One set of loops that can help us better understand the basic interactions between a company and its marketplace is the supply/demand structure. Most everyone is familiar with the basic law of supply and demand: if demand rises, price tends to go up (all else remaining the same), and conversely, as supply goes down, price tends to go up (again, all else remaining equal). From a systems thinking perspective, this dynamic can be simply described by two coupled balancing loops that attempt to stabilize around a particular variable—in this case, price.

Supply and Demand: A Generic View

If we look at the supply/demand structure from a more generic perspective, we can use it to describe any situation in which an ability to supply a good or service is being balanced with the demand, utilization, or consumption of that product or service. This structure acts like a see-saw, with supply on one side, demand on the other, and some pivot point in the middle (such as quality, price, availability, or service) that links the consumer actions and the company’s decisions (see “Balancing Loops with Delays: Teeter-Tottering on See-Saws,” June/July 1990). The central variable serves as the “adjusting variable” because it is the signal that causes players on both sides of the see-saw to adjust the imbalance between supply and demand (see “Generic Structure”). These dynamics can occur between the company and the market-place or within an organization, where an internal function or unit (such as training or l.S.) is supplying services to other parts of the company.

For example, in the medical industry, one common adjusting process revolves around waiting time to get an appointment with a physician. On the demand side, if the wait time to see a particular physician becomes too long, patients might either try to find another provider, put off receiving care (in the hopes that the problem will “take care of itself”), or, if the problem is serious enough, go to the emergency room. If enough patients find alternate solutions, this leads to a decline in the physician’s utilization rate, which then eases the pressure on the physician’s schedule so that the wait time is reduced (B1 in “Medical Supply/Demand,” page 8). Physicians, for their part, might try to reduce the wait time for care by processing patients faster, adding physicians to their practice, or asking ancillary staff (such as nurse practitioners) to play a more significant role in patient care. All of these actions would increase the patient capacity and reduce the wait (B2).

What is important to note is that both balancing actions are usually happening simultaneously—that is, at the same time that the physicians are looking for ways to ease the patient bottle-neck, the patients are already taking action to relieve that pressure by seeking alternate providers or finding other ways to take care of themselves. Because demand is falling at the same time that capacity is rising, these actions will create another imbalance this time, with more available capacity for seeing patients than the actual demand for appointments. When this occurs, both parties will once again take action to close the gap (patients will return to their original provider because of the reduced wait time, while the physician’s practice might ease scheduling pressure) and the see-saw invariably tips in the other direction.

Seeking a Balance

This same see-saw structure of balancing capacity and demand shows up in a variety of contexts, such as service quality (hospitals, banks, car-rental shops, fast-food restaurants, I.S., training) or product availability (retail stores, specialty products, manufacturers).

Of course, most companies would like to find a way to strike exactly the right balance between the demand in the marketplace and their ability to service that demand. Unfortunately, that rarely happens. As the medical example shows, what is more likely is a pattern of oscillation as the two sides overshoot each other, adjust, and overshoot again.

In part, this behavior occurs because of several significant delays in the system: customer perception delay, company perception delay, and capacity addition delay.

• Customer Perception. It takes time for word to get around that a company cannot provide a particular product or service (this signal usually comes in the form pf rising prices, lengthening delivery delays, or declining quality). It also takes time for people to alter their usage or consumption patterns. Similarly, once a company has added capacity, it takes time for that signal to make it into the marketplace and draw customers back.
• Company Perception. Just as it takes time for customers to realize that a company can no longer meet their needs, it takes time for the company to recognize that demand for its product or service is declining. This delay is often exacerbated because companies do not act upon the information immediately, believing that the drop off in demand is either temporary or due to factors other than capacity shortfall.
• Capacity Additions. Once the company has recognized the imbalance between the marketplace demand and its ability to meet that demand, there is a further delay while the company adds the needed capacity. The length of this delay depends on the nature of the capacity being added—for example, it takes a lot longer to add capital equipment than to increase customer service representatives or improve a process.

Using the Structure

The generic supply/demand causal loop structure provides a useful starting point for exploring how internal actions and marketplace decisions are intertwined. To see how the structure can be applied to a specific problem, let’s take a look at the example of ZSearch, a research company that specializes in tracking down research articles in the biochemical industry. ZSearch had built its reputation on the quality and timeliness of its response to its customers’ inquiries. However, the company’s managers have become concerned about two recent trends: customer surveys have ranked the company below its competitors in terms of customer service, and they have noticed a drop-off in the overall number of research requests per day.

1. Define the Variables. To begin mapping out the system, first define the different parts of the see-saw: what is being “supplied,” what is being “demanded,” and what is the fulcrum around which the imbalances between the two are resolved.

