Elements of the Organisation Through the Lens of System Theory

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Fachbereich MaschinenbauManagement internationaler Projekte

Elements of the Organisation

through the Lens of the System Theory

Joana G. Geraldi

May 2007


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This work is aimed at defining the main elements in an organisation, that is, what an organisation

comprises. The system theory is used here as basis for this definition.

1 IntroductionThe system theory is a flexible body of thinking that can be applied to analyse organisations. This

section reviews some main principles and elements of systems and adapt them to the equivalent in

organisations.

On the heart of the System Theory is the concept of a system 1. The Greek word System derives from

syn together and histemisites. Generically, system is defined as a complex of interacting elements,

where the behaviour of elements varies according to their relationship with the others2

. Symbolically,system can be illustrated as

Eq. 1: ),( RTS=

Where S refers to the system; T refers to the set of things, or thingwood; and R refers to the relation

between the elements, orrelationwood3.

This formula identifies the configuration of systems. When defining S, one is automatically defining the

borders of the system, and its environment. The interface with the environment strongly influences the

way systems function, i.e. its dynamics. Thus, apart from structure and environment, systems also have

dynamic features4.

The dynamic refers to the throughput and development of the system. The first entitles the conversion of

inputs into outputs. The second is related to how system evolves in the course of time, and adapts to

exogenous and endogenous perturbations. Moreover, organisational systems are also characterised by

1 The System Theory (also termed System Thinking, System Movement or System Science (Gharajedaghi, 1999; Klir, 1991,among others) is a cross-disciplinary. Both the terminus and the concept of systems were used before this period. However,System Theory or System movement is considered to emerge or gain importance as such in the 50s (Klir, 1991, pp. 7-19),counting with influences of, among others, the philosophy, biology, physics, engineering, mathematics. This multipleinfluences on the System Thinking led to a heterogeneous understanding, development and uses of system. Associationssuch as the IFSR (International Federation for Systems Research) dedicate efforts to coordinate activities related to thescientific study on systems. There are different perspectives of system theory. However, this chapter focuses rather on whatthese streams have in common, and not these differences.

This theory is being equally applied and further developed in and by a pool of disciplines; Organisational Theory is one ofthese. Thus, System Theory is not a theory, but rather a flexible and holistic way of thinking based on the concept of system.

2 (von Bertalanffy, 1973). For more definitions of system see Patzak (1982, pp. 18, 19).

3

The term used by Klir (1991, pp. 7) to refer to the relationships is systemwood rather than relationwood. This change wasmade to clearly differentiate the system and the relationships.

4 The system science gained dynamic with the ideas of Cybernetics initiated by William Ross Ashby and Robert Wiener(Schrgyogg, 1998, pp. 91-92).


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its purpose, that is, the structure and transformations are at least intending to fulfil these purposes. The

set of purpose of systems is also relevant to assess the success of current actions.

These elements are illustrated in the Figure 1.

Purpose Structure

Dynamic

Environment

ThingwoodThingwood RelationwoodRelationwood

Figure 1: Elements of the Organisation

These elements are the same elements defined as relevant to the concept of organisation applied in this

study. Structure refers to the features of the organisation, such as structure, set of instruments and

tools, competences, culture, etc. The Purpose is related to what the organisation defines as success, as

well as the strategic direction. Purpose is fundamental for this research as it serves as a controlling

mechanism, to evaluate the success of different configurations, and the consequences of internally and

externally driven dynamics. The dynamics refers to how organisation develops in the course of time. It is

taken as granted that not only external forces act upon organisations, but also internal forces are able to

generate changes. Finally contingencies are the idiosyncratic situation of the organisation. The next

sections describe these different elements.

2 StructureJust as organisation, organisational structure is also defined in different ways

5

.

