[In the Proceedings for the 3rd International Conference on Systems Thinking in Management. May, 2004, Philadelphia, PA.]

Systems Thinking and Its Implications in Organizational Transformation

John Pourdehnad and Gnana K. BharathyAckoff Collaboratory for Advancement of Systems Approaches (ACASA)

University of Pennsylvania

“Most transformation programs satisfy themselves with shifting the same old furniture about in the same old room. Some seek to throw some of the furniture away. But real transformation requires that we redesign the room itself. Perhaps even blow up the old room. It requires that we change the thinking behind our thinking — literally, that we learn to rewire our corporate brains.” Danah Zohar (1997)

ABSTRACT

We argue that for society, government, and business to deal with evolving complex situations, organizational transformation must be based on a different paradigm: systems thinking. This paper investigates the nature of transformation, offers criteria for determining when transformation is useful, and postulates the requisites for successful transformation based on systems thinking.

I. INTRODUCTION

1.1 A Problem Exists

Numerous unresolved dilemmas characterize the beginning of the 21st century: the rise of transnational religious fundamentalist networks, asymmetric warfare, the Internet and globalization, jobs outsourcing, terrorism, and proliferating weapons of mass destruction.

Society, business, and government either ignore the current situation or throw money at it. Leaders attempt to act without a reasonable presumption of success. Academics attempt to wrestle with the problems, only to find no clear answers within the traditionally narrow branches of learning. Consequently, organizations that only yesterday appeared to be responsive and adaptive are experiencing profound change.  Worse, they are now finding that familiar patterns of response to the unexpected are proving less and less useful for sustainability and the pursuit of a desired future.

All of this is happening even though most organizations are continuing to do — and do well — the things that initially brought them success.  In response, they are implementing a variety of corrective measures, including “organizational transformation.” But, in fact, most such efforts are failing.

Albert Einstein once said: “Without changing our pattern of thought, we will not be able to solve the problems we created with our current pattern of thought.”  Therefore, conventional formulations and solutions based on the “logic of the day” are inadequate to deal with new problems.

Although most organizational leaders recognize this deficiency, they lack a paradigm that would assist them with organizational transformation.

1.2 Why Do Transformation Efforts Fail?

Too many organizations have attempted to transform themselves only to meet with failure. Some companies did not undertake transformation efforts until it was too late. Others did not plan and carry out the function properly. Still others were pursuing the wrong kind of transformation. The so-called transformed companies have often failed to adapt to client needs and haven't improved their processes to meet rising competitive standards.

Tinkering at the margins and seeking cosmetic solutions to even the most urgent problems of our times have no doubt precipitated more problems and lackluster results. Engaging in approaches such as “continuous improvement” has only made things worse.

Jill Jusko (2003) attributes four main reasons for organizational failures: 1) strategic or organizational mindset failures; 2) cultural bias and close-mindedness; 3) informational breakdowns; and 4) leadership mistakes.

Although organizations are prone to mistakes in each of these dimensions, the strategic or organizational mindset failures top the list. Most organizations lack a paradigm that would facilitate perception and learning and have a political bias to conserve the previously successful ways of seeing, thinking, learning, and therefore acting.

Taking a process perspective, Kotter (1995) argues that:

Change involves numerous phases that, together, usually take a long time. Skipping steps creates only an illusion of speed and never produces a satisfying result.

Critical mistakes in any of the phases can have a devastating impact, slowing momentum and negating previous gains.

While the reasons above relate to one or more causes of failure, they do not necessarily trace the root cause of the problem: a misplaced emphasis on doing it right, as opposed to doing the right thing.

1.3 Successful Transformation and Change of Mindset

As the economy evolves, the rate of change accelerates at certain points in time. These fast-forwards occur when a major new resource becomes available or when there is a major shift in the relative abundance of existing resources.

These “shock” changes are of a different class than the type of change that requires continuous improvement or even major adjustment. These revolutionary changes require a completely different theoretical basis in order to be understood. It is our contention that recent advances in systems thinking make it possible to achieve the desired understanding and to use that understanding creatively to transform systems into new and successful entities.