In ZSearch’s case, the “supply” would be the number of customer service representatives, the “demand” would be the number of requests from customers, and the “fulcrum” would be the wait time for service. If the number of requests coming in outstrips the available capacity, an imbalance appears in the system. Customers who are stuck on the phone waiting for a customer service rep might be inclined to hang up and call one of ZSearch’s competitors, thus decreasing the wait time for service (B1 in “ZSearch’s Balancing Act”). On the other side of the see-saw, once ZSearch gets the signal that it needs more capacity, it can respond by increasing the number of service reps or raking other actions that would likewise decrease wait time (B2).

2. Identify Delays. Once you have identified the fundamental balancing loops, it is important to identify and quantify the relevant delays. In ZSearch’s case, the customer perception delay may be fairly short—it doesn’t take lung for customers to get a busy signal, put down the phone, and call a competitor (although it does take time to establish new supplier relationships).

On ZSearch’s side, there might be a long perceptual delay before ZSearch identifies the source of the drop-off in call volume and how to respond to it. At this point, it would be easy for them to blame external forces, such as aggressive competitors, rather think examining how their own policies might be contributing to the decline. However, ZSearch’s managers felt that the problem might stem from a shortage of trained service reps. They knew they could case this burden in the short term by increasing the work hours of their current staff, though they acknowledged that it would take several months to hire and train the new reps.

3. Design Interventions. When considering any potential solution, it is important Lu evaluate the action in terms of both its internal consequences and its impact on the marketplace. In particular, look for ways you can more directly influence the customers’ behavior (the demand loop), rather than simply reacting after-the-fact (the supply loop).

At first, ZSearch’s managers were at a loss as to how they could have any direct influence on their customer’s decision to hang up and call a competitor. But after some thought, they came up with with a program that they called the “superior customer service guarantee.” They promised that any customer who waited longer than 60 seconds for an available representative would receive a 40% discount on the order. It was a costly gamble, but it paid off—the guarantee not only boosted ZSearch’s reputation in the field, bur on three occasions that the demand outstripped capacity, customers were willing to wait the extra time (to get the discount) and ZSearch retained the sale.

More importantly, ZSearch received timely, valuable feedback about their response time without risking losing customers. Knowing that they now had a strong system in place for tracking their call volume and service turnaround (the demand side of the diagram), they could focus their attention on the supply side of the diagram—finding ways to keep their staffing up to optimal levels.

Larger Implications

Many organizational “crises”—poor sales, quality problems, slipping delivery times–can be traced back to the mismatch between supply and demand and how this disequilibrium is corrected. Within organizations, this plays out in pressures to outsource in order to improve service or reduce costs. But it also occurs in whole industries, as poor service or high prices attract new competitors and innovators to the industry. This is the very mechanism by which customers see quality rise as prices decline over rime in an industry.

Michael Goodman is vice president of Innovation Associates, Inc. (Waltham MA) and heads IA’s Systems Thinking Group.

Colleen Lannon Is co-founder of Pegasus Communications and managing editor of The Systems Thinker•.

Balancing Act

If the number of incoming requests outstrips capacity, an imbalance appears. This imbalance can be resolved in one of two ways: (1) customer calls drop off due to the long wait (B1); or (2) customer service reps are added in order to reduce the time it takes to process requests (B2).

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Contrary to conventional wisdom, Americans are proving not only able but willing to separate their garbage. In fact we’re becoming such ferocious recyclers that old newspapers are piling up by the ton with no place to go.

As the market for used newsprint crashes, some recyclers are getting discouraged, and some purveyors of conventional wisdom are saying, see there? Recycling just doesn’t work. There’s no market for it.

It would be more accurate to say we don’t know if recycling works; we haven’t yet tried it. When we do, gluts and scarcities will be signals not that there’s no market, but that the market is working the way it always works — in fits and starts.

What we are doing so far is separating, not recycling. We’re beginning to reclaim materials before they get to the dump. We have barely begun to close the loop — to reuse major materials in the same products: newspapers back to newspapers; plastic soda bottles back to soda bottles.

Product-to-same-product recycling is the only kind that can work in the long run.

Product-to-same-product recycling is the only kind that can work in the long run. Turning newspapers into cattle bedding will be helpful for a while, but eventually it will clog, either because we use newspapers faster than cattle bedding, or vice versa. Similarly the plastics industry is congratulating itself too soon for turning soda bottles into plastic flowerpots. Given the nation’s consumption rate of soda versus flowerpots one can easily predict a market collapse due to flowerpot glut.

What works is illustrated by the nation’s one smooth-running and economical recycling system—aluminum cans back into aluminum cans.

Even when newspapers are printed on recycled newsprint and the plastics industry makes new bottles out of old, there will be glitches, scarcities and overflows. These are inevitable in the evolution of any production system, especially one that is guided by the market. The only way the market can sense a large potential supply of something new is to let that something accumulate somewhere. The only way the market can stimulate a demand is to bring the price down low enough, and be sufficiently assuring about future supply, to stimulate new users.

In short, don’t let a temporary newspaper glut discourage you. We’re just at the beginning of a major industrial transformation. We’re working out a material-supply system consistent with a finite planet. It will be totally different from the wasteful, polluting system we have now — and it will take a while to get it right.

