In fact, such an event did occur in Sweden in 1992, when the OK Petroleum company successfully lobbied for an increase in the country’s tax on leaded gasoline. This surprising action stemmed from OK’s development of a high-octane (98) lead-free automobile fuel, which burned cleaner than other fuels while still maintaining high performance. The Swedish government agreed to the tax because it was in alignment with its own clean air policies and with international conventions that it supported. Since OK had the only lead-free product on the market, the gas tax gave the company a significant price advantage at the pumps. “The competition was forced to follow suit,” explained OK’s Per Wadstein, leading to cleaner air for all of Sweden.

Economy vs. Ecology

Economy and ecology arc often pitted against each other in the “profitability versus environment” debate. There is a perception that companies can either prosper financially or take care of the earth, but not both. However, as OK Petroleum showed, these pursuits do not have to be mutually exclusive. In fact, ecology and economy derive from the same Greek root, eco, meaning house. (Ecoloqy stands for “study of the house,” and economy means “management of the house.”) This etymology suggests that the two concepts are not contradictory, but actually part of the same larger idea. I low, then, can we study and manage our “house” (the earth) in ways that benefit both industry and society over the long term?

The “Systems ‘Thinking for a Sustainable Future” initiative, based at the MIT Center for Organizational Learning, provides a set of principles, practices, and processes that recognize and reinforce the synergistic link between long-term economic and ecological development. It seeks to provide industrial decision-makers with both a conceptual, framework stud practical tools for building financially healthy companies that arc also ecologically sustainable. In addition, the initiative attempts to foster learning environments in which various stakeholders can grapple with the larger issues of the day. The hope is that within these settings, the participants will create presently unimaginable solutions to some of the world’s most intractable problems.

Sustainabillty

What do we mean by “sustainable”? A sustainable society is one that is self-perpetuating over the long term—meaning that it uses resources at a rare that does not exceed the rare at which they can be replenished, and that it produces waste materials at a pace that does not exceed the rare at which they can be reabsorbed by the environment. Within this framework, a sustainable organization can be described as a company that provides customers with goods and services for living a satisfying life, while maintaining both a healthy balance sheet and a healthy balance with the natural world.

Creating environmentally sustain-able business practices used to be considered a choice for businesses—an optional activity for those companies that had the time, energy, and interest. But now it is becoming a more mainstream concern, due to several trends:

• The marketplace is demanding “greener” products that reflect environmentally responsible management. Supermarket aisles are filled with products that proclaim their eco-friendliness—from phosphate-free detergent and acid-free paper to recycled cardboard and “dolphin-safe” tuna.
• Material resources are becoming more scarce, resulting in a rise in production costs in many industries. For example, integrated steel producers virtually disappeared in the U.S. during the 1980s because the costs of mining iron ore grew financially prohibitive as the availability of that resource decreased.
• Regulatory compliance is becoming an increasingly costly concern. One petroleum company’s environmental compliance costs topped $1 billion in 1994—a figure that exceeded the company’s net profit for the year.

How can business managers think systemically about a sustainable future? How can they balance needs for economic prosperity and ecological survival? To address these challenges, companies need to expand their current strategic thinking to include economic and ecological concerns—creating what W. Edward Stead and Jean Garner Stead call “sustainability strategies.”

A Conceptual Framework

The Natural Step movement. which originated in Sweden, offers clear conceptual framework for creating such sustainability strategies. Lei Dr. Karl-Henrik Robert. The Natural Step has proven to be one the most effective sustainability movements in the world, aligning diverse social business and ecological interests around fundamental scientific principles of natural systems. The Natural step process has been studies: and practiced by corporate managers, urban community members, youth at risk, and schoolchildren; it has been shared via books, audiotape, board game, or CD-ROM with every household in Sweden. It is an approach that does not blame any one sector of society for our current problems, but rather encourages all of us to find ways to contribute CO effective solutions.

The guiding principles of The Natural Step, known as the “four systems conditions,” are derived from the basic hews of thermodynamics: matter cannot disappear, and matter tends to dispense (see “The Four Systems Conditions”). By using the four systems conditions to evaluate whether their products and services are economically and ecologically sustainable, some of Sweden’s largest corporations have produced significant changes in their business strategies.

For example, the ICA supermarket chain in Sweden was asked frequently by its customers whether its refrigerators and freezers emitted CFCs, which are linked to ozone layer damage. After familiarizing themselves with the four systems conditions, ICA’s leadership engaged in a conversation with Electrolux (Eureka in the U.S.), their primary vendor of refrigeration products. Aware that CFCs, a non-biodegradable, unnatural compound, violated systems condition 2, ICA’s leaders asked Electrolux what it would cost to eliminate this compound from their existing inventory. After some technical hedging, Electrolux designers answered that it would take 1 billion Swedish crowns (approximately $140 million) to convert to soft freons—another persistent and unnatural compound, but one that is thought to be less damaging than CFCs. The CEO’s response was, “You want me to invest 1 billion crowns in a product, of which the only thing I know for sure is that it is doomed to failure?! Please come up with a more suitable alternative.”

Electrolux, which had not previously encountered The Natural Step, subsequently phoned Dr. Robert and asked him to come “talk about your damned systems conditions.” A short time later, the Electrolux team announced the development of an interim compound that does not harm the ozone and that is now successfully being manufactured and marketed as a “green” refrigerant. The company is also well on its way to producing a refrigerant that is biologically harmless. As a result of its work with Dr. Robert and his colleagues, Electrolux has begun employing The Natural Step method throughout the company, and is now using the four systems conditions as a framework for its strategic planning process.

Integrating Sustainability Strategies and Organizational Learning

While the four systems conditions offer a basic conceptual framework for creating sustainable business strategies, they do not provide a specific process whereby those principles can be used to develop and implement such strategies. This is where the disciplines and tools of organizational learning can help. For example, the tools and methodology of systems thinking provide a means to test the long-term implications of policy decisions on the wider environmental system.

Systems thinking can also provide an overarching framework for understanding the industrial, governmental, and environmental interactions that play a role in sustainable development (see “The Sustainability Challenge”). An overall increase in industrial productivity (such as the U.S. has experienced for most of the 20th century) leads to a reinforcing cycle of economic growth and profitability (R1), but it can also lead to an accumulation of industrial wastes in the environment. In the U.S., this has led to heightened regulatory pressures designed to reduced waste.

At the same time, increased consumer awareness of the environmental impact of production is leading to emerging new market opportunities in terms of “clean” technologies (B3), which, for those companies that invest in them, can lead to profitable alternatives to unsustainable production techniques (R4). However, the subsequent increase in regulatory compliance costs can constrain profits (B2), which can potentially limit industry’s ability to invest in “clean” technologies (R4).

The disciplines of team learning and mental models also have much to offer in that they can help generate more informed, productive conversations. In the ecology/economy debate, dialogue skills of genuine inquiry, deep listening, displaying one’s own line of reasoning, and respect for other view-points are critical, as are the ability to surface our mental models and to inquire into those of other people (see “The Power of Mental Models”). Through the use of dialogue and role-playing, we can gain deeper understanding of diverse points of view and bring out new ideas and solutions that a single point of view might not have produced.

In a recent learning laboratory at a petroleum company, for example, role-reversal, dialogue, and consensus-building tools were used to develop a new framework for environmental leadership. As part of the workshop, employees from the environmental engineering division took turns role-playing the traditional contestants in the environmental debate: “Government Bureaucrats,” “Tree-Hugging Environmentalists,” and “Big Bad Business.” By humorously taking on their worst perceptions of each other, participants were able to see beyond the stereotypes that they had placed on their professional adversaries.

The Sustainability Challenge

Heightened consumer awareness of accumulated industrial wastes has led to heightened regulatory pressures designed to reduce waste. However, the subsequent increase In regulatory compliance costs can constrain profits (B2) which can potentially limit Industry’s Investment in “clean” technologies (R4).

In the dialogue that followed, the engineers gained insights into the motivation, logic, and humanity of the various stakeholders, and were better able to understand the validity and utility of each point of view, even if the perspective challenged their own position. The engineers found that their subsequent meetings with EPA representatives on a difficult Clean Air Act project were significantly enhanced in terms of quality of communications, creativity of thinking, and efficacy of solution generated—all as a result of their experience in the workshop.

Organizational Learning for a Sustainable Future Integrating sustainability strategies and organizational learning—one approach focused on content (where we need to. go) and the other focused on process (how we’ll get there)—may hold unprecedented potential for producing sustainable ecological and economic development. We have termed this synergy Sustainable Organizational Learning (SOL). Although the development of SOL is only in its initial stages, we can imagine a variety of learning practices through which SOL practitioners will work toward long-term economic and ecological sustainability:

• Aligning industrial cycles and natural systems. Conversations around strategy and future planning will include the question, “What business activities should we engage in that will be aligned with the systems conditions for sustainability?” The answers to this question will strongly influence investment decisions with respect to new products and services. In this way, SOL practitioners will begin to align their company’s industrial cycles with natural systems.
• Building cross-company consortiums. By building consortiums of companies engaged in a similar inquiry, sustainable learning organizations will participate in company-to-company conversations that will enable them to learn from each other’s challenges and successes in the pursuit of sustainability strategies.
• Engaging in ongoing practice. By studying and practicing the disciplines of SOL, practitioners will foster new learning in themselves, their compa

The post The Sustainability Challenge: Ecological and Economic Development appeared first on The Systems Thinker.

Following are summaries of three of the keynote talks. Recordings of some keynote and parallel sessions are also available on audio and/or videotape as part of the Systems Thinking in Action Conference Collection.

—Colleen P. Lannon

Peter Senge—Creating Transformational Knowledge

The concept of the learning organization first became prominent about six years ago. It is only now becoming clear, however, that this concept is missing something fundamental. We are now learning that what goes on in any creative process isn’t about organization, it’s about community. The absence of effective learning communities keeps our organizations from being able to learn from our most clear, demonstrated breakthroughs. Although individual learning occurs all the time in organizations, it often has little or no impact on the larger system. Learning communities provide the infrastructure and support to expand learning beyond the individual level.

The three core activities of the learning community are practice, research, and capacity building (see “Core Activities” on p. 2). Practice is anything that people do to produce an outcome or result. Practitioners can be line managers, a product development team, a sales team, or front-line manufacturing people. Research, on the other hand, is any disciplined approach to discovering and understanding, with a commitment to share what’s learned. The institution we associate most often with research is the university. Capacity building is carried out by coaches and mentors, who help people develop the capacity to do something they couldn’t do before. Consulting, or the HR function within an organization, is the institution most often associated with capacity building.

Unfortunately, in the real world these three activities rarely overlap. But if we were to get rid of the imaginary boxes that separate these areas, we would actually begin to see a system for producing theory, methods, tools, and practical know-how. This is the essence of a learning community.

Fragmentation

The fragmentation among these three areas of activity is at the heart of many problems we face today. One reason we are powerless to deal with our environmental problems or can’t help our large institutions change in fundamental ways is that the system whereby we collectively learn and alter our conditions is deeply fragmented. Walls have been built around the three areas of activity. Capacity builders such as consulting institutions, for example, undermine the knowledge-creating process because they have almost no incentive to share their insights with others. How free are they really to deal with the toughest issues of the client system? What if the person paying the bill is the problem? Can they tell him or her?