Organizations can transform themselves into new entities and retain the ability to learn and transform all the time, even after becoming specialized. One example is the legendary, yet enigmatic, 140-year-old Nokia Corporation, a company that began in the forestry industry; expanded into rubber works, cable, and electrical power; survived the political upheavals of war; became a European technology conglomerate; emerged as a global maker of cellular phones — and now, in its latest incarnation, is a

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mobile Internet vendor. Nokia did not emerge successful overnight, but it never stopped transforming itself. It had transdisciplinary vision, relying on ceaseless innovation and high goals, the pursuit of excellence in domestic and overseas markets, and the promotion of both teamwork and self-reliance.

DuPont, in business for more than 200 years, is another example of a company that has survived by using its ability to change mindset. When its CEO, Charles O. Holliday Jr., was asked about DuPont’s success, he responded, “The willingness to undertake profound change to remake the company is in the ‘DNA’ of DuPont” (DuPont.com, 2003).

Pina, e Cunha, da Cunha, and Kamoche (2001) describe the traditional business mindset as focusing on optimizing, planning, efficiency, integration via hierarchies, and authoritarian leadership. To survive in the new business environment, companies must replace that outmoded mindset with one that focuses on action, effectiveness, integration via networks, and democratic leadership.

Shifting to a new mindset is not, however, a simple task. Company leadership cannot simply say, “Today our company will behave differently.” According to Vijay Sathe (2000), leaders will not be able to create transformation unless they can change both behavior and mindset.

1. Employees must believe that change is necessary, that the change is feasible, and that they will personally benefit from it. They must also be motivated extrinsically with punishment and reward. Education and training, which are distinctly different things, must both occur.

2. The company must be reframed and recharted through reconceptualization of the business. The relationship between organizations and their parents or units must change.

3. The organization must receive a transfusion of new blood that supports the desired mindset. A critical mass of outsiders must be hired, and change blockers must be dealt with. Skeptics must be listened to because they may see problems with the new mindset that leadership may not see.

4. Modeling must go on within the organization.

5. Leadership must take the time to look in the mirror.

According to Sathe, if these steps are followed, organizational mindset change will be successful.

An example of a company that has dealt with organizational mindset change is UPS (Ganesan, 2002). Founded in 1907, UPS expanded over the years and across the world, developing a “we-know-what’s-best-for-you” arrogance. In the 1990s, though, the business environment began to change and UPS was facing intense competition from other carriers such as FedEx and DHL. UPS realized that it needed a new mindset if it was to remain successful.

UPS had been a heavily structured, change-averse company that stressed control. Workers were worried not about customer satisfaction, but about time constraints and meeting schedules. To change this, the company set up programs to educate and train employees in teamwork and trust. Any report that did not produce a value greater than its cost was discontinued. Weekly meetings were held for managers so that everyone could be on the same page. Meetings were also held every morning at the hubs or package centers to discuss specific questions with all employees. Many other things were done that fell in line with Sathe’s views on mindset change. The result has been rapid profit growth for UPS.

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Mindset is key to achieving organizational transformation. Why aren’t such examples as those above replicated more frequently? We propose that one key reason is that we have not attempted to learn what is fundamentally required of transformation.

II. FUNDAMENTALS OF LASTING TRANSFORMATION

2.1 Definitions of Transformation

The dictionary definitions of transformation include: 1) to change markedly the appearance or form; 2) to metamorphose; 3) to change the nature, function, or condition of; 4) to convert.

In molecular biology, transformation strictly refers to either the genetic alteration of a cell resulting from the introduction, uptake, and expression of foreign DNA, or the process by which normal cells are converted into cells that will continue to divide without limit (Miller et al., 2002).

In mathematics, transformation refers to a variety of different operations that change the position or direction of the axes of a coordinate system — a change in the paradigm (Bronshtein et.al., 2001).

In music, a transformation is any operation or process by which the recorded music is edited using software to alter the tones, octaves, and pitch to create new music from the old (Wikipedia, 2003).

Transformation in linguistics refers to a rule that systematically converts one syntactic form or form of a sentence into another.

In physics, transformation is often appreciated in the study of work and energy, where one form of energy is transformable into another (Resnick and Halliday, 1986).