It’s worth keeping part of our attention cast ahead of the immediate economics to the place where we’re ultimately headed. A sustainable, economic, ecologically supportable materials system will re-use everything it can. It will add virgin materials only as necessary to sustain product quality. It won’t waste materials on unproduc-tive purposes such as packaging—it will use uniform and minimal packaging, standard bottles or boxes of standard sizes, interchangeable among products, for easy re-use. Only the label will distinguish the product.

” ..gluts and scarcities will be signals that the market is working the way it always works—in fits and starts.”

Marketers will have to attract consumers with a reason to buy their product that’s more important than glitzy packaging.

For easy recycling the use of mixed materials in manufacture (like the infamous squeezable ketchup bottle with seven different laminated plastics) will be discouraged. Products will be designed to last longer and be easily repairable. There will be thriving businesses that refurbish or recapture the components of large appliances. All this can be brought about simply by adding a tax to each product equivalent to the real cost of its disposal. That’s not distorting to the market, it’s correcting the market by adding a cost signal that should have been there all along.

When materials are finally so well used that they must be thrown out, they will be more carefully separated than they are today. First and most important, toxics — heavy metals, organic chemicals, radioactive materials — will not be allowed at all in municipal waste streams or sewage treatment systems. Toxics will go into entirely separate collection and disposal systems.

With the hazardous wastes out of the way, all organic wastes will be composted, along with sewage sludge. That single step will reduce garbage volume by 30 percent and provide tons of safe, free fertilizer. If glass, paper and metals are recycled, that would bring the garbage flow down to just 10 percent of what it is now. And that doesn’t include the possibility of recycling plastic.

No part of this dream system is impossible. Every piece of it is operating somewhere. Denmark has a model system for processing toxic wastes. The Netherlands has a massive composting system, as do many American cities. Technologies exist to reclaim paper, glass, metal and some plastics. Put them all together and we’d have the same material quality of life but with less mining, less air and water pollution, less traffic, less taxes, and 90 percent less stuff to haul to the curb every week.

Along the way toward a sustainable materials system — or any large social goal — there will be fits and starts, market failures, and disappointments. It’s worth hanging in there. We’re on the right track.

Donella Meadows is an adjunct professor of environmental and policy studies at Dartmouth College. She writes a weekly column for the Plainfield. NH Valley News.

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The struggle to have both a good personal life and a good career arises from a dominant societal image of the ideal worker as “career-primary,” the person who is able and willing to put work first, and for whom work time is infinitely expandable. This view translates into work practices that include dawn meetings; planning sessions that run into the evening, often ending with the suggestion to “continue this over dinner”; and training programs requiring long absences from home. Commitment is measured by what one manager proudly declared as his definition of a star engineer: “someone who doesn’t know enough to go home at night.” At lower levels in the organization, the belief in the dominance of work translates into tight controls over worker time and flexibility.

In situations where “ideal workers” are assumed to be those whose first allegiance is to the job, people with career aspirations go to great lengths to keep personal issues from intruding into work. Some people give false reasons for leaving work early: They feel that attending a community board or civic meeting is not likely to brand them as uncommitted, while taking a child for a physical might. Some secretly take children on business trips. Others leave their computers on while picking up children from sporting events, hoping that colleagues passing by will think they are in a meeting.

When Individuals Try to Change

BUSINESS CASE FOR RELINKING WORK AND FAMILY

As management’s support of family-sensitive work practices rises, employees experience less work-family conflict, leading to greater worker satisfaction and better quality of work.

Some workers, because of their positions, their financial resources, or their perceived value as employees, are themselves able, at times, to forge satisfactory links between work and family. The rest simmer with discontent. In all cases, energy and loyalty are diverted unnecessarily from the organization (see “Can Your Company Benefit from Relinking?”). Because people feel powerless to deal with these concerns on their own, relevant work-related issues cannot be discussed at the collective level, where real systemic change might yield significant business and personal results.

When individuals change, but the system remains the same, there may be unexpected negative consequences for both. For example, one team leader arranged a four-day schedule to cut down on a long commute and to spend more time with her children. Not only did this arrangement serve her needs, but because the team leader rotated group members to take her place on the fifth day, she developed their self-management skills. By all measures, including productivity and satisfaction, the group was thriving. But the arrangement did not last long. In the end, the manager was stripped of her supervisory duties and moved to the bottom category of performance. Management regarded the team leader’s efforts as a negative reflection of her future potential and management capability. Similarly, a full-time sales technician who negotiated earlier hours was forced to give up the arrangement because her managers were unwilling to adjust their daily demands to conform to the schedule they had approved. From the beginning, the managers imposed so many “exceptions” that the employee was putting in extra hours and was unable to pick up

her child at school much of the time — the reason she wanted the earlier hours in the first place. In the end, she reverted to her old schedule and became very disillusioned.