Structure refers here to the form of organise the thingwoodand relationwoodinto interrelated groups by

aggregating and decomposing systems components. That is, a system can be decomposed in several

subsystems, which can be again decomposed in subsystems, and so on, until the definition of a

5

It goes beyond the objective of this study to summarise all ways of understanding organisational structures. Furtherinformation on organisational structure can be found in, for instance, (Child, 1982; Khandwalla, 1977; Mintzberg, 1983; Scott& Mitchell, 1975)


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minimum element of the system6. Similarly, one can aggregate systems into larger systems, up to the

composition of the whole7.

The Elements orThingwood are the things that are being organised. These can be objects, subjects8,

features, variables9

, etc,10

, both living or non-living elements11

. In organic socio-cultural systems, suchas the organisations, the thingwood is dynamic both in terms of structure and elements, and stability is

not guarantied12. Thingwood in organisations refer to the organisational structure, employees,

instruments, procedures, know-how, etc.

Structure is a means for attaining the objectives and goals of an institution(Drucker, 1974, p. 52)

Structure serves to:

produce organisational outputs and to achieve organizational goals ()

minimise or at least regulate the influence of individual variations on the organization ()

(and to provide) the settings in which power in exercised (), in which decisions are made

(), and in which organizations activities are carried out(Hall, R. H, 1983, pp. 45)

Structure involves the following elements:

Basic Structure is aimed at the allocation of people and resources to the tasks and provision of

mechanisms for their coordination. This comprises the organisational chart, comities, work

parties, etc

Operating Mechanism encompasses the definition of what is expected from the member is the

organisation. For example, the working procedures, controlling systems, quality and success

measurements, schedule and planning, etc

Decision Mechanism refers to the support systems assisting decision making systems (such as

programmes, rules, check lists, procedures), and the necessary information processing

(gathering information from the environment, preparing it for the decision makers)13.

There are a maximum number of organisational configurations due to: (Minzberg)

6 Simon, H. (1962), pp. 468

7 i.e. Cleland, D. I and King, W. R. (1973), pp. 32ff

8 Gigch, 1991, pp. 31

9 Defining systems as a set of variable implies a high level of abstraction. (Klir (1991) pp. 42, 43 and 47) For example acompany is not going to be understood as a set of interrelated people, but as a set of interrelated variables, such as Returnon Sales, Number of Employees, Market Capitalisation, etc.

10 Elements can be inanimate, living or both, Gigch (1991) pp. 41

11 i.e. Patzak, G. (1983)

12 Buckley, W. (1980), pp. 35

13 Child, J. (1977), pp. 8, 9.


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Coherence: constraints derived from the environment and companys characteristics and the

necessity to be coherent with these constraints due to the interdependence between the former

and the latter

Selection: the evolutional these that there is an environmental force that leads to the selection

of structures that best fit. This perspective is supported by the high quote of falencia, etc

Harmonisation: the older the organisation gets, the more it searches for an internal and external

harmonisation, and by this means launching synergies, avoiding incompatibilities, etc

Quantum Change: changes occur in batch rather than continuously, as changes are expensive,

usually not welcomed by employees, etc. Thus, organisational structures tend to keep a limited

number of organisational designs in a certain historical process. This statement is not in line

with other perspectives, such as the one of continuous organisational development. One can

discern major changes from minor changes. These minor changes happen in a higher

frequency, and more closely to continuous than major ones.

The Relationwood refers to the interdependences of the elements. For the System Thinking, the

Relationwood stays on the foreground.

The concept ofBlack Box14aids the organisation of systems. This principle can be used as an artefact

to narrow down the scope of analysis without loosing the holistic approach to the problems. Therewith,

the minimum element of the system is usually a black box, as it usually could be further decomposed.

In organisations, the configuration refers to the Aufbau and Ablauforganisations.

Mintzberg identified five coordination mechanisms used by organisations to coordinate the

tasks(Mintzberg, 1983, p. 4ff):

- Mutual adjustments: coordination by informal communication

- Direct supervision: coordination is undertaken by a person responsible for the activities, who will

be giving instructions and monitoring the tasks to be coordinated

- Standardisation of work process: work process as well as coordination between tasks is

specified or programmed

- Standardized outputs: the process is not pre-defined, but the result is standardised

14 In our daily lives we are confronted at every turn with systems whose internal mechanisms are not fully open toinspection, and which must be treated by the methods appropriate to the Black Box (Ashby, W. R., 1957, pp. 86). In otherwords, Black Boxes are sub-systems that cannot (or are not wished to) be further decomposed. Thus, one analyses only the(dynamic) relationship between the Black Box and the other sub-systems to be analysed.


