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.

System Dynamics as a tool for modelling Complex systems

Over 40 years ago, a visionary character proposed a way of modelling systems based on the control systems theory that was being used at the time in the electrical engineering area, and which proposed the understanding of a system in terms of the different interactions between its components and the stock and flow of relevant quantities. The idea at first may seem simple, but it has deep and very profound consequences.
Let us do a simple mind exercise. Think about a bathtub. This bathtub is originally empty, but might be filled by opening the water tap above it, and closing the drain. In this way, the bathtub may be filled until a certain depth. What would happen if we open the drain? Well it depends. If the water escaping through thee drain is greater than the water coming in through the water-tap, then the water level inside the drain will slowly being to decrease. The contrary will happen if the water coming in is greater than the water leaving the bathtub through the drain. Now imagine the "Water" inside the Bathtub was instead the Greenhouse gasses in the earth's atmosphere. The dynamics of accumulation, as well as delay in closing or opening the "taps" and "drain" for the greenhouse gasses, are in this way much more understandable.

This example, from which a parallel can be drawn to our own experiences, is a very simple conceptualization of the stock, low and delay concept central to the System Dynamics framework. The Bathtub can be considered as the stock in this system, and the water coming in through the tap or leaving the bathtub through the sink can be considered to be the flows.
It results that, if thought out carefully, many problems can be represented in these terms, as concepts that can be viewed as stocks include available forests, wildlife diversity, cars in a specific street at a given time, or the experience in building houses at a particular construction company, for instance. The rates at which these quantities change can have a wide variety of influences in the way the complete system behaves over time, can expose a causal relationships that can be quite complex, and a resulting behavior that is highly non-linear.
There is extensive literature on the application of these techniques in industrial settings, yet from the information I have been able to gather so far, I am for the time being convinced that at MIT I have come across a discipline which is not getting nearly as much attention as I believe it must, and I am having a hard time figuring out why . I have spoken with leading practitioners and direct disciples of the inventor of this approach, Jay Forrester, who have been able to provide their particular viewpoint, but this matter is something in which I believe much is to be written.

Systemic view of the world

Its been more than 40 years from a very dramatic scientific declaration: if the humankind continued to go about its business as it had been doing until then, using up resources and imposing a tremendous footprint onto the ecosystem, the conditions on the earth will  become unfit for human existence.

I am talking about the 70's.

Those scientists, (based at MIT System Dynamics group and led by Jay Forrester, founder of the System Dynamics Discipline by applying Control Theory principles to organizational systems), as well as those who have followed in their footsteps were, after an initial shock in the scientific and economic world, heavily criticized, notwithstanding the open and documented scientific method through which those conclusions were reached. The world was not ready for such extreme indications.

Four decades later, many of the predictions are indeed happening. The Smithsonian recently published some interesting graphs that show the trend several of the indicators have followed through the years, and which unfortunately continue to rise, already above the current environmental thresholds.

These updates have to be looked at carefully. Although critics may say these originally predicted trends do not exactly mirror the observed values,the accuracy of the order of magnitude for each of these values, as well as the trends observed, cannot but deeply impress.

Tools such as System Dynamics can give us an outlook into the broad vision of processes with multiple dimensions and crossed influences, like no other method I am aware of.

However, not everybody seems to think in this way. Politicians or economists, who influence policy directly are not being trained consistently in this domain, and the main uses for system dynamics are within Businesses and for academic enjoyment, notwithstanding several other current societal issues, such as Education, Public Health, and Strategic Industrial Development may surely benefit from this type of analysis.

A typical System Dynamics Model, has just a few crucial components (i.e. Stocks, Flows, Delays, Auxiliary Variables) which unleash a myriad of dynamic behaviors. Relatively simple diagrams can add a wealth of understanding on the different causal paths decisions take, and show explicitly all relevant feedback flows, when some decisions affect us back through their unintended chain effect  on the original policy.

Probabilistic future- learning from the past?

It is interesting to think about the implications that assumptions have on the way people behave. Many of the paradigms with which we evaluate the world are full of our own experiences and conclusions, cloaked in the illusion of objectivity, which scientific education purports. Beyond the hard data, any interpretation of the information that can be obtained is inevitably subject to the investigator. The first five sessions of this Advanced Strategic Management course have allowed me to continue analyzing this, and have added to the intuitive appreciation of this subjectivity which engulfs organizations, appreciation I have had the chance of experiencing in all previous organizational roles I have had the opportunity of fulfilling.