In economics, transformation refers to significant changes due to policies as well as through market forces, bringing about a change in either economic stability or in people’s condition.

Transformations in sociology and political science generally refer to widespread social or political change, respectively.

In business, transformation is often used to mean change in the organization.

We have shown that the term transformation is applied uniquely to different disciplines. However, in almost every case, it retains its definition as a qualitative or marked change of form or condition. Such a qualitative change in organizations can come about only through fundamental, not cosmetic, transformation (Zohar, 1997).

2.2 Is Transformation the Appropriate Response?

In order to survive, organizations respond to challenges posed by both the external world and organizational maladies. Not every challenge requires transformation. For example, simple subsystem inadequacies or internal maladies (where under-performing subsystems are controlling the performance

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of the larger system) must be addressed by correcting or optimizing the subsystem. Similarly, for linear, predictable changes in the environment, the system must be fine-tuned to meet the new environment.

On the other hand, organizational transformation is required when the environment itself changes qualitatively, drastically, and almost always discontinuously, engineering a radical break with the past. The old way of doing things no longer works, even though you are doing it the best way you can. Accordingly, the only meaningful response is a transformative change — a quantum leap involving a paradigm shift. Indeed, Nadler et al. (1995) suggest that transformational change is always “discontinuous,” as opposed to incremental progression. They argue that any change composed of many competing elements is an “inevitable, ineluctable force with a life of its own.”

Transformative change is induced and shaped by external forces: resources, technology, innovation, competition, regulation, and the decline or rise of whole industries and regional economies. For example, consider the introduction of a new resource or the rise of a disruptive technology that could change the game significantly, making the previously successful strategies, practices, and tactics obsolete. New organizational design that makes full use of the new resource must be devised.

Thus, we have a problem of creative design, not integration. In today’s world, the new resource is ubiquitous low-cost communication and computation, which manifest as feedbacks in their productive form. The organization must be redesigned to exploit this feedback. A prompt feedback, in fact, not only enables the system to be operated in a more dynamic way, such as at Wal-Mart and Dell, but can also help create an evolving design.

2.3 Recognizing the Need for Transformation

How does one recognize that the environment has undergone a discontinuous change and will require a response of similar scope? The following are some telltale signs:

You have a well-oiled machine: The organization is continuing to do the things that initially brought success.

Old tricks do not work and old laws no longer apply: Familiar patterns of response that were so effective in the past are proving counterproductive, and there is a noticeable decline in returns. The way you used to do business simply doesn’t seem to work.

You are not alone in the soup: Chances are very high that other organizations doing similar things are also struggling.

Change is in the air: Similar challenges and changes are noticeable in seemingly unrelated domains. A paradigm shift does not occur in one domain alone. Not only is the change in the environment pervasive, but there are also other changes, which seem to have been co-produced.

You adopt the "push harder" response: Immediately, everyone tries to push more and adopt a more conservative position. Unfortunately, these repairs, adaptations, and adjustments, including those under the patronage of “change programs,” fail to produce the greatest opportunities for troubled companies.

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If you find yourself in one of these situations, you are likely working in an environment that has changed drastically. It is time to go back to the drawing board.

III. NECESSARY CONDITIONS FOR TRANSFORMATION OF ORGANIZATIONS

3.1 The Need for a Paradigm Shift

How effectively we deal with emergent conditions depends on the quality of the approaches we use and try to implement. Such approaches depend more on our philosophy and “worldview” than on our science and technology.

The traditional approach treats organizational transformation as a temporary one-off affair undertaken to create a change in the organization. We, however, contend that transformation should be in the mindset.

Much of the confusion we encounter in organizational transformation results from misconceptions about the nature of change in social systems and their environments. As Ackoff (1981) notes:

“The important change taking place, I believe, is in the way we try to understand the world, and our conception of its nature. However, the large and growing literature on change and its management focuses on its objective rather than subjective aspects. It assumes that most of the managerial problems created by change derive from its rate. This may be true, but it is apparent that we cannot deal with change effectively unless we understand its nature. This means understanding it in general, not just in particular instances.”

