Leadership, Management and Management Control - a System Dynamics Approach

Utilizing a system-dynamic interpretation of the term leadership, we aim to identify the current challenges to companies from their environments, and to explain the consequences of these challenges for company design and control As well, we aim to develop a dynamic approach to leadership based on theories of system dynamics and living systems. The purpose of leadership is to create a living and learning organization capable of development that is both internally guided and externally oriented. For a company to achieve sustained development, there must be a healthy proportion of growth and balance. Management needs to be counterbalanced by control: management and management control together enable viable leadership. Leadership, Management and Management Control Gueldenberg and Hoffmann 3 Leadership, Management and Management Control – a System Dynamics Approach 1. Research Question and Objectives Why do so many brilliant management strategies lead firms directly into decline? Why do so many other strategies not produce the anticipated sustainable success? Why do some companies grow while others shrink? Why are some firms extraordinarily successful over the years while others – even those in the same industry – slide from crisis to crisis? Why do so many classical theories of business administration fail to explain these phenomena and help to overcome these problems? Business administration – and in particular management science – is constantly seeking the best approach to understanding reality, so that the patterns and structures underlying tangible events can be more easily understood (cf. Ulrich 1970, Morgan 1986, Nelson and Winter 1982). Apparently, traditional reductionist methods – ones that analyze a system’s tangible events – are unable to adequately explain the dynamic structure of the business environment, i.e. they are unable to explain ”reality." Otherwise, systems would not so often behave differently than had been "predicted" ( Sterman 1985). Thinking in terms of determination and regularity has gradually shifted to thinking in terms of systems and chaos (f.e . Brown and Eisenhardt 1998). Little by little, our perception of today’s business organizations as "machines" is changing to regard them as evolving organisms, i.e. living systems ( Miller 1978, Morgan 1986). Accordingly, a definition of the business world in terms of simple formulas, numbers and tangible events is becoming less and less pertinent. Our complex business world can be described and explained only in terms of structures and dynamic behavior ( McKelvey 1997, Sterman 2000). Linearity in our thinking has to be complemented or replaced by non-linearity. In Western culture, successful corporate leadership is usually measured by visible results (Freedman 1992). We look only at the ”visible” – the tip of the iceberg – and neglect its underlying structure and dynamic development patterns (see Illustration 1). In firms focused on the short term, management’s main objective is to deliver results on a daily basis. Such short-term optimization, however, can take place only within boundaries set by the structure of the underlying system. Organizations are shaped by individual human beings. Within the same system, however, Leadership, Management and Management Control Gueldenberg and Hoffmann 4 participating individuals basically produce the same results – independent of how different such individuals may actually be ( Senge 1990). Consequently, we need to change our focus from visible events and individuals to the connections between them and to a system’s underlying b havior pattern and structure. Behavior and Patterns Visible Results Dynamic Systems Structure As with an Iceberg, the more important and substantial Part is hidden. The “Waterline” Illustration 1: System Structure and System Behavior ( Senge 1990) Since, however, sustainable success and successful leadership of an enterprise can be explained by factors other than visible results and the behavior of individual persons, it is necessary to understand the enterprises from a lower-level perspective that allows us to see what is below the "waterline,” each system behavior and system structure, to observe and understand it better (Mintzberg 1979). If this approach succeeds, the knowledge gained w ill help design and improve companies’ structures and behavior patterns, facilitating desirable results in day-to-day management. Leadership, in this sense, doesn’t primarily mean optimizing day-to-day business; more importantly, it means enabling overall success by daily creation and cultivation of structures and behavior principles that guarantee the viability of the whole firm. This approach to understanding leadership represents a fundamental shift from such traditional management concepts as Leadership, Management and Management Control Gueldenberg and Hoffmann 5 • the separation of management functions into planning, decision-making, organization, execution, control and motivation (See Schreyögg 1998), • the charismatic leadership theory, • the exclusively reactive management concept (adaptive organization). These traditional approaches are giving way to an evolutionary definition of leadership based on system dynamics. This paper, using theories of system dynamics, evolution, learning, complexity and living systems, aims to work out a model for system dynamics evolutionary leadership, and to detail the two most important dimensions of leadership: management and management control. Leadership, Management and Management Control Gueldenberg and Hoffmann 6 2. Theoretical underpinnings 2.1. System Dynamics Theory Jay Forrester, in his 1961 classical "Industrial Dynamics," originated the ideas and methodology of system dynamics ( Forrester 1961). He pointed out that traditional reductionist and static approaches of management sciences could not satisfactorily explain the causes for corporate growth and sustainable economical success: "The solutions to small problems yield small rewards. Very often the most important problems are but little more difficult to handle than the unimportant. Many [people] predetermine mediocre results by setting initial goals too low. The attitude must be one of enterprise design. The expectation should be for major improvement (...). The attitude that the goal is to explain behavior, which is fairly common in academic circles, is not sufficient. The goal should be to find management policies and organizational structures that lead to greater success." (Forrester 1961, p. 449) Growth and sustainable success have to be understood dynamically. Accordingly, they can be analyzed, understood and explained only by dynamic models. A system’s behavior is a product of its structure. Complex systems consist of an interconnected structure of feedback loops . Therefore, the elementary behavior of structured systems should be identified in terms of their underlying feedback loops. Such behavior patterns include growth (caused by positive feedback); balancing (caused by negative feedback); and oscillations (caused by negative feedback combined with a time delay). Other behavior patterns of complex systems — for examples, S-shaped growth or overshoot and collapse — are caused by a non-linear interconnection of these underlying feedback loops. ( Sterman 2000). 2.2. Complexity Theory Stafford Beer is regarded as the founder of a system-oriented management approach (cf. Beer 1975). His basic assumption is that the "substance" of management science is not money or capital, not machines or materials or employees, but mainly complexity (see also Malik 1993). Such other "variables" as profit, sales, cash flow, investments, products, prices and customer Leadership, Management and Management Control Gueldenberg and Hoffmann 7 needs represent merely " manifestations of complexity " and therefore are only forms in which complexity appears. These visible results of system behavior combine to form the tip of the iceberg. The complexity itself originates in the dynamic structure of the underlying system and can be represented by the measure of variety. According to Ashby's law of requisite variety , a high degree of external variety can be ”destroyed” only by a high degree of internal variety ( Ashby 1958). Organizations without sufficient internal complexity endanger their very existence because they lack a vital capab ility: the ability to neutralize external structural challenges by making internal structural changes. In systems theory, this capability is known as tructural plasticity (see the following chapter). Every viable system must remain structurally fit to survive in a constantly changing environment . Recent years have seen the emergence of another stream of research in complexity theory, rooted in the work of the Santa Fe Institute ( Kauffman 1993, Gell-Mann 1994). These researchers created the notion of CAS (complex adaptive systems) to describe and explain the (co-)evolution of complex systems and their environments ( Kauffman 1992, Waldrop 1992, Holland 1995). A few attempts have been made to utilize these ideas for business management (f.e. Stacey 1995, Brown and Eisenhardt 1998, Sachs 1997). Leadership assessments that consider companies as CAS regard leadership as the process of mastering complexity — reducing external complexity while increasing internal (organized) complexity, i.e. the capacity to absorb complexity. 2.3. Theory of system viability In newer systems theory, one influential idea comes from the Chilean neurobiologists Maturana and Varela. They used a series of neuro-physiological experiments to develop a theory about the basic principles of the human nervous system and then derived an epistemology theory, which was extended into a theory of living systems and their self-generation. Their approach is used to distinguish between living, or viable, and non-living systems. According to Maturana and Varela (1987), living systems are complex systems that have the