Merall & P.M.Allen, 2011), but despite a strong business literature, Systems Thinking concepts and principles have not really made their way into business discussions (Straub, 2013).

Why Systems Thinking?

Businesses are not machines:

Management thinking can be traced back to the industrial age, when Frederick Taylor, showed how increased productivity could be achieved through standardization and division of labor (Ackoff & Wardman, 1993). Since that time, management thinking has continued evolving, drawing upon theories from different fields such as psychology and sociology, with ever increasing application of statistical and mathematical principles. However, despite the evolution, Professor Rita McGrath says that management thinking still is largely based on a mechanistic view of the business (McGrath, 2014). This creates the notion that if you provide the right inputs and optimize the functioning of the machine for efficiency, it is going to produce the right outputs at the desirable level of productivity.

However, the mechanistic paradigm has a couple of fundamental flaws. Firstly, it creates the perception that a business cannot think for itself (Olson & Eoyang), which is not true for modern organizations which are perfectly capable of deciding their own courses of action.

Reject reductionism. Stop treating the business as a machine and embrace the reality that it is a complex adaptive system of highly interdependent human processes” - Roger Martin.

Source: Financial Times Article: In times of crisis, we need to be more resilient

Secondly, a machine needs a stable environment to operate (Olson & Eoyang) which again is not true because businesses operate under continuously changing market conditions. Given the falsity of these assumptions, there is increasing commentary on how businesses should in fact be viewed as living organisms (Reeves, Levin, & Ueda, 2016). The similarity, to a large part, is based on complex human choices at the heart of business activities, where employees acting as agents respond to the needs of their immediate environment while interacting with each other through a complex network of relationships, creating self-organizing structures and patterns that allow the business to evolve as a whole (Straub, 2017). Research shows that businesses that operate based on the living paradigm are not only able to outperform firms that operate in a mechanistic way by gaining more market share, but they are also able to better fulfill their social and environmental responsibilities (Hutchins, 2014).

To make sense of complexity, we need to embrace complexity:

Continued growth in an interconnected global economy along with the need to support ever increasing heterogeneity of products and service offerings, customer segments, channels and increased regulatory pressure has led to an increase in the scale and complexity of operations for businesses (Koch & Windsperger, 2017). The rise in environmental complexity in recent times has largely been driven by rapid advances in Information Technology which, by reducing the cost of transactions and collaboration, has enabled a high degree of interconnectedness (Benkler, 2017). Such high levels of digital connectivity have altered the dynamics of competition, value creation and consumption as well as the internal structure of organizations. Following are some examples:

? Information driven business models: Availability of smart phones and digital technology has allowed companies such as Uber and Airbnb to disrupt traditional business models. Online Lodging over a decade has gathered 6x the amount of lodging capacity that Marriott built in 60 years. In 2019, Airbnb overtook Marriott (Iansiti & Lakhani, 2020).

? Access not ownership: The success of companies like Uber and AirBnB points to the emergence of a sharing economy which is based on the concept of access to an asset as opposed to ownership (Laker, 2023).

? Distribution of production capabilities: Technology has allowed peers to pool their knowledge and resources towards shared goals without the interference of businesses or markets. Apache beating Microsoft Server for more than 20 years exemplifies the success of this new mode of organizational innovation (Benkler, 2017).

? Changing roles of consumers: Consumers have greater penetration into the production lifecycle, which changes their role from passive consumers into prosumers. (Alderete, 2017). E.g., GE’s collaboration platform called FirstBuild allows outsiders to share new ideas about their home appliance products (Alderete, 2017).

? Shifting locus of innovation: Digitization of products and services has allowed players across traditional industry boundaries to combine resources for innovation. For instance, Waymo, a subsidiary of Alphabet Inc., partnered with Jaguar to deploy the Jaguar I-PACE electric vehicles equipped with Waymo's self-driving technology (Waymo, 2018).

? Organizations as networks: To respond faster to its environment, organizations have gradually morphed from the tightly controlled hierarchical model into more of a networked form that allows greater autonomy and flexibility (Allee, 2003).

While complexity of businesses has continued increasing, experts say that management practices have not evolved adequately to deal with complexity (Straub, 2013). Failure to adapt to complexity could lead to reduced innovation, collaboration, failure to seize the right opportunities at the right time and ultimately a loss of competitive advantage (Sinfield, 2019). Studies reveal that dealing effectively with complexity is not just a critical determinant of success in difficult times (Malnight & Buche, 2022) but could determine the lifespan of companies (Reeves, Levin, & Ueda, 2016). Complexity by itself is not the problem. Executives acknowledge the potential to create value from complexity (Heywood, Hillar, & Turnbull, 2010). However, complexity cannot be understood with our traditional reductionist approach of breaking the whole into manageable parts (Benjamin & Komlos, 2022). In fact, the need might be for the exact opposite of a "breaking things down" mindset to a Systems Thinking approach of looking at the whole.

References

Ackoff, R., & Wardman, K. (1993). FROM MECHANISTIC TO SOCIAL SYSTEMIC THINKING. Pegasus Communications. Retrieved from https://thesystemsthinker.com/: https://thesystemsthinker.com/from-mechanistic-to-social-systemic-thinking/

Alderete, M. V. (2017). The Age of Prosumerism: Some Micro-Economic Analysis. Journal of theoretical and applied electronic commerce research, 12(3). Retrieved from https://dx.doi.org/10.4067/S0718-18762017000300002

Allee, V. (2003). Introduction: The Center Keeps Moving. In The Future of Knowledge (pp. 12-13). Elsevier.