In this context, it is not surprising that managers typically view requests for flexibility as risky to grant. Even though they may sympathize and want to grant such requests, especially when it comes to their most valued employees, they worry about the potential negative consequences of allowing such arrangements. Not only do they worry that productivity might suffer, but they fear that, in negotiating and monitoring these special arrangements, they might have an increased workload. As a result, managers often end up sending negative signals indicating that the use of flexible, family-friendly benefits is a problem for them and for the company as a whole.

The important point is that it is problematic when work-family issues are viewed as individual concerns to be addressed only through flexible work practices, sensitive managers, and individual accommodations. This approach often fails the individuals involved, and it may lead to negative career repercussions. More important, by viewing these issues as problems, companies miss opportunities for creative change. For example, management could have perceived the unusual arrangement of the team leader with the four-day schedule as a chance to embrace this innovative work practice and to rethink the criteria for effective management. Similarly, the revised schedule of the sales technician could have been an opportunity to rethink the way time is used in the organization.

Consider, also, the following example: two workers, one in sales and one in management, requested a job-sharing arrangement that would have allowed each of them to spend more time with their families. In an extensive proposal, they outlined how they would meet business needs under the new arrangement. As an added benefit, they also suggested a way to revamp the management development process so that a sales representative, working under the guidance of a sales manager, took on limited management duties. Such an apprenticeship model promised to be a significant improvement over the existing practice of “throwing sales people into management” with little training. Nevertheless, the company rejected the proposal because it was seen as stemming from a private concern (a desire for more personal time) rather than a work concern (a wish to increase the organization’s effectiveness), and the opportunity was missed.

Thus, despite the potential benefits to the company, making the link between work and employees’ personal lives in today’s business environment is, to say the least, not easy. Significant organizational barriers — for example, assumptions about what makes a good worker, how productivity is achieved, and how rewards are distributed — militate against such linkage. Work-family benefits are often designed and administered by the human resource function but implemented by line managers. Associating strategic initiatives with line managers and work-family concerns with human resources reinforces perceptions that business issues are separate, conceptually and functionally, from individuals’ personal lives.

Putting Work-Family Issues on the Table

Putting work-family concerns on the table as legitimate issues for discussion in the workplace turns out to be liberating. By talking about such issues, people realize that they are not alone in struggling to meet work and family/ personal demands. Such discussions help people see that the problems are not solely of their own making, but stem from the way work is done today. The process of transforming personal issues to the collective level engages people’s interest and leads to more creative ways of thinking. It also provides a strategic business opportunity that, if exploited correctly, can lead to improved bottom-line results (see “Business Case for Relinking Work and Family” on p. 1).

For example, at one site we documented the work practices of “integrated” individuals — people who link the two spheres of their life in the way they work. We found that integrated individuals draw not only on skills, competencies, and behaviors typical of the public, work sphere, such as rationality, linear thinking, assertiveness, and competition, but also on those associated with the private, personal sphere, such as collaboration, sharing, empathy, and nurturing. Their work practices include working behind the scenes to smooth difficulties between people that might disrupt the project, going out of their way to pass on key information to other groups, taking the time from their individual work to teach someone a new way of doing something, building on rather than attacking others’ ideas in meetings, and routinely affirming and acknowledging the contributions of others. We showed the value-added nature of this work—the way it prevented problems, enhanced organizational learning, and encouraged collaboration. Offering a new vision of the ideal worker as an integrated individual, someone who brings skills to the job from both spheres of life, helps the organization recognize the importance of hiring and retaining such individuals.

Where appropriate, we also pointed out to management the dissonance between policy and practice. For example, at an administrative site, despite the presence of a wide range of work-family policies, managers limited their use to very minor changes in daily work times. Employees dealt with the situation by “jiggling the system” on an ad hoc, individual basis to achieve the flexibility they needed, often by using sick days or vacation time. Thus, for instance, a man whose mother was chronically ill had to take a combination of sick days and vacation days to be with her. The costs to the site for this companywide behavior were considerable in terms of unplanned absences, lack of coverage, turnover, and backlash against people who took the time they needed. It also created employee mistrust of an organization that claimed it had benefits but made using them so difficult that the result was lower morale and widespread cynicism.

By bringing family to bear on work, we also focused attention on the process by which work is accomplished (see “How Long Hours Become the Norm”). In one sales environment, for example, we found that a sales team habitually worked around the clock to complete proposals for prospective customers. In the morning, the workers were rewarded with cheers from managers and coworkers, complimenting them on their commitment and willingness to get the job done. In response to our interventions, one manager recognized that this behavior reflected poor work habits and made it tough on these people’s family lives. Not only were their families suffering, but it took several days for these workers to recover, during which time they were less productive.

The manager told his team that their behavior demonstrated an inability to plan. He also began to share his perceptions with other managers. As a result, the sales team began to recognize and reward new work habits such as planning ahead and anticipating problems rather than waiting until they were crises.

