Systems Theory

Systems theory and the term systems approach represent an approach to inquiry that fundamentally contrasts with the well-established, dominant reductionist-deterministic paradigm, which assumes that systems may be understood by studying their individual parts and that systemic behavior is essentially predetermined. Essentially, the systems approach focuses on adopting a holistic perspective and places greater emphasis on the relationships between the elements that are under study. One important objective of a systems analysis is to develop a deeper understanding of “how things work” by investigating the nature of the interactions of the components of interest. In an organizational context, this perspective recognizes a broader range of issues than that offered by a specialist-driven, reductionist approach. This feature is particularly relevant for understanding the development and management of a firm’s reputation.

Reputation is broadly seen as a summary representation in the minds of stakeholders of an organization’s character. Through its actions, a firm sends out signals of various kinds and through different media that are received by stakeholders and transformed into an assessment of the firm. The signal transmission is only under partial control by the firm, and the signal processing in the minds of stakeholders is not well understood. Despite these problems, reputation is important to the firm and is characterized as an intangible strategic asset. Thus, managing this resource falls under the purview of the firm’s management. The systems approach offers two important benefits. First, it provides a methodology for explicitly working with managerial mental models of the relationship between reputation and value creation. Second, through the use of computer-based tools, the relationships hypothesized by managers can be operationalized, and strategies for reputation management can be investigated prior to implementation. This entry further discusses the characteristics of systems; then, it examines the origins and development of systems theory and its implications for corporate reputation.

The ubiquity and variability of systems are indisputable, yet the basic definition of a system is simple. A system (a) is a collection of entities that (b) stand in relation to one another, and it (c) has a distinct boundary separating the internal entities from the external environment. Systems are often defined with respect to a specific purpose within a larger system. For example, the marketing department is one specific system contained within the larger organizational system of the parent company, along with the other (sub)systems required for the parent to function successfully. Systems are characterized by their complexity, which has two attributes: detail complexity and dynamic complexity.

A system’s detail complexity is determined by the combination of the number of entities constituting the system, the attributes associated with the entities, the number of relationships among the entities, and the degree of organization of the system. In systems with high detail complexity, there is a high likelihood that actions taken in one part of the system will have unexpected and unintended consequences in another part of the same system. Dynamic complexity describes the behavior of the system over time. A system that changes very little over time has low dynamic complexity, even though it may have high detail complexity. Similarly, simple systems with very few components may have high dynamic complexity if there are rapid and dramatic changes in system performance as its components interact.

Origins and Development of Systems Theory

The intuitive idea of systems is not new, but theory development and subsequent practice based on theory experienced significant growth in the early 20th century. Biologist Ludwig von Bertalanffy was among the first to propose the use of a holistic perspective to understand living organisms, a unique notion at that time, which contained the seeds of what was to become general systems theory (GST). The emergence of GST in the early to middle part of the 20th century represented the next step in the evolutionary process of formal inquiry that began with the Ancient Greeks.

GST was misunderstood and controversial from the beginning. However, von Bertalanffy’s intention was not to propose a general theory of all systems but rather to establish a new paradigm for developing theories in the separate disciplines. In this sense, GST contributes by identifying universal principles that apply to systems in general. Subsequent development and application of systems theory showed that a nonreductionist perspective that focuses on relationships rather than individuals has contributed to improved insight into and management of complex social systems.

The 1950s to 1970s produced important works that established the basis for modern systems theory. The rapid development of science and technology in the early 20th century resulted in an evolution of the previously traditional disciplines of physics, biology, and economics into “interdisciplines,” such as biophysics, biochemistry, and later behavioral economics. These developments came about from an increasing realization that previously distinct bodies of knowledge had many commonalities in terms of both processes and methodology.

Kenneth Boulding (1956) did much to promote the concept of GST and claimed that it was the result of “an increasing need … for a body of systematic theoretical construction which will discuss the general relationships of the empirical world” (p. 197). One outcome of his work was a typology of systems ranked in order of increasing complexity. This “system of systems” established a framework for identifying gaps in the theoretical and empirical knowledge relating to systems. Boulding suggested that the most useful application of the classification scheme “is to prevent us from accepting as final a level of theoretical analysis which is below the level of the empirical world we are understanding” (p. 207).

The modern business organization is a complex system that ranks high in Boulding’s typology and functions in a dynamic environment containing other high-level systems: institutional, competitors, regulatory, and ecological. The number of possible interactions over time overwhelms the human capacity to comprehend fully the situation. Rather than retreating into the confines of a single discipline, systems theory offers a new perspective on organizations that promotes deeper understanding of “how things work” in these entities.