The definite role chance plays in all decision outcomes,business or otherwise, can be unsettling to many, who naturally expect that the accumulated knowledge that can be derived from the documented experience of past endeavors should lead us to decisions which eventually converge to achieving the required outcomes. This might be perceived to be the case if the media concentrates on the cases of success (which in itself might have a series of reasons, normally economic). However upon careful analysis, time and again we see this is not true. If anything, the opposite holds.

The fair comparison

Why is this, that the future will not subject to our increasing loads of information, models and case studies? One of my beliefs, is that maybe through the process we have chosen, which is to learn from past experiences, we are not making a fair comparison. At a point on my life I acquired the concept (probably learnt from my family) that future and past can be somehow “compared” through experience. This comparison I believe has mainly stayed in a first basic, visual level of understating the factual things that happened, and the learnings have been understood as identifying these visible “signs” and to apply the corresponding recipe that worked in the past. Upon reflection, this might help with short term decisions of recurring activities (how to do a task, how to get from one place to another, etc.), but fails to be useful as the decisions become medium or long term. A great deal of the business books I have read, engaged with medium/long termdecisions, deal with strategy in this way, and a great deal of them are destined to become just another management flavor that will most probably be proven wrong or taken off its highlighted status by an even more convincing and attractive new theory.

Just as a message has a literal meaning and a deeper, transcendent implication, the analysis of past experiences also has a first level of events, but at the same time, a deeper transcendent implication, which I believe is more difficult to grasp. The reasons I have found for this added difficulty, lie in the fact that the implications will be understood from experience, and in this point, every single person is a completely different world.

The unfairness of a past-future comparison also lies in the nature of these concepts. Past is deterministic while Future is probabilistic. What I mean with this is that there is only one past, events that can be recounted and researched up to the required detail, relived, retold and reinterpreted. The future is a bundle of different alternatives subject to chance, which may very well stand for an as-yet unknown causality.

The Probabilistic future

In order to face the probabilistic future, where any of a different set of circumstances might develop, as limited organizations we must either, influence the probabilities or prepare ourselves with a range of skills and capabilities of rearranging these skills, this is, flexibility, to better face whatever future presents itself.

The influencing of the probabilities concept starts from a concept known as path dependence. Through this probabilistic concept, the future probabilities are affected by the present outcome. This is, future does not cease to be probabilistic, but the probabilities as so to say "skewed" by what already happened. A simple thought experiment can picture this more clearly. Suppose you have a box with two balls, one red and one white, and you are instructed to draw one ball without looking into the contents of the box. The probability of choosing either color is 50%. Now, depending on the color chosen, ne next step is restoring the chosen ball to the box, but adding an additional ball of the same color as the one chosen last. This means that on our next blind choice, one of the colors will have a 66% chance of being chosen and the other one a 33% chance. If we happen to then choose a ball of the color not chosen first, following the same procedure of restoring the chosen ball as well an additional ball of the color last chosen, the probabilities would return to 50% for each color.

However, if in the second round, a ball is chosen of the same color as the one chosen in the first round, at the end of the second round the box would contain 3 balls of one color and 1 of the other color, raising the probability ratio to 75% to 25%. This can be easily simulated in Excel, which would result in eventually the series converging to one of the colors being dominant in the box. Iterations of the same process will mostly show a convergence towards one of the colors, which means that in a system with random probabilities,behaviors can be observed which tend towards a specific outcome.

Several iterations show that this tendency can go to either color (analysis equivalent to looking at several futures), yet if we analyze the past, only one of these tendencies will be seen and analyzed. This contrast for me pictures clearly our false assumption that past and future can be somehow be compared.

Facing an uncertain future

How can then a random future be effectively faced, and what is the use of strategy then if the future is of a random nature? These two questions require a relevant answer, to which I will contribute next with my personal outlook.

If we assume that the future is random all we can do is to prepare a set of skills (e.g. toolbox) that will allow us to deploy the required skills depending on the situation that we face. These set of skills need not (and probably will not) lie completely in one person, but be disseminated in a group of people. Organizations that are able to communicateeffectively and trigger action upon specified circumstances not only derive solutions that may not only counter, but take advantage of the changes, but will also stimulate the members of the organization, as change and novelty is a sensory biological requirement of living beings.

