Fachbereich Maschinenbau Management internationaler Projekte

Elements of the Organisation through the Lens of the System Theory

Joana G. Geraldi

May 2007

This work is aimed at defining the main elements in an organisation, that is, what an organisation comprises. The system theory is used here as basis for this definition.

Introduction

The system theory is a flexible body of thinking that can be applied to analyse organisations. This section reviews some main principles and elements of systems and adapt them to the equivalent in organisations. On the heart of the System Theory is the concept of a system1. The Greek word System derives from syn together and histemi sites. Generically, system is defined as a complex of interacting elements, where the behaviour of elements varies according to their relationship with the others2. Symbolically, system can be illustrated as Eq. 1: S = (T , R ) Where S refers to the system; T refers to the set of things, or thingwood; and R refers to the relation between the elements, or relationwood3. This formula identifies the configuration of systems. When defining S, one is automatically defining the borders of the system, and its environment. The interface with the environment strongly influences the way systems function, i.e. its dynamics. Thus, apart from structure and environment, systems also have dynamic features4. The dynamic refers to the throughput and development of the system. The first entitles the conversion of inputs into outputs. The second is related to how system evolves in the course of time, and adapts to exogenous and endogenous perturbations. Moreover, organisational systems are also characterised by

The System Theory (also termed System Thinking, System Movement or System Science (Gharajedaghi, 1999; Klir, 1991, among others) is a cross-disciplinary. Both the terminus and the concept of systems were used before this period. However, System Theory or System movement is considered to emerge or gain importance as such in the 50s (Klir, 1991, pp. 7-19), counting with influences of, among others, the philosophy, biology, physics, engineering, mathematics. This multiple influences on the System Thinking led to a heterogeneous understanding, development and uses of system. Associations such as the IFSR (International Federation for Systems Research) dedicate efforts to coordinate activities related to the scientific study on systems. There are different perspectives of system theory. However, this chapter focuses rather on what these streams have in common, and not these differences. This theory is being equally applied and further developed in and by a pool of disciplines; Organisational Theory is one of these. Thus, System Theory is not a theory, but rather a flexible and holistic way of thinking based on the concept of system. 2 (von Bertalanffy, 1973). For more definitions of system see Patzak (1982, pp. 18, 19). 3 The term used by Klir (1991, pp. 7) to refer to the relationships is systemwood rather than relationwood. This change was made to clearly differentiate the system and the relationships. 4 The system science gained dynamic with the ideas of Cybernetics initiated by William Ross Ashby and Robert Wiener (Schrgyogg, 1998, pp. 91-92).
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its purpose, that is, the structure and transformations are at least intending to fulfil these purposes. The set of purpose of systems is also relevant to assess the success of current actions. These elements are illustrated in the Figure 1.

Thingwood

Relationwood

Purpose

Structure Dynamic

Environment

Figure 1: Elements of the Organisation

These elements are the same elements defined as relevant to the concept of organisation applied in this study. Structure refers to the features of the organisation, such as structure, set of instruments and tools, competences, culture, etc. The Purpose is related to what the organisation defines as success, as well as the strategic direction. Purpose is fundamental for this research as it serves as a controlling mechanism, to evaluate the success of different configurations, and the consequences of internally and externally driven dynamics. The dynamics refers to how organisation develops in the course of time. It is taken as granted that not only external forces act upon organisations, but also internal forces are able to generate changes. Finally contingencies are the idiosyncratic situation of the organisation. The next sections describe these different elements.