We have found that changes in work practices can be brought about by looking at work through a work-family lens, linking what is learned from that process to a salient business need, and pushing for change at each step of the process (see “The Synergy of Linking Work and Family”). We begin to make the systemic link between work practice and work-family integration by engaging three lines of questioning:

• How does work get done around here?
• What are the employees’ personal stories of work-family integration?
• What is it about the way work gets done around here that makes it difficult (or easy) to integrate work and personal life so that neither one suffers? Ultimately, however, success also depends on the existence of two specific conditions:
• a safe environment that minimizes individual risk, freeing employees to take part in the change; and
• room in the process for engaging people’s resistance — in other words, addressing their objections, concerns, and underlying feelings with a view toward creating options that were not previously envisioned.<;i>

Creating Safety and Engaging Resistance

By giving people permission to talk about their feelings and their personal dilemmas in the context of redesigning work, a surprising level of energy, creativity, and innovative thinking gets released. But raising these issues may not be easy for those who fear they will be branded as less committed or undependable if they acknowledge such difficulties. At the same time, managers who are used to viewing gains for the family as productivity losses for the business may fear they will bear all the risks of innovation.

Therefore, collaboration and sharing the risks across the organization are important aspects of the process. In concrete terms, this means getting some sign from senior managers that they are willing to suspend, if only temporarily, some of the standard operating procedures that the work groups have identified as barriers both to work-family integration and to productivity. Such a signal from upper management also helps people believe that cultural change is possible and provides higher-level support to individual managers seeking to bring about change. The point is that employees need concrete evidence that they are truly able to control some of the conditions that affect their own productivity. And managers need assurance that they will not be penalized for experimenting in this fashion.

The process of relinking work to family creates resistance because it touches core beliefs about society, success, gender roles, and the place of work and family in our lives. We found, however, that such resistance almost always points to something important that needs to be acknowledged and addressed collaboratively.

Engaging with this type of resistance means listening to and learning from people’s objections, incorporating their concerns and new ideas, and working together to establish a dual agenda. To be effective, the process cannot be shortchanged. It requires trust, openness, and a willingness to learn from others.

Challenges

The next challenge is how to sustain these efforts over the long term and to diffuse them beyond the local sites. Lasting organizational change requires mutual learning by individuals, by the group, and by the system as a whole. It is important to continue to keep the double agenda on the table, ensuring that benefits from the change process continue to accrue to employees and their families as well as to the organization. If not, the individual energy unleashed will dissipate — triggering anger and mistrust within the organization.

What’s more, if local changes are to be sustained and if lessons from them are to be diffused, the work needs to be legitimized so that operational successes become widely known. Given the tendency to marginalize and individualize work-family issues, the overt support of senior management is essential here. Such support reinforces “work-family” as a business issue that is owned by the corporation as a whole.

Lasting change also requires an infrastructure, a process for carrying the lessons learned and the methodology used to other parts of the organization. In one organization, that process took the form of an operations steering committee working hand-in-hand with the research team to carry on the work in other parts of the corporation.

Our experience also suggests that multiple points of diffusion must exist. We sought opportunities, for instance, to present our work as part of special events as well as operational reviews and to look for internal allies among line managers, people involved in organizational change, and so on. Diffusion is also a challenge because, as people reflect on how the various operational pilots meet business needs, they tend to want to pass on to other teams only the results that yielded the productivity gains, rather than information about the process itself. This tendency shortchanges the process and seriously undermines the chances for replicating its success and sustainability.

Conclusion

As corporations continue to restructure and reinvent themselves, linking such change efforts to employees’ personal concerns greatly enhances their chances for success. Such relinking energizes employees to participate fully in the process because there are personal benefits to be gained. It also uncovers hidden or ignored assumptions about work practices and organizational cultures that can undermine the changes envisioned.

But relinking work and family is not something that can be accomplished simply by wishing it were so or by pointing out the negative consequences of separation. It is something that touches the very core of our beliefs about society, success, and gender. And it implies rethinking the place of families and communities and a new look at how we can nurture and strengthen these vital building blocks of our society.

The assumed separation of the domestic and nondomestic spheres breeds inequality, since present practices, structures, and policies — at all levels of society — favor the economic sphere above all others. As a result, employment concerns are assumed to take precedence over other concerns; achievement in the employment sector is assumed to be the major source of self-esteem and the measure of personal success. And, since employment skills are most highly valued and compensated, they dominate government, educational, and organizational policy

In the end, the goal of relinking work and family life is not simple and it is not just about being “whole.” It is about shifting to a more equitable society in which family and community are valued as much as paid work is valued, and where men and women have equal opportunity to achieve in both spheres. Such change is possible and provides real benefits not only to individuals and their families, but also to business and society.

Suggested Further Reading

Bailyn, L., Breaking the Mold: Women, Men and Time in the New Corporate World. Free Press, 1993.

Hochschild, A., The Second Shift: Working Parents and the Revolution at Home. Avon Books, 1997.

Perlow, L., Finding Time: How Corporations, Individuals, and Families Can Benefit from New Work Practices. Cornell University Press, 1997.

Schor, J., The Overworked American: The Unexpected Decline of Leisure. Basic Books, 1993.