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- Standardised knowledge or skills: the person executing the work has a specific training for the

execution of these task

Companies use a combination of these aspects for coordinate their interfaces.


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3 PurposenessIn purposeful systems15, such as the organisational systems16, the transformations follow a certain set

of purposes.

Gigch (1991) defined purpose as a combination of function, goals, and attributes. Function expresses

the reason for existence of the company. Attributes or properties refer to the measurements used to

appraise effectiveness. These can be quantitative, such as return on sales, or qualitative, such as value

of the core competence. Goals and objectives refer to the value of effectiveness that the system is to

accomplish17.

Purpose is understood here in a broader sense as the integrative forces, that is, the elements the hold

systemwood together and convey the necessary stability to the system. It is important to discern the

integrative forces from the relationwood. The relationwood may also act enforcing the integrative

forces, but the integrative forces are understood here as what makes the thingwood perceives or being

perceived as part of the system18. Thus, the purpose of the system is related to the reasons why

systems emerged in the first place, it can be considered the soul of the system.

In purposeful systems, such as the organisational systems19, the transformations follow a certain set of

purposes.

It is worthy to review some different perspectives to analyse this integration forces When analysingcompanies as systems.

Coase and its fellows in the New Institutional Economy look at the market structures and transaction

costs to explain this integrating force. Coase (1988) argues that a pure market environment still conveys

integrations forces based on price mechanism. The firm just provides a different type of integration

based on the role of the entrepreneur. He argues that what is to be explained is why one integrating

force (the entrepreneur) should be substituted for another integrating force (the price mechanism)20.

The new institutionalism economy justifies this mainly by the reduction of transaction and agent costs,some examples:

15 Systems can also exist without a defined purpose, this are termed purposeless system. This type of system is notconsidered in this study.

16 Cleland and King (1983), p. 62, among others.

17 This division is similar to the VMOST (Vision, mission, objectives strategy and tactics) concept, popular to practitioners.

18 This perception of membership does not deny the possibility of the same elements being members of other systems.

19 Cleland, D. I and King, W. R. (1983), pp. 62, among others.

20 Coase, 1988, pp. 48


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- The (costs) of discovering what the relevant price are21. The emergence of specialists selling this

service only ameliorates these costs but do not eliminate them.

- The costs of negotiating and concluding a separate contract for each exchange transaction22.

Even if these contract costs are not eliminated by the existence of firms, they are greatly reduced,and specially interesting when short-term contracts are unsatisfactory (pp. 40)

- The costs of operating a market are avoided (pp. 40)

- Different treatment by governments or other bodies with regulatory powers (pp. 41)

- Save cost incurred controlling input and output of information regarding the transactions23

- Lower production costs as well as gains of synergies and experiences when controlling and

motivating people24

The purpose of organisations is not defined by simple means. Cyert and March argue that individuals

have goals, but collectives do not25. Indeed, organisations have different and frequently conflicting

purposes26. Therewith, in a Bottom-Up perspective, the purpose of the whole is defined by a complex

interaction of different individual purposes and wish for autonomy27. In a Top-Down perspective, the

existence of common purpose is believed to be one of the most relevant factors for the existence of

organisations. It is one element that holds these different perspectives together, providing advantages

such as the reduction of transaction costs.

Thus, the organisational design is the result of a dynamic balance between integrative and autonomy

forces.

In the system theory, the purpose i.e. this entrepreneur integrating force is grated by the identity of the

system28, by its vitality, and by the Autopoisis principle.