Structure

Just as organisation, organisational structure is also defined in different ways5. Structure refers here to the form of organise the thingwood and relationwood into interrelated groups by aggregating and decomposing systems components. That is, a system can be decomposed in several subsystems, which can be again decomposed in subsystems, and so on, until the definition of a

It goes beyond the objective of this study to summarise all ways of understanding organisational structures. Further information on organisational structure can be found in, for instance, (Child, 1982; Khandwalla, 1977; Mintzberg, 1983; Scott & Mitchell, 1975)
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minimum element of the system6. Similarly, one can aggregate systems into larger systems, up to the composition of the whole7. The Elements or Thingwood are the things that are being organised. These can be objects, subjects8, features, variables9, etc,10, both living or non-living elements11. In organic socio-cultural systems, such as the organisations, the thingwood is dynamic both in terms of structure and elements, and stability is not guarantied12. Thingwood in organisations refer to the organisational structure, employees, instruments, procedures, know-how, etc. Structure is a means for attaining the objectives and goals of an institution (Drucker, 1974, p. 52) Structure serves to: produce organisational outputs and to achieve organizational goals () minimise or at least regulate the influence of individual variations on the organization () (and to provide) the settings in which power in exercised (), in which decisions are made (), and in which organizations activities are carried out (Hall, R. H, 1983, pp. 45) Structure involves the following elements: Basic Structure is aimed at the allocation of people and resources to the tasks and provision of mechanisms for their coordination. This comprises the organisational chart, comities, work parties, etc Operating Mechanism encompasses the definition of what is expected from the member is the organisation. For example, the working procedures, controlling systems, quality and success measurements, schedule and planning, etc Decision Mechanism refers to the support systems assisting decision making systems (such as programmes, rules, check lists, procedures), and the necessary information processing (gathering information from the environment, preparing it for the decision makers)13. There are a maximum number of organisational configurations due to: (Minzberg)

Simon, H. (1962), pp. 468 i.e. Cleland, D. I and King, W. R. (1973), pp. 32ff 8 Gigch, 1991, pp. 31 9 Defining systems as a set of variable implies a high level of abstraction. (Klir (1991) pp. 42, 43 and 47) For example a company is not going to be understood as a set of interrelated people, but as a set of interrelated variables, such as Return on Sales, Number of Employees, Market Capitalisation, etc. 10 Elements can be inanimate, living or both, Gigch (1991) pp. 41 11 i.e. Patzak, G. (1983) 12 Buckley, W. (1980), pp. 35 13 Child, J. (1977), pp. 8, 9.
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Coherence: constraints derived from the environment and companys characteristics and the necessity to be coherent with these constraints due to the interdependence between the former and the latter

Selection: the evolutional these that there is an environmental force that leads to the selection of structures that best fit. This perspective is supported by the high quote of falencia, etc

Harmonisation: the older the organisation gets, the more it searches for an internal and external harmonisation, and by this means launching synergies, avoiding incompatibilities, etc

Quantum Change: changes occur in batch rather than continuously, as changes are expensive, usually not welcomed by employees, etc. Thus, organisational structures tend to keep a limited number of organisational designs in a certain historical process. This statement is not in line with other perspectives, such as the one of continuous organisational development. One can discern major changes from minor changes. These minor changes happen in a higher frequency, and more closely to continuous than major ones.

The Relationwood refers to the interdependences of the elements. For the System Thinking, the Relationwood stays on the foreground. The concept of Black Box14 aids the organisation of systems. This principle can be used as an artefact to narrow down the scope of analysis without loosing the holistic approach to the problems. Therewith, the minimum element of the system is usually a black box, as it usually could be further decomposed. In organisations, the configuration refers to the Aufbau and Ablauforganisations. Mintzberg identified five coordination mechanisms used by organisations to coordinate the tasks(Mintzberg, 1983, p. 4ff): Mutual adjustments: coordination by informal communication Direct supervision: coordination is undertaken by a person responsible for the activities, who will be giving instructions and monitoring the tasks to be coordinated Standardisation of work process: work process as well as coordination between tasks is specified or programmed 14

Standardized outputs: the process is not pre-defined, but the result is standardised

In our daily lives we are confronted at every turn with systems whose internal mechanisms are not fully open to inspection, and which must be treated by the methods appropriate to the Black Box (Ashby, W. R., 1957, pp. 86). In other words, Black Boxes are sub-systems that cannot (or are not wished to) be further decomposed. Thus, one analyses only the (dynamic) relationship between the Black Box and the other sub-systems to be analysed.