This article is excerpted from Relinking Life and Work: Toward a Better Future (Pegasus Communications, 1998), which is an edited version of a report originally published by the Ford Foundation.

Rhona Rapoport is co-director of the Institute of Family and Environmental Research in London, England. Lotte Bailyn is the T Wilson (1953) Professor of Management at the MIT Sloan School of Management. Deborah Kolb is professor of management at the Simmons Graduate School of Management and director of the Simmons Institute on Gender and Organizations. Joyce K. Fletcher is professor of management at the Simmons Graduate School of Management. Contributing authors include Dana E. Friedman, Barbara Miller, Susan Eaton, and Maureen Harvey.

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Executives today are constantly seeking to predict how their organizations and the marketplace will behave. But because many leaders continue to use traditional reductionist methods to understand organizational behavior ones that focus more on symptoms than on causes of a company’s success they fail to gain real insight into how to build and sustain that success. The result is often reactive, crisis driven management with unanticipated side effects and unforeseen outcomes.

Contrary to this rigid perception of organizations as predictable machines, some management thinkers have come to view them as complex and evolving organisms. Accordingly, the tendency in the business world to define companies in terms of simple formulas and numerical results is slowly being replaced by the recognition that, to be effective in leading organizations, we must think of them in terms of the underlying structures and dynamic patterns of behavior that produce those results. In other words, we must begin to complement or replace linear thinking about how our businesses work with nonlinear approaches by applying the principles and tools of system dynamics.

System Dynamics Theory

Why do so many brilliant management strategies lead firms directly into decline or not produce the anticipated results?

In his classic 1961 book Industrial Dynamics, Massachusetts Institute of Technology professor Jay Forrester originated the ideas and methodology of system dynamics. He pointed out that the traditional approaches of the management sciences could not satisfactorily explain the causes of corporate growth or decline because they focused on simply explaining behavior. He believed that a system’s behavior is actually a product of its structure and that leaders should seek to identify where changes in structure might lead to significant, enduring improvements. They could then design organizational policies and processes that would lead to even greater success.

In order for managers to undertake this design process, Forrester advocated that they must analyze their organizations using dynamic models. For this purpose, he developed tools such as causal loop and stock and flow diagrams. These tools serve to illustrate the interconnected feedback loops that form a complex system. By identifying these feedback loops, management can figure out a system’s basic patterns of behavior, which include growth(caused by positive feedback), balance(caused by negative feedback), oscillations(caused by negative feedback combined with a time delay), and further complex interconnections.

Applied to organizations, this way of thinking challenges the notion of measuring success only through financial results. Because people can see financial results, they think they have control over them. But these results are actually produced by the organization’s underlying structures. These structures consist of:

• Organizational Architecture: the basic organizational design (such as the functions or divisions that the company includes) and the governance system (such as the planning and control system)
• Organizational Routines: standard operating procedures, decision making processes, behavioral archetypes
• Tangible and Intangible Resources: financial capital, human resources, buildings, machinery, land, brands
• Organizational Knowledge and Value Base: patents, core competencies, cultural beliefs, attitudes

When we focus on systemic structures and behavioral patterns, we gain the knowledge to design our organizations to produce desirable day-to-day results in areas such as profits, employee motivation, customer satisfaction, and so on (see, “Structure, Behavior, and Results”). The basic idea of the dynamic approach is that, although people shape their organizations, their behavior is ultimately influenced, and therefore limited, by the organizational framework in which they operate. Consequently, leadership means much more than optimizing businesses for short-term outcomes; it involves creating and cultivating structures and enabling organizational behaviors that guarantee the viability of the whole firm. Therefore, in order to manage their organizations successfully, leaders must realize that the best way to achieve sustainable results is not by relying only on what they see or measure but by:

• Describing and assessing the observable behavior of the system;
• Understanding the interdependencies between a system’s behavior and its underlying structure;
• Making assumptions about and modeling these interdependencies using system dynamics tools; and
• Finding and implementing policies to redesign the structure of the system in order to improve its performance.

Building on this system dynamics foundation, we propose to take leadership one step further, to what we call evolutionary leadership. The natural process of evolution offers a compelling model of how leaders might intentionally design and guide growth and balancing processes to create a viable organization. Evolutionary leadership involves the deliberate interplay of two management functions: strategic management (designing structures and processes that stimulate growth) and management control (guiding the external and internal factors that regulate growth). But before we explore the synergy between these two functions, we need to talk about how evolution works in nature and in organizations.

Evolutionary Theory in Organizations

Evolutionary theory has been the predominant paradigm in natural sciences for more than a century. Recently, theorists and practitioners in the social and management sciences have begun to adopt the ideas of evolutionary theory as a framework for describing and analyzing organizational development. The basic concept these pioneers have set forth is that processes of variation, selection, and retention as well as the struggle for scarce resources trigger the evolution of an organization.

