A Systemic View of Decision Making

In earlier posts we have stressed the importance of choosing process as the correct unit of analysis, and selecting the process level of detail commensurate with the decision making problem at hand. It is also important to identify the core processes that represent the building block for any organization, and then to evaluate each process through appropriate performance metrics that directly relate to that process. Doing so allows an organization to have precise visibility into how process-level decisions advance organizational objectives.

In spite of doing some of these things well, organizations end up with sub-optimal decisions and failed outcomes. Why?

Decision Interactions Aren't Explicitly Recognized.

One major reason is that interactions between decisions made and underlying relationships they affect are not explicitly recognized. The systems viewpoint suggests that exactly the reverse should be done. A whole field of study on systems analysis exists to provide insights on how and why such outcomes occur.

Swimming in a Vortex

One of the best expositions on identifying the patterns that control events and how to obtain leverage from them in the business context is contained in Peter Senge's seminal text The Fifth Discipline (Doubleday Currency, New York 1990). This book is a must-read for most managers and decision makers, because the author succinctly provides alternate explanations for why doing the most intuitive thing at first glance would not lead to desired consequences. One particularly telling example is that of a swimmer caught in the vortex of a whirlpool. While the instinct would be to fight against going down, the only chance of survival depends on allowing oneself to go down the vortex and then swimming laterally to escape the drowning. Only a systemic view of the situation would yield such a perspective.

Like the swimmer in Senge's example, managers and decision makers need to take the holistic view point on how their decisions affect other parts of the organization. Inter-relationships and interactions among and between decisions may often determine the quality of outcomes, rather than any single decision by itself.

Bullwhip Decisionmaking

Instances of lack of systemic thinking abound in real world. The bullwhip effect in supply chains that costs retailers, manufacturers, and distributors large losses due to excessive investment in inventories which do not yield appropriate customer service and returns on investment, is a well-known example of lack of systemic thinking and decision making.

Real-World Example: Systems-Based Decision-making

I have evidenced it myself in some different contexts. For one of the product lines, a second tier supplier to a large firm (say Ajax for convenience) had a high cost structure, and was thus charging higher prices to Ajax. Negotiations only yielded minor improvements in price over time. A more systemic analysis revealed that a key input to the second tier supplier was being procured from a third tier firm, which also had pre-negotiated lower price point contracts with Ajax on some other items. By extending this lower price point to the second tier supplier, the cost structure of the second tier supplier was reduced to the extent that it could now supply the same input material to Ajax at a much lower price than before. These improvements would not have come about without looking at the entire set of supply chain entities in a more holistic fashion.

So What: Systemic decision making reduces decision error and increases the return on decisions made.

It is clear that the level of analysis should be broad enough and high enough to reveal all the interactions and relationships in detail. Drilling down very deep into specific processes and their nested sub-processes is entirely appropriate for several kinds of decisions, and it also makes the analysis easier. However, caution must be exercised that the decision maker does not go so deep so as to lose sight of the benefits that can only come with systemic decision making and bigger picture analysis.