Standardised knowledge or skills: the person executing the work has a specific training for the execution of these task

Companies use a combination of these aspects for coordinate their interfaces.

Purposeness

In purposeful systems15, such as the organisational systems16, the transformations follow a certain set of purposes. Gigch (1991) defined purpose as a combination of function, goals, and attributes. Function expresses the reason for existence of the company. Attributes or properties refer to the measurements used to appraise effectiveness. These can be quantitative, such as return on sales, or qualitative, such as value of the core competence. Goals and objectives refer to the value of effectiveness that the system is to accomplish17. Purpose is understood here in a broader sense as the integrative forces, that is, the elements the hold systemwood together and convey the necessary stability to the system. It is important to discern the integrative forces from the relationwood. The relationwood may also act enforcing the integrative forces, but the integrative forces are understood here as what makes the thingwood perceives or being perceived as part of the system18. Thus, the purpose of the system is related to the reasons why systems emerged in the first place, it can be considered the soul of the system. In purposeful systems, such as the organisational systems19, the transformations follow a certain set of purposes. It is worthy to review some different perspectives to analyse this integration forces When analysing companies as systems. Coase and its fellows in the New Institutional Economy look at the market structures and transaction costs to explain this integrating force. Coase (1988) argues that a pure market environment still conveys integrations forces based on price mechanism. The firm just provides a different type of integration based on the role of the entrepreneur. He argues that what is to be explained is why one integrating force (the entrepreneur) should be substituted for another integrating force (the price mechanism)20. The new institutionalism economy justifies this mainly by the reduction of transaction and agent costs, some examples:

Systems can also exist without a defined purpose, this are termed purposeless system. This type of system is not considered in this study. 16 Cleland and King (1983), p. 62, among others. 17 This division is similar to the VMOST (Vision, mission, objectives strategy and tactics) concept, popular to practitioners. 18 This perception of membership does not deny the possibility of the same elements being members of other systems. 19 Cleland, D. I and King, W. R. (1983), pp. 62, among others. 20 Coase, 1988, pp. 48
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The (costs) of discovering what the relevant price are21. The emergence of specialists selling this service only ameliorates these costs but do not eliminate them.

The costs of negotiating and concluding a separate contract for each exchange transaction22. Even if these contract costs are not eliminated by the existence of firms, they are greatly reduced, and specially interesting when short-term contracts are unsatisfactory (pp. 40)

The costs of operating a market are avoided (pp. 40) Different treatment by governments or other bodies with regulatory powers (pp. 41) Save cost incurred controlling input and output of information regarding the transactions23 Lower production costs as well as gains of synergies and experiences when controlling and motivating people24

The purpose of organisations is not defined by simple means. Cyert and March argue that individuals have goals, but collectives do not25. Indeed, organisations have different and frequently conflicting purposes26. Therewith, in a Bottom-Up perspective, the purpose of the whole is defined by a complex interaction of different individual purposes and wish for autonomy27. In a Top-Down perspective, the existence of common purpose is believed to be one of the most relevant factors for the existence of organisations. It is one element that holds these different perspectives together, providing advantages such as the reduction of transaction costs. Thus, the organisational design is the result of a dynamic balance between integrative and autonomy forces. In the system theory, the purpose i.e. this entrepreneur integrating force is grated by the identity of the system28, by its vitality, and by the Autopoisis principle. Drucker (1954) proposes an approach to ameliorate this problem: introduction of the concept of management by objectives (MBO)29. MBO proposes a jointly definition of goals and controlling system (definition of common goals, areas of responsibility, expected results and guides for measurement of
Coase, 1988, pp. 38 Coase, 1988, pp. 39 23 Cheung, 1983 in Ebers, M. and Gotsch, W., 1999, pp. 206 24 Alchian and Demsetz (1972) in Ebers, M. and Gotsch, W., 1999, pp. 206 25 Cyert, R. M. and March, J. G. (1963), pp. 26. Similar in Perrow (1979, where he argues that ambiguity is one of the reasons for the non-viability of the ideal bureaucracy. The problem is that even if the interest of the organisation is unambiguous, men do not exist just for organizations, pp. 4. 26 Kast and Rosenzweig (1979), pp. 153 27 Gigch (1991) 28 Malik, F. 2002, pp. 106ff 29 Drucker, P. (1954) The practice of management. Heinemann, further developed by Odiorne, G. S. (1968)
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these results). Success of this method is conferred to the collaboration among horizontal and vertical layers of the organisation, thus, MBO programmes imposed from the top management show less effectiveness30.