Then there are the walls between the university and other parts of the system. A typical article from an academic journal is full of jargon, referencing thousands of ideas that only a handful of people know about. These experts employ what Donald Schorr calls “technical rationality,” which separates theory from application: first you get the theory, then you apply it. This disconnection also appears in organizations, where the executives operate by technical rationality while the people on the front lines are the ones who actually have to put theory into practice.

Once we let go of technical rationality, we can ask: How does real learning occur? What happens in a community that integrates these areas? Artistic communities, for example, show that a different way of working together is possible. MIT’s Eric von Hipple, a world leader on product design, cites another example of a learning community. He notes that a lot of terrific new products are created by the customer, not by the company. In his view, companies that form different relationships with their customers can be extraordinarily more competent in product innovation—an example of how companies can form a learning community.

AutoCo: Learning Community in Action

Another example of a learning community is the AutoCo case, which has been the subject of a three-and-a-half year project at the MIT Center for Organizational Learning (OLC). It has been documented through a series of interviews that tell the story of this product development team’s journey—a story that chronicles fascinating change among individuals that occurred as they developed new capacities to work together. As one of the team leaders explained, “(Now) everybody says what’s really on their mind. All our problems are thrown on the table. It looks like chaos, but issues really get sorted out. We don’t wait until we have the answer to bring up the problem.”

In an engineering culture, this directly contradicts a basic ground rule: bring up the problem only after you have solved it. But by the end of the project, this team wasn’t operating that way anymore. They had found a new way of working together—one that proved extraordinarily successful and broke many company records. Clearly, this is a powerful story of the interaction between capacity building and practice.

However, the activities and mindset of the team were viewed as so foreign by the larger bureaucracy that the team was seen as “out of control.” After a global reorganization, the senior team members were not offered compelling positions, so they left the company within a few months of the product’s release.

Core Activities

[drop]T[/drop]he three core activities of the learning community Involve practice, research, and capacity building. By integrating these areas, we can begin to create a system for producing theory, methods, tools, and practical know-how.

There is a postscript to this story. Today, almost two years later, there are thousands of people involved in learning organization projects at AutoCo. Somehow, what seemed like an enormous setback at the time—the loss of several senior team members—did not hamper the overall process. And, per-haps even more surprising, AutoCo’s senior managers recently decided to publicly disseminate the learning history document, which tells the story of the team’s successes and failures. Why? Because it was consistent with their overall vision of making the link between research and practice. Until this disciplined approach to “discovery and understanding with a commitment to sharing” is present, the toughest issues that arise in innovative practices will often remain submerged.

Creating Learning Communities

How do we create learning communities? First, as in the AutoCo case, we must let our story out—even the parts of it that we do not like. Second, we need to be clear about our larger purpose. What are we committed to? If we are focused only on producing practical results, our efforts will never be truly successful. The knowledge-creating process must be broader than that; it must embrace all three areas. Without these multiple perspectives and commitments, brilliant innovations will not spread.

Finally, we have to find new ways of governing. At the MIT Center for Organizational Learning, we’re moving toward having a governing council that is elected by all the members of the community. This approach is radical, because in almost all nonprofit organizations the council appoints its own successors. But we believe that a democratic system, in essence, should invest more power in underlying ideas than in institutions.

In a democratic community, theory, tools, and practical knowledge are like a tree. The roots of the tree are theory, the branches are tools, and the fruit is practical knowledge. If you just eat all the fruit (take all the practical know-how, apply it, make lots of money) but don’t reinvest some of that fruit and let it reseed, you’ll have no more theory, no more trees.

At the heart of this tree is a transformational process: photosynthesis. The ideas that are drawn up through the roots (the theory) interact with the outside environment through the leaves (the tools) that create the fruit of practical knowledge. This system is transformational, and knowledge of the whole system might be called transformational knowledge.

But this transformational knowledge– of the knowledge-creating process—is not held by any one individual or group. It exists as collective knowledge held only by a community, a learning community. Thus, as we learn how to develop such communities, we may come to a much deeper appreciation of democracy, “a great word,” as Walt Whitman said, “whose … history has yet to be enacted.”

—Edited by Joy Sobeck

Robert Fritz—The Power and Beauty of Structure: Moving Organizations from Oscillation to Advancement

I studied at a conservatory of music, which is something I usually don’t mention in business settings. When people hear that you are in the arts, they immediately assume that you don’t know anything about business. But it strikes me that, in some ways, an organization is really no different from a piece of music. No organization is more structurally complex than, for example, Stravinsky’s Rite of Spring. In fact, if our organizations functioned like great orchestras, they would work very well—far better than many of them currently do. But we must include design as well as execution in our analogy—the composition is as important as the performance, if not more so.

The key to optimal performance—both in organizations and in the arts—lies in understanding and working with structure. Structure is an essential element in artistic pieces, and it can also work for or against change in organizations. If we focus on altering those fundamental structures that don’t work, we can accomplish the changes we want. However, if we don’t take structure into consideration, any change effort, no matter how valuable, may be doomed to failure.

The key to optimal performance—both in organizations and in the arts—lies in understanding and working with structure.

What Is Structure? The first characteristic of structure is that it consists of individual elements. These elements form relationships in which the combination of the elements causes the elements to behave in particular ways. The relationships, taken together, form a kind of unified entity. So structure is not simply various elements that have relationships with each other; it is the overall entity formed by these particular causal relationships.

In the arts, structure is based on tension/resolution systems. Tension is caused by a discrepancy between two things (light/dark, loud/soft, protagonist/antagonist, etc.), and it produces a desire for resolution. Artists manage tensions and resolutions quite consciously. To a filmmaker, the audience’s feelings are predictable, controllable. Alfred Hitchcock, for example, was a master at understanding how structural relationships cause particular patterns of behavior. He could make a film in which he determined exactly what the audience would feel at any moment of the film. If we, like Hitchcock, can understand structure, we can create a structure that is bound CO go in a particular direction. For an organization, this principle can help people form structures that lead to predictable and wanted changes, rather than unintended consequences and neutralization of success.

For example, a pivotal moment in the movie Casablanca occurs when Ilsa and Victor Laslow walk into Rick’s cafe. They’re sitting at a table chatting, and Rick looks over at Ilsa. Their eyes meet, and in that moment, we know we have a triangle. We have a woman who loves two men. We have a movie!

To determine if these relationships are structural, let’s test them. If we change the elements, do any of the dynamics change? Let’s say that Rick is in his cafe and Ilsa comes in alone. Does that change the dynamics? How about if Ilsa and Victor come into Rick’s cafe, but Rick has gone to Chicago, so he’s not there? Or, Rick is at the cafe and Victor comes in, but Ilsa’s not with him? It’s simply not the same—the tension that is set up between those three people dissipates the moment one of them is taken out of the scene. As soon as we change the structure of the relationships, the tendency for behavior changes.

As this scene illustrates, a structural relationship is one in which there’s a tendency for behavior to move in a particular direction. At the beginning of the film, Rick says, “I stick my neck out for nobody.” But at the end he sends the woman he loves off with another man for the well-being of humanity. Now that’s movement!

Organizational Structures

We can see similar tension/resolution systems operating within organizations. This type of system produces either oscillation or advancement (also called resolution). Obviously, we would like our companies to advance, but we often get stuck in oscillating patterns. Why? It has to do with the conflict that is set up when there are two competing tension/resolution structures operating in the same system.

To understand how conflict plays out, let’s say I’ve got a rubber band tied around my waist and anchored to a wall that represents change. This sets up a tension/resolution system—the tension in the rubber band will naturally resolve as I move toward the desired change. But suppose I’ve got another rubber band around my waist that anchors me to the opposite wall, representing stability and continuity. As I start moving toward change, the rubber band in front of me becomes slack, but the rubber band behind me becomes more tense. At a certain point, no matter how much I believe in the change, the tension produced by the desire for stability will overcome the desire for change. At this point, I will move toward continuity and away from change.

This is the type of trap that many organizations find themselves in when they are caught in competing tension/ resolution systems. In our example, there is a need for both continuity and change, but if these two tension resolution systems are in the same structure, they must compete. It isn’t that people by nature are resistant to change, but that there has to be an underlying structural motivation for us to resolve tension in the direction in which we want to go.

Moving Toward Resolution

Obviously, we want to structure our organizations to enable resolution rather than oscillation—to move from where we are to where we want to be and, having moved there, be able to move to yet another place. So how can we prevent ourselves and our companies from getting stuck in competing structures? By creating structures that can “resolve,” thus moving us toward advancement and success.

One way to sort out these conflicts is to establish hierarchies of importance in values, which can enable us to create structural tension— structures that are capable of resolution and advancement. When thinking about capitalizing a business, for example, the goals of building the company and managing short-term stock-market performance can become conflicting. If a leader in a company doesn’t sort out what’s more important—building the business or focusing on the return on the stock market—every time the employees move in a direction that will build long-term growth and sustainability, they will be pulled away from that because the company’s share price went down. In contrast, if a company understands the principle of structural tension, organizes itself around what matters to it most (in contrast with its current reality), and then takes actions that move it in that direction, it will move toward resolution rather than oscillation.

In a way, this process is like creating music. As a composer takes a theme and begins to develop it throughout a piece, all the parts coordinate and play together to create a comprehensive whole. It’s the same way in a well-designed company—by understanding and working with the concept of tension/resolution systems, individuals and departments can work together to continually evolve their capacity to design and then create their future.

—Edited by Joy Sobeck

Margaret Wheatley—Understanding Organizations as Living Systems

Most of us are pathfinders. We are trying to understand organizations as systems. But there are profound differences between cybernetic systems and living ones. The path of living systems requires that we entertain some startling and disturbing concepts—ideas that call into question our present approaches to systems study.

An organization is not just a system, it is a living system. Life is always new and surprising, constantly creating further complications and mystery as it unfolds. These characteristics of life do not sit well with our desire for control. Yet life creates such dense and entangled webs that it is impossible for us to predict its behavior or to understand it through mapping. Graphic depictions deceive us into believing that we can truly understand a system. In truth, every time we develop precision in our understanding of something—including causal loops and system maps—we lose the rest of the system. Every act of defining loses more information than it gains. The relevancy is actually in the messy, never-ending complexity of relationships.

Our desire for control leads us not just to maps, but to a reverence for techniques. We substitute the messiness of meaning for the elegance of techniques. Dialogue is an example. We took this valuable idea and turned it into a matter of technical skill, focusing on the techniques of dialogue at the expense of its essence. In this way, our desire for control can turn vital ideas into approaches that endanger and even destroy the good that we are trying to create in organizations.

Organizational Identity

A system is alive only if it can give birth to itself. This means that all organizations create themselves, spin themselves into existence. They become more dense and complex as they generate endless webs of connections. Organizations create themselves around questions of identity—i.e., what is the organization? Any changes that we hope to accomplish in the workplace must therefore occur at this deep level of identity.

To create learning organizations, we must understand the underlying agreements we have made about how we will be together. Instead of focusing on training programs or structures related to organizational learning, we first need to explore the agreements people have used to organize themselves, since it is within such agreements that our organizations take form. What is the cost, the price, of belonging to this system?

Failure to address these kinds of beliefs leaves us tinkering at the level of structure and form rather than at the organization’s core. An organization cannot be changed at the level of what we see, but only at the level where its identity is forming itself. Therefore, we cannot expect a learning structure to work unless the organization’s agreement of belonging is about learning. We cannot train people to be life-long learners if the agreements of belonging dictate keeping their mouths shut and “never making the boss look bad.”