Arnold, R. D., & Wade, J. P. (2015, Dec). A Definition of Systems Thinking: A Systems Approach. Procedia Computer Science, 4. Retrieved Jan 2, 2023, from https://www.sciencedirect.com/science/article/pii/S1877050915002860

Benjamin, D., & Komlos, D. (2022, Nov 14). Complexity Can’t Be Tamed With Divide-And-Conquer Thinking. Retrieved from www.forbes.com: https://www.forbes.com/sites/benjaminkomlos/2022/11/14/complexity-cant-be-tamed-with-divide-and-conquer-thinking/?sh=47be817278e6

Benkler, Y. (2017). Peer production, the commons, and the future of the firm. 264-274. doi:https://doi.org/10.1177/1476127016652606

Deeb, G. (2020, June 2). Don’t Let Short-Term Thinking Hurt Long-Term Success. Retrieved from www.forbes.com: https://www.forbes.com/sites/georgedeeb/2020/06/02/dont-let-short-term-thinking-hurt-long-term-success/?sh=af807c57b435

Gustin, S. (2013, Sep 24). The Fatal Mistake That Doomed BlackBerry. Retrieved from https://business.time.com/: https://business.time.com/2013/09/24/the-fatal-mistake-that-doomed-blackberry/

Heywood, S., Hillar, R., & Turnbull, D. (2010, April). How do I manage . Retrieved from Mckinsey & Company: https://www.mckinsey.com/~/media/mckinsey/industries/chemicals/our%20insights/organizing%20to%20enable%20the%20shift%20from%20volume%20to%20value/how_do_i_manage_complexity_in_my_organization.pdf

Hutchins, G. (2014, Sep 3). The Nature of Business. Retrieved from https://thenatureofbusiness.org/: https://thenatureofbusiness.org/2014/09/03/companies-that-mimic-living-systems-out-perform-mechanistic-ones/

Iansiti, M., & Lakhani, K. R. (2020). From Disruption to Collision: The New Competitive Dynamics. MIT Sloan Management Review, 61(3), 34-39.

Kim, D. (n.d.). FIXES THAT FAIL: OILING THE SQUEAKY WHEEL—AGAIN AND AGAIN . . . Retrieved from https://thesystemsthinker.com/: https://thesystemsthinker.com/fixes-that-fail-oiling-the-squeaky-wheel-again-and-again/

Kim, D. (n.d.). USING “LIMITS TO SUCCESS” AS A PLANNING TOOL. Retrieved from https://thesystemsthinker.com/: https://thesystemsthinker.com/using-limits-to-success-as-a-planning-tool/

Koch, T., & Windsperger, J. (2017, May 19). Seeing through the network: Competitive advantage in the digital economy. Retrieved from https://link.springer.com/: https://link.springer.com/article/10.1186/s41469-017-0016-z

Laker, B. (2023, Jul 6). Redefining Leadership: The Rise And Evolution Of The Sharing Economy. Retrieved from https://www.forbes.com/:

Malnight, T. W., & Buche, I. (2022, Feb). The Strategic Advantage of Incumbency. Retrieved from Harvard Business Review: https://hbr.org/2022/01/the-strategic-advantage-of-incumbency

McGrath, R. (2014, July 30). Management’s Three Eras: A Brief History. Retrieved from Harvard Business Review: https://hbr.org/2014/07/managements-three-eras-a-brief-history

Merall, Y., & P.M.Allen. (2011, Jan 01). Complexity and Systems Thinking. doi:10.4135/9781446201084.n1

Olson, E. E., & Eoyang, G. H. (n.d.). An emerging paradigm of organizational change. Jossey-Bass/Pfeiffer. Retrieved 2023

Reeves, M., & Levin, S. (2017, July 18). Think Biologically: Messy Management for a Complex World. Retrieved from https://www.bcg.com/: https://www.bcg.com/publications/2017/think-biologically-messy-management-for-complex-world

Reeves, M., Levin, S., & Ueda, D. (2016, Feb). HBR - The Biology of Corporate Survival. Retrieved from Harvard Business Review: https://hbr.org/2016/01/the-biology-of-corporate-survival

Sinfield, R. (2019, Sep 5). How can business leaders manage complexity in an evolving world? Retrieved from https://www.sage.com/: https://www.sage.com/en-us/blog/manage-business-complexity/

Straub, R. (2013, May 06). Why Managers Haven’t Embraced Complexity. Retrieved from https://hbr.org/: https://hbr.org/2013/05/why-managers-havent-embraced-c

Straub, R. (2017, Dec 04). Order from chaos: How to apply complexity theory at work. Retrieved from https://www.bbva.com/: https://www.bbva.com/en/innovation/order-from-chaos-how-to-apply-complexity-theory-at-work/

Waymo. (2018, Mar 27). Meet our newest self-driving vehicle: the all-electric Jaguar I-PACE. Retrieved from https://waymo.com/: https://waymo.com/blog/2019/08/meet-our-newest-self-driving-vehicle.htm

Hill, A. (2020, Sep 27). In times of crisis, we need to be more resilient. Retrieved from https://www.ft.com/: https://www.ft.com/content/170fc53e-a2d2-4ddc-89d6-fb491d8be104

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