Financial Flush Method (FFM) - Part 2

Part 2 Financial Analysis Concept known as Flush by Jeff 'SKI' Kinsey, Jonah People are only human. That is the good news, as well as the bad news. In part one, we talked of problem solving. And of using Dr. Eli Goldratt's three step approach:

1. What to change?
2. What to change it to?
3. How to cause the change?

But humans resist change, or so it seems. If that is true, why do we buy lottery tickets? We must be seeking a change on some level. Goldratt has used the lottery example on at least one occasion to prove that behavior can and will change on a dime. No one excited about your suggested changes? Consider the source: you! Have you failed to excite them? Failed to understand the true nature of the environment? Failed to take the time required to do a proper analysis? The great news about failure: it does not have to be permanent. This series of articles seeks to explore a method for changing how you determine what projects get selected, and in what order they are implemented. Pretty important stuff. It you want it to be. As Les Brown (and others have) said: "you are going to be just as happy as you make up your mind to be!" It must start with you. If you are happy with your business and its approach to managing projects, then stop reading. Now. Period. Go back to the sports page. Or whatever. Still reading? Great. Here is the heart of the matter: FFM (Financial Flush Method) works. Better than all other evaluation tools when cash (in the form of working capital for projects) is your constraint. Let us define constraint: a bottleneck that prevents or restricts throughput. Let us define Throughput (from Purple Curve Effect): Systems define objectives in terms of goals. For example, for-profit businesses may set a goal based upon cashflow or gross profit. Throughput is the rate at which a system produces "goal units," i.e. dollars of profit. Selecting the proper projects in the proper order will have huge ramifications on your company or organization's throughput. Enough said? Part three next Monday. -ski (c)Copyright 2006, Jeff 'SKI' Kinsey, Jonah All rights reserved.

Destruction and Creation

This is the third of a series of 12 articles by our guest blogger on systems thinking, a way of understanding complex organizations and society offering significant promise for improving the leadership and management of commercial companies, not-for-profit organizations, and government agencies.