Sociocultural evolution differs from biological evolution in that it allows for the intentional variation and selection of ideas. In this context, an organization’s fitness its “viability,” or ability to survive and thrive depends on how its decisions and strategies affect its position in product and resource markets and on its legitimacy from the point of view of important stakeholders. Chilean neurobiologists Humberto Maturana and Francisco Varela have deeply influenced thinking about viability with their theory that living systems are complex systems that can self-generate. A system dies when it loses its ability to renew itself. In the business world, a company that fails to renew itself by changing its strategic orientation and/or internal structure in response to shifting conditions will die. In contrast, a viable organization is one that can continually create its own future and there by assure its fitness in an evolutionary sense.

But how does a viable organism develop this capacity to self generate? According to Maturana and Varela, it happens when the organism

• Preserves its identify by repeatedly drawing system boundaries (i.e., defining what is “internal” and, “external”); and
• Maintains its ability to adapt to a changing environment.

Within ever-changing environments, external forces constantly threaten the existence of a species by altering its living space. To survive, a species must adapt to the changing conditions successfully without losing its identity. For example, in nature, many kinds of birds have adapted from natural to urban environments, but not all have managed to do so. In the banking industry, banks have profoundly shifted their strategies in the past decade in response to technology changes and new competitors. Many brick and mortar institutions have gone “virtual.” In doing so, they are able to maintain their existence by simultaneously preserving their identity while adapting their strategy and structure to a changing environment.

The key to an organization’s survival lies in mastering the trade-off between preserving its identity and adapting to a changing environment. Leaders do so through strategic thinking and acting, and by asking how they can maintain the fit of the organizational structure and its environment. There are two ways to achieve this goal:

• Maintain your identity and structure and avoid fundamental adaptations by changing the environment or searching for an appropriate new environment.
• Fundamentally change your structure and redefine your identity to reestablish a fit between the organization and its ever changing environment.

In reality, most organizations choose adaptation strategies that lie somewhere between these two extremes.

Organizations can only make alterations to the extent that their structures and resources make modifications possible. A firm has a good chance to successfully adapt to a changing environment when it has a strong learning capacity, that is, the ability to anticipate, influence, and quickly react to environmental changes, along with the ability to recognize, vary, and advance the underlying mechanisms of the learning process itself. For example, Shell Oil enhances its learning capacity by combining strategic planning and organizational learning through scenario planning. Scenario planning provides a mechanism for thinking in alternatives and making underlying assumptions explicit. This process reduces the company’s risk of encountering negative surprises and increases the speed with which it can implement changes. In short, organizational learning is a dynamic feedback process that can help organizations remain viable and therefore survive the external pressures of natural selection (see “The Evolutionary Cycle in Organizations”).

Growth and Balance

In addition to having the ability to adapt and learn, systems must be able to grow. Generally speaking, growing means incorporating more and more available resources like nutrients for a plant or natural or human resources for a company in order to become larger and larger. For a company, growth can mean an increase in market share or market value. But is growth in itself sufficient for survival? Clearly, the answer is no, because nothing grows forever. But where and what are the limits to growth?

In nature, reinforcing processes, such as population growth, are slowed by balancing processes, such as limited food supplies and the spread of diseases. If normal balancing processes aren’t blocked and assert themselves before a population reaches the limits of its habitat, that species can maintain a harmonious relationship with its environment. Such balancing processes ensure that the evolving system remains within a viable range of activities, in this case, healthy population density. Indeed, these balancing processes are more crucial than reinforcing processes, in that they keep the overall system alive. If, on the other hand, important balancing processes are missing, the species might become extinct by overtaxing the resources in its environment.

Are there similar natural boundaries to the development of social systems? The answer is yes. For example, a firm’s development can be limited by its production capacity, the size of its market, or the number of its competitors. The faster the company grows, the more rapidly it reaches these boundaries. From time to time, such limits to growth can change. For example, shifts in market conditions, such as those created by the Internet boom or the world oil crisis of the 1970s, can increase or decrease the time it takes an organization to reach a certain limit, unless people find ways to use their limited resources more efficiently.

We can say that an organization is evolving when its configuration, routines, tangible and intangible resources, knowledge, and value base develop in accordance with the changing external environment. Scientists now know that most healthy living systems follow a developmental path described as punctuated equilibrium periods of balanced growth that are interrupted by periods of exponential growth (see “The Stages of Organizational Evolution” on p. 4).

We regularly underestimate the tremendous power of exponential, or reinforcing, growth. We tend to assume that growth is linear and increases consistently over time. However, exponential growth happens much more precipitously. If we observe the two over a short period of time, exponential growth approximates linear growth. Over a longer period, however, the gap between the two becomes enormous.

Because human beings tend to perceive short term rather than long-term changes, we often reach the boundaries of exponential growth faster than we anticipated, often completely unexpectedly. We see this happen to companies when booming success is followed by equally dramatic failure. For example, cellular telephone companies experienced this phenomenon when they projected that their sales would continue to increase at a high level. But they eventually saturated the market and experienced declining sales. For this reason, unless we understand and anticipate the impact and boundaries of exponential growth, we will have a distorted perception of the evolutionary process, leading to unpleasant surprises and even to an existential crisis for the whole enterprise.