To illustrate this last point, humans become insensitive to known information in order to concentrate resources in the new inputs, phenomenon known as sensory adaptation. This is a natural process, which we do not determine and even control. For example, we don’t detect smells after a while if we are normally exposed to them, the same case with recurring noises. I have many a time asked an external eye to look at problems, or look for stuff I had been looking for a long time, as I has become insensitive for looking at it so many times.

The use of strategy, then, if we assume a random environment, is to align organizations towards a common set of skills, allowing ideally for an informed risk-taking within a healthy organization, and sense of purpose within a healthy team of motivated individuals, crucial to the maintaining the hope that deep down drives our everyday decisions. We have a natural attraction to stories, our proverbial attraction to gathering around the fire to listen to stories.

Lessons for now

Stories of success, such as Crown, Cork & Seal or the events that came to pass during the Cuban Missile Crisis, more than telling us about the actual decisions taken, leave me with a sense of having had organizations that could rearrange their resources for rapidly adapting to the changing environment, and were thus favored by chance on having a successful outcome (similar to the balls being chosen out of the box at the beginning of the exercise, this is, with similar probabilities for success or failure), and which have later molded circumstances so as to have increasing chances of new successes (equivalent to a box with colored balls already subject to path dependence, this is, with more balls of one color than the other).

The presence of uncertainty in our lives can be interpreted as a source of anxiety and/or humbleness, this is, it is our choice to face the future from an outlook of threat and impending catastrophe, or from an outlook of humbleness and communication building and empathy for our own or other’s failures.

Self-knowledge of limitations and assumptions, as well as network building and constant communication within those networks, are therefore important lessons to remember, so that within an uncertain world, we may not only navigate it effectively, but also enjoy the ride.

Complexity in Economics

The subject of my deep interest are Complex Adaptive Systems and the way this theory has developed over the years to be applied to a variety of subjects and situations. have recently become somewhat more informed on the subject of the recent global economic crisis and how it has been a breaking point for the redefinition of the complete economic system. The 2008 economic crisis has had such a deep impact on world economy, that after over 4 years of having passed through times of deep turmoil and uncertainty, I have found no conclusive evidence that any nations has taken any specific, solid action towards even implying that this will not happen again.

In fact, the foundations of the current economic system have been maintained as if nothing had happened. Gruesome assumptions which became clear in a somewhat pathetic fashion, were well reflected by Alan Greenspan, Head of the Federal reserve at the time (2008), when declaring in front of the US congress, stating bluntly that he did not anticipate institutions or private companies would proceed in any other direction than in the utmost benefit of its shareholders. He at that hearing accepted he believed in the markets and their supposed power to restore equilibrium, condition which never arrived.

If we consider Mr. Greenspan to be one of the most respected and powerful men in the world economy at the time, this statement is baffling. How could he not have seen this crisis coming? In the aftermath, from Chile, a corner of the world that has followed the Monetarist doctrines faithfully,and a country which has diligently opened up its economy to the world according to the school of Chicago's gospel, I can respectfully say that the due reflections on the real causes of the crisis have not yet been carried out. The crisis has somewhat been left behind, maybe because we did not experience it first hand, and due to soaring commodity prices and increased internal demand due to 2010 earthquake reconstruction activities.

Our main universities are still far away from having an independent knowledge generating process, and have since the time of the military dictatorship, been in charge of producing generation after generation of economists who firmly defend the dogma of the free market economy, without so much as a thread of doubt regarding the foundations of the doctrine. The reasons for this may be multiple, such as a high percentage of Catholicism in the country, the effect of a repressive regime in the formation of alternate theories or independent thought, and the overhanging shadow of the US over Latin America, both through international investment as well as in the formation of minds in their elite campuses, minds that have taken, and still hold the main administrative seats in the economic direction of the country and the education policies at Chile's main Universities.

The foundations of the doctrine are clearly shaky, have been for over 50 years, and these weaknesses have been much more evident since the crisis, and even more so after Mr. Greenspan's words before congress. However, Chile apparently has not taken notice so far.

