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

ACKNOWLEDGMENTS

This MBA dissertation benefited from the help of many people. I am especially grateful to my tutor John Darwin for his suggestions when preparing and carrying out the project, and Michael Schlinkert for giving me 'injections' of Luhmannian systems theory . Paul Cooper gave great advice on the 'palatability' of the work. Sheridan Webb gave the final script a brush of 'English English'.

"Any manager is only as good as the partner behind him or her", as they say. This holds true especially in times of double work. I am grateful to my wife Maite who put up with a husband travelling extensively in Germany as a sales manager while writing this piece of work in the few and precious hours at home.

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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

¹ four will never forget. Based on Richard Whittington's Does Strategy Matter ? 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.

¹ Whittington (1996)

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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 selfreferential 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 selfreferential loops which govern growth and transaction processes reveal, that the

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  organization is somewhat trapped in circular loops which impede growth, rather  

  than supporting it  

TABLE OF  CONTENTS  

  Page  

  ACKNOWLEDGMENTS  iii

  PREFACE  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

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5. CONCLUSION 53

REFERENCES 60

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FIGURES & TABLES Page FIGURES

Figure 4.1. Competitive Position of F.C.M Along Criteria of Product 29

Portfolio and Geographic Representation

Figure 4.2. Shifting the Burden of Organic Growth to Acquisitions 34 Figure 4.3. Archetype "Drifting Goals" applied to F.C.M. Product 35 Development

Figure 4.4. Growth and Underinvestment of F.C.M./F. Mini-excavator 38 Production Capacity Figure 4.5. Causal Loop "Bad Performance". 48

Figure 4.6. Systems Archetype "Fixes that Fail". Business Practice 49 Cost Reduction.

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 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

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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, easyto-implement fashion. Some of the concepts in the light of academic scrutiny turn

³ . Others, on in-depth study are revealed to be paraphrased out to be business fads

⁴ . And even the more serious accounts of change ideas from the 1920s and 1930s

and managerial intervention - the critique also finds ample evidence beyond

⁵ - sometimes are based on over-simplified accounts which 'airport literature'

retrospectively explain implementing a nouvelle management practice as a veni,

⁶ . Finally, to take issue vidi, vici: rational, well-planned, coherent managerial action with the distribution of business success recipes, management recipes are often

² Forrester (1996:225p)

³ Pascale (1990:18pp)

⁴ See e.g. Mumford (1996:46pp) on Mary Parker Follett's ideas.

⁵ I am indebted to an unknown author for this phrase.

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disseminated into the business community through business consultants,

⁷ . Within the business community there "merchants of meaning and beautiful words"

is ample suspicion that consultants arbitrarily come up with new cures to wellknown 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

⁸ . Perhaps systemic thinking could serve to achieve some preliminary processes"

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

⁹ . 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

¹⁰ . F.C.M. Corporation, global manufacturer and organization "beyond the hype"

¹¹ is currently in a phase of growth that follows a supplier of construction machinery

long phase of decline. In many markets F.C.M. suffers from low profitability, low market share and low image, in particular:

⁶ Marchington (1995:52pp)

⁷ Czarniawska-Joerges, quoted from: Björkegren (1994:101)

⁸ Wilson (1992:7)

⁹ See for instance Groth (1996)

¹⁰ Eccles & Nohria (1992)

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• 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

• Long-term success in North America where F.C.M. has a share of market of 20% in some market segments;

• Product acceptance of wheeled loaders, compact loaders, or crawler excavators which have distinct features;

• Sufficient economies of scale as a transcontinental CE manufacturer gaining from of the concentration trend in the CE manufacturing industry.

¹¹ In the following F.C.M. Germany will denote the German construction equipment subsidiary, while F.C.M. Corporation will denote the global holding. Other business units w hich form part of F.C.M. Corporation shall remain unmentioned to avoid giving away F.C.M.'s identity.

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In F.C.M. Corporation's press releases, Annual Reports, or other items of communication aimed at the external public, growth is one of the most eminent topics. F.C.M. is committed to growth, and its recent growth is in fact remarkable: F.C.M. holds a record of 16 consecutive quarters of growth both in revenues and profits. In 1997 e.g., F.C.M. increased its global revenues by 11% compared to full year 1997 to US$ 6 bn, while gross operating profits increased by 8% to US$ 627 m. Since 1994, when F.C.M. become a public company US$ 1 bn was added in

¹² . revenue

In 1998, part of F.C.M.'s growth strategy has already been implemented. Several restructuring measurements have been implemented, and new products have been launched. The most obvious effect, however, was that F.C.M. embarked on several projects to enhance its product offerings such as the acquisition of a manufacturer of compact equipment (e.g. miniexcavators), acquisition of a producer of horizontal drilling equipment, and a joint-venture with a Japanese manufacturer of crawler excavators. Clearly, F.C.M. is already amidst a process of rapid growth and change. This is the starting point of this paper.