PART-3

Destruction and Creation: Analysis and Synthesis By H. William Dettmer "Let us not lose sight of the fact that the etymological root of the word analysis is 'anal.'" --Unknown The word “analysis” has been overused, to the point becoming a cliché. We have environmental analysis, business analysis, financial analysis, cost-benefit analysis, metallurgical analysis, spectrographic analysis, and systems analysis (which has come to refer too narrowly to information systems). Even these are only a partial list. We're virtually awash in analyses. The concept of analysis is deeply embedded in our lives, but where did this concept come from? And why should you care about it? Since the Renaissance, analysis has been the foundation of problem solving. But as we move from the 20th into the 21st century, it's becoming clearer that analysis alone is an incomplete, suboptimal way of understanding and functioning in our world. Worse, without the next step---synthesis---practicing analysis alone is a dangerous way of operating. Analysis Equals Reductionism What, exactly, is analysis? Simply put, it's a process of reducing a complex whole, or system, into its component parts---manageable “bites”, if you will---and dealing with those parts in isolation. Take an automobile, for example. The engine is a complex system made up of many components. If the engine runs roughly, the analysis approach is to mentally “deconstruct” the engine into carburetion (or fuel injection), fuel supply, fuel transport system, and combustion chamber (cylinders). The person repairing the engine “analyzes” the situation: he or she examines and “tweaks” each of these parts individually. Fuel injectors are checked, and perhaps cleaned. The fuel pump is checked for proper operation and the filter replaced. Spark plugs are cleaned or replaced, and timing may be adjusted. Then the components are rejoined again. Often the car is returned to the owner with all these things done (accompanied by a substantial bill!), and the owner finds that the engine doesn't run substantially more smoothly. The reason may be that the repair person failed to “synthesize” the system again---to ensure that all the adjusted components actually function well together. The assumption underlying the concept of analysis is reductionism, the idea that all the reality of our ultimate experience can be reduced to indivisible parts. [1:9] From the 15th through the 19th centuries, a reductionist philosophy predominated all scientific inquiry and the expansion of human knowledge. It was assumed that if a phenomenon was deconstructed sufficiently and the parts examined, understanding of the phenomenon was assured. In fact, this thinking is embodied in one of the basic axioms of analytic geometry: the whole is equal to the sum of its parts. But a funny thing happens with complex systems: interdependence among the parts rears its ugly head---what some have called synergy comes into play! The reductionist, or analytic approach reached its culmination with the concept of scientific management in the early 20th century. The father of scientific management, Frederick W. Taylor broke down (analyzed) complex industrial activities into component tasks, sought to make those tasks more efficient, and “glued” the more efficient components back together again. The expected result was a more efficient, effective system. Taylor's disciples, including Frank and Lillian Gilbreth and Henry Gantt, extended and refined Taylor's analytic approach to management well into the 1950s essentially unchanged. Deficiencies in Analysis Because early organizational (specifically, industrial) systems were simple, the analytic approach was much more effective than the alternative---which was more or less ad hoc. But as the complexity of organizational systems increased to the point where no one person could have complete visibility on all components simultaneously, the “cracks in the plaster” of the analytic approach began to show. Analysis could no longer explain the difference between the whole-equals-the-sum-of-the-parts and observed results that were disproportionately higher (or lower) than expected. In other words, the success of an analytical approach “topped out.” The problem is that parts of systems have properties that they lose when separated from the whole system, and the whole system has essential properties that none of its parts does. Ackoff provided an effective analogy: The eye detached from the body can't see, yet the human body as a whole can run, play piano, read, write, and do many other things that none of its parts can do by themselves. [1:16] What does all this mean? Basically, that the essential properties (and thus the ultimate performance) of a system derives from the interactions of its parts. And these essential properties are lost when the system is taken apart. In other words, a system is a whole that cannot be understood by analysis alone. Synthesis: The Second Half of the Equation What, then, is the key to resolving this deficiency? The answer is synthesis. Simply put, synthesis is amounts to putting things together. Sometimes these are pieces known to be part of a system, for example, the rebuilding of an automobile engine from its disassembled parts. In other cases, it may be the combination of things never thought of as “going together” before, to create new concepts, solutions, or realities. Synthesis is not a new idea; it's as old as analysis. As Ackoff has pointed out, Aristotle dealt with both. [1:17] But in our current world of complex systems, synthesis becomes more important than most people realize. Analysis and synthesis are complimentary processes; though they can be considered separately, they can't really be separated. Systems thinking doesn't deny the value of analysis, however. Rather, it emphasizes the fact that there is another side to the system equation that has, until recently, been ignored or overlooked. In 1976, John R. Boyd, a retired U.S. Air Force colonel whose chief claims to fame had been his development of the energy-maneuverability theory and the latest-generation fighters (the F-15 and F-16), tackled the issue of analysis versus synthesis in a paper entitled Destruction and Creation. [3] The core of Boyd's argument was that creativity was essentially the outcome of a process of analysis and synthesis, which he referred to as destruction and creation. Boyd suggested that new ideas and breakthrough solutions to particularly challenging problems resulted from mentally deconstructing multiple known existing concepts or processes, then selectively reassembling key elements to form a completely new concept---thus, the characterization as “destruction