The Importance of Systems Thinking to Business Success

systems thinking Mar 13, 2022
By: Rich Stewart & Paula Stewart

Business Agility is a set of organizational capabilities, behaviors, and ways of working that affords your business the freedom, flexibility, and resilience to achieve its purpose.” – Business Agility Institute. 

Organizations that are thriving are those that are finding ways to increase their business agility. Business agility pulls from the work of giants of industry including Henry Ford, Taiichi Ohno, Edward Deming, Eliyahu Goldratt, and others. These leaders had a common thread to their success: They applied scientific principles and thinking to business. In this article, we focus on systems thinking, an enabler for business agility. 

What Is Systems Thinking? 

Systems thinking is a holistic approach to analysis that focuses on the way that a system's constituent parts interrelate and how systems work over time and within the context of larger systems. It allows us to more easily make sense of and manage complex systems. In contrast to this holistic mindset, it is all too common for organizations to put significant effort into optimizing one part of a system, and not achieving their desired outcomes because of a lack of systems thinking. Let us demonstrate how models and patterns crucial to business agility transformations evolved from systems thinking. 

Systems Thinking Applied to Organizational Structure 

Organizations are created to provide value to customers by developing and delivering products and/or services. Unfortunately, organizations are often siloed where leaders are incentivized to maximize the efficiency of their part of delivering value to customers. Local optimization leads the overall system to operate sub-optimally in providing value to the customer. The identification, assessment, and organization around value streams is a critical step in any business agility transformation. A value stream is the set of actions that take place from the initial customer request through the realization of value by the customer and the organization. Let us consider a value stream associated with a product or service as illustrated within the Scaled Agile Framework. 

 

 

As shown in the illustration above, value streams can effectively deliver value to customers by creating alignment and eliminating the unnecessary complexity and delays of cross-team dependencies. They also make it much easier to recognize bottlenecks in the flow of value and address them. We have seen the impact of organizations skipping the identification and organization around value streams and jumping into planning events or other parts of a transformation roadmap. This creates significant waste as these planning events are unnecessarily complex, involve too many or the wrong people, and force teams to commit to the delivery of products or product enhancements in the face of significant organizational barriers. Employees end up spending countless hours on meaningless, tedious, and demotivating work that is not value-add. Teams continue to struggle with unnecessary dependencies and leadership ends up frustrated that their transformation has not provided market adaptability, predictability, quality, or reduced time-to-market. In fact, the opposite has happened. 

Systems Thinking Applied to Metrics 

The highly successful venture capitalist, Dave McClure, applied systems thinking by boiling down what it takes to be a successful startup to five holistic metrics which he called Pirate Metrics. After developing these metrics, if they were not all addressed in the business plans of startups, he would refuse to fund them. These metrics are equally critical to established businesses and for external as well as internal customers. These metrics are as follows: 

Acquisition 

Activation 

Retention 

Revenue (or Return) 

Referral 

The acronym AARRR and its pronunciation led to the name Pirate Metrics. Recognition of the importance of these metrics inspired business agility thought leader Peter Merel, CEO of XSCALE Alliance, to create a Pirate Canvas that applies root cause and impact analysis to the Pirate Metrics and generates a prioritized list of Epics. 

Recently, we had the opportunity to consult with a sales team for a leading engineering product. We will use this experience to demonstrate use of the Pirate Metrics. This product generates significant Revenue for its company and as we learned while consulting with a team that sells this product, many customers buy this product mainly to satisfy a regulatory requirement for access to engineering standards associated with a product license. Thus, many customers that have been Acquired haven’t been Activated, i.e, they are not using or even aware of most of the product’s functionality and potential to improve how they get work done. These customers are not going to provide Referrals of the product’s capabilities, and they are at risk of not being Retained as customers, since as we learned, the engineering standards organizations are beginning to sell their standards directly to end customers, as a new revenue stream. In running a brainstorming session with this sales group, there were several valuable licensing, product, and marketing strategies that surfaced including new licensing models and integrating into the customers’ primary tools. Unfortunately, as this was a siloed organization, sales leadership had to compete just to have conversations with licensing, product, and marketing. There is no doubt that by organizing around a value stream, it will be much easier for the organization to uncover the constraint(s) that limit the success of this product and may even uncover more valuable products for the end customer.  

Organizing around value streams and the Pirate Canvas are a couple of examples from a business agility toolset enabled by systems thinking. There are other tools that allow us to identify and address constraints and to improve management decision-making in taking an effective system-wide economic view. In future blogs, we will introduce more of these tools and will demonstrate how to apply them in both technology and manufacturing organizations. 

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