Drucker (1954) proposes an approach to ameliorate this problem: introduction of the concept of

management by objectives (MBO)29. MBO proposes a jointly definition of goals and controlling system

(definition of common goals, areas of responsibility, expected results and guides for measurement of

21 Coase, 1988, pp. 38

22 Coase, 1988, pp. 39

23 Cheung, 1983 in Ebers, M. and Gotsch, W., 1999, pp. 206

24 Alchian and Demsetz (1972) in Ebers, M. and Gotsch, W., 1999, pp. 206

25 Cyert, R. M. and March, J. G. (1963), pp. 26. Similar in Perrow (1979, where he argues that ambiguity is one of thereasons for the non-viability of the ideal bureaucracy. The problem is that even if the interest of the organisation isunambiguous, men do not exist just for organizations, pp. 4.

26 Kast and Rosenzweig (1979), pp. 153

27 Gigch (1991)

28 Malik, F. 2002, pp. 106ff

29 Drucker, P. (1954) The practice of management. Heinemann, further developed by Odiorne, G. S. (1968)


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these results). Success of this method is conferred to the collaboration among horizontal and vertical

layers of the organisation, thus, MBO programmes imposed from the top management show less

effectiveness30.

Purpose and Control

Organisations, as purposeful systems31, control the transformations. Controlling only makes sense if

there are states which are more or less accepted. The acceptance of certain states is related to the

agreed purpose of the system. Thus, changes in the system, either due to throughput or

transformations, are to be apprised against the purpose of the system.

The higher the diversity of purposes, the higher the higher the difficulty to achieve stability in systems,

as the controlling function will not work properly.

30 Kast and Rosenzweig (1979), pp. 168. Further information about MBO in, for example,

31 Cleland, D. I and King, W. R. (1972), pp. 61


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4 EnvironmentWhen defining the thingwood and relationwood of a system, one is automatically considering the

definition of borders and Environment of the system, so that the combination of system and environment

results on the whole.

Defining the borders does not mean that the environment is to be disregarded; the interactions with the

environment are centre to the system thinking. The relationship between the environment and the

system is defined by the Openness32 of the system. In thermodynamics, a system may have three

degrees of Openness:

- Open systems exchange energy, material and information with the environment

- Close systems exchange information and energy

- Isolated systems do not interact with the surroundings33.

The definition of boundaries of the system is not-given but rather decided by the observer, according to

the objective of analysis.

It is agreed that organisations are open systems34.

Gigch (1991, pp. 42) proposes the distinguishing internal and external based on the degree of control:

Defining system boundaries determines which systems are considered under control of the decision

maker and which are to be left outside the decision makers jurisdiction (considered as given).

In this perspective, the external environment is formed by these variables or elements that are not

controllable, but still may impact the organisational system, and hence were to be predicted. Typical

variables of external environment are related to dimensions such as: Political; Economic, Socio-Cultural,

Technological, Legal, Demographic and Educational, Ecological, Environment (availability of

resources)35. The system should be prepared to deal with different scenarios according to the behaviour

of these uncontrolled elements. This is the principle of Risk Management, Game Theory, etc. Manymodels for organisational systems suggest the addition of an identifier function between the

environment and the organisation. This function refers to recognising (identifying, perceiving) the

32 The openness of systems has relevant implications to the dynamic and stability of the system.

33 i.e. von Bertalanffy (1973), pp. 38ff

34 In the 40s and 50s, organisational scholars studied the organisational system as a closed system. To date, this opennessof the organisation is a consensus (Perrow, C. 1973, pp. 11). This change inspirits the formation of various organisational

schools, such as the contingency and ecology schools. Discussions on this subject in, for example, Emery, F. E. and Trist, E.L. (1960), pp. 85ff

35 It is not the aim of this section to discuss each of these aspects, for more information, see for instance, Kast andRosenzweig, pp. 131, Hall, R. H. (1983), pp. 227ff


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behaviour of the external environment to prepare for potential changes36 (reactive) or recognising

possible opportunities (active).

This view of the external environment leads to the dichotomy between controllable and non-controllable

variables. Gharajedaghi, J., (1999) calls attention to another type of variable: the variable that one caninfluence. To control means that an action is both necessary and sufficient to produce the intended

outcome. To influence means that the action is not sufficient; it is only a coproducer37.

