Strategic Leadership and Decision Making

4

SYSTEMS THINKING AND LEARNING ORGANIZATIONS

The systems paradigm is a way of thinking about the strategic environment, and how to develop processes in organizations that achieve strategic goals. The systems paradigm should be viewed as a tool that leaders can use to design their organization's capability to: (1) analyze tactical and strategic environments; (2) develop and enact strategies in response to environmental demands; and, (3) sustain an adaptive and productive organizational culture. These three types of organizational processes are important in determining whether an organization can achieve strategic objectives in competitive environments.

A Leader's Strategic Analysis of the Environment 

In 1997, Monsanto's CEO Robert Shapiro's analysis of Monsanto's strategic environment surfaced the future need for the company to create low cost, environmentally friendly products. He announced that Monsanto would begin its transformation from the chemicals company (ranked 4th in Fortune's 1996 domestic industry ranking and 18th in Fortune's global industry ranking) into a life sciences enterprise devoted to improving human health by seeking synergies in biotech, pharmaceutical research, and food products.

Developing and Enacting Strategies in Response To Environmental Demands

The Zoltek Company, in St. Louis, Missouri, manufactures carbon fiber, a versatile, light and strong material with wide uses ranging from golf club shafts to the tail section of the Boeing 777 jet liner. Its chairman, Zsolt Rumy has the strategic goal of being the leader in the commercialization of low cost carbon fibers for non-aerospace applications. To achieve this objective, the firm is enacting its strategy in two ways. First it has developed manufacturing process to drive down production costs. Second, it has established a series of strategic partnerships with companies such as B.F. Goodrich, General Motors, and Owens Corning for strategic positioning and growth in the marketplace.

An Adaptive and Productive Organizational Culture

Harvard Professor Rosabeth Moss Kanter concluded from her study of large U.S. corporations that successful organizations have cultures that encourage multiple sensing mechanisms to the environment and enable quick reactions to changing environments by generating the best combinations of people for the job.

These examples illustrate one of the key principles in the systems paradigm: an organization's survival is based on sensing, analysis, and interaction with its environment. It is important to establish a set of definitions of terms that are highly relevant to the systems paradigm in strategic decision making.

Terms such as strategic, decision making processes, and systems are used in both every day conversation and in professional settings. Consequently, each of these terms are subject to misinterpretation when used within specific discussions in this chapter.

WHAT IS STRATEGIC?

The term strategic has three components. The first refers to the top level of the organization and the principal or principals who are ultimately responsible for the organization's actions and consequences of those actions.

The second and third components add temporal and risk dimensions to the decisions these principals are responsible for. Strategic outcomes are long term in nature and may not materialize for at least 10 years. Moreover, strategic outcomes contribute directly to the survivability of the organization.

DECISION MAKING PROCESSES

Decision making is associated with an individual, the leader; or, to small groups, such as a management team. Decision making also refers to the strategic decisions made by the principal or principals in an organization, as well as the collective information processes within organizations that precede, support, or follow those decisions. These processes include, but are not limited to: interpretation of issues, deliberations conceiving data and information, problem definition, development of decision options, and the selection of a course of action.

WHAT IS A SYSTEM?

Systems are composed of interrelated components such that the properties of both the system and its components are changed if the system is disassembled in any way (Ashmos and Huber 1987). There are different levels of systems, ranging from the simple mechanical systems with predetermined, motions of levers and pulleys (e.g., an automobile engine) to complex social organizations acting to accomplish objectives. The systems paradigm focuses on these processes that exist among system components, and between system components and the environment.

SYSTEMS THINKING

It is safe to say that all of you have been acquainted with the cybernetic or control systems of inputs, transformation processes, outputs, and feedback loops that maintain equilibrium. These system components operate within an environment as shown on the next page (figure). The cybernetic system has been used in a variety of disciplines as the general model of the systems paradigm. Cybernetic systems are closed systems, largely unaffected by the environment where they reside. By its definition, a cybernetic system is an inappropriate representation of the complex processes that occur in organizations, and particularly the strategic decision making processes in organizations.

ORGANIZATIONS ARE OPEN SYSTEMS

Today, organizations exist in competitive global environments where there is strong competition for resources, markets, skilled employees, and innovations. At the same time, many organizations confront environments that are unpredictable and complex. Organizational environments are multifaceted and can be categorized in the following way:

First, as open systems, organizations are highly engaged with their environments. Successful organizations develop characteristics and perform processes that allow them to adapt to constraints, threats, and opportunities. They import capability from the environment. This capability can be achieved by acquiring another organization through a joint venture; or by improving their human and physical capital; or by obtaining the information needed to transform that capability into desired outputs such as physical goods, services, or a focused set of monetary or operational actions. Next, organizations' transformation processes are cyclical in nature, that is to say they are a predictable, ordered set of processes that might be determined by a budget cycle, a sales cycle, or a growing season. These well-ordered processes create negative entropy, the resistance to disorganization. Negative entropy maintains the reliability of transformation processes in spite of changes in environmental conditions.

