What can Systemic Thinking Contribute
to the Understanding of an Organization
in a Process of Growth and Change ?

MBA Dissertation
June 1998
Sheffield Business School
Sheffield Hallam University
Sheffield UK

by

Ralf Frank

Preface

I hold a degree in communicational sociology, which is untypical for the industry I work in. Be it for my degree, be it for professional ambitions, my interest has always been to increase my cognitive capabilities as a manager in analyzing situations and improving my abilities in handling complex subject matters. Thus, throughout my MBA studies I was led by a genuine epistemological interest: what do I know as a manager, and what would I have to know to become a better manager ?

During my studies at Sheffield Business School between autumn 1996 and spring 1998 I had the opportunity to delve into a host of material on business, management, strategy, and organizations. One great moment of being lectured I will never forget. Based on Richard Whittington′s Does Strategy Matter ? four lecturers gave talks on the characteristics of different approaches to strategy, each of them representing one school of strategy in its own words and speaking for itself - the Classical, the Evolutionary, the Processualist, and the Systemic one. After the Classical school had loudmouthedly propagated "I am one and all for planning !", followed by an Evolutionist credo that "I think only the fittest survive", the Systemic school confessed that "I think it all depends". It would be unfair to consider this exclamation systemic thinking′s epigraph (and moreover, it would do great injustice to the lecturer′s speech which was excellent), but as a starting point of explanation to those unfamiliar with systemic thinking it may well be suitable.

Synopsis

This paper is an explorative study which applies systemic theory and models of systemic thinking to the case study of F.C.M., global manufacturer and distributor of construction equipment. Systemic thinking stresses the importance of monitoring dynamics of processes instead of seeing events. Representation of dynamics through so-called system archetypes and causal loops helps to identify problematic areas and identify leverage opportunities. Complementary concepts from self-referential systems theory explains why systems are difficult to change even if the dynamics have been detected: social systems operate on the basis of an autonomous logic of control. In brief, any intervention needs to become part of the systems operating rules and procedures to be successful.

F.C.M., an organization which is currently in a phase of change caused by growth, suffers from a variety of problems such as low image, low share of market, and low profitability. F.C.M. Corporation′s growth strategy depends primarily on acquiring competitors in order to gain access to markets, strengthen its distribution network and enhance its product portfolio.

Systems thinking indeed offers new perspectives on F.C.M.′s problems. The need of being global reveals guiding distinctions which systematically lead away from achieving a realistic understanding of F.C.M.′s situation. F.C.M. Corporation′s growth strategy of acquiring instead of growing out of its own devices, is a quick fix which bears the risk of neglecting existing products and services which respond to customer′s needs. There is already indication of an erosion of customer standards. There is also evidence that integration between parts of F.C.M. (and newly gained parts) as well as coordination between existing profit centres is an area in which systemic thinking may serve to improve the current status. Finally, F.C.M.′s self-referential loops which govern growth and transaction processes reveal, that the organization is somewhat trapped in circular loops which impede growth, rather than supporting it.

Table of contents

Achnowledgments ... iii
Prefaces ... iv
Synopsis ... v
Table of contents ... vi
Figures & Tables ... vii

1. INTRODUCTION ... 1

2. SYSTEMIC THEORY AND COMPLEX SOCIAL SYSTEMS ... 6
2.1. Complex Social Systems - a Starting Point ... 6
2.2. Systems Thinking and Systems Archetypes ... 8
2.3. Self-reference and Autopoiesis of Social Systems ... 10
2.4. Summary ... 17

3. METHODOLOGY ... 20

4. "FIXING THE BIKE, WHILE WINNING THE TOUR DE FRANCE"-F.C.M.′s CHANGE PROCESS ... 28
4.1. Becoming a Global Player ... 28
4.2. Acquisitions, Mergers and Integration ... 31
4.3. A Climate of Transition ... 40
4.4. The Permanent Crisis ... 46