Thus, this new type of variable formed the transactional environment37. The increasing technological

development and specialisation, and the (consequent) growing interdependence among companies

triggered the relevance (and ability) to convert uncontrollable variables in influenceble variables.

Cleland and King (1983, pp. 23) applied a similar concept to the transactional environment the

operational environment - to a classical engineering project context (see figure X).

The model proposed by Cleland and King is reduced to the ability (and necessity) to influence of a

fraction of the external environment. However, the challenges on controlling the systemwood are also

relevant. Examples are the different objectives, people, cultures inside of the company. Many

approaches in the Organisational Theory at least acknowledge this influence, such as the bounded

rationality and opportunism in decision making processes38 and the entire organisational behaviour.

Slowly, we are realizing that we do not actually control much of anything, but do have the ability to

influence many things. () Managing a system is therefore more and more about managing its

transactional environment.39

This enforces the importance of interactions and system theory to manage companies. The Figure 2

illustrates this paradigm of systems.

36 For example, Viable System Model (Beer) in cybernetics, Takahara, Y. (2003) in COT, Kast and Rosenzweig, J. E. (1979)in contingency theory. The contingency and ecology are especially focused on this area.

37 Gharajedaghi, J., (1999), pp. 31. The distinction between general external environment and the closer or task specificenvironment was also proposed by Kast and Rosenzweig (1979), pp. 127ff

38 March, J. G. (1988).

39 Gharajedaghi, J., (1999), pp. 32


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System A System B

System C

Figure 2: The Intersections of Systems

In this sense, endogenous or exogenous elements are defined rather by the embeddness in the system,

strength of relationship, and in a certain time and location. So that the employees feel sometimes more

embedded in the system organisation and other times in the system suppliers, for instance.

It is agreed that organisations are open systems40.

40 In the 40s and 50s, organisational scholars studied the organisational system as a closed system. To date, this opennessof the organisation is a consensus (Perrow, C. 1973, pp. 11). This change inspirits the formation of various organisationalschools, such as the contingency and ecology schools. Discussions on this subject in, for example, Emery, F. E. and Trist, E.L. (1960), pp. 85ff


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5 DynamicsOrganisational systems are dynamic41; consequently, the structure and environment of a system

described in the last section are not an absolute state but rather depends on the current situation42 and

evolutes on time.

The system science acknowledged the relevance of dynamic with the ideas of Cybernetics initiated by

William Ross Ashby and Robert Wiener43. First, the concept of transformation is to be portrayed.

Thereafter, the feedback systems involved in such dynamics are reviewed.

a. TransformationTransformation refers to a transaction from a State44 A to a State B45. A series of positions or states

taken in different points in time defines the trajectory or line of behaviour of systems46. In order to

analyse the trajectory of systems, it is useful to discern between two main types of trajectories47:

Throughput and System Change.

Throughput48 is the process in which inputs are converted in outputs49. Gigch (1991) differentiates

between inputs and resources. In the process of conversion, inputs are usually the elements to which

the resources are applied50. In other words, resources are the elements of the system and belong to

41 Organisational scholars agree upon the fact that organisations are dynamic: Already in the 50s this concept was widelyaccepted, this is made clear by the statements such as this: Organisational systems are constantly changing and adaptingto internal and external pressures, and is in a continual process of evolution (Kast, F. E; Rosenzweig, J. E., 1979, pp. 105referring to Selznick, 1948).

42 Similar in Hill, W. at. al. (1998) pp. 435.

43 Main authors: Ackoff (1960, 1964), Beer (1959, 1966), Mirow (1969), Flik (1969), Krieg (1971), Malik (1984), Probst (1987)

44 (State is meant as) any well-defined condition or property that can be recognised if it occurs again (Ashby, W. R., 1957,pp. 25)

45 Where State A in a given time, it , is not necessarily different from a State B, in a different point in time, jt , and, as the

systems transformation tend to be continuum, the fact that State A in it is the same as State B in jt does not exclude the

possibility of a State A in ajtit


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the thingwood, and inputs are a special type of element that enters the system51. For example, in a

factory the raw material is the input and the machinery is a resource. In service based companies, this

difference is more abstract. In a software house, for example, one could understand the resource as the

programmers (and their ideas), computers and software, and the input is the order of the client the

wish to have a certain programme.