The Autonomy of Living Systems

A living system is also autonomous—free to choose what it wants to recognize, regardless of what we explain to it or show it. Only if the system finds what we have to say interesting and meaningful will it open itself to new information. Thus we can never direct a living system; we can only disturb it. To truly understand an organization as a living system, we need to determine what the system finds meaningful. One way to do this is to think of our “interventions” as indications of what the system notices. This method can reveal a lot about what is going on inside the system—what motivates and inspires it, and how information moves through it. If we try to change an organization and it pushes back by ignoring us or moving in another direction, we need to see these responses as a window onto how the system works, rather than as a personal failure.

The post Learning Organizations: The Promise and the Possibilities appeared first on The Systems Thinker.

It is the farmers’ fault. . . . They have neglected to plant new oaks. It takes ten years for truffles to appear under them in edible size. Truffles have dwindled. The price, in 30 years, has tripled. . . . Now the French taxpayer is paying for research into just how the truffle is born.”

–Ruffling France’s Truffles,’ The Economist, May 4, 1996

France’s Truffle Crisis

Why should anyone other than gourmets care about the fate of the black truffle? French government officials are concerned because the declining truffle harvest is opening the way for foreign competition. Though France dismisses the truffles grown by other countries as being of “dreadfully inferior quality,” some restaurateurs say that you cannot tell the difference—which could mean a big difference in terms of France’s hold on the worldwide truffle market.

But systems thinkers can also find something of interest in France’s “truffle crisis.” The issue—complete with long time delays and interesting behavior over time—lends itself well to a systemic perspective, and can provide a good opportunity for practicing drawing casual theories of a problem. Since most news articles are event oriented, drawing causal diagrams of news stories provides excellent practice in moving from events to patterns over time to systemic structure.

Creating a Causal Theory

The first step in creating a causal theory is to identify the problem and map key behaviors over time. In this case, the Economist article described the “problem” as a declining truffle harvest and a tripling of the price of truffles over the last 30 years (see “Declining Truffle Harvest”).

We know from the article that the truffle harvest is dependent on the truffle population, which in turn is based on the number of appropriately aged oak trees under which the truffles grow. The dynamics suggested by the Economist is that farmers are planting fewer oak trees, leading to less nurturing oak trees, a fall in the truffle population, lower truffle harvest, and finally, climbing prices (see “Simple Explanation”).

We can expand on this rather linear worldview by looking for plausible feedback loops. For example, a simple balancing loop governs the relationship between population and harvest—increasing population allows for a greater harvest, but each year the harvest reduces the live population (B1 in “Closing Feedback Loops” on p. 8). Based on general commodities theory, as the price goes up, we would expect people to put more effort into gathering truffles, which would lead to an increase in the truffle harvest and an eventual decrease in the price (B2). Notice, however, that the two balancing loops could act as a reinforcing loop—the higher price leading to a greater harvest, potentially lowering the population beyond its ability to regenerate, which would lower the harvest and raise the price even further in the future.

Exploring Solutions

To close the gap between the actual truffle harvest and the desired truffle harvest, the French government is investing in research to find ways to increase the truffle harvest without relying on oak trees. The implicit thinking behind this strategy is that putting more money into research will (after a time delay) result in effective alternatives for increasing the truffle harvest, and thus reduce the price to reasonable levels (B3 in “Looking for ‘Solutions’ “).

Technological Solutions

Investing in research can be described as a technological solution—an attempt to solve a problem by developing alternatives that bypass the cause of the problem. This is often faster and cheaper than finding a more fundamental structural solution. Without a clear understanding of the root causes, however, this approach risks creating unintended consequences that could set off a cascade of additional problems.

While the Economist article focused on potential technological solutions that would bypass the need for oak trees, other solutions could also be found by examining why the oak tree population itself is declining, and what can be done about it. Traditionally, oak trees in France have been planted by farmers in the course of their normal farm maintenance. Since most farmers lived on their farm for life, the 10-year delay between planting and truffle harvest was negligible. Over the last century, however, more farmers have been seeking employment in the city, as the attractiveness of city jobs relative to working on the farm has increased.

The question this raises for the French government is whether the oak tree population can be increased without relying on the farmers, or whether the farmers can be encouraged to take up farming (and oak planting) again. Because of the 10-year time delay between planting an oak tree and harvesting the truffles, it would be difficult to rely on short-term market forces to encourage the planting of trees. Through public programs, the French government could (and actually is) encouraging children to plant trees—but this is not likely to be a sustainable long-term solution, because it will likely stop as soon as the government push ends.

To ensure the long-term oak tree supply, the French government might therefore need to examine the forces that have made it so attractive to leave the farm for the city, and potentially create incentives to encourage more domestic farming (B4). Since the dynamics around this migration is complex and the delays long, it is not hard to imagine why the government is hoping for a technological solution rather than trying to influence a major social dynamic.

Using Articles for Practice

Using the truffle example, we have tried to illustrate how one might practice developing causal theories using stories found in magazine or newspaper articles. In summary, the process would be to:

1. Look for articles that talk about a problem over time. Avoid specific cases (Joe lost his job today) and hunt for trends (more and more people are losing their jobs).

2. Draw out the behavior over time. This provides a reference point of behavior that the causal theory should be able to explain.

3. Map out the problem as described in the article, first limiting yourself to the data directly mentioned. Then add other variables or feedback loops that you would hypothesize are driving forces behind the problem.

4. Map out any proposed solutions, and then look for unintended consequences or other alternatives.

Peter Senge has said, “We only learn what we want to learn.” By using real-life news items as the starting point for developing theories, the practice of systems thinking becomes more than an academic exercise. It can serve as a true exploration of issues that are important to us.

Linda Booth Sweeney is an educator consultant, and associate of the MR Center for Organizational Learning.

Don Seville is an associate with GKA Incorporated and is affiliated with Sustainable Solutions.

Editorial support for this article was provided by Colleen Lannon.

The post Creating Causal Theories appeared first on The Systems Thinker.

As we will see, most organizations and people have mastered the ability to adapt to new situations and challenges. They can learn and improve, as long as the basic causes of their success do not change. But sometimes managers and enterprises become addicted to old ways of operating and making decisions, and thus fail to function well in a new environment. The result is decline. To understand the powerful dynamics that cause this turn of events, we must investigate the systems within which these organizations and managers operate.

Adaptation Versus Addiction

Adaptation and addiction differ in subtle ways. Adaptation takes place when we observe the symptoms of a problem and then take an action that counteracts the problem. Addiction occurs when we observe the symptoms of a problem and then take an action that suppresses the symptoms of the problem but makes the actual problem worse.

For example, lei’s say that you have just moved to a new area and find yourself spending a great deal of time alone. The number and quality of your social relationships are important indicators of the health of your personal system. Moving causes a decline in your system’s health when it leads to loneliness. An adaptive response to your loneliness could be to get involved with activities in your new community, to make connections with people at your new workplace, or to join a few clubs with members you find compatible.

The cause-effect mechanisms at work in this process are illustrated in the diagram “Adaptation” (p. 2). If the quality of your social life is important to you, then any change that causes loneliness in effect decreases the health of the system. After a delay, perceived health also goes down. When perceived health declines, the gap between perceived and desired health—between where you think your health is and where you want it to be—increases. So you take action to close the gap. In an adaptive system, the consequence of an action counteracts the problem and restores the health of the system. The whole process is a balancing loop that holds perceived health close to the level of health you actually desire.

But let’s look at another scenario, one of addiction. Say that when you find yourself feeling lonely, rather than trying to meet people, you have a few drinks. Drinking alcohol depresses the emotional center in your brain that causes you to experience loneliness. Thus, over the short term, the alcohol suppresses the symptoms of loneliness (sadness, self-pity, and so forth). But when you drink to an extreme, the quality of your social life deteriorates even further, making you even more lonely. So the action you took to ease the problem eventually only worsens it.

The cause-effect relations involved in addiction have two subtle differences from those associated with adaptation (see “Addiction” on p. 3). First, we take an action whose consequence raises our perceptions of the health of the system, but not the actual health. Second, our action actually damages the system’s real health.

Addiction, therefore, is a process by which an external problem can send us into a damaging cycle that quickly feeds on itself. Eventually, we don’t even need an external problem to spur us to take action; we simply generate our own internal problems through our addictive behavior—like someone who drinks salt water to quench his or her thirst.

Unfortunately, it is fairly easy to slide from adaptation into addiction, because it is usually difficult to measure the true health of any system. We often rely on symptoms—indirect measures—to determine the perceived health of the system. But information about symptoms typically comes to us only after a delay. The information also may contain deliberate biases or random errors. As a result, we take an action – that will eventually damage our true health, because the short-term symptoms cause us to feel better than we did before. A classic example of this pattern is smoking cigarettes, which can bring us immediate pleasure, but will also damage our health in the long run.

An Addictive Response in Organizations

Enterprises often become addicted to patterns of behavior that have brought them success in the past. They persist in pursuing policies that are no longer productive, until there is some sort of collapse within the organization, such as excessive outsourcing of technology until there is virtually no internal capacity left. This failure can happen when the feedback loops governing the firm’s success manifest a phenomenon called shifting dominance.

The “dominant” loop in a system is the one that principally controls the system’s behavior over a certain, often extended, period of time. When one loop dominates for a decade or more, a whole generation of managers, a set of control systems, and even a mythology grow up around the lever points that activate the loop governing the enterprise’s success; for example, “Marketing promotions are always the answer to a sales slump.” The company leaders see these lever points as the keys to their prosperity and act in ways that reinforce them.

But eventually, any loop will lose its dominance; another set of causal mechanisms will become more important. Then the usual lever points no longer lead to success, and the managers are left with a heritage of ineffective policies and irrelevant myths. At this point, the firm should drastically revise its policies. But often it simply redefines its measures of success so that the old policies still appear attractive. Why does this occur, and what can we do to prevent it from happening?

The Market Growth Model: Shifting Dominance at Ace Electronics

The concept of shifting dominance first became real to me in the 1960s when I encountered a model created by David Packer, an early member of the Industrial Dynamics Group at the Massachusetts Institute of Technology’s Sloan School of Management. Out of the group’s investigations evolved an elegant theory, later called the Market Growth Model, that illustrates the mechanics and importance of shifting dominance.

Packer and his colleagues applied system dynamics to a firm I will call Ace Electronics. In its earliest days, Ace had an enormously superior product. Its sales were limited only by the company’s capacity to market and sell the product. The dominant loop governing the firm’s profits was composed of its expanding sales force, growing orders and backlogs, swelling production capacity, and increasing deliveries (R4 in “Market Growth”). Because the budget for the marketing and sales department was a percentage of sales income, its budgets expanded, and the sales force grew even more. This loop produced rapid growth.

For a long time at Ace, the market growth loop was dominant, and a group of people who knew how to make this loop operate moved up through the firm’s ranks. However, eventually the dominance shifted within the system (B5 in “Market Growth”). The sales force booked far more orders than the factory could produce, so the order backlog started to increase. When the sales force could not promise timely delivery in a technologically sophisticated and rapidly changing market, its effectiveness in booking new orders declined. Sales began to drop. Before, expanding the sales force increased profits; now it cut into them.

When we find ourselves unknowingly caught up in a situation of shifting dominance, we often blame each other for our faltering fortunes. Ace is a perfect example of this phenomenon. We can imagine that the company leaders agonized over why the sales staff wasn’t as good as it used to be, what kind of new incentives were needed to whip the sales staff back into shape, and so forth. But in shifting dominance, the problem actually originates within the system in the form of an addiction to the old ways of doing things. Managers can push a sales force as hard as they like and still fail to revive sales—the system simply doesn’t respond to this kind of force when the control has shifted to a different loop.