5. CONCLUSION ... 53

References ... 60

Figures & Tables

Figures
Figure 4.1. Competitive Position of F.C.M Along Criteria of Product Portfolio and Geographic Representation ... 29
Figure 4.2. Shifting the Burden of Organic Growth to Acquisitions ... 34
Figure 4.3. Archetype "Drifting Goals" applied to F.C.M. Product Development ... 35
Figure 4.4. Growth and Underinvestment of F.C.M./F. Mini-excavator Production Capacity ... 38
Figure 4.5. Causal Loop "Bad Performance" ... 48
Figure 4.6. Systems Archetype "Fixes that Fail". Business Practice Cost Reduction ... 49

Tables
Table 2.1. The Laws of the Fifth Discipline ... 9
Table 4.1. F.C.M. Acquisitions since 1957 ... 32
Table 4.2. F.C.M. Credit Terms compared to Marketleader ... 40
Table 4.3. A Simplistic Model on the Impact of Volume Relative to Revenue ... 51

"In a troubled company, people are usually trying in good conscience and to the best of their abilities to solve the major difficulties. (...) In many instances it then emerges that the known policies describe a system which actually causes the troubles. In other words, the known and intended practices of the organization are fully sufficient to create the difficulty, regardless of what happens outside the company or in the marketplace."

1. INTRODUCTION

This chapter will take the reader to the starting point of this paper which is determined by the question as to which motivation led to choosing the topic of this MBA assignment and in which area of management studies the topic can be located. Furthermore, this chapter will seek to delineate the research area and try to describe which boundaries confine the subject.

Change management is a contemporary subject in management and business studies. There is a vast body of literature on the management of change encompassing numerous recipes and prescriptions on how to turn around organizations, how to induce change, and how to organize, streamline, re-engineer, re-structure organizations. Some of the material is written in an easy-to-read, easy-to-implement fashion. Some of the concepts in the light of academic scrutiny turn out to be business fads . Others, on in-depth study are revealed to be paraphrased ideas from the 1920s and 1930s . And even the more serious accounts of change and managerial intervention - the critique also finds ample evidence beyond ′airport literature′ - sometimes are based on over-simplified accounts which retrospectively explain implementing a nouvelle management practice as a veni, vidi, vici: rational, well-planned, coherent managerial action . Finally, to take issue with the distribution of business success recipes, management recipes are often disseminated into the business community through business consultants, "merchants of meaning and beautiful words" . Within the business community there is ample suspicion that consultants arbitrarily come up with new cures to well-known evils every other year - and nothing ever changes.

As a manager working in an organization undergoing massive changes, my prime motivation was to find out what systemic theory had to contribute to change management. Change management was defined elsewhere as the "understanding, creating and coping with change (...) [through] establishing some rationality, or some predictability, out of the seeming chaos that characterizes change processes" . Perhaps systemic thinking could serve to achieve some preliminary order out of the chaos and give some guidance to those who are amidst the change processes, seeking to accomplish and facilitate change. Accounts of managers utilizing systemic theory in change processes, however, are rare, although amongst consultants, systemic theory in general has been en vogue for quite some time .

How to manage and cope with change is a contemporary issue in many organizations and in my organization, too. Therefore, there remains the issue of whether there are ways of handling and perhaps organizing change in my organization "beyond the hype" . F.C.M. Corporation, global manufacturer and supplier of construction machinery is currently in a phase of growth that follows a long phase of decline. In many markets F.C.M. suffers from low profitability, low market share and low image, in particular:

• In the last 10 years, F.C.M. in Europe incurred losses.
• In Europe, F.C.M.′s market position declined from market-leader in excavators in the mid 1970s to marginal player in the 1990s.
• In some areas such as the Asia-Pacific Rim, F.C.M. has had very little market presence.
• The distribution network in many markets is weak, stagnant or crumbling away. In many current growth areas such as East Germany or Central Europe an early start was missed, so that market coverage is minimal.
• Particularly, in the German market which accounts for 40% of the total European market in terms of industry, acceptance of F.C.M.′s products is below F.C.M. Corporation′s expectations.

With F.C.M.′s IPO in 1994, the company launched a massive turn-around programme aimed at increasing its CE market presence by capitalizing on some existing competencies and the funds released through the IPO, such as:

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