Open systems also have environmental scanning processes that might exist in the recruiting directorate, the market

research department, or the complaint department to provide information about the systems performance and to adjust processes within the system.

Another feature of open systems is that they operate under conditions of dynamic homeostasis, the process of preserving the character of the system through its growth. Open systems use internal processes of review to modify their environmental scanning, input, transformation, and output processes to adapt to the changing VUCA factors of the environment, while still staying focused on their core competency. These modifications culminate in the quantitative and qualitative growth of an organization's capability to respond to future contingencies.

The systems paradigm is a useful model of the capabilities of government agencies, particularly the Department of Defense. Defense bureaucracies process tremendous quantities of information about the external environment to produce threat analyses, implement processes that transform information about manpower and resources into combat capability, and adjust internal processes for synthesizing information to support all levels of decision making. But there's a potential problem. The Defense Department, to achieve stability, uses sets of standards, to accomplish programmable outcomes. The sets DOD has been using may not be suited to respond to potential environmental challenges.

Change rather than stability has engulfed us. There are endless calls for the reinvention of government, acquisition reform, and defense realignment, as well as cautions about the revolution in global military affairs and the growing threat of terrorism. These changes in the environment have strategic implications beyond the realm of a single decision maker or even a top management team. But the systems paradigm prompts and demands that future leaders analyze their organization's capability to respond to these VUCA issues. Here are some points to consider:

The ability to answer these questions depends on how you frame organizational capability. If you view an organization as a structural design (e.g., a battalion), an organizational chart (e.g., a directorate in the Pentagon), a personnel roster (e.g., the comptroller shop) or a surrogate of military or industrial output (e.g., the 82nd Airborne or Boeing Aerospace) then you won't obtain an understanding how processes are translated into capability. You need to adjust your thinking to a systems perspective to bring out these dynamics.

From a systems perspective, organizations are collections of human and physical capital that exchange and process information, transform physical objects, and make decisions for the purpose of achieving some set of objectives related to their external environment. From this frame of reference, leaders can find ways to enhance existing processes in the organization, and identify the need for additional processes of environmental analysis to maintain the organization's survivability.

THE SYSTEMS PARADIGM AND STRATEGIC DECISION MAKING

Today, strategic leaders of competitive organizations face the challenge of using their organization's open systems capabilities to respond to present and future environmental challenges. This is a daunting task for any group of strategic leaders, regardless of their intelligence or experience. Leaders at this level are often overwhelmed by the quantity, as well as the VUCA aspects of environmental change. These conditions often place decision makers in situations that are beyond their expertise. In these situations, if a decision has to be rendered, leaders typically rely on their own scanning, analysis, and interpretation of data, albeit fraught with personal biases. Some leaders are effective using this technique but most strategic issues demand more rigorous approaches towards their resolution.

For the purposes of strategic decision making, organizations can be considered interpretation systems (Daft and Weick, 1984). Organizational interpretation is defined as "the process of translating events and developing shared understanding and conceptual schemes among members of upper management." Organizational interpretation about strategic issues is more than bureaucratic "staffing". In general, members of organizations support strategic leaders' interpretations by: creating and maintaining the organization's capability to gather information about environmental threats and opportunities; and efficiently analyzing, evaluating and internally synthesizing this information to support the strategic decision making process. Organizational interpretation processes are valuable to strategic decision makers on two counts. First, they reduce the ambiguity of strategic issues by analyzing data from the environment. Next, these processes reduce the uncertainty associated with strategic issues. (For example, decentralized scanning performed by field organizations, lower level divisions, and individual specialists creates more insights to strategic issues in less time.) The ultimate benefit to strategic decision makers is that they can respond to strategic issues more quickly, with higher quality decisions.

If leaders permit their organizations to treat each confrontation with environmental change as a unique experience then, despite performance outcomes, these leaders are not deriving the full capability of organizational interpretation. When organizations develop the capability for systematic learning then successful and unsuccessful experiences will influence their future scanning and interpretation processes favorably.

ORGANIZATIONS AS LEARNING SYSTEMS

Learning, whether associated with people or organizations, is a set of processes that produce change. Edwin Nevis, Anthony DiBella, and Janet Gould from the MIT Organizational Learning Center define organizational learning as "the capacity or processes within an organization to maintain or improve performance based on experience." The purpose of this section is to identify ways leaders can influence these processes to promote learning and improve strategic leadership and decision making.

Earlier in this chapter we described the features of organizations as open systems. Two features among them were relevant to organizational learning:

The first feature highlights the importance of organizational members dedicated to continuous process improvement. The phrase "process improvement" is overused, but it means that people should be constantly analyzing how they think, communicate, perform and add value to their organization. The first feature also implies that members need to have an intimate knowledge of the organization's core competencies, how their work contributes to the core competencies, and the environmental factors that are related to those core competencies.