As one particularly destructive result of Ace’s failure to adapt to change, the company eventually developed an addiction to a new, short-term “solution”: downsizing. Many companies fall into the trap of firing people in order to make the bottom line look good on the next quarterly report. Downsizing lowers costs and temporarily kicks up profits. But if it’s not done well—and often it isn’t—downsizing also drastically reduces the quality and size of the staff and dulls a company’s competitive edge. As its niche shrinks, the company has to fire even more people in order to boost its profits. The addictive cycle of downsizing takes over.

The Difficulties of Breaking Addiction

If the pitfalls of addiction seem so obvious, why is it so difficult to break out of addictive processes? There are three main forces that work against an individual or organization seeking to break the cycle of addiction.

The Pain of Withdrawal. One reason is that withdrawal is extremely painful. Remember that perceived health, which drives our actions in the addictive system, is affected by two factors: actual health and the consequences of the actions we take (see “Addiction” on p. 3). These addictive consequences progressively damage actual health, which means that we have to take more and more of the addictive action to offset the consequences. The process becomes a spiral of increasing use.

Codependency. When we get ourselves into the trap of addiction, it’s astonishing how the various components of the system work in collusion to sustain the addictive behavior. This subtle reorganization of the system to support the addictive action is called codependency and is another reason that breaking an addiction is so difficult.

Drifting Goals. Addiction has many forms. One interesting variant of the addictive structure occurs with the addition of a causal link that produces what is commonly known as “Drifting Goals.” If we don’t get what we want, we start to want what we get. When we lower our aspirations, the addiction causes progressive deterioration of our goal.

If we don’t get what we want, we start to want what we get.

For example, imagine a firm that borrows more and more in order to finance its operations. One symptom of a company’s health is its debt-equity ratio; there are industry standards that indicate the appropriate ratio of debt to equity in a healthy firm. When debt rises above this level, a company will undertake efforts to increase profitability or sell off assets to reduce debt. But if these efforts fail and the debt-equity ratio remains high, management may get used to the higher levels of debt and stop trying to reduce them. Spokespeople for the firm may even develop elaborate rationalizations indicating why the higher levels are acceptable. Of course, over the long term, high levels of debt can be fatal to an organization.

Understanding and Changing Systemic Structure

Addictive behaviors, with their self-perpetuating, destructive cycles, can seem particularly stubborn. But cycles of addiction can be broken, allowing us to respond more adaptively to situations of shifting dominance.

What is the key to breaking addictive responses in organizations? One place to begin is to familiarize ourselves with the laws of systemic behavior and learn to work with these laws (see The Fifth Discipline by Peter Senge). Most of the principles of systemic behavior apply directly to the process of addiction and contain the seeds of a solution (see “Moving Beyond Organizational Addictions” on p. 4).

The most effective way to combat organizational addiction is to learn to understand the system. When we do that, we can anticipate an imminent shift in dominance and prepare ourselves for it; in other words, we can design an adaptive instead of an addictive response. We can also identify opportunities to create new feedback loops that let us catalyze a desirable shift in dominance. But beware of spending too much time creating loops that aren’t going to dominate. The key is to make a change that will grip the system and take it down a different path.

To beat personal addictions, we often must place our trust in the potential of the system to change. Likewise, in organizations, if we build up confidence in a group’s ability to work together, to stay committed to each other, and to cope with problems in a way that will produce satisfactory results in the long run, we can get through withdrawal together. With the high turnover rates the business world is experiencing under downsizing, it has become harder for workers to place their faith in anyone or to adopt long-term perspectives. However, only trust can help an organization establish a sense of stability. Despite all the pressures to do otherwise, we must work to cultivate a culture of trust.

Herman Daly, a leader among economists in analyzing sustainable development, once made a statement that is profoundly applicable to the challenges discussed in this article: “The paths to sustainability are unknown, not because they’re hard to find, but because we never looked.” Let’s start looking for long-term solutions to organizational addictions.

Dennis Meadows is director of the Institute for Policy and Social Science at the University of New Hampshire. He directed the system dynamics graduate program at Dartmouth College for 16 years. He has written eight books that apply systems thinking to social and corporate issues.

Editorial support for this article was provided by the editorial staff and Joy Sobeck.

The post Breaking the Cycle of Organizational Addiction appeared first on The Systems Thinker.

To answer this question, Shell’s planners set out to study other companies that had weathered significant changes and survived with their corporate identity intact. In particular, they were looking for companies that were older than Shell (100 years or more) and that were as important in their own industries. After some research, a few examples started trickling in: Dupont, the Hudson Bay Company, W.R. Grace, Kodak, Mitsui, Sumitomo, Daimaru. Forty companies were eventually identified, of which 27 were studied in detail.

Keys to Longevity

Of the tens of thousands of companies that had existed at the beginning of the 19th century, why did so few remain by 1980? And what had these few done to survive? Shell’s planners found that, in general, the 27 long-established companies shared a history of adaptation to changing social, economic, and political conditions. The changes within those companies appeared to have occurred gradually, either in response to opportunity or in anticipation of customer demand. The companies shared some additional characteristics that could explain their durability:

• Conservative Financing. These companies had an old-fashioned appreciation of money. They did not make business decisions based on intricate financial deals using other people’s money. Rather, they understood that money-in-hand gave them the flexibility to take advantage of opportunities as they arose.
• Sensitivity to the Environment. The leaders of these companies were outward looking, and the companies were connected to their external environment in ways that promoted intelligence and learning. As a result, they were sensitive to changes and developments in the world. They saw changes early, drew conclusions quickly, and took action swiftly.
• A Sense of Cohesion and Company Identity. In numerous cases, the Shell researchers found a deep concern and interest in the human element of the company–a quality that was somewhat surprising for the times. Employees and management seemed to have a good understanding of what the company stood for, and they personally identified with it. Quite often, this value system had been brought in by the founder, and was occasionally formalized in a kind of company constitution.
• Tolerance. The companies had made full use of what we would call in modern terms “decentralized structures and delegated authorities.” They did not insist on relevance to the original business as a criterion for selecting new business possibilities, nor did they value central control over moves to diversify. In other words, they had high tolerance for “activities in the margin.”

Businesses: Economic Entities or Organisms?

The Shell planners summed up their profile of these corporate survivors as follows: “They are financially conservative, with a staff that identifies with the company and a management which is tolerant and sensitive to the world in which they live.” This definition of a successful enterprise is quite different from the one I was taught in college, which portrayed businesses as rational, calculable, and controllable. Production, we learned, is a matter of costs and price. Costs are associated mostly with labor and capital—production factors that are interchangeable. If you have trouble with labor or if it is too expensive, you simply replace it with capital assets. For aspiring corporate leaders, this description of their future workplace painted a reassuring and comforting picture.

The real world, we discovered, was quite different. The economic theories offered at school made no mention of people, and yet the real workplace seemed to be full of them. And because the workplace teemed with people, it looked suspiciously as if companies were not always rational, calculable, and controllable.

The Shell study, which described within these companies a “struggle for survival, maintaining the institution in the face of a constantly changing world,” supports this view that companies are perhaps more organic than economic in nature. Of course, the long-term survivors had to control costs, market their product, and update their technology, but they tended to see these basic functions as secondary to the more important considerations of life and death. These companies not only employed people who sometimes proved uncontrollable or irrational; the companies themselves behaved as if they were alive.

What if we were to look at companies as “living systems,” rather than mere economic instruments created to produce goods and services? Would that viewpoint change our ideas about how to manage a business, or perhaps offer an explanation of why some companies endure and so many die young?

Though this hypothesis certainly does not apply to all companies—many do operate as if the production of goods and services is a purely economic problem—it may offer new insights into some corporate phenomena. In particular, I’d like to explore how “living” versus “economic” companies—and the management of them—differ in three basic respects:

• the role of profits and assets
• the amount of steering and control from the top (in decisions such as diversification, downsizing, or expansion)
• the way the company creates and shapes its human community

Role of Profits and Assets

In the 27 companies Shell studied, the main driving force seemed to be the firm’s own survival and the development of its potential. History shows that these companies engaged in a business—any business—so long as doing so sustained them as viable work communities. In fact, over their long lifetimes, each one changed its business portfolio at least once.

For example, Stora, a company that was not included in the original Shell study, began as a copper mine in central Sweden around the year 1288. During the next 700 years, new activities replaced the old “core” business: the company moved from copper to forest exploitation, to iron smelting, to hydro • power, and, more recently, to paper and wood pulp and then chemicals.

Dupont de Nemours started out as a gunpowder manufacturer, became the largest shareholder of General Motors in the 1930s, and now focuses mostly on specialty chemicals. Mitsui’s founder opened a drapery shop in Edo (Tokyo) in 1673, went into money-changing, and then converted the company into a bank after the Meiji Restoration in the 19th century. The company later added coal mining, and toward the end of the 19th century it ventured into manufacturing.

In retrospect, each one of these portfolio changes might seem Herculean. But for the people running these enterprises at the time, the shift may have been imperceptible at the outset. At some stage, these companies may have thought of themselves as bankers, while a later generation of their leaders viewed themselves as manufacturers. Such changes cannot come about if a company regards its assets as the essence of its existence.

This fluidity demonstrates an important attitude toward whatever “core” business the company happens to be doing at any moment. All businesses need to make a profit in order to stay alive, but neither the core business—nor the profits from it—must be the driving force. Businesses need profits in the same way that any living being needs oxygen: we need to breathe in order to live, but we do not live in order to breathe.

This attitude is quite different from the “economic” company, which engages in a particular business to make profits or to maximize shareholder value. For such a company, the core business is the essence of life, and profits are its purpose. This position can lead to the belief that the present asset base represents the essence of the company—that the company’s purpose in life is to exploit this particular set of assets. In a crisis, such a business will scuttle people rather than assets to save its “balance sheet” (which quite appropriately records only physical assets).

Businesses need profits in the same way that any living being needs oxygen: we need to breathe in order to live, but we do not live in order to breathe.

The logical endpoint of this thinking would be: “We will liquidate the company and return the remaining value to the shareholder whenever the oil runs out.” Such “corporate suicide” is uncommon among “living” companies, however. Because their main purpose is their survival and the development of their potential, they would sooner shift the asset base than allow the current assets to determine the death of the institution.

Steering and Control from the Top

The long-term survivors shared two ways of handling a shift in their core business: the new business was not required to be relevant to the original business, and the diversifications were not initiated from a central control point. This pattern suggests that the companies’ managers were highly tolerant of “activities in the margin.”

Tolerance levels—toward new people, ideas, or practices—differ from company to company. Both a low-tolerance and a high-tolerance approach have a place in business, but which strategy a company should pursue depends on the amount of control that company has over its environment.

A management policy of low tolerance can be very efficient, but it needs two conditions to be fulfilled: the company should have some control over the world in which it is operating, and this world should be relatively stable. In such a world, a company can aim for maximum results with minimum resources. To achieve its goal of minimum resources, however, management will have to exercise not only some control over its surrounding world, but also a high degree of control over all internal operations. In these companies, little room exists for delegated authority and freedom of action.

A company may be lucky enough to live in a world that happens to be stable. However, any business that endures for more than a few score years will inevitably face changes in the external world. In a shifting and uncontrollable world, any company with the desire to survive over the long term would be ill advised to rely on a management policy of high internal and external controls. The Shell study showed that the survivors did, in fact, follow a high-tolerance strategy by creating the internal space and freedom to cope with external changes.

