Systems Thinking

This week I had one of those rare but wonderful moments as a proud parent when I had the privilege of being in the audience when my son Garik gave a TED Talk at TEDxNCSU (North Carolina State Univ), a fifteen minute lecture which he entitled, “How LSD changed my life”, the LSD standing for Life Style Design, the name of an honors seminar he teaches in his “spare” time. While I attended primarily to hear what Garik had to say (and how he would say it), I also got to listen to several other excellent sessions, such as Dan Ariely on ‘Self Control - The Problem and How to Get Over It’, and Mike Rowe, the host of Dirty Jobs, via video. The talk that struck with the most resonance for me, however, was given by Dr. Michael Steer, a Distinguished Professor of Electrical and Computer Engineering at N.C. State on the topic of problem solving. Dr. Steer has further distinguished himself by winning the Commanders Award for Public Service from the U.S. Army, an award that is handed out roughly only once a decade, for his classified work in protecting soldiers from remotely controlled roadside explosives. While he couldn’t explain exactly what he did or how he did it, Dr. Steer could share with us how he went about solving the problem. His approach is what he termed “systems thinking.”

Systems thinking is nothing more than considering the complete system, the entire collection of components and subsystems, as a whole. Systems thinking is not terribly in vogue these days, as materialism, reductionism and specialization tends to rule the sciences, academia and engineering. Systems thinking is considering not just how A affects B, or how B affects C or how C affects D, but how A affects D. In reality the problem is more difficult than I just presented it, for A doesn’t just affect D through a direct chain from B to C, but all four components interact with each other in ways that no computer has been able to effectively model up to this point. Dr. Steer flat out states we are not very good at this, not good at this at all. There is no discipline where he feels that anyone has any handle on how A affects D.

One unlikely discipline where Dr. Steer thinks that systems thinking could reap huge benefits is in the financial markets. Without really needing to say so, he of course implied that our so-called financial experts are no closer to explaining the workings of complex economies than scientists are in predicting earthquakes. His reference to finance and economics reminded me of some of the work just now coming out from economists on the root causes of the 2008 global financial crisis. One very interesting synthesis comes from Dr. Peter Rodriguez of the Darden School of Business at the University of Virginia. In a nutshell, his explanation centers on the rather counter-intuitive idea that, because of the lack of confidence that resulted from the Asian financial crisis of the 1990’s, although most of the extremely high rates of growth and wealth production were occurring in the Asian economies during the decade of the 2000’s, most of that money was ending up back in the United States because both the U.S. economy and the U.S. dollar were considered safer places to store that newly created value than immediate reinvestment or saving in those Asian Tiger countries. Essentially, they had all the investment they could handle and couldn’t realistically grow any faster anyhow, so all that money flowed back into the U.S. asset markets – thus, the housing bubble among other things.

While it remains to be seen if this particular theory will prevail, it is a most compelling explanation, and not one that was foreseen or discussed by any of the “experts” during the couple of decades leading up to the recent worldwide collapse.

The point of this story for us is how this complexity and need for systems thinking can be applied to our microeconomic commercial and public sectors. I can neither personally solve this issue for your enterprise in either the space of this blog or the space of my lifetime, but I can highlight two areas to concentrate on. The first are the complexities and interconnections of your business:

- Between your suppliers, yourself, and your customers.
- Among and between your vertically and horizontally integrated functions.
- Between technology, culture and markets.
- Between strategies, plans and budgets, incentives, and human behavior.
- Between information sources, information users, and information processing / data mining.
- And so on and so forth …

The second area is your response, your reaction, your approach to applying systems thinking:

- How realistic are your five and ten year strategic plans?
- Are you engaged in scenario planning?
- Are you continually testing your strategy (i.e. strategy is a hypothesis)?
- Are you continually validating your goals, objectives and metrics?
- Are you too inward focused, do you have enough feelers pointing outwards, searching for trends and weak signals?
- Is your forecast process one-dimensional (i.e. field sales) or are you gathering and integrating forecast data from multiple sources across multiple time frames?
- And so on and so forth …

What systems thinking is saying is that you will never get it “right”, and even if you did you’d never know it. What you can do is to be constantly monitoring the entire business environment and incorporating those insights and data points into continual mid-course corrections, some intended to adjust your course directly, others to adjust your target, and others to adjust the processes and resources you use to get there. Systems thinking is humbling, which is as it should be. Systems thinking doesn’t mean you can’t exert confident leadership, it just means that you don’t allow that confidence to cause you to overreach or to become stubborn in your pursuit of strategy in the face of reality.

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    There are two sides to the Value equation: value creation and value extraction, and analytics has a role to play in both. Leo Sadovy, a former Vice President with 25+ years of strategy, finance and marketing experience at Fortune 50 companies, takes a bi-weekly trip down Value Alley to explore some of the innovation and operational insights that analytics can provide, from forecasting to segmentation to data visualization. The common currency of our digital economy is data, but it takes analytics to turn that data into information, into insights, and into value, both for your customers and for your stakeholders.
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