The paradigms we develop and the underlying assumptions we make are the products of historical circumstances. In general, they are based on assumptions that evolved from the industrial era and the “mechanistic worldview” that prevailed from the Renaissance until about the time of World War II. The overall change that is taking place is a shift in the paradigm.

The concepts of paradigm and paradigm shift began with Kuhn (1962). Kuhn, along with the structuralists of the 1960s and 1970s (e.g., Saussure and Levi-Strauss), saw the world as fundamentally structured in its essence. Once you were in the scientific paradigm, or a linguistic system, there was no escaping this system except through radical and revolutionary change. This type of change cannot be accomplished by an individual. For Kuhn, a pile of inconsistencies accumulate until someone innovates a solution, and then the “better” solution or new worldview slowly filters through.

Based on Kuhn's theory of scientific progress, various researchers (e.g. Sippel) have written about the distinction between two kinds of change: change that occurs as part of the process of “normal science” and change that occurs in periods of scientific revolution. According to Kuhn, scientific progress does not occur incrementally, one discovery building on another like so many bricks in a wall. Instead, scientists construct what Kuhn calls “paradigms,” which integrate the known data and enable scientists to make predictions about the future.

Kuhn et.al. (1996) also give examples of smaller shifts for individuals, citing William James, whose philosophy of pragmatism serves as a good basis for systems thinking. In many ways, James laid the foundation for paradigm shifts, arguing that there are two types of knowledge in the world: what can be

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known and tested beyond a doubt, and what can be believed based only on faith and interpretation of evidence.

Managers and other decision makers have to act on faith-based evidence as much as on real evidence simply because some decisions are forced, and they have no choice but to act even when they do not have the complete truth. They will have created their own worldview by cobbling together facts with assumptions. And, as created truths are usually unprovable in themselves, these decision makers, convinced that their interpretation is correct, become unwilling to experiment with other possibilities.

So how does a change in worldview come about? James (1907) argues that individuals need to reconsider beliefs that could possibly be forced assumptions. Neustadt and May (1998), in Thinking in Time: The Uses of History for Decision-Makers, provide a method for this reconsideration by forcing individuals to filter their perceptions into categories of known, presumed, and assumed. The relativists such as Richard Rorty (1991) state that an individual must consider the relative nature of his or her viewpoint in order to open the mind to greater possibilities.

We believe that paradigms integrate experience and tell us how to approach questions and problems. There are always a certain number of anomalies [dilemmas] that stubbornly resist being reconciled to the [existing] paradigm. These accrete and become increasingly troublesome until the authority of the paradigm itself comes into question. Eventually, a new paradigm is promulgated that relates these anomalies to all other known observations. The replacement of one paradigm by another is scientific revolution.

“Systems thinking” or a “systems view of the world,” we believe, is evolving as an alternative to the old paradigms. Systems thinking is a lens through which you can look at the world, and that lens determines what you see. In addition, it often determines what you do about the things you see.

3.2 The Need for a Multidimensional Approach

More than a few elements need to change for a radical transformation to take place in an organization's character and performance.

We agree with Ledford, Mohrman, Mohrman Jr., and Lawler (1989), who describe the key dimensions of large-scale organizational change:

Depth of change: The extent of change within the organization, including deep cognitive shifts. The depth of change should involve major shifts in the mindsets (beliefs and values) of organizational members that alter their view of the organization.

Pervasiveness of change: The extent of change throughout the organization's sub-units (e.g., divisions), subsystems (e.g., information), and levels.

Organizational size: The critical mass required for the change. The larger the size of the organization, the larger the change required to alter its character and performance significantly. In fact, very large organizations, which by extension are more complex, might resist or distort changes significantly, giving rise to unintended consequences.

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Other factors affecting the change process include organizational complexity, stage of development, age, strong culture, degrees of strategic freedom, and power to alter the environment.

3.3 Need for an Iterative and Participative Design Process

We propose that transformation should be an iterative and participative process that adheres to the idealized design of Ackoff (1981). Pourdehnad (Pourdehnad, 1992; Leemann, 2002) argues for an iterative process with four steps, revisited at least three times: 1) creating the mission statement; 2) identifying functions of the system; 3) developing processes for doing the work; and 4) organizing the structure to do the work.