High tolerance is inefficient and wasteful of resources, but it enables a company to adapt to a changing environment over which the company has no control. Moreover, high tolerance provides a means for gradually renewing the business portfolio without having to resort to diversification by top-down “diktat.”

The spring ritual of pruning roses provides a good illustration of the different implications of a high-tolerance versus a low-tolerance strategy. If a gardener wants to have the largest and most glorious roses in the neighborhood, he or she will take a “low-tolerance” approach and prune hard—reducing each rose plant to one to three stems, each of which is in turn limited to two or three buds. Because the plant is forced to put all its available resources into its “core business,” it will likely produce some sizable, dazzling flowers by June.

However, if a severe night frost were to strike in late April or early May, the plant could well suffer serious damage to the limited number of shoots that remain. Worse, if the frost (or hungry deer, or a sudden invasion of green flies) is very serious, the gardener may not get any roses at all. In fact, he or she risks losing the main stems or even the entire plant.

Pruning hard is a dangerous policy in a volatile environment. If a gardener lives in an unpredictable climate, he or she may instead want to try a “high-tolerance” approach, leaving more stems on the plant and more buds per stem. This gardener may not grow the biggest roses in the neighborhood, but he or she will have increased the likelihood of producing roses not only this year, but also in future years.

Living companies, by contrast, are more like rivers. The river may swell or it may shrink, but it takes a long and severe drought for it to disappear altogether.

This policy of high tolerance offers yet another benefit—in companies as well as gardens. “Pruning long” achieves a gradual renewal of the “portfolio.” Leaving young, weaker shoots on the plant gives them the chance to grow and to strengthen, so that they can take over the task of the main shoots in a few years. Thus, a tolerant pruning policy achieves two ends: it makes it easier to cope with unexpected environmental changes, and it works toward a gradual restructuring of the plant.

Although this policy is not as efficient as hard pruning in its use of resources—since the marginal activities take resources away from the main stem—it is better suited to an unpredictable environment or one in which we have little control. And as the success of the long-term survivors indicates, diversifying by creating tolerance for activities in the margin has a better track record than diversification by dictum.

Creating and Shaping the Human Community

The way a company views its human community is the third area of distinction between economic companies and self-perpetuating organic companies. The fact that living companies want to survive far beyond the lifetime of any individual employee requires a different managerial attitude toward the shaping of its human community.

Economic companies are like puddles of rainwater—a collection of raindrops that have run together into a suitable hollow. From time to time, more drops are added, and from time to time (when the temperature heats up), the puddle starts to evaporate. But overall, puddles are relatively static. The drops stay in the same position most of the time, and some of the drops never seem to leave the puddle. In fact, the drops are the puddle.

“Living” companies, by contrast, are more like rivers. The river may swell or it may shrink, but it takes a long and severe drought for it to disappear altogether. Unlike a puddle, the drops of water that form the river change at every moment in time, and its activity is far more turbulent. The river lasts many times longer than the drops of water that shaped it originally.

A company can become more like a river by introducing “continuity rules”—personnel policies that ensure a regular influx of new human talent. Continuity rules also stipulate a fixed moment of retirement for every member, without exception. These strict exit rules remind the incumbent management that they are only one link in a chain. Within this expanded perspective, leadership becomes more like stewardship. A leader takes over from someone else, and eventually hands the enterprise over to yet another person. In the meantime, the current leader tries to keep the shop as healthy as he or she received it, if not a bit healthier than before.

Companies that are seen as teaming, living beings demand different thinking, not only about recruitment, but also about other aspects of human relations. This rethinking begins with a definition of self: Who are we? Who belongs to the institution, and whom shall we let in? Clarity on these points is essential for a living work community. Without it, there is no continuity. Without continuity, there is no basis for mutual trust between the community and its individual members. And without trust, there is no cohesion and therefore no community.

This thinking varies dramatically from the human-relations practices required in an economic company, where the HR function is expected to fit people to the asset base of the company. People are seen as cogs to fit a wheel, “hands” to serve the machines, or “brain? To make the right type of calculation or do the most promising research. Recruitment numbers are determined by the need for capacity to satisfy the foreseen demand for the company’s products. If the company has more demand than capacity to fulfill the demand, it adds new people and machines. When it has less demand, it reduces capacity by letting people go.

The type of people the company will admit or fire is defined mostly in terms of “skills”: “We need 250 metal bashers,” or “We have a surplus of paper pushers.” Within this framework, “people” are not hired or fired, only “skills” are. The mutual obligation between company and individual is that of “delivering a skill against the payment of a remuneration,” an agreement usually concluded under the umbrella of the country’s social legislation or some collective labor agreement.

In the living institution, criteria for admitting or dismissing people more closely parallels those methods used in clubs, trade unions, or professional bodies. Good care is taken that the new members carry the right professional qualifications, but the company also strives for a kind of harmony between the individual and the company. The members and the institution share certain values and purposes, and they aim to harmonize their respective long-term goals.

In the “living” company, admission is not determined solely by capacity. Capacity issues are addressed via the outside world, not by increasing or decreasing the internal membership. A shortage of capacity therefore leads to more subcontracting. In Italy, for example, Benetton does only a minor part of its manufacturing (recently, only 20%) with its own people. Benetton admits relatively few members to the inner core of its work community. In this case, the use of subcontractors has proven effective for acquiring capacity in a competitive industry with fluctuating demand.

The Choice

Many people in the business world may not want to create a living work community, and simply to manage a corporate machine with the sole purpose of earning a living. However, the latter choice has important consequences.

People in economic companies enjoy fewer options in their managerial practices. In those companies, only a small group of people qualify to be “one of us,” while the rest of the recruits become attachments to somebody else’s money machine. The company culture will consequently reflect this relationship. Non-managers will be viewed—and will view themselves—as “outsiders” hired for their skills rather than members with full rights and obligations. Their loyalty to the company will never extend beyond performing the tasks necessary to earn a paycheck. The lack of common goals and low levels of trust will require a strengthening of hierarchical controls in order to make the money machine work effectively and efficiently. As a result, the ability to mobilize all of the company’s human potential will be severely limited.

For such a company, a critical point comes when the succession of the inner community needs to be addressed. The absence of continuity rules or the reliance on the next generation of the family for corporate continuity will turn many of these money machines into “ships that pass in the night.” In short, economic companies not only face difficulties trying to operate effectively within a changing environment, but they also have to overcome considerable obstacles in their internal management practices just to make it to the next generation.

This paper was originally presented at the Royal Society of Arts in London on January 25. 1995.

Arie de Geus was appointed executive vice president at the Royal Dutch/Shell Group In 1978 and was with the company for 38 years. He served as head of an advisory group to the World Bank from 1990 to 1993, and is a visiting fellow at London Business School. Editorial support for this article was provided by Colleen P. Lannon.

Further Resources: Many of the ideas in this article are discussed further In the video infrastructure and Its Impact on Organizational Success” by Me de Geus which is available through Pegasus Communications, Inc.

The post The “Living” Company: Extending the Corporate Lifeline appeared first on The Systems Thinker.

—Colleen P. Lannon

Peter Block—Stewardship: A Governance Strategy for the Learning Organization

As we begin to develop new infrastructures for organizational learning, at some point we must address the ineffectiveness of our current governance systems. Peter Block argues that nothing short of political reform at the institutional level will provide us with the systems and structures needed to stew-ard the learning organization into the future. His exploration of the concept of stewardship provides a foundation for creating institutional structures that engage each individual in the process of moving a company toward its desired future.

—CPL

Over the years, we have tried to humanize and soften our organizational structures. But all we have learned to do is adapt more effectively to what is essentially a corrupt and autocratic system. What we really need is political reform at the level of institutional structure that addresses the larger issue of power—who is “in charge.” Ultimately, we must ask how we can create institutions where citizens and citizenship are rediscovered. How can we create a culture where we are all accountable for what is happening?

Accountability and Patriarchy

To be accountable means to carry the well-being of an institution in one’s hands. Such a change in thinking demands a redistribution of power. But given the political structures in which we now live, such redistribution is almost impossible. Our current structures are highly controlling and deeply patriarchal. Unfortunately, we all collude in maintaining that structure. We treat top management as if it is more important than other areas of the company, and we continue to express the belief that learning must start at the top (e.g., “leadership sets the vision”).

In fact, most of our management practices are “colonial” strategies designed to maintain consistency, control, and predictability. If we are serious about creating learning organizations—places where surprise, discovery, and genuine contact have meaning—then we have to do something about these artifacts of sovereignty and colonialism.

The economic motivation for change is driven by customers. They are demanding a unique response to their needs, which our current structures are incapable of providing. For example, look at the difference between Federal Express and the U.S. Post Office. At Federal Express, if I give them my last name and zip code, they know exactly who 1 am. More importantly, they know my needs and preferences as a customer. The post office, on the other hand, identifies me as “Current Resident.” Even though they come to my house every day, they do not know me as a unique customer. It’s not that the people in the post office care less about their customers than Federal Express does, it is just that Federal Express is organized to allow the customer to control the relationship. In order to make that happen in all organizations, we need to redesign our structures so that everyone feels responsible and accountable for meeting the customer’s needs.

Social Architecture

So how can we design new social architecture to support accountability and responsibility? Our task is to build the capacity of local units to redesign and reconfigure themselves—whether it is a neighborhood, school, or department. That redesign should focus on five areas: job design, staff roles, human resource practices, pay practices, and financial practices.

Redesigning Jobs. How do we engage people in restructuring their jobs to ensure that they meet the needs of a market?

Staff Roles. Many of our staff functions—finance, human resources, training and development, etc.—still operate as if top management is their customer. But we cannot have an empowered workforce if we still have staff groups that serve in a policing role. By allowing line management a choice of staff services, we can remove the power from the hands of staff groups and have them serve local units.

Human Resource Practices. How can we redesign our human resource practices to promote partnership? One way is to put power and choice in the hands of those doing the actual work by enabling peers to do the hiring, the scheduling, and the feedback of each other.

Pay Practices. Most institutions have two pay systems: executive compensation and regular compensation. The goal for executive compensation is to pay the people at the top as much as possible, while regular compensation is targeted at suppressing labor costs. How can we create a partnership when we have a system as divisive as that?

Pay should be based on success or failure in the marketplace. If a supervisor determines pay increases, that insulates individuals from the marketplace. We need to pay according to real business outcomes, rather than approval ratings.

Financial Practices. How can our financial practices create ownership at the center and at the bottom of the organization? The problem with high-control systems is that they steal accountability away from people. If management decides our pay, if others organize our efforts, if we look to “the top” to define the future, we are simply reinforcing the notion that we are not responsible. By creating a culture of accountability, and by redistributing choice and power throughout the organization, we can create large, whole systems change.

—Edited by Elisabeth Bowman

Danah Zohar—A Quantum Vision for Building the Learning Organization

The top-down control that has characterized traditional management structures is no longer effective in an age of accelerating uncertainty and rapid change. The new physics of the 20th century–particularly quantum physics—offers a new model for creating the integrative, cooperative, and constantly inventive infrastructures necessary for the learning organization. In her presentation, Danah Zohar explores the implications of the Newtonian paradigm for our society and our organizations, and describes the new possibilities that present themselves when we begin to view our organizations through the lens of quantum physics.