Organizations sustain themselves when they attain a balanced evolution off setting reinforcing growth action with timely balancing impulses. Sustaining this balance is the only way to ensure that companies remain in the realm of “sound growth” as they develop and that they don’t exceed the limits of their environment or resources. Balanced evolution plays an especially critical role during periods of exponential growth, when the organization is at a much higher risk of losing its viability than in periods of balanced growth, when the stakes aren’t as high.

For example, when a leap in growth occurs for a limited time(through external factors such as deregulation or new developments in technology, or through internal factors such as changes in top management or a merger and acquisition), leaders need to off set that growth by intentionally introducing balancing feedback loops. They can do so through control and coordination systems as well as productivity enhancement programs. These loops keep the organization’s growth from consuming the company.

Leadership in Organizational Evolution

But how can leaders help firms achieve the balanced growth they need to evolve? Through strategic management, leaders expand the business; through management control, they regulate the growth process, making sure that it remains within a sustainable range. Together, the two functions form a balanced leadership cycle for guiding and controlling the company’s evolution.

Strategic Management. Through strategic management, leaders cultivate the conditions for a company’s sustainable growth. Specifically, they perform the following three functions:

1. Set Direction. As mentioned earlier, leaders need to preserve or redefine the organization’s core identity and develop its structures in ways that lead to lasting success. They do so by communicating the company’s values and beliefs to employees and external stakeholders through shared vision and mission statements, and by strengthening internal rein forcing processes such as employee morale. They also formulate and implement strategy, not by detailing a map of action but rather by defining a corridor of learning opportunities.
2. Build Resources. Leaders need resources to support entrepreneurial activity. They can acquire them externally (such as machinery or capital) or develop them internally (such as people or policies). From a resource based perspective, only internally built resources can provide the basis for competitive advantages and above average returns, because they are specific to the company and therefore more difficult to imitate. On the other hand, resources that are available on the open market are available to all competitors.
3. Create Infrastructure. Leaders must not attempt to drive growth but rather to influence the factors that can block or support it. As such, they need to design an organizational context that eliminates barriers to company development (such as fear, distrust, centralized decision making, too tight control, and insufficient resources) and develop processes to promote learning (such as organizing flexible teams, supporting communities of practice, creating incentive systems for transferring knowledge, and creating learning spaces).

From a system dynamics perspective, these three functions combine to form a reinforcing process called the “Strategic Management Loop,” which strengthens the company’s growth(see “The Balanced Leadership Cycle”). But for the organization to remain viable, this reinforcing loop must be reined in by balancing processes, such as those that make up the “Management Control Loop.”

Management Control. Management control acts to bring equilibrium to the expanding system. To do so, leaders must perform three central functions:

1. Assure Internal Consistency of Infrastructure, Resources, and Direction. Leaders need to maintain the coherence of a system, particularly in large companies where management functions often get split among different organizational units or departments. To handle this specialization of functions, they must synchronize the development of strategy, resources, structure, and systems. They do so by working with others to develop a shared view of the system, which acts as a basis of companywide activity. However, this model is necessarily a subjective simplification of complex reality, so it can easily become selective and distorted.
2. Compensate for Selective Perception. Therefore, leaders and their teams must compensate for their selective perception by continually enriching their assumptions with relevant new information and challenging their mental models. For example, they might use management information and decision support systems, which provide comprehensive data and make blind spots of organizational perception visible. Management control thus leads to more informed decision making and better anticipation of the consequences of those decisions.
3. Appropriately Limit Developmental Dynamics. Designing appropriate limits on developmental dynamics involves two realms: content and time. Leaders must analyze whether the firm’s expansion exceeds the limits set by its internal conditions (for instance, the number of staff with expertise in certain areas) and the external forces of its environment (for example, the size of the market), thus endangering its boundaries. They also must regulate how fast the firm grows. They do so by pacing the speed of growth so it doesn’t over tax the current management capacity (resources and infrastructure) or environmental limits (size and growth of the market).

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Leaders put these functions into action using different diagnostic tools, such as the balanced score card and budgeting. The balanced scorecard helps them see the inter connections among the key measures of the business, for instance, between employee capacity and customer satisfaction, or between customer satisfaction and market share. Executives can then ensure that key measures stay in balance. Through the budgeting process, they translate strategic direction into financial objectives, setting the frame work for the allocation of resources and the utilization of infrastructures to assure internal consistency. By limiting and balancing developmental dynamics as well as by assuring internal consistency, these tools contribute to the fulfillment of the management control function in the balanced leadership cycle.

In order to avoid survival threatening oscillations between growth and decline, leaders need to take into account the time delays that occur before balancing impulses take effect. Working properly, the interplay of strategic management (growth actions) and management control (balancing impulses) assures a synergistic rhythm of a company’s evolution, a characteristic of particularly successful firms in dynamic environments.

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