¹³ , the Given that there are no equifinal approaches to change management question is what systemic thinking and systemic theory, which are typically dedicated to development such as organizational learning, or evolution of organizational dynamics, may add to F.C.M.'s growth processes in terms of tools for diagnosing problems and means of arriving at new perspectives. Thus, this paper will seek to explore in how far systemic thinking helps to develop an understanding of F.C.M.'s problems related to growth and transition, and for the formulation of potential leverage opportunities.

¹² NB. All financial figures include total portfolio of F.C.M. Corporation's activities.

¹³ Stace (1994:18)

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Therefore, it is an explorative study, because it is a venture into applying (to the author, at least) an alternative approach to management issues. Explorative also, as there are no 'hard', 'objective' criteria chosen to analyze and examine F.C.M.'s situation; rather, this paper is designed as a pre-test into a full-scale examination based on application of systemic theory. Such a future undertaking was effectively a consultation project, something which an MBA dissertation clearly cannot achieve.

The narrow scope of this paper does not allow for a fully-fledged application of systemic theory to the entire F.C.M. organization. This is no systemic turn-around programme. Secondly, the theoretical framework will merely draw on two strings on systemic theory: the System Dynamics approach as represented by Peter Senge and his colleagues for example, and the theory of self-referential systems as represented by Niklas Luhmann and collaborators from the University of Bielefeld.

¹⁴ remain Due to the narrow frame of this paper, other schools of systemic theory largely neglected. Critique from systemic academia may well be entitled to call the theoretical basis of this study ecclecticistic.

¹⁴ Hard- and Soft Systems Methodology comp. Checkland (1985); Integrated Management Probst & Siegwart (1985) to name a few.

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2. SYSTEMIC THEORY AND COMPLEX SOCIAL SYSTEMS

This section outlines the theoretical perspective adopted. Beginning with the basics of systemic theory such as defining general features and traits of complex systems, I will continue to discuss the benefits of a specific approach to the application of systemic theory. Recognizing the strength of this approach while compensating for some of its theoretical weaknesses, I will continue to complement this approach to applying systemic thinking with other key concepts within systemic theory which is self-reference. The ensuing theoretical combination will equip us with a compact but adequate theoretical framework to approach the organization under scrutiny.

2.1. Complex Social Systems - a Starting Point

¹⁵ . as a holistic ensemble of elements, the A complex system may be defined

relations of which are quantitatively more intense and qualitatively more productive

¹⁶ . Complex systems show selfthan their relationships to other elements

organization, boundary constitution, self-reference and generativity In particular,

¹⁷ : complex systems show the following dynamic features

1. they tend to be self-stabilizing i.e. they show tendencies to maintain states of equilibrium,

2. they appear to be purposeful i.e. serve some sort of goal (which may not be explicit),

3. they use feedback - both positive and negative feedback - to modify their behaviour,

4. they modify their environment, and

5. they are capable of reorganizing themselves.

¹⁵ Willke (1996a:266)

¹⁶ Throughout this paper, the term system will categorically and synonymously describe complex systems as opposed to trivial systems such as single-cell organisms. Other common dichotomies in use are e.g. linear/non-linear, or simple/complex.

¹⁷ Anderson & Johnson (1997:78p)

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Complex systems are non-linear; non-linearity is the guiding difference in terms of dynamics: "in linear systems change is gradual and incremental, whereas in non-

¹⁸ .Moreover, effects in linear systems change can be precipitous and revolutionary" non-linear systems tend to be disproportionate to the cause, the whole system is greater than the sum of its parts, internal interaction tends to be multi-directional,

¹⁹ . and outcomes tend to be unpredictable

Social systems are by definition complex systems because

• they are relatively insensitive to intervention from management intending to alter system behaviour.

• they tend to have a few sensitive spots at which alteration of system behaviour may be more fruitious. However, even when those sensitive spots are discovered there is the risk of misapprehension or misinterpretation of their impact.

• there is a fundamental conflict between short-term intervention and long-term intervention in that short-term solutions which produce improvement tend to shift towards deterioration after some time, while solutions which improve the system

²⁰ over the long-term may initially depress the system.

The human mind is not well equipped to understand the dynamics of complex

²¹ . Learning systems because they are multi-loop nonlinear feedback systems disabilities such as conceiving of organizations as assemblies of functions instead of purposes, failure to see the consequences of one's actions, seeing events instead of processes are organizational universals, to be found even in successful

¹⁸ Goldstein (1994:19)

¹⁹ ibid:19pp

²⁰ Forrester (1996:228p)

²¹ Dörner (1989)

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