and creation.” Creativity and Synthesis: Building Snowmobiles In the mid-1980s, Boyd offered an analogy to illustrate this process of analysis (destruction) and synthesis (creation). [4] He challenged people to think of four seemingly unrelated mechanical systems: a set of snow skis, a boat with an outboard motor, a bicycle, and a military tank or tread-type earthmover. Each of these is a discrete device with its own purpose. Boyd suggested mentally deconstructing these into their component parts and selectively re-combining parts from each to for a new “whole” that would not otherwise exist. He discarded the bindings and poles from the snow-skis, retaining only the “boards.” From the outboard boat, he retained only the gasoline-powered motor; from the bicycle, the handlebars, and from the earthmover, a tread. He recombined these concepts (the functions of the different parts) to form…a snowmobile! The snowmobile concept became Boyd's short-hand analogy for characterizing the domain of competition. He separated people into two types: those who could conceive and build snowmobiles, and those who couldn't: [5:156] “A loser is someone (individual or group) who cannot build snowmobiles when facing uncertainty and unpredictable change; whereas a winner is someone who can build snowmobiles and employ them in appropriate fashion, when facing uncertainty and unpredictable change.” [5:182] Hand in hand with being able to build snowmobiles, Boyd suggested, is adaptability---the capability to respond to a situation with variety and rapidity. Variety is an outgrowth of analysis and synthesis. Rapidity implies the ability to analyze and synthesize quickly. Paradigms Let's briefly consider a concept seemingly unrelated to Boyd's destruction-and-creation process: the idea of paradigms. The term was coined by Thomas Kuhn in 1962, in his seminal book, The Structure of Scientific Revolutions. [6:x] Kuhn's original treatise dealt with the evolution of scientific theories, particularly the physical sciences. Through the later work of others, primarily Joel Barker [2], it has since come to be applied more widely (and broadly) to the realms of business management, societal development, and social interaction. Grossly oversimplified, a paradigm is a model, a set or rules, or a pattern of behavior that defines current, accepted (and acceptable) thinking about a domain or subject. For example, the game of baseball is a paradigm operating within the confines of a stadium and the organizational structures behind the competing teams. Behavior of those within this paradigm is largely prescribed within relatively well defined boundaries. Concepts associated with other paradigms (e.g., football, tennis, or aviation) are excluded from baseball “thinking.” Likewise, at the higher economic and political levels, capitalism and democracy are also paradigms. Thinking within these paradigms is somewhat constrained by the “traditional,” the accepted, or common practice. Kuhn introduced the notion that paradigms change over time, as more and newer information is discovered. In most cases, this change is evolutionary, rather than revolutionary. As Barker has pointed out, however, paradigm “shifts” can often be dramatic. The Internet and its many and varied uses is an example of such a rapid paradigm shift. A key characteristic of paradigms and their associated shifts is the idea that they naturally evolve or “happen”---they're not consciously directed. Summary: Our OWN Synthesis To summarize what we've seen so far, let's do a little “destruction-and-creation” of our own. Ackoff, Churchman, and other system thinkers maintain that the widespread current practice of analyzing systems and issues alone---that is, breaking them down into their component parts and maximizing performance of the discrete parts---is a flawed practice, because it ignores the central role of interdependencies. Kuhn and Barker suggest that the rules of the “meta-game” change over time, sometimes with dramatic shifts that must be discerned and accommodated. Failure to do so can leave one “behind the power curve.” That's an aviation term implying that the pilot has allowed the aircraft enter a condition where much more power is required just to maintain or arrest a deteriorating flight condition. Or, in management terms, “Have you seen them? Which way did they go? I must be after them, for I am their leader!” And finally, Boyd maintains that the kind of destruction-and-creation process (analysis and synthesis, in Ackoff's terms) he recommends produces the ability to dictate rules and results of an engagement. The people and organizations that become really good at doing this can achieve a much greater degree of influence over their environment. (Boyd referred to this as “improving their capacity for independent action.”) [3] So, what does our “snowmobile” look like? If paradigms govern conventional thinking about how things happen, or must be done, and if our organizations are arrangements of systems, sub-systems, and meta-systems that can't be effectively managed analytically, then the application of a conscious, pro-active method of destruction-and-creation (analysis and synthesis),systemically applied, can put practitioners of such methods at a tactical advantage over competitors. It can also keep them ahead of the environmental changes that evolve over time---and perhaps be in a position to drive or lead revolutionary paradigm shifts. Which position would you rather be in: chasing after a changing environment, or leading the change? In our next installment, we'll examine the O-O-D-A loop, a prescriptive approach to applying analysis and synthesis to secure the “high ground”---Boyd's improved capacity for independent action---in our chosen fields. ENDNOTES 1. Ackoff, Russell L. Ackoff's Best: His Classic Writings on Management. New York: John Wiley & Sons, 1999. 2. Barker, Joel. (http://www.joelbarker.com) 3. Boyd, John R. Destruction and Creation. An unpublished paper. (http://www.goalsys.com/id17.htm) 4. Boyd, John R. “Revelation,” part of the August 1987 version of the larger unpublished briefing, A Discourse on Winning and Losing. Cited in Hammond, Grant T., The Mind of War: John Boyd and American Security, Washington, D.C.: The Smithsonian Institution Press, 2001, p.182. 5. Hammond, Grant T. The Mind of War: John Boyd and American Security. Washington, D.C.:The Smithsonian Institution Press, 2001. 6. Kuhn, Thomas S. The Structure of Scientific Revolutions. Chicago: The University of Chicago Press, 1962. ---- (c)Copyright 2005,2006, H. William Dettmer. All rights reserved. Permission granted to Jeff 'SKI' Kinsey to reprint on SKI's Throughput on Command.