In idealized design, stakeholders first formulate the purpose and mission of the transformed or future organization, then specify the properties they would ideally like to endow it with.

Specifying desired properties should include the following topics: outputs (including products, services, markets and marketing, distribution), processes (including production), inputs (including support services, personnel, finance), and organization and management structure. The responsibilities for the organization's social and physical environment should also be specified. The list of specifications will usually go through many iterations before consensus is reached.

Once a list of specifications has been prepared, the design process can begin; however, the consequences of the specifications’ interactions usually become apparent at this stage, and changes to the list are often required.

Once prepared, a final design assumes no changes in any of the relevant constraining systems. Each constraint, if it is a basis for change, should be checked with the appropriate authorities in the constraining system to make sure it is possible to circumvent (most constraints have loopholes).

If the difference between the constrained and unconstrained versions of the idealized design is not large, then it is clear that the system's future is largely in its own hands. If the difference is large, then changes in the external constraining system should be the major focus of the remainder of the planning process. The unconstrained idealized design should be accompanied by an explicit statement of the assumed changes in the constraining system: why they should and how they might be brought about.

3.4 Need for a New Leadership

Leadership is an important and indispensable component of transformation efforts. Ackoff (1999), who draws a vital distinction between commanding and leading, says, “A system cannot learn and adapt unless its management can.”

While theories abound in the area of transformational leadership, most revolved around the concept of charismatic leadership with “sacred” rather than pragmatic goals (House, 1977). Recent studies (Conger and Kanungo, 1987) attempted to demystify the charisma and rendered it along a continuum of effectiveness with other leadership models.

Ackoff points out that leadership in an organization should not be command and control but rather participative, with managers willing to address issues systemically. In other words, the leaders should be system thinkers themselves who recognize that the performance of the organization is not the sum of

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its parts but the product of the interaction of those parts. Managers must lead employees to help them understand how their jobs fit into the system.

IV. IMPLICATIONS OF SYSTEMS THINKING IN ORGANIZATIONAL TRANSFORMATION

In this section, we discuss how the change of mindset to that of systems thinking would influence the decision components, including premises, assumptions, cognitive style, and the method of inquiry.

4.1 Implications of Paradigm Shift on Premises and Assumptions

The mechanistic (machine-like) worldview still influences the way we treat organizations by completely ignoring the interactions among, and purpose in, the parts. Even an organismic (organism-like) worldview does not capture the purposeful nature of the parts.

Unlike mechanistic and organismic systems, social systems are purposeful systems containing purposeful parts and are themselves contained in a larger purposeful system. This tells us that unless the purposes of the parts are in alignment with the purpose of the whole, the components will work antagonistically and the performance of the whole will deteriorate.

The systems thinking approach provides for a formal awareness of the interactions of a system’s parts, recognizing purpose (a matter of choice) as the most critical classifying variable used in distinguishing social systems from other types of systems. This approach has tremendous implications for social systems: it recognizes that the performance of a system is not the sum of the independent performances of its parts; it is the product of their interaction.

Failing to consider the systemic properties as derived from the interaction of the parts leads to sub-optimization of the parts while leaving the whole with little change or even deterioration in performance (as typically occurs during blind reengineering).

By engaging all stakeholders in creating an idealized and shared vision, system thinking techniques such as idealized design and interactive planning get the entire organization to belong and commit to the course of the change. Resurfacing the premises and assumptions and increasing the awareness are important in systems thinking because these actions help minimize the failures accompanying incorrect or outdated assumptions.

4.2 Implications of Design on Method Inquiry and Cognitive Style

In shifting from “mechanistic worldview” to a “systemic worldview,” we need to change our method of inquiry (and thought process). Systems thinking employs design rather than research as a way of handling systems of interacting problems, called messes, and dissolving the messes rather than solving their components. Design is holistic, specific, and deliberate.

As mentioned above, it is through the iterative and interactive design process(es) that systems thinking will impact on the organizational transformation. The systems thinking will provide a new set of organizing principles, including emphasis on the systemic wholeness, interdependency, synthetic thinking, optimization of the whole (versus just the parts), and support for organizational learning.