—CPL

Our paradigm—our deeply held set of unconscious assumptions—structures our experiences without us even realizing it. Our environment shapes this paradigm, and the paradigm, in turn, focuses our attention. It determines the questions we will ask, the expectations we will have, and the experiments we will do in our lives and in our organizations.

In fact, our brains can’t help making mental models based on our paradigms. The purpose of the self-organizing system in the brain is to make patterns out of our experience. Without this pattern-making process, we would be completely scattered. The downside, however, is that our paradigms can trap us. We can get “paradigm paralysis,” where we only know how to ask the questions that our paradigm allows us to ask.

Part of breaking out of paradigm paralysis is learning to ask new questions. In complexity and chaos physics today, there is this idea of being “at the edge,” meaning that we are poised like a tightrope walker between too much order and too much chaos. If we can learn to poise ourselves at the edge, that is where we can be most creative and begin to ask new questions that will lead to new mental models and patterns.

Newtonian Physics

All of the concepts, language, expectations, and images of our culture have come down to us filtered through the lens of Newtonian physics. Newton said that the physical world consists ultimately of atoms. Each atom is impenetrable and is related to every other by way of forces of action and reaction. When one atom touches another, it knocks the other off its path. If it doesn’t want the other off its path, the best it can do is avoid the other atom—it can “compromise.”

Freud modeled his psychology of object relations after Newtonian atomism. He said, “You’re an object to me, and I’m an object to you. When we meet, all we can do is bounce into each other, conflict, and go our separate ways. Or we find avoidance strategies.” This idea is the basis of our notion that the individual is the primary unit of society. It has led, unfortunately, to an emphasis on fragmentation. We divide our organizations into units, and these units compete and bounce against each other.

The quantum model, on the other hand, tells us that everything in the universe is interwoven with everything else. The quantum universe says that the world doesn’t consist of separate interacting parts; it consists of sets of systems that are so interwoven that they take their identity from their relationship. For example, the way I relate to you changes me. The environment in which your organization operates changes the potentiality and the whole agenda for your organization.

Uncertainty in the Quantum Organization

A quantum organization therefore stresses dynamic integration—cooperation rather than competition. In quantum physics, C always equals more than A+B. You have to bring A and B into interrelationship to get that larger C. For example, I am an individual, and I make decisions as an individual. But I am also in relationship to others, and part of me is being evoked by participation in that field. By engaging with another person in relationship, I realize an aspect of myself to which I did not have access before.

If you have a Newtonian particle at A, and it wants to get to location B, there’s one best path for that particle—it will follow the path of a straight line and go directly to B. Now in quantum systems, if you have a particle at A, you don’t even know where B is or what B is. It’s only eventually, when B comes into focus, that we see retroactively the particular path A rook to get to B. Quantum physics thus says we can’t predict anything, and that there’s no single “best path.”

Thus, the leading principle of 20th-century science is this idea of uncertainty. For our organizations, this means that we need to develop infrastructures that will allow us to surface all our potentiality and actually thrive on uncertainty. If I come into a situation with the belief that I know what I want to do, I will just get the result I am looking for. But if I come to a situation with an attitude of inquiry—questioning what might be the best way forward or what insights others can offer—then new possibilities will slowly evolve and I will get a result I never imagined possible.

Dialogue

The larger question we need to address as individuals and organizations is, “How can we dip into that rich field of potentiality and develop a whole that is greater than the sum of the parts?” Dialogue is one way to do this, because we come to a dialogue with a willingness to share our uncertainty, our pain, and our expectations. Through that process, something rather magical happens. Suddenly, everything comes together, and new ideas emerge. With those new ideas, our present position evolves—not through a Newtonian perspective, but through questioning and uncertainty. And from that experience, we arrive at a new way of thinking.

—Edited by Kellie Wardman O’Reilly

Karl-Henrik Robert—The Natural Step: A Framework for Large-Scale Change

Moving from fragmentation to wholeness means expanding our perspective to include the larger system. In his talk, Karl-Henrik Robert describes The Natural Step, a large-scale social and environmental movement that is based on the following premise: “If you want a large number of people to work together in a coordinated way, they must share an image of the system of which they are a part.” His story provides an illustration of how a common shared vision can become the catalyst for effecting large-scale change.

—CPI..

The Natural Step is a federation of professional associations in Sweden—economists, doctors, business leaders, lawyers, entertainers, etc.—that are working toward developing a sustainable society. There are approximately 10,000 people participating in The Natural Step, working together on cooperative projects. What binds our group together is a collective under-standing of the larger system of which we are a part.

A system is like a tree—the trunk and the branches are the underlying principles that give form and structure to the system, while the leaves represent the various efforts we can take to meet the principles. If we look at our work in The Natural Step from this perspective, we can see that the various associations—the engineers and scientists, doctors and lawyers—are each operating as the leaves, providing input from their background, while the trunk provides an overarching unity to our work. Because we are operating out of a shared mental model of the system as a whole, we are able to operate effectively as a team, rather than simply a collection of individuals. By working cooperatively toward the same overall principles of sustainability, we believe we can create large-scale change.

There Is No “Away”

We know from physics—from the principal of the conservation of matter—that the Earth cannot expand in volume or size to support its inhabitants. Matter doesn’t disappear on Earth, but it does change forms. That is the core of our dilemma: we are systematically turning our natural resources into garbage. We are consuming resources and turning them into dispersed waste faster than they can be reconstituted back into resources.

Our whole biosphere operates as a system of natural cycles. For over two million years, the human species took part in those cycles, utilizing resources in a manner that was sustainable. Then we identified concentrated energy, such as fossil fuels and nuclear power, which gave us access to tremendous flows of matter. Now that we have the power to utilize these resources, we are flooding our own ecosystem. We are turning back the evolutionary clock and making our species extinct. This is the global challenge that we face.

Toward Sustainability

So what are some overall principles for sustainability? Clearly, a sustainable society must integrate itself into the natural cycles of the Earth. Since matter cannot disappear, the sum of the living resources must equal the waste that is emitted back into the system. With this in mind, it is not difficult to identify the overall principle for sustainability in our whole ecosphere: there must be a balance in these flows. The basic principles can be summarized in four system conditions:

1. Extracted substances from the Earth’s crust must not systematically increase in nature. Nature cannot sustain a systematic increase of dispersed junk from the Earth’s crust. Why? Because substances disperse, but they do not disappear. Every substance becomes a toxin if its concentration is too high.

2. Substances produced by society must not systematically increase in nature. For the same reason as above, we must not produce unnatural, persistent substances such as DDT, PCB, or freons, which contribute to a systematic increase of man-made compounds. When we produce more compounds than can be handled in the system, they naturally increase in concentration and become deleterious to the system as a whole.

3. The physical basis for the productivity and diversity of nature must not be systematically deteriorated. This principle refers to the Earth’s system itself—its physical needs. We cannot keep digging up the earth, eliminating forests, and destroying the species that coexist in this system.

4. We must have a fair and efficient use of energy and other resources. If one billion people starve while another billion have a definitive over-production of goods, this cannot be perceived as a fair and efficient use of resources to meet human needs.

Creating a Sustainable Society

Thus, the four system conditions make up the trunk of the tree—the absolute, bottom-line conditions for the entire system. If we want to create a sustain-able society, we must live in agreement with these basic principles. For businesses, operating according to these basic principles is also a way of saving money and becoming more efficient.

As part of our work in The Natural Step, we work with businesses to identify the systemic consequences of their actions. By referring to the four basic system conditions, we identify the consequences of current practices, and offer professional advice on how to operate within those principles as well as pros-per from them. We train businesses to make investments that help them improve their image in the short term and set the stage for greater profitability in the long term. For example, if we continually convert non-renewable resources into garbage, the prices of those resources will inevitably go up.

We also prompt businesses to ask themselves this critical question: “Are we systematically making ourselves less economically dependent on resources or practices that have no futures’ For example, suppose we are trying to decide if we should rely more or less on mining a particular substance. If there is very little room for more mining in the system because it will violate a system condition, it is not a good long-term strategy. Any smart team understands that you will be hit by the future market or by future legislation if you systematically depend on something that has no future.

So the rules of the game for the future involve making ourselves economically independent of violating the four system conditions. If we do not succeed in this effort, the consequences are obvious—we are our own Titanic. If we go down, we all die together. The laws of nature supersede manmade laws, and they will impose themselves on us whether we want it or not—it’s just a matter of time. In realizing this, we can make a choice—to continue to follow unsustainable practices that we will pay for in the long term, or begin to profit now from smart investments that take into account the natural infrastructure of which we are a part.

—Edited by Diane J. Reed

Peter M. Senge—Building Learning Infrastructures

Sustaining large-scale change requires more than a one-time shift in structures and habits—it requires deeply embedded infrastructures that enable the continued creation and dissemination of new knowledge. Peter Senge discusses the recent innovations in infrastructure that are snaking the learning organization a sustainable phenomenon. His discussion of infrastructure then becomes a springboard for exploring the role of storytelling in creating a larger context and meaning for our work.

—CPL

There has been a lot of emphasis in business lately on the importance of infrastructure. Reengineering, business process redesign, and rethinking performance measures all have to do with the infrastructure of organizations—what wires things together. I believe that fundamental innovations in infrastructure are important in order to create an environment where the work we are doing can continue. These innovations in infrastructure fall into two categories: (1) rethinking and redesigning existing infrastructures; and (2) creating new infrastructures to support learning.

Redesigning Existing Infrastructure. One area of potential leverage involves redesigning existing organizational infrastructures—the process that currently hold together organizations. For example, Shell International Petroleum Company’s rise from a mediocre position in the world oil industry to preeminence was the redesign of a critical infrastructure—its planning process. Shell’s planners discovered that having a single plan was becoming irrelevant in a world of unpredictability and change. But the planning process itself—the act of bringing people together to develop strategies in response to various scenarios—was increasingly important. Shell’s scenario planning process, which was eventually named “planning as learning,” represents an extraordinarily elegant strategy for creating new learning capabilities in organizations.

Creating New Infrastructures. In addition to rethinking the elements of infrastructure that have always existed, over the last few years a whole host of new innovations in learning infrastructure have emerged. For example, coaching networks have become an important part of team development. Coaching can take the form of educational initiatives, diagnosis, intervention design, facilitation, and core process consultation. At EDS there are now about 100 “transformational coaches” who have gone through a one-year training program in these skills, and several other companies are developing similar networks of internal coaches.

Another area of infrastructure development centers around redesigning the work environment so that working and learning become inseparable. This includes innovations such as learning laboratories and applied practice fields. For example, at Ford Motor Company, the 1995 Lincoln Continental team created a new car development learning laboratory. Federal Express has also developed a global sales learning laboratory, and there are many other learning laboratories being used in other companies.

These individual learning experiences have had some well-documented successes. But the next challenge is how to share the insights from individual teams throughout the respective companies. We are gradually coming to realize that there is no infrastructure in our organizations to enable serious analysis and reflection on what is being learned. One possible way to do this is through learning histories—a formal process that is being developed for capturing data on critical learning incidents. As one example, for 150 years the U.S. Army has had learning historians who provide it with a rich sense of its own history and its ability to learn from the past.

Why Talk about Infrastructure?

We can get very excited about the new infrastructures that are being developed, but building infrastructure is not an end in and of itself. Organizational learning infrastructures are part of a larger group of elements that are essential for designing a learning organization—what I have termed “organizational architecture” (see “Framework for the Learning Organization”). And organizational architecture really functions in the service of a larger purpose, which is to create an environment in which the “deep learning cycle” can be initiated, energized, and sustained. The deep learning cycle involves developing fundamental new skills and capabilities, which lead people to see the world differently and then to develop fundamental new attitudes and beliefs.

