Tuesday, June 8, 2010

A Systems Approach to Business - Part 1

Note:  This is the first in a series of three posts on the subject of systems thinking in business.  Systems thinking is an critical subject for organizational leadership that cannot be adequately covered in a single post.

"If you try to take a cat apart to see how it works, the first thing you have in your hands is a non-working cat."  Douglas Adams

In the most basic sense, an organization is a continually developing system of people, processes, equipment, and sub-systems working together to achieve a common purpose (the key word for this discussion being 'system').  Like any organic system, organizations are complex and need to be managed as a whole in order to achieve the purpose.  Efforts to break a company apart and focus on individual elements can negatively affect the balance and interfere with success by creating competition and fragmentation between components.

Although most people in business would agree that the performance of the company is more important than that of individuals or teams, the way many organizations are managed achieves just the opposite.  For a variety of reasons, leaders inadvertently fragment organizations, and set individual or team goals and objectives that often interfere with long-term success.

Consider the following:

Situation #1
In an attempt to reduce material costs, an incentive program for the supply chain team is implemented with rewards tied to containment and reduction of costs.  The program succeeds in reducing material costs but leads to increased production costs, customer returns, shipping delays, and warranty expenses due to the purchase of substandard materials and longer supplier deliveries.

Situation #2
Sales managers are rewarded based on revenues generated from the regions they manage.  The sales manager in Scandinavia has a significant opportunity with a new customer but, to secure the business, needs a good deal of technical assistance from the sales manager in France - who is very knowledgeable in this customer's particular application.  Although the French sales manager wants to help, he feels he can't afford to spend time on an activity that will not generate sales in his territory.

Both sales managers end up barely meeting their targets, but the company misses the opportunity to secure business from a new customer.  Also, teamwork between the sales managers has been damaged.

Situation #3
Plant managers in a global manufacturing company are measured and rewarded on meeting EBIT targets for activity in their plants.  Plant A has more demand than capacity, while Plant B has more capacity than demand.  The manager of Plant A decides to buy products from the outside to meet demand.  In order to meet the EBIT target, however, he orders product from a competitor instead of Plant B because of a lower price (the manager of Plant B priced the product high enough to assure the order wouldn't negatively affect his plant's EBIT).

As a result, the manager of Plant A met his targets and received a bonus while the manager of Plant B did not.  Because Plant B did not meet its targets, the company as a whole failed to meet its targets.  Teamwork between each of the plants, which was already strained, has deteriorated further.

There are numerous examples like the above where goals or measures encourage behavior that fragments the organization.  Although it seems perfectly logical to evaluate performance of a team member on a measure like EBIT or sales revenues, it can easily cause someone to act in a way that is detrimental to the performance of the organization, as a whole.

Organizations are far too complex to objectively, accurately, and easily evaluate an individual's performance.  Extreme care must be taken when setting objectives and basing rewards on achieving individual targets. 

The more one adopts systems thinking and understands how it is important to continually focus on improving the overall system - especially the hand-offs between people and teams - the easier it is to abandon traditional measurement and reward systems and move to a more holistic approach to leadership.

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