During 2011 I was in my second year pursuing a master's degree in Industrial Engineering at one of the most conservative and traditional universities in the country, the Pontifical Catholic University of Chile. This University was the think tank of the military dictatorship's economic team, elite which was educated mostly at Chicago's school of Business. I will not easily forget a macroeconomics class when, driven by the evident accumulation of assumptions for the construction of the economic model, I felt compelled to ask whether the moral aspect was ever present in the formation of economic policies, since the discussion had got to the point where externalities were being explained as inevitably having to be absorbed and assumed by the community housing the generator of the externality. Additionally, and following strictly the "invisible hand" dogma, this externality generator only thought about what maximized his own position.

How could this be regarded as the intention of an economic model which is there to maximize the well-being of society? Clearly there were some big winners and some big losers, and in that aspect, following my own experience when confronted with situations where great inequality was caused by my doing, a sense of social responsibility (ethics), I considered also drove actions.

Much to my dismay, my question was quickly discarded by the professor, a middle-aged economist with the usual credentials for professor at the university, a PhD at a US university, many years of teaching experience and little to no published papers. His argument was simply that the ethical question was not something relevant at the level of policy making, where an ethical process was expected, and rather the ethical controls were mainly applied to the organization, the middle management and operators.

Well, that is just great, i thought to myself. What I carried out with me that day was the deeper conviction that the ethical aspect of business was being ignored by those who needed it the most, and this attitude of no ethics for me, but indeed to those who work for me, is something that can be felt at the worker level as actually widespread in the Chilean idiosyncrasy.

I have therefore welcomed the real-world economics review as a fruitful source of fresh thinking in regard with the economics which affects the people on the street, and urge anyone interested in educating him/herself into alternate ways of thinking about the society that should be built through the knowledge of relevant economics, to investigate further, keep a close watch over the World Economics Association (please note how suspiciously little information can be found in internet regarding this organization) and begin to take part in the discussion.

What does this have to do with Complexity? Well, the economy can also benefit very much from having a Complex adaptive system model approach, proposal still in a nascent state, but which has been explored so far by researchers such as Dirk Helbing in articles such as Rethinking economics using complexity theory .

Complex Supply Networks as CAS

An interesting challenge that has been undertaken by several researchers for well over a decade now, is the modeling of Supply Networks as Complex adaptive Systems (CAS's).

One of the first to attempt the characterization of what Supply networks look like and how these charcteristics can be Modeled as CAS's, is Professor Choi at the Arizona State University in the early part of the 2000's.

Through analyses of actual supply networks, he made a series of propositions which were further scrutinized and have been improved by subsequent research: 

 Proposition 1: The greater the level of shared schema (e.g. shared work norms and procedures, shared language) among allied firms in a Supply network, the higher will be the level of fitness for each of these firms (e.g. firm performance) 

 Proposition 2:  Firms that adjust goals and infrastructure quickly, according o the changes in their customers, suppliers, and/or competitors, will survive longer in their Supply networks than firms that adhere to predetrmined, static goals and infrastructure, and are slow to change 

 Proposition 3:  Witin a Supply Network, firms that are cognizant of activities across the supply chain (including tertiary level suppliers) will be more effective at managing materials flow and technological developments, than firms that are cognizant of activities of only their immediate suppliers 

 Proposition 4:  Successful implementation of control-oriented schemes (e.g. ERP, JIT II) leads to higher efficiencies, but it may also lead to negative conbsequences such as less than expected performance improvements and reduction in innovative activities by the suppliers 

 Proposition 5:  The degree of innovation by suppliers is directly proportional o the amount of autonomy that suppliers receive in working with customers 

 Proposition 6:  Supply Networks that turn over quickly stand a better chance of exposing weak members and thus, gaining higher efficiency than supply networks that are artificially bound by long-term relationships 

 Proposition 7:  Modilarization of tasks will decreace overall inter-dependencies among firms in a supply network, and thus, offer a higher efficeincy when optimizing the overall system 

 Proposition 8:  Over time, quantum changes will last longer within a supply network than incremental changes that go against accepted practices 

 Proposition 9:  Firms that deliberately manage their supply networks by both control and emergence will outperform irms that try to manage their supply networks by either control or emergence alone 

Proposition 10:  In a supply network, upstream suppliers that are more diversified are more likely to survive than those that are not

Whether you agree or not with these statements will depend on your background and experience, but to me they resonate for their soundness and simplicity, specially for having become a first milestone in the explicit description of complex adaptive systems.