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Designing the whole system means creation of an optimum system configuration. Therefore, the systems approach is a method of inquiry and a way of thinking that emphasizes the whole system instead of component systems and strives to optimize the whole system’s effectiveness.

Systems thinking states that the organizational redesign, in addition to self-control issues, should be geared toward the two problems with which a social system has to contend:

The “environmentalization” problem: how to design and manage the organization so it better serves the larger system of which it is a part, and

The “humanization” problem: how to design and manage the new organization so it better serves the purposes of its stakeholders, including employees.

It is important that the system enable, not constrain, the actions of its members — in this case, people. The basic issue, therefore, is whether our designs enhance or debase the quality of human life, and whether the design contradicts or is in alignment with human ergonomics and cognitive tendencies.

Humans in general, and most decision makers in particular, tend to be more analytical than synthetic. Systems thinking brings about a practical balance by focusing on synthetic thinking, but it does not negate the value of an analytical approach where it is really appropriate.

4.3 Implications of the Leadership

Transformational leadership requires the ability to encourage and facilitate the formulation of an inspiring vision, but it also requires the ability to implement pursuit of that vision.

Using systems thinking, transformational leaders would be better able to understand the nature of the system, as well as that of the transformation. They would be better prepared to formulate a shared vision for the organization that alters the traditional notion of supervision to give its members more freedom and the opportunity to learn from mistakes, to develop continuously, and to manage interactions that maximize organizational output. This empowerment also increases enthusiasm, commitment, and the level of motivation among the stakeholders. It gives them an opportunity to redesign their future based on the desires of all parts of the organization. Thus, the stakeholders own the transformation plan.

4.4 Implications of Multidimensionality

Multidimensionality of depth and pervasiveness together ensure that the entire organization is being transformed. We agree with those who suggest that the following aspects of the organization should be transformed:

Core processes, including organizational change, management, decision-making processes, and rewards.

Organizational culture, including beliefs, values, norms, symbolic action, and management style.

Formally stated mission and strategy.

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Organizational paradigm, including “meta-rules” or underlying assumptions that shape perceptions, procedures, and behavior.

The changes in organizational values are closely connected to organizational design changes. In sum, a paradigm shift, as a major part of the depth dimension, results in a major organizational movement away from old values and the acceptance of new organizational norms.

V. TESTING, VALIDATION & FUTURE DIRECTION

We have gained preliminary support for our ideas by examining past cases of successful and unsuccessful transformations. At this juncture, we are able to offer only a face validation, which asks negating questions as to whether the organization can afford to ignore the conditions described in this paper. However, before we investigate any further, we might be required to invest further effort in the analysis and synthesis of competing hypotheses.

We propose to follow up this paper with a sequel considering case studies in which systems thinking has been applied to organizational transformation. It could even be a joint paper with some of the authors at this conference. We believe there is synergy in this conference to examine each other’s work.

For example, some of the empirical papers have discussed the application of systems thinking principles to organizational transformation. We can collaboratively leverage these works to test the validity of the paradigm and give a structure to the empirical studies.

VI. CONCLUSIONS

For the last decade, some of us have been addressing the following questions: Why is it so difficult to change? Why do change efforts so often fail? And then there is the hardest question of all: What is the necessary and sufficient condition for successful change?

We believe we have answers to these questions, but that they do not lie within conventional business wisdom. Those of us who are doing research in the area of “change” have come to the conclusion that advances in the two branches of science that deal with irreversible systems — evolutionary/developmental biology and nonequilibrium thermodynamics — have brought us to the point where a much more useful and practical understanding of change is now possible.

When these understandings are coupled with advances in complementary fields (e.g., linguistics, cognitive sciences, economics, information sciences, etc.), they can provide a sound basis for the development of “new world” business theory and practices, regardless of whether the need is for adaptive change or radical transformation.

Just as Newton's theories in physics were quite adequate for several hundred years, but then began to crumble as the questions grew more sophisticated, traditional business theory has sufficed for the last century, but is now being called into question. The systems paradigm is a necessary vehicle for further progress in a fast-changing world known for addressing the wrong problems.

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