Purpose and Control Organisations, as purposeful systems31, control the transformations. Controlling only makes sense if there are states which are more or less accepted. The acceptance of certain states is related to the agreed purpose of the system. Thus, changes in the system, either due to throughput or transformations, are to be apprised against the purpose of the system. The higher the diversity of purposes, the higher the higher the difficulty to achieve stability in systems, as the controlling function will not work properly.

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Kast and Rosenzweig (1979), pp. 168. Further information about MBO in, for example, Cleland, D. I and King, W. R. (1972), pp. 61

Environment

When defining the thingwood and relationwood of a system, one is automatically considering the definition of borders and Environment of the system, so that the combination of system and environment results on the whole. Defining the borders does not mean that the environment is to be disregarded; the interactions with the environment are centre to the system thinking. The relationship between the environment and the system is defined by the Openness32 of the system. In thermodynamics, a system may have three degrees of Openness: Open systems exchange energy, material and information with the environment Close systems exchange information and energy Isolated systems do not interact with the surroundings33.

The definition of boundaries of the system is not-given but rather decided by the observer, according to the objective of analysis. It is agreed that organisations are open systems34. Gigch (1991, pp. 42) proposes the distinguishing internal and external based on the degree of control: Defining system boundaries determines which systems are considered under control of the decision maker and which are to be left outside the decision makers jurisdiction (considered as given). In this perspective, the external environment is formed by these variables or elements that are not controllable, but still may impact the organisational system, and hence were to be predicted. Typical variables of external environment are related to dimensions such as: Political; Economic, Socio-Cultural, Technological, Legal, Demographic and Educational, Ecological, Environment (availability of resources)35. The system should be prepared to deal with different scenarios according to the behaviour of these uncontrolled elements. This is the principle of Risk Management, Game Theory, etc. Many models for organisational systems suggest the addition of an identifier function between the environment and the organisation. This function refers to recognising (identifying, perceiving) the

The openness of systems has relevant implications to the dynamic and stability of the system. i.e. von Bertalanffy (1973), pp. 38ff 34 In the 40s and 50s, organisational scholars studied the organisational system as a closed system. To date, this openness of the organisation is a consensus (Perrow, C. 1973, pp. 11). This change inspirits the formation of various organisational schools, such as the contingency and ecology schools. Discussions on this subject in, for example, Emery, F. E. and Trist, E. L. (1960), pp. 85ff 35 It is not the aim of this section to discuss each of these aspects, for more information, see for instance, Kast and Rosenzweig, pp. 131, Hall, R. H. (1983), pp. 227ff
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behaviour of the external environment to prepare for potential changes36 (reactive) or recognising possible opportunities (active). This view of the external environment leads to the dichotomy between controllable and non-controllable variables. Gharajedaghi, J., (1999) calls attention to another type of variable: the variable that one can influence. To control means that an action is both necessary and sufficient to produce the intended outcome. To influence means that the action is not sufficient; it is only a coproducer37. Thus, this new type of variable formed the transactional environment37. The increasing technological development and specialisation, and the (consequent) growing interdependence among companies triggered the relevance (and ability) to convert uncontrollable variables in influenceble variables. Cleland and King (1983, pp. 23) applied a similar concept to the transactional environment the operational environment - to a classical engineering project context (see figure X). The model proposed by Cleland and King is reduced to the ability (and necessity) to influence of a fraction of the external environment. However, the challenges on controlling the systemwood are also relevant. Examples are the different objectives, people, cultures inside of the company. Many approaches in the Organisational Theory at least acknowledge this influence, such as the bounded rationality and opportunism in decision making processes38 and the entire organisational behaviour. Slowly, we are realizing that we do not actually control much of anything, but do have the ability to influence many things. () Managing a system is therefore more and more about managing its transactional environment.39 This enforces the importance of interactions and system theory to manage companies. The Figure 2 illustrates this paradigm of systems.

