Monday, December 16, 2013

Systems thinking in Strategy configuration

Strategy cannot be understood without its context, and although past experiences can be skillfully analyzed and dissected to obtain guidelines for future endeavors, the success or failure of these strategies cannot be understood without considering the context in which this performance took place. It is this consideration, as well as the relationships and causal paths that will inevitable arise from any decision taken with respect to how to face a specific business situation, which enables the strategy to be successful.
It was therefore to me somehow puzzling why the systemic outlook for business was not explicitly mentioned in an Advanced Strategic Management Course. I will therefore attempt to give a brief personal outlook on the relevance of Systems thinking for Strategy Generation.
From my personal experience I have come to see that the systemic understanding of the business environment and the crystallization of this understanding into a proper business strategy, is one of the biggest challenges that await new generations of Managers. The difficulty in systemic understanding of complex systems such as organizations within highly volatile and changing business environments I consider lies in the spatial and temporal nature of the dynamic behavior of complex systems, natural biases and the difficulty managers face in obtaining sufficient experience to understand these influences; issues which I discuss next.
First, there is a learning curve issue, this is, the time available to learn the skill. In one of the last Advanced Strategic Management Classes this semester, and upon reading the “the sports gene” where the 10000 hour rule was mentioned (a.k.a. “deliberate practice framework” for skill acquisition), a student asked how Managers can get thisamount of practice hours to become proficient in the task of Managing change, a first and I consider applicable answer was given of forming a startup. Normally in the positions held in corporations, and due to the scheme of risk diversification present in the assignment of organizational roles which leads to 3 to 4 year cycles in management positions in the company, a manager will not get nearly the 10kh of active practice as required by the rule. A clear way of achieving more active experience (i.e. beyond the reading and analysis of cases) is by engaging actively in the formation of strategy, implementing change and experiencing the consequences, as is the case of a startup. This would however entail devoting almost 5 years of exclusive dedication to developing the managerial skill within the organization, and since the role assignment cycles present in western organizations are shorter than thisrequired time, such a level of specialization in applied management strategy is achievable only by consultants working in the field. From the aspect of the Learning Curve therefore, the strategy skill is something which is very difficult to develop from within an organization.
A second important issue in the understanding of complex systems is the spatial and temporal nature of the system’s influences and effects. An argument can be made that the problems we are facing as organizations go beyond what our biological capabilities are, in terms of understanding the duration and extent of the influences of our actions. Complex organizations have multiple channels through which decisions can have effects, which in some or other way will have a feedback on the organization, either reinforcing the effect of the decision, or (many times puzzlingly if the causal chain is ill-understood) have a counteracting effect from the intended effect of the decision. Many organizations have dealt with this by considering many of these effects as exogenous. However, a broader analysis may (and frequently does) evidence the endogenous nature to these effects, i.e. the decision and its consequences is leading to an effect originally considered as outside the bounds of the organization. For example, in the case of the North American automobile manufacturers, an argument can be made of the fact that the success of their competitors is in fact partially an effect of a causal chain that was generated by e.g., some of the strategic decisions made by the GM in terms of manufacturing outsource, technical assistance given to Japanese companies or the way some of their improvements were implemented. Even if these effects seemed external to the company, or may have resulted from decisions made some time ago, its effect can be felt in the present performance of the company. As human beings we both have a difficulty in understanding causal chains which prolong themselves through time, and have a tendency to simplify the causal chains to understand them as effects in much shorter spans of time. Therefore, we not only many times fail to see the bigger picture, but many times we use the perceptual tools at our disposal to convince ourselves that we do understand that, which in fact escapes us. And this leads me to the next important difficulty in understanding complex systems: Cognitive Biases.
The third important factor I consider relevant in properly understanding complex systems are the many built-in biases and routines humans have, evolutionary tools which have served us well in making sense of a world with an overload of information to our senses. This overload is especially true in the case of complex business organizations, and human characteristics such as the Framing Cognitive Bias (whereby, through selective influence, an issue or situation is described in an very narrow approach) can lead to ignoring the longer term effect of decisions in an organization.
My professional experience in project management has allowed me to see all the factors mentioned in this paper as preventing a proper understating of a business strategythrough the consideration of all aspects of the respective system. Management decisions that were taken to influencee.g., the excessive number of rework being done through the hiring of additional staff, resulted in even more rework, as the complete effect of this additional hiring was not considered in the decision, including the learning curve of the new staff and the time that experienced staff would have to spend training the new staff, plus the lower initial work quality and productivity of this new staff, which led to an increased delay and rework, with great additional cost to the company. Upon the strategy taken, the system’s feedback came around to worsen the symptom. A similar case can be made of higher level decisions which result in feedback loops which take years to develop and are thus even more difficult to grasp intuitively.
Several of the examples described in the assigned readings and later analyzed in class, I consider could have greatly benefited from a systemic outlook, through the description of the symptoms (visible effects) as caused by the structure of the system in which the organizations and their business decisions were embedded.
Cases like Yahoo and Tencent have particular organizational characteristics which have allowed them to flourish/stumble in the present business conditions. From the video ofTencent’s CEO that we had the opportunity of watching during class, an argument can be made that a systemic understanding might have been behind the successful business decisions that have been made in order to enter western markets through the funding and later purchase of gaming companies located in western countries. On the contrary, Yahoo through its incremental approach to business development, has spent the last years developing products in a market that has continued to be defined by others in the business.
A systemic approach similar to Tencent’s, might throw light on seemingly disconnect courses of action that might make the company prone to success. What are the loops that are making Yahoo! Stagnant in terms of innovation and market definition? What are the feedback loops that will make the platform that Yahoo has provided to the market succeed or fail? How important are the applications or interfaces in the success of the products/services offered by Yahoo? All these are relevant questions when the systemic outlook is considered.
It is my personal belief that Systems thinking in strategy is an approach that requires a greater management of the information being generated by organizations (Data Mining) along with a substantial investment in the appropriate management skills to model and understand the multiple feedback effects which influence the success or failure of a specific strategy.
Unless Systems Thinking is included into the generation of strategy, this will continue to be a realm where a perfect description of the past can be achieved, where great detail into the decisions and their effects can be described, with however, at best a bleak certainty of all these learnings being applicable to future business situations.

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