System Change is, as the term indicates, related to changes on the system itself. This is the core of

organisational change theories. One can discern between changes triggered endogenously or

exogenously. Exogenous triggers are usually started52 by the throughput, for example, changes in the

system due to changes in the quality or availability of inputs; by other external influences, as studied for

instance by contingency, ecology and institutional theories. Endogenous changes are those initiated by

internal forces53.

Apart from this triggers, it is relevant to acknowledge the development process as organisations age,

that is, its evolution from the genesis to a successful established organisation.

Such transformation can be both conscious or not. When conscious, these changes are related to the

organisational development, and usually follow a strategic direction, for example, the organisational

growth, internationalisation, process reengineering, etc.

b. Feedback SystemThe concepts of positive and negative feedback are reviewed in this section.

Negative Feedback Loop

This is the classical feedback loop. This feedback is responsible for controlling based on goal,

monitoring, comparison and correction actions. As showed in the Figure 3, deviations are identified and

the route of action is corrected back to the desired route, or towards the goal.

Start Finishdesired route

over-reaction

correction

correction

actual route

(deviation)

51 Kring, P. (2002).

52 Evered, R. (1980), pp. 6, proposes these three triggers for change.

53


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Figure 3:Negative Feedback

The difference between corrections back to the planed route and towards the goal can be illustrated by

strategies of navigation.

Positive Feedback

Start Finishdesired route

actual route

(deviation)

Figure 4: Negative Feedback

In contrary to negative feedbacks, positive feedback reinforces the deviation, amplifying the deviation. In

other words, one variable positively influences the other, increasing the deviation to the plan more and

more, leading to vicious cycles54. The Figure 4 illustrates such deviation.

Learning Systems

Simple feedback control has a memory capacity, and saves there the standard or goal; feedback

control with selective memory is able to distinguish different standards for different situations, and the

learning system change the decision rules on the basis of higher goal55. Learning Systems can be

subdivided into purposive and purposeful systems56. Purposive systems are those that are able to

choose the means to reach a certain objective, and purposeful system chooses both means and goals.

The feedback processes also have influences on the decision making process. There are programmed

and non-programmed decisions57. The former refers to routine and repeated decisions, while the latter

indicates ill-structured and non-recurrent situations. Programmed decisions do not necessarily mean

computer programmable decisions, whether the non-programmed decisions are those that cannot be

54 Stacey (1993), p. 150f

55 Cleland, D. I and King, W. R. (1972), pp. 37ff. These three types of feedback can also be referred to according to thepurpose of the system: maintaining-state (simple feedback), goal seeking (feedback control with selective memory) and idealseeking (learning systems) (Kanellis, P. and Paul, R. J., 1997)

56 Ackoff (1976) pp. 24 in Gigch (1991), pp. 74

57 Simon (1965) pp. 58-59 in Gigch (1991) pp. 83-84


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(computer) programmed, nor previously structured. Heuristics and rule of thumb58 are common methods

to deal with non-programmed tasks. The Table 1 summarises the

Table 1: Feedback, Purposeness and Decisions

No Decisions No goals Purposeness

Fixed Goal Simple Feedback, State MaintenanceProgrammed Decisions

Different goals to different situations feedback control with selective memory, goalseeking

Choose means to achieve goal PurposiveNon-programmed decisions:rule of the thumb andheuristics

Choose goals and means

Learning Systems, Idealseeking

Purposeful

58 Hall and Hitch (1939) already reported that managers make decision based on the rule of the thumb, rather than in ananalytical and rational approach.

Elements of the Organisation Through the Lens of System Theory

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