Financial Flush Method (FFM)

Financial Analysis Concept known as Flush by Jeff 'SKI' Kinsey, Jonah After something like 40 or 50 years of stagnation, Dr. Eli Goldratt and his colleagues reinvented project management. It is called "Critical Chain Project Management" (CCPM). There is also a version for development teams that share resources among multiple projects. In fact, Tony Rizzo actually applied this multi-project version first. But I digress... In the last chapter of "Critical Chain", Goldratt gives us one last jab in the ribs, after exposing the critical chain method. The book explains how to insure that projects finish on time and within budget. Great news for mere mortals. But then, almost as an afterthought (which is was not!), he introduces a method to decide which projects should actually be launched! The poor word choice for this concept: Flush Think in terms as in "getting back to flush" or even, with regard to cash. As Goldratt justified a radical new approach to production (the concept that resources are finite, not infinite), and as he explained in Critical Chain Project Management (again, resources are finite, among other concepts), he makes another leap of brilliance: cash (to be used as working capital) is finite as well. Therefore, we need better measurements than those in use today. Refresher in Finance 101 (Managerial Accounting):

• Banks want to know: "What's in it for me?"
• Customers want to know: "What's in it for me!"
• Business owners want to know: "How should I use my limited funds?"

Anyone around the Constraints Management method for more than about two days, knows that there has to be a method to determine a "win-win-win" solution. For the bank (source of funding, not necessarily from a bricks and mortar building type bank), the customer, and for the business with more projects than cash to implement them all.

First, we must consider problem solving 101 (Goldratt style):

1. What to change?
2. What to change it to?
3. How to cause the change?

Answer #1: We must change how we pick the projects that we are going to implement. As constraints management folks know, when considering vendors or suppliers, price is way down the list of priorities. It is far more important that the vendor be reliable. Reliable in terms of a suitable (quality) product delivered at the agreed upon time and place. Suppliers on the other end of the phone/fax/email from me understand this concept very well. I tell the story often and with prejudice! I do not care when delivery of my purchased goods are promised (within reason), just make sure they are delivered when promised. When you are building high end custom motorcycles to order (using sDBR {simplified Drum-Buffer-Rope}), job shop fashion, the lack of parts is a death wish. If this concept (of reliability over price) is foreign to you, stop. Do not read any further. You will not comprehend Flush. Or Critical Chain Project Management. Or how to turn million dollar loses into profits in less than 90 days. All of which are true, valid, proven concepts. Part two next Monday. -ski (c)Copyright 2006, Jeff 'SKI' Kinsey, Jonah All rights reserved.