Essentially, we need to develop sufficient organizational architecture in order to begin to sustain this deep learning cycle—to be able to create some degree of critical mass of new collective capacity. As this capacity develops, it further expands our collective ability to listen to the larger pattern of what is emerging—the “implicate order” that I referred to in my original presentation of this framework at the 1993 Systems Thinking in Action”‘ Conference. This brings us to a new point in the cycle, as we reflect on the emerging story—a new, deeper set of “guiding ideas.”

Framework for the Learning Organization

Innovations in infrastructure are part of a larger group of elements–organizational architecture–that are essential for designing a learning organization. Organizational architecture really functions in the service of a larger purpose. which is to create an environment in which the “deep learning cycle” can be initiated, energized, and sustained. The deep learning cycle involves developing fundamental new skills and capabilities, which lead people to see the world differently and to develop fundamental new attitudes and beliefs.

What Is Our Story?

I think this brings us to the question, “What is our new cultural story?” Cultures ultimately need a story in order to be vital. But as a society and as a culture, we have lost our story. The old story—the account of how the world came to be and how we fit into it—sustained us for a long period of time. It shaped our emotional attitudes, provided us with life purpose, and energized our actions. But it is no longer functioning properly, and we have not learned a new one.

Dee Hock, the founder of VISA International, says that “we are living in an era of massive institutional failure on every front.” The mismatch between our large institutions and the deeply complex interdependent world we live in is evident in our current environmental crises, in the chaos and perpetual crises of businesses, in our paralysis in confronting national political issues, in the breakdown of our societal infrastructure and civic spirit, etc. There is not a single critical institution that is not failing in the eyes of the public.

As the cycle moves another turn, it’s time for a new set of guiding ideas. It’s time for a new story of how human beings and human institutions can rediscover our place in a larger natural order. As Sarita Chawla asked, “What is the story our grandchildren would want us to be telling today?”

—Edited by Colleen P. Lannon

Peter Block is a consultant and speaker whose work focuses on ways to create empowering organizations. He is the author of Stewardship and The Empowered Manager

Danah Zohar is a physicist and philosopher who teaches at Oxford Brooks University in England. She is the author of The Quantum Self and The Quantum Society.

Karl-Henrik Robert is the founder and working chairman of The Natural Step, a federation of professional associations in Sweden that cooperate on projects to benefit the environment.
Peter M. Senge is the director of the MIT Center for Organizational Learning, and author of The Fifth Discipline: The Art and Practice of the Learning Organization.

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Why are people being more frugal about their credit card purchases? It may be that consumers are so busy paying off their current credit card debt that they don’t have much cash left for additional purchases. The Fortune article notes that the percent of delinquent credit card accounts — accounts that are 30 or more days overdue — has risen from 2.4% in 1994 to about 3.2% in 1995. They also report that the Consumer Credit Counseling Service, a nonprofit organization that helps people in credit trouble, has a caseload of over 800,000 clients “whose consumer-debt loads average $20,000 — no, that’s not a typo — on incomes of just $24,000.”

These and other reasons for the sudden fall in spending can be seen through the lens of the “Limits to Success” archetype (see “Spending & Credit Loop”). The reinforcing loop of this story describes the “spending begets more spending” orientation of our consumer society. As we buy more “stuff,” we increase our standard of living and grow accustomed to the comfort and status of our new spending level. Over time, this increases our desired standard of living, which leads to a desire to buy more things, further increasing our spending (R1).

Optimistic marketers would like to believe that this reinforcing loop is never-ending — that consumers will continually escalate their spending to achieve ever-higher living standards.

But most of us do have limits — in the form of funds available for spending. As our spending increases, our funds available decreases, which requires us to decrease our spending (B2). There are, however, two primary ways to increase the pool of funds available: find ways to increase real income, or simply borrow the money.

The favored path in recent years has been to borrow money by using credit cards, which temporarily bypasses the balancing loop through another reinforcing loop of credit line “funds” (R3). But if the real limit, which is the person’s income, has not increased to support the higher spending levels, then at some point spending not only must fall, but it must fall below the long-term sustainable level. This is inevitable, because when we use credit card debt to increase our current consumption, we have done so at the expense of our future consumption power.

Living the “High Life”—with High Debts

So, what’s wrong with borrowing from the future to live better today? If it will all balance out in the long run, why not enjoy certain purchases now rather than wait until tomorrow?

If you pay off your entire balance each month and incur no finance charges, then credit cards can serve as a convenient tool for managing short-term cash flows. But if they are used to expand current spending through increasing amounts of debt, a reinforcing cycle kicks in that will eventually force a drop in spending, as a greater percentage of current spending must go toward paying off the debt.

To understand how credit card debt can get so out of control — and how it impacts both current and future spending — we need to look more closely at a stock and flow structure of credit card debt.

Basically, credit cards expand our current spending capability because spending (in the form of credit card charges) is carried in a credit card debt accumulator and does not affect current spending until credit card payments are made (B4 in “Credit Card Debt Structure”). At first glance, it appears that we have simply substituted the original “Funds Available” balancing loop (B2) with the “Credit Card Debt” loop (B4) — a seemingly innocuous change that simply delays payment of purchases. Of course, carrying a balance means that we will have to pay finance charges, so delaying payment comes at some cost. But what is less obvious is how that delay structure distorts our perception of funds available.

When we carry a balance, most credit card companies (with the exception of American Express) only require us to pay off a fraction of the total balance. This allows us to shift our attention away from paying off the total debt toward simply meeting the minimum monthly payments, which makes it look like we have more spending money available than we actually do. In a way, the credit card accumulator helps us “forget” that we made a $1000 purchase, since • our monthly minimum payment has only gone up by $100.

At some point, however, the debt balance gets large enough that the monthly payments themselves are no longer affordable. In addition, the accumulation of finance charges (R5) means that a greater percentage of the monthly payments are going toward paying off interest charges, not toward paying for the actual goods purchased. We can temporarily “fix” this problem by acquiring new credit cards, which prolong the illusion of greater wealth (R3). But sooner or later, the credit card games must end — either we reach our maxi-mum spending limit or begin defaulting on payments. At that point, the debt problem itself must be addressed.

A Debtor Society

Unfortunately, the problem of debt is not isolated to a few overzealous consumers. The U.S. federal debt illustrates the same structure on a much larger scale. Like credit card debt, the federal debt allows the government to decouple current spending from current funds available, and shifts attention to the payments on the debt rather than on the debt itself. But unlike credit card holders, who cannot expand their own credit lines at will, the federal government can simply choose to raise its own credit limit rather than restrain spending (e.g., by selling more Treasury Bills, issuing more government bonds, or raising taxes).

Given both the consumer and national debt crises, it would seem that the United States has become a debtor nation at both the micro- and macro-level. In fact, we seem to have adopted the mentality that being in debt is normal — even desirable. At a national level, it is almost inevitable that our standard of living will fall, as more of our future wealth goes toward paying “finance charges” to the foreign countries that have been giving us their “line of credit.” Just as families are shifting their wealth to the bankers and the retailers, the U.S. as a whole is shifting wealth to Japan, Germany, and other countries.

A Sustainable Future

Of course, there is an obvious solution to both debt crises—stop spending and start saving. Rather than funding current spending with future income, we could instead save current income to be used for future spending. This approach has the added benefit of actually expanding our future spending ability, through the accumulation of interest payments.

In the “Shift from Debt to Savings” diagram, the credit card debt structure has been replaced with a savings structure. In this situation, some of the current spending is devoted to deposits, which can be withdrawn later to in-crease the funds available at that time (R7). Also, the vicious cycle of ever-increasing finance charges (R5) has been replaced by a virtuous cycle of interest payments (R6). The delay also plays a major role in the dynamics of building savings — once savings reaches a certain level, withdrawals can be made indefinitely without ever touching the principal.

Although the structures are basically the same, the outcome is completely different. While the savings situation provides a sustainable spending approach for the long term, the debt structure does not. Shifting from operating in the debt structure to the savings structure is doubly hard, however, since not only do you have to cut current spending to get out of the debt structure, but you have to cut it even further to begin the savings structure.

Outlining a map of the structure — complete with all the relevant numbers — may help us see more explicitly the full costs and benefits of savings. For example, putting money into savings rather than into credit card purchases results in a double payoff because you avoid finance charges and gain interest payments. One hundred dollars in savings, for example, earns 5% interest and saves 18% in finance charges.

Ultimately, making the shift from the debt structure to the savings structure — both as individuals and as a nation— requires a clear choice. To end the credit game, we need to decide that creating a sustainable future is more important than satisfying current consumption. Such a clear and compelling vision can provide the momentum to see the strategy through — even during the long delay as we pull out of debt and begin the savings structure. Unfortunately, given the short-term focus of our government officials, the prospects of that happening for the U.S. government seem a lot less optimistic than it does for individual consumers.

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If you are guiding a complex social mechanism like a city, you need even more lights and dials. But what should they measure for a city?

Five years ago, several hundred citizens from Seattle asked themselves that question. Last week, they came out with an answer—a book of 40 “indicators of sustainability” for their city. Eight of those indicators show things improving. Eighteen show no discernible trend. Fourteen show declining sustainability, negative progress, trouble ahead.

The report made front-page headlines in Seattle. When citizens deliver an instrument panel with warning lights blinking, the powers-that-be tend to pay attention.

It took a lot of work to get those indicators together. The volunteer organization called Sustainable Seattle started by arguing for six months over the word “sustainable.” Overfishing or overcutting a forest is clearly not sustainable. Neither, the Seattle folks decided, is deficit spending, nor loading the environment with pollutants, nor cramming more cars onto the roads, nor letting young people grow up uneducated and hopeless.

Eventually, they came up with a definition: sustainability is “long-term cultural, economic and environmental health.” Now, how to measure it? More months of discussion produced 99 suggestion indicators. They were posted on a wall and everyone got 15 green dots to stick up by the indicators each person thought were most important. The most green dots by far went to the salmon.

Wild salmon are a valuable resource in the Northwest, and they reflect the quality of water and the integrity of ecosystems. More than that, they are beloved. The spectacular annual return of the salmon is a sign that all’s well with the world. But in the new report, the salmon light is blinking a red alert. Since 1978, the population of sockeye salmon is down by 75 percent, coho by 81 percent.

One possible cause is soil erosion, measured in the report by the muddiness of streams, which has increased by 185 percent since 1987. Turbid water is not good for salmon. Sustainable Seattle folks are fond of pointing out link-ages like that among their indicators. For example, they say, child poverty leads to crime, leads to unsafe streets, leads to fewer people walking and more driving, leads to paving and water pollution, leads CO pollution in the salmon streams.

They have indicators all along that chain. More children are living in poverty-13.4 percent in 1979, 15.7 percent in 1989. Juvenile crime is up (35 to 40 percent higher per capita than in the mid-1980s). Vehicle miles traveled have almost doubled since 1970. Fifty-nine percent of Seattle’s land is paved or otherwise impervious to water. Paved land doesn’t absorb rain, doesn’t recharge water tables, and sends storm water into streams, carrying the oil and dirt of the city.

There is good news, however. In spite of the huge increase in driving, air quality has improved greatly. In 1981, there were 29 “unhealthful” air days in Seattle. In the last five years, there has been only one. Total municipal garbage generation more than doubled since 1976, but the city has just turned an important corner—its recycling rate is high enough now (at about 30 percent of municipal waste) to reduce the flow of garbage to landfills.