Jay Forrester was an early advocate of applying systems theory to managerial problems. Through his work with business firms at the Massachusetts Institute of Technology, he observed that organizations frequently reacted to managerial actions in ways that were neither intended nor expected. Three commonly observed dysfunctional reactions are (1) policy resistance, (2) unintended consequences, and (3) counterintuitive behavior. These are systemic responses to initiatives that are based on a reductionist, linear understanding of the relationships among the components of the system.

The area of systems thinking, the operational branch of systems theory, identified a number of systems archetypes—“generic structures”—that have characteristic behavioral patterns that may be applied to a wide range of applications. For example, the well-known “tragedy of the commons” structure was originally applied to describe the behavior of African herdsmen, yet it has been applied to other local resource management situations as well as to automotive design. Similarly, the underlying structure and decision rules that represent a stock management system are similar to those of many other systems, from inventory management to social drinking. Systems theory allows the underlying systemic similarity of many seemingly unrelated processes in diverse fields and applications to be discerned, thus enriching the inquiry process.

Systems thinking enables a deeper level of insight into phenomena of interest than is afforded by the reductionist perspective. Figure 1 identifies a four-level hierarchy of insight to the experienced world. Humans naturally focus on events and patterns—the indicators of the “real world.” However, beneath the observation of events and patterns there can exist a number of potential generating structures, and below that there is a governing worldview, or mental model, that makes sense of it all. The mental model construct is associated with the disciplinary perspective, and the generating structure is a consequence of the cause-effect relationships embodied in the logic of the particular discipline. A central assumption in systems thinking is that systemic behaviors are endogenously generated. Applying the systems thinking methodology can help managers develop explicit hypotheses, in the form of system structures, that can account for the observed behaviors. The task facing managers is to make the generating structures explicit, operationalize them, study the consequences of various potential courses of action, and use this insight to make better decisions.

Figure 1 Levels of Insight

The concept of mental models, or worldviews, is central to the systems thinking approach. In Figure 1, the dotted lines from the mental models to the other levels of insight reflect the fact that one’s unique worldview influences attention and observation (i.e., which events are selected), organization (i.e., how the events are presented), and explanation (i.e., the logical structure that generates the observations) of a situation under study. With a fixed mental model, one can expect only incremental changes in these activities. A radically different mental model opens up the possibility of a completely new set of observations, patterns, and explanatory structures to be generated from the same situation. Applying the systems thinking approach supports inquiry by conceptualizing the explanatory structures as hypotheses that can be scientifically tested rather than uncritically accepted without question.

Applying Systems Thinking to Reputation

Reputation is an organizational attribute that emerges from an organization’s interactions with its stakeholders. The lack of a clear operational theory of reputation formation and contribution to value makes attempts to manage it a potentially risky venture. Systems theory provides insights into this problem through the application of a set of skills that are not generally recognized by either the management or the reputation literature.

Surveys have revealed that reputation has a bewildering number of definitions; different academic disciplines have different views of it. Efforts expended in understanding the corporate reputation construct have resulted in instruments such as the RepTrak reputation measure and subsequent international rankings of corporate reputation. These methods have value, but they also tend to focus attention on specific indicators.

Assessing a firm’s reputation tends to consider the firm as a black box with inputs and outputs that correlate with reputation. Actions are based on the interpreted results of the surveys. This is a legitimate application, but it has limitations with respect to both the practice and the understanding of the phenomenon. Managing reputation is often a matter of working to improve performance on individual measurement aspects. In the systems thinking perspective, this corresponds to concentrating on events and patterns, but without a clear understanding of the underlying organizational relationships that generate the survey observations.

Applying a systems theory–based perspective, moving to the next deeper level of “structures” requires that managers develop explicit models of how the reputation resource is connected to the firm’s value-creating processes. There are many advantages in using these kinds of tools. They require managers to improve and complete their mental models of the way reputation affects firm performance. In the process of building this model, self-contradictions and ambiguities are discovered and resolved. Once the model is validated and running, formal experiments reveal the probable outcomes of policy alternatives. No other strategic analysis tool enables decision makers to experiment with policies in a laboratory setting, called a “virtual world” of the management flight simulator.

Business organizations are systems that combine well-understood technical systems with more complex and ambiguous social systems. Coordinating the various activities is a difficult task that directly influences the firm’s reputation. At the strategic level, pressure and scrutiny from external stakeholders means that having a good reputation can ease the firm’s relationships with these uncontrollable forces. Internally, reputation can serve to enhance the acquisition and retention of other important resources, for example, skilled workers.

Fundamentally, managing the corporation’s reputation consists of doing the best job possible in all the firm’s activities. Reputation management at all organizational levels consists of ensuring superior performance in each level’s contribution to value creation. Systems theory and the system dynamics methodology contribute by providing a set of tools for better representing the level-specific causal relationships and the interlevel causal relationships that constitute an organization.