For example, Viable System Model (Beer) in cybernetics, Takahara, Y. (2003) in COT, Kast and Rosenzweig, J. E. (1979) in contingency theory. The contingency and ecology are especially focused on this area. 37 Gharajedaghi, J., (1999), pp. 31. The distinction between general external environment and the closer or task specific environment was also proposed by Kast and Rosenzweig (1979), pp. 127ff 38 March, J. G. (1988). 39 Gharajedaghi, J., (1999), pp. 32
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System A

System B

System C

Figure 2: The Intersections of Systems

In this sense, endogenous or exogenous elements are defined rather by the embeddness in the system, strength of relationship, and in a certain time and location. So that the employees feel sometimes more embedded in the system organisation and other times in the system suppliers, for instance. It is agreed that organisations are open systems40.

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In the 40s and 50s, organisational scholars studied the organisational system as a closed system. To date, this openness of the organisation is a consensus (Perrow, C. 1973, pp. 11). This change inspirits the formation of various organisational schools, such as the contingency and ecology schools. Discussions on this subject in, for example, Emery, F. E. and Trist, E. L. (1960), pp. 85ff

Dynamics

Organisational systems are dynamic41; consequently, the structure and environment of a system described in the last section are not an absolute state but rather depends on the current situation42 and evolutes on time. The system science acknowledged the relevance of dynamic with the ideas of Cybernetics initiated by William Ross Ashby and Robert Wiener43. First, the concept of transformation is to be portrayed. Thereafter, the feedback systems involved in such dynamics are reviewed.

a. Transformation Transformation refers to a transaction from a State44 A to a State B45. A series of positions or states taken in different points in time defines the trajectory or line of behaviour of systems46. In order to analyse the trajectory of systems, it is useful to discern between two main types of trajectories47: Throughput and System Change. Throughput48 is the process in which inputs are converted in outputs49. Gigch (1991) differentiates between inputs and resources. In the process of conversion, inputs are usually the elements to which the resources are applied50. In other words, resources are the elements of the system and belong to

Organisational scholars agree upon the fact that organisations are dynamic: Already in the 50s this concept was widely accepted, this is made clear by the statements such as this: Organisational systems are constantly changing and adapting to internal and external pressures, and is in a continual process of evolution (Kast, F. E; Rosenzweig, J. E., 1979, pp. 105 referring to Selznick, 1948). 42 Similar in Hill, W. at. al. (1998) pp. 435. 43 Main authors: Ackoff (1960, 1964), Beer (1959, 1966), Mirow (1969), Flik (1969), Krieg (1971), Malik (1984), Probst (1987) 44 (State is meant as) any well-defined condition or property that can be recognised if it occurs again (Ashby, W. R., 1957, pp. 25)
41 45

Where State A in a given time,

t i , is not necessarily different from a State B, in a different point in time, t j , and, as the
t i is the same as State B in t j does not exclude the

systems transformation tend to be continuum, the fact that State A in possibility of a State A in a

t i<t < j different from State A and State B (adapted from Ashby, 1957, pp. 9). These simple

axioms have grave consequences in the research of systems, as a continuous observation is usually not possible at least when one is studying a phenomenon in organisations involving a scope larger then one can observe or measure at the same time. 46 Ashby, W. R. (1957), pp. 25. 47 There are other perspectives for the analysis of the trajectory of systems, for example, the analysis of the closure of the change, that is, whether change is circulatory and the elements stay the same or not (Ashby, W. R., 1957, pp. 11). The differentiation between operational and rather strategic changes was chosen due to its relevance for the organisational systems. 48 Katz, D. and Kahn, R. L. (1966). Also termed Conversion Process (Gigch, 1991, pp. 41). 49 Output: the result of the conversion process, in a paper production factory, for instance, this output is the paper. Or in the software house, this would be new software. 50 Gigch (1991), pp. 41

