Systems thinking is an approach to analysis that zeros in on how the different parts of a system interrelate and how systems work within the context of other, larger systems. It is a holistic approach that can be used in many areas of research. It can be useful in analyzing a variety of operational systems, such as medical, political, economic, environmental, and educational systems.
The concept of “Systems Thinking” originated in 1956, when the Systems Dynamic Group was created by Professor Jay W. Forrester at the Sloan School of Management at MIT. It utilizes computer simulations and different graphs and diagrams to illustrate and predict system behavior. Some of the popular graphics used in the analysis include the causal loop diagram, the behavior over time graph, the management flight simulator, and the simulation model.
When it comes to managing organizations, many find systems thinking an effective approach, as it sees how different complex entities interact and influence each other and make up the whole system. Different divisions or teams within an organization connect with and affect each other. Ideally, they work together toward a goal. Business leaders who are systems thinkers see “the big picture”, and that is what they focus on to maximize performance within the organization.
Aside from understanding how various components work with and affect each other, systems thinkers also consider how their actions in any component can affect the system as a whole. There’s also the concept of supply and demand, where systems thinkers know when and where their outputs will be needed, as well as the external factors that can affect demand. They also understand the capacity of their organization to meet the marketplace demand.
An essential component of systems thinking is focusing on feedback. Giving attention to relevant feedback enables business leaders to come up with solutions to problems and to avoid wasting resources. Maximizing operational efficiency is a primary goal of using systems thinking analysis.
When business leaders are systems thinkers, they veer away from the practice of just giving instructions and controlling the system. For example, systems thinkers recognize the importance of integrating the personal goals of employees with the overarching business goals of the company. Therefore, they employ a management style that puts emphasis on recognizing and rewarding employees’ individual accomplishments, and that seeks to keep employees well-informed regarding the company’s primary goals and how their contributions are each individually important in the achievement of those goals.
Not all leaders gain a systems perspective, partly because of the organizational structure. In many cases, each division or team has its own manager, goals, tasks, budgets, and KPIs. As a result, teams only focus on tasks assigned to them. Also, many organizations function in a top-down, command-and-control format. In systems thinking, business leaders allow employees to understand how the organization works and encourage them to help improve processes to meet overall corporate goals.
Are you a systems thinker? Taking a systems perspective is no easy feat. It involves not only the senior management – everyone in the organization needs to understand the business goals and what processes to implement to achieve them. It is essential to develop the practice of seeing the system as a whole and taking actions that will be beneficial for the entire organization.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