Employees' level of understanding about the organization's core competencies is initiated and reinforced by leadership messages. When leaders communicate how the organization's core competencies are linked to the activities of different organizational subunits, then employees will understand how their daily efforts are translated into organizational capability. Moreover, when leaders communicate the organization's vision, and the values and ideology that support the organizational culture, they enhance employees' understanding of the organization's strategic objectives.

Organizational leaders must institutionalize the processes of knowledge acquisition. Knowledge acquisition includes activities such as customer surveys, research and development programs, demonstration projects, performance reviews, and the analysis of competitors' products. Informal sources for knowledge acquisition activities include trade publications, televised news and print media. The goal is for knowledge acquisition to be performed continuously as opposed to a singular response from a management inquiry. In an organizational learning system, knowledge acquisition is followed by information distribution. Organizational scholar George Huber from the University of Texas at Austin describes information distribution in the following way:

Information distribution is a determinant of both the occurrence and breadth of organizational learning . . . organizational components commonly develop "new" information by piecing together items of information that they can obtain from other organizational units. . . . When information is widely distributed in an organization so that more and more varied sources for it exist, retrieval efforts are more likely to succeed and individuals and units are more likely to learn.

The activity of information distribution has even greater significance when it is performed by employees who are also knowledgeable about the organization's core competencies. At its best, information distribution in learning organizations involves purposeful exchanges of information among divisions in the organization that reduces the efforts of any single division to scan the environment. For example, in learning organizations, the supply division would know what information would be important to the marketing division, the production division, and the accounts division, and would route it to those divisions. Division personnel would also know when to modify the information it distributed, and to whom they distributed it as changes occurred in the organization's environment and in the organization's strategy. Again, organizational leaders can facilitate these communication processes.

Leaders can also establish interdepartmental working groups that have the assigned purpose of sharing acquired information to solve problems or develop strategies related to core competencies. Ultimately organizational leaders can make investments in human capital via training and development programs to standardize and improve "information-distribution" skills. Leaders can also invest in physical capital. They can create company-wide information systems that increase the ease and rate of information sharing among subunits.

ORGANIZATIONAL MEMORY

The second feature of open systems in learning organizations is process modification. This feature depends on organizational memory processes. An organization's capability to learn, and ultimately improve its future responses to the environment relies on processes that:

However, the processes that create organizational memory are frequently problematic. Many organizations have poor organizational memories because of a reliance only on employees' memories to retain, retrieve, and apply organizational experiences. This form of organizational memory is vulnerable to turnover and downsizing. Furthermore, organizations can have inadequate memories of success and failure because leaders develop processes to address immediate issues, but fail to evaluate if these processes have future value. Finally, poor organizational memories can result from the absence of organizational processes to: document and catalog organizational actions and outcomes; or, evaluate how past strategies can be applied to achieve new strategic objectives.

There are interventions that organizational leaders can make to improve organizational memory processes. For example, they have to determine how the current experiences of the organization are linked to the vision they have for the organization, the organization's core competencies, and strategic objectives. These actions help set up criteria for identifying which organizational experiences should be a part of organizational memory.

Next, leaders need to leverage their role as shapers of the organization's culture to inculcate employees' beliefs that organizational memory is a valuable tool, instrumental to goal achievement. When processes of creating memory become a part of the organizational culture they have a better chance for longevity in spite of employee turnover.

The erosion of organizational memory can also be minimized when leaders formalize processes for creating and using organizational memory. Computer-based organizational memory can range from strictly archival systems to "memory banks" that continuously process information and form networks from organizational experiences and provide rapid access via search engines.

The bottom line is that organizational memory, like human memory, gets better with use. Strategic leaders must create the conditions and find methods to increase the relevance and capacity of organizational memory, and increase opportunities for members of the organization to use that organizational memory in either supporting strategic decision making, or in their strategic decision making processes.

CONCLUSIONS

This chapter has discussed a set of tools that leaders can use to make their organizations successful in VUCA environments. The systems paradigm is a "macro tool", providing an approach to analyze organizational capability through an understanding of processes that occur in organizations. This tool may be difficult for some to master but it has value for many organizational issues in the strategic environment. A tool within the systems paradigm that is particularly valuable is organizational learning. This set of processes has the potential to improve an organization's capability to respond to future environmental challenges and opportunities successfully.

By emphasizing these concepts as tools, greater responsibility is placed on leadership to use them to achieve strategic outcomes efficiently and favorably for the organization. In the chapters to follow there will be opportunities to refine your understanding of the systems paradigm and processes, and to expand your leadership style for personal effectiveness in strategic leadership and decision making.

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