the thingwood, and inputs are a special type of element that enters the system51. For example, in a factory the raw material is the input and the machinery is a resource. In service based companies, this difference is more abstract. In a software house, for example, one could understand the resource as the programmers (and their ideas), computers and software, and the input is the order of the client the wish to have a certain programme. System Change is, as the term indicates, related to changes on the system itself. This is the core of organisational change theories. One can discern between changes triggered endogenously or exogenously. Exogenous triggers are usually started52 by the throughput, for example, changes in the system due to changes in the quality or availability of inputs; by other external influences, as studied for instance by contingency, ecology and institutional theories. Endogenous changes are those initiated by internal forces53. Apart from this triggers, it is relevant to acknowledge the development process as organisations age, that is, its evolution from the genesis to a successful established organisation. Such transformation can be both conscious or not. When conscious, these changes are related to the organisational development, and usually follow a strategic direction, for example, the organisational growth, internationalisation, process reengineering, etc.

b. Feedback System The concepts of positive and negative feedback are reviewed in this section. Negative Feedback Loop This is the classical feedback loop. This feedback is responsible for controlling based on goal, monitoring, comparison and correction actions. As showed in the Figure 3, deviations are identified and the route of action is corrected back to the desired route, or towards the goal.
correction actual route (deviation)

Start

desired route over-reaction correction

Finish

51 52 53

Kring, P. (2002). Evered, R. (1980), pp. 6, proposes these three triggers for change.

Figure 3: Negative Feedback

The difference between corrections back to the planed route and towards the goal can be illustrated by strategies of navigation.

Positive Feedback

actual route (deviation)

Start

desired route

Finish

Figure 4: Negative Feedback

In contrary to negative feedbacks, positive feedback reinforces the deviation, amplifying the deviation. In other words, one variable positively influences the other, increasing the deviation to the plan more and more, leading to vicious cycles54. The Figure 4 illustrates such deviation.

Learning Systems Simple feedback control has a memory capacity, and saves there the standard or goal; feedback control with selective memory is able to distinguish different standards for different situations, and the learning system change the decision rules on the basis of higher goal55. Learning Systems can be subdivided into purposive and purposeful systems56. Purposive systems are those that are able to choose the means to reach a certain objective, and purposeful system chooses both means and goals. The feedback processes also have influences on the decision making process. There are programmed and non-programmed decisions57. The former refers to routine and repeated decisions, while the latter indicates ill-structured and non-recurrent situations. Programmed decisions do not necessarily mean computer programmable decisions, whether the non-programmed decisions are those that cannot be

Stacey (1993), p. 150f Cleland, D. I and King, W. R. (1972), pp. 37ff. These three types of feedback can also be referred to according to the purpose of the system: maintaining-state (simple feedback), goal seeking (feedback control with selective memory) and ideal seeking (learning systems) (Kanellis, P. and Paul, R. J., 1997) 56 Ackoff (1976) pp. 24 in Gigch (1991), pp. 74 57 Simon (1965) pp. 58-59 in Gigch (1991) pp. 83-84
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(computer) programmed, nor previously structured. Heuristics and rule of thumb58 are common methods to deal with non-programmed tasks. The Table 1 summarises the
Table 1: Feedback, Purposeness and Decisions No Decisions Programmed Decisions No goals Fixed Goal Different goals to different situations Non-programmed decisions: rule of the thumb and heuristics Choose means to achieve goal Choose goals and means Purposeness Simple Feedback, State Maintenance feedback control with selective memory, goal seeking Learning Systems, Ideal seeking Purposive Purposeful

58 Hall and Hitch (1939) already reported that managers make decision based on the rule of the thumb, rather than in an analytical and rational approach.