Economically, Seattle is thriving (20-percent growth in average income between 1980 and 1990), but, like the rest of the nation, the rising tide is not lifting all boats. Middle- and low-income families are working as hard but earning less. In 1990 about 12 percent of households received more than 33 percent of the city’s income, while the lowest 50 percent of households received only 20 percent of the income.

Perhaps the most unsustainable trend in Seattle, as in the nation, is in healthcare costs. The average person in 1980 paid $1,081 (in 1990 dollars) for healthcare; in 1990 the amount had more than doubled, to $2,737. The average household spent 10 percent of its income on healthcare in 1980 and almost 15 percent in 1990. Emergency-room visits at the main public hospital went up by 50 percent in the past five years; most of those visits were not emergencies but people without health insurance going to the only place that would take them in.

On a cheerier note, the percentage of low birth-weight infants is holding about steady. Voter participation is way up after some heated elections. And 44 percent of Seattle households grow some of their own fruits and vegetables.

Some politicians are suspicious of data-gathering efforts like this and suspicious of public information in general, thinking of it as some kind of report card on their performance. The Sustainable Seattle folks finessed that reluctance partly by including city officials in the discussion from the beginning, and partly by acknowledging that the indices reflect the behavior of all residents, not just City Hall. In fact, a full, informative instrument panel makes City Hall’s job clearer and easier. Furthermore, as Seattle’s first report on itself illustrates, indicators are not only ways of pointing out problems. They can also be ways of documenting successes.

Donella Meadows is a system dynamicist and an adjunct professor of environmental studies at Dartmouth. She is a co-author of the best-selling books The Limits to Growth and Beyond the Limits. She writes a weekly column for the Plainfield, NH Valley News.

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Deciding when to use computer models requires special attention, since they can require significant investments of time and money. While computer modeling is often a lengthy and intensive process, it can produce insights and action plans far beyond what is possible with pen-and-paper tools. So how do you know when to simulate? The following set of simple guidelines can help in that decision.

Modeling a Specific Issue

It is important to have a specific problem or issue in mind before you begin modeling. If you are working on a particular issue that has a clear purpose, you will have more success in setting appropriate boundaries for the model and determining the amount of detail you will need. If you try to model your whole organization, you will quickly get bogged down.

If you are not sure exactly where to start, the early steps of model building (identifying the important variables and how they relate) can help you flesh out some of the important issues. Starting with simple diagrams and building from there can also help you determine what to include in the final model.

Example: Attempting to model your entire manufacturing process without a clear sense of purpose can be difficult. Knowing, for example, that you want to assess the impact of hidden manufacturing delays can help you determine whether to include factors like purchasing or suppliers, or whether to chart information on a weekly or minute-by-minute basis.

Understanding Complex Behavior

Humans are very good at understanding and articulating relationships. We can describe, for example, how marketing, production, and sales are related. We are not as adept, however, at simulating how those relationships play out over time. If we increase marketing by 15%, for example, what will happen to sales and production in the next year? Computer models can take such complex, non-linear relationships and show how they play out over time.

Computer models offer vivid illustrations of how the structure of a system creates the behavior we observe. In essence, modeling means developing a structural picture of the problem and then simulating the behavior of the system under those assumptions. A model can also aid in linking past and present behavior by showing how both can be described by the same structure.

Modeling can be very useful if long time delays are a key part of the problem or issue. While tools such as causal loop diagrams cannot adequately quantify the impact of delays in the system, computer models can clearly identify different kinds of delays and show how they affect a system’s overall behavior.

Example: In order to investigate the rising cost of insurance claims, one property and casualty insurer built a model of its claims adjusting process. The managers involved in the process surfaced several non-linear connections between time pressure, productivity, and quality—all of which in turn had long-term effects on overall costs. Mapping and simulating these relationships revealed how a short-term focus on cutting costs led to a long-term erosion of quality—and ultimately higher settlement costs.

Formulating and Testing Policies

Computer models can be very effective for developing and testing specific policies. For example, a computer model can allow you to test the results of different hiring, marketing, or inventory management strategies. Testing your ideas and assumptions about critical relationships can help you better assess the results of the policy interventions you make.

Most policies have both short-term and long-term implications. Without some understanding of the long-term ramifications of a specific policy, we tend to favor decisions that will benefit us in the short term. Unfortunately, those short-term actions often undermine long-term sustainability or profitability. Modeling can reveal those tradeoffs by making the long-term consequences just as real and present as the short-term ones.

Example: One heavy equipment manufacturer had a policy of adding additional plant capacity only when its backlog grew to six months. By the time the new capacity came on line, however, order volume had generally decreased (due to the long shipping delays) and the company was saddled with over-capacity until its order backlog grew again. This would spark another round of capacity additions, and the whole dynamic would repeat itself. When the company’s managers built a simulation model, they discovered that their own capacity decisions were in large part responsible for the order swings. Testing different policies suggested that their conservative approach to capacity expansion might actually be putting the company at the greatest risk of losing customers over the long term, and might be unnecessarily constraining their growth. Simulation modeling is generally most effective when it is applied to a specific, focused problem. There are, however, particular situations where the lack of specific focus is the problem. In such cases, the process of modeling itself can help you gain a clearer understanding of a particular problem or issue (see “From Causal Loop Diagrams to Computer Models—Part 11,” August 1994). Since model building is a highly iterative process, as you cycle through the steps you can come to a greater level of clarity about what the most critical issues are. At that point, you will be in a better place to assess whether or not you should go further in the simulation process.

Kelile T. Wardman is publications director at Pegasus Communications and an editor of The Systems Thinker”4.

Daniel H. Kim is the publisher of The Systems Thinker’ and co-founder of the MIT Organizational Learning Center where he directs the Learning Lab Research Project.

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In using systems thinking effectively on-line, the first step is to recognize when it is appropriate and can add value to a discussion. One way to do this is to listen for competing (or divergent) hypotheses about a specific problem, which can then be explored using the tools of systems thinking.

Recognizing Competing Hypotheses

Although we might not realize it, we are formulating causal theories all the time. Statements such as “more police officers will reduce crime,” or “if you exercise more, you’ll lose weight,” are theories indicating that a particular action will cause a specific result. For example, I would be making a causal theory if I said, “Increasing our change efforts will lead to a better quality product.” However, my colleague may feel that increasing our change efforts will actually diminish the quality of the product. Now we have competing hypotheses: two statements that presume a different dynamic outcome from the same action. When competing hypotheses surface, it usually suggests there are different assumptions (or collective uncertainty) about the consequences of an action over time.

Exploring a Case

To illustrate how to listen for dynamic complexity — and how to use systems thinking to explore competing hypotheses—let’s look at an example from an experience at Philips Display Components. During a team meeting, an interpersonal “incident” occurred that led to heated comments from several participants. After it was over, the people involved apologized to one another for the emotional way they had reacted. Since this team was practicing using organizational learning tools at the time, it seemed only natural to discuss how their new skills would affect behaviors such as public apologies. One person thoughtfully commented, “The more we invest in this [learning] stuff and the better we get, the fewer apologies we will see.” Another person immediately responded, “I completely disagree. The more we practice these techniques, the more public apologies we will see.”

Once these two contradictory views were stated, the team was presented with a choice — to spend energy trying to resolve the tension, or to move on. In this particular case, both parties glared at each other for a moment, and the conversation shifted.

But the team missed out on an important discussion — because in the future, if the number of apologies in the organization increased, one person would think the investment in organizational learning had been successful, while the other person might conclude that organizational learning had actually made things worse. These kinds of contradictory statements are clues to listen for when looking for opportunities to use systems thinking “on-line.”

Exploring Multiple Hypotheses

The process of exploring and clarifying contradictory theories can be broken down into four steps, from explicitly describing each of the theories separately to showing how they might actually fit together. By integrating the theories into a common systems diagram, a group can move beyond the conflict of seemingly incompatible ideas and begin exploring the possibility that there can be multiple consequences of an action, and that these outcomes can occur at different times.

Step 1: Diagram Each Theory Separately

The first step is to diagram each theory separately, using links to show causal connections between the different elements in the theory. For example, the first person’s suggestion that organizational learning would lead to fewer apologies can be mapped as a link between organizational learning and apologies that is labeled with an “o” to indicate a change in the opposite direction (see “Competing Hypotheses”). The second person’s theory would look identical, except that the link would be labeled “s” (a change in the same direction) to indicate his view that as organizational learning increases, so will apologies. At this level of abstraction, the two theories are diametrically opposed, and only one of them can be considered “right.”

Step 2: Inquire into the Line of Reasoning and Expand Theories

The next step is to explore the reasoning behind each theory and clarify the link between the two variables. Lack of understanding of the nature of a link often leads to confusion in a group. When this occurs, it is usually necessary to rename the variables, or to insert an intermediate term (or two) between the variables. For example, we might find that the first person believes that practice in organizational learning will lead to more effective communication, which will lead to fewer mistakes and misunderstandings, thus requiring fewer apologies (see “Expanding the Theories”). The second person, on the other hand, may feel that practice in organizational learning will lead to an increased awareness of how our actions impact others, leading to more apologies.

With a fuller description of both theories, we can see that they are not necessarily contradictory. In fact, both of these causal connections exist between organizational learning and apologies.

Step 3: Integrate the Theories and Identify Time Delays

Depending on which of these scenarios we look at, we could reasonably assume that increasing practice in organizational learning can actually increase and decrease the rate of apologies — but not at the same time. Oftentimes, a difference in causal theories results because people are looking at the same phenomenon, but over a different time span. To make these differences more explicit, we need to refine the diagrams by noting any significant time delays between links. In this example, we might conclude that developing effective communication takes significantly more time than just becoming more aware of the impact of our actions. So now we can bring the theories together and look at the issue within a common framework (see “Integrating the Theories”).

In drawing the single system and clarifying your discussion “on-line,” it is important to note that it is okay to leave the links “open.” Don’t feel compelled to close the causal paths just for the sake of creating feedback loops. The goal of this process is just to express the line reasoning behind each theory, so try to keep things as simple as possible. Even as open loops, this use of systems thinking can generate a collective theory about the consequences of a change in the system. But if you want to continue to explore this issue from a systems thinking perspective, it is important to go further and look at how the feedback loops actually close. To complete the loops, you would want to ask the question, “How do any of these variables come back to influence the original factor?” For instance, how does the observed number of apologies influence the time and resources put into practicing organizational learning?

Step 4: Estimate What Will Happen over Time

Creating a good causal theory is useful for developing our sense of the possible dynamic consequences of an action. To begin thinking about this future behavior, we might ask the question, “Which causal ‘path’ is dominant at what time?” After an increase in organizational learning practice, we would expect that awareness would go up at first, causing the number of apologies also to increase. After a significant time delay, communication skills would increase, which would cause the apologies to go down (see “Mapping the Behavior”).

Rather than leaving the discussion with separate and contradictory theories on the relationship between apologies and effective organizational learning, everyone now can see a single theory that contains both sets of assumptions. Both causal connections are real; we just expect them to be dominant at different times. In this case, although the individuals seemed to be saying contradictory things on the surface, both could be right about their predictions if they were simply thinking in different time frames.

Don Seville (dsevilla@sustainer.org) is a project manager at Sustainability Institute, a consulting, training, and research center focused on social, economic, and environmental issues.

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