Business and the Blitzkrieg

This is the second of a series of 12 articles by our guest blogger on systems thinking, a way of understanding complex organizations and society offering significant promise for improving the leadership and management of commercial companies, not-for-profit organizations, and government agencies. PART-2 Business and the Blitzkrieg By H. William Dettmer "It would be foolish, however, to disguise the gravity of the hour. It would be still more foolish to lose heart and courage or to suppose that well-trained, well-equipped armies numbering three or four millions of men can be overcome in the space of a few weeks, or even months, by a scoop or raid of mechanized vehicles, however formidable. We may look with confidence to the stabilization of the Front in France…" --Winston Churchill, May 19, 1940 [1:17-18] Prophetic words---too bad they were completely wrong. Thirty-two days later, in the same railroad car, at the same place where Germany signed an unconditional surrender in 1918, Hitler accepted the surrender of France. During World War II, no battle group struck more fear into the hearts of its opponents than the German panzer corps. In 1939-40, fast-moving tank divisions, operating in independent, flexible, small groups, swept across Poland in 26 days. The Baltic States fell in less than a week, Denmark in four hours, and France in five weeks. [2] British forces on the continent were pushed back against the sea at Dunkirk. The only reason they survived to be evacuated across the English Channel (by small boat flotilla) was that the Germans inexplicably decided to stop their advance. Later, in 1942, Rommel's panzers similarly ran the north coast of Africa from Egypt to Morocco, devastating British forces. The British and French armies, in particular, were standing, well-trained professional armies. Why, then, were the German panzer corps so effective while their opponents acted so confused? Learning from Experience The difference: The Germans learned more from their experience in World War I than the Allies (including the Americans) did. While the British, French, and Americans focused on deploying technology improvements, they pretty much prepared mentally to re-fight the direct, slow-moving frontal engagements of “the war to end all wars.” (Too bad it really wasn't that!) Spearheaded by the creative Prussian military genius, Heinz Guderian, the German Army developed the concept of maneuver warfare we know as the blitzkrieg-literally, “lightning war”---and it caught the world totally by surprise in 1939. [2] For decades, businesses throughout the world have operated much the same way the French and British did in 1939: they're fighting the last engagement, albeit with newer technology, such as the Internet, e-business, and sophisticated information systems such as Enterprise Resource Planning (ERP). But their thinking, and the behavior that springs from it, remains the same as it always has been. However, as in 1939, times have changed. While the world has “grown smaller,” it is in many respects a less stable place now than it was in the 1930s. This is especially true of economics and politics. Maneuver Warfare German tacticians created the blitzkrieg to defeat discrete, known opponents through speed, flexibility, agility, and surprise--a concept that can be generally characterized as maneuver warfare. It has long been accepted that these same attributes of maneuver warfare can be translated into other domains, such as business. But whereas the military application of maneuver warfare is aimed at discrete, specific opponents, its application to business is may be less distinct. Yes, maneuver tactics in business can be particularly effective in head-to-head competition between specific competitors. But their greater value may be in their ability to help a business respond rapidly to a volatile, ever-changing operating environment. In other words, the concepts of maneuver warfare can help organizations deal with the uncertainty of a world that, more than ever before, is not standing still. Moreover, by understanding maneuver warfare as a potential strategic advantage, companies can develop a level of comfort embracing what Peter Drucker has called “discontinuous change”---even seeking it out or, better yet, leading it! Our real opponent in business is the uncertainty of a volatile, constantly changing environment, as much as it is any particular competitor. In such circumstances, is the ability to change directions (and actions) “on a dime” any less important just because we're responding to events, rather than opponents? There's an old saying: “When life hands you lemons, make lemonade.” Sound simple enough, but the ability to make this kind of adjustment on short notice demands the flexibility and agility---the responsiveness---that maneuver warfare offers. But it's one thing to say this; it's quite another to apply it. So it's appropriate to examine the philosophical foundation on which the blitzkrieg and its success were built. The Conceptual Foundation of Blitzkrieg Tactics The ability of the German panzer divisions to sow such dramatic confusion and fear among their adversaries depended on four interrelated concepts that were impressed into every member of those units: einheit, fingerspitzengefühl, auftragstaktik, and schwerpunkt. [1:51-59] Okay, so these words are a real mouthful for those not fluent in German. Let's take them one at a time. Einheit. (pronounced “aye'n-height”). The literal meaning of the word is mutual trust. It's the sense of well being a member of a cohesive team realizes from knowing that he or she can depend utterly on fellow team members---superiors, subordinates, and contemporaries alike---for help, support, or just faithfully doing what's expected of them. Mutual trust can't be mandated or imposed. It develops over time---it's earned, by all parties to the mutuality, and that doesn't happen overnight. Einheit is more than simple camaraderie, though it includes that, too. It's knowing that other team members will be in the right place at the right time to do whatever the situation dictates in fulfilling their responsibilities for mission accomplishment. Fingersptizengefühl. (pronounced “finger-SHPITZ-in-geh-fyool”) Literally “fingertip feel,” or “touch,” it really implies intuitive skill. This is the consummate skill in doing something that comes from having done it so many times, or for so long, that, as the song of the same name goes, “nobody does it better.” It's the kind of expertise that world-class musicians such as Yitzhak Perlman or Yoyo Ma have. They don't need to read the music and consciously translate it to hand movements; the music just flows from their heads, where they hear it in all its detail, through their fingertips to the instrument---instinctively and inherently correct the first time. Fingerspitzengefühl is inextricably tied to einheit. As a team works together over time, they become better at what they do, both individually and collectively. This breeds confidence in one another, which is fundamental to realizing mutual trust. Who would you trust more: a world-class performer with whom you'd worked regularly, or a newcomer you've never seen before and know only by their résumé or press notices? Auftragstaktik. (pronounced “OWF-trags-TACtic”) This is a virtual or implied contract between superior and subordinate. Simply put, the superior tacitly avoids ordering a subordinate to do something. He or she asks the subordinate to accept the responsibility for getting it done. Einheit and fingerspitzengefühl figure prominently into the auftragstaktik. Because the team has worked together repeatedly for a long time, they have developed an intimate knowledge and respect for each other's skills and capabilities. Superiors know what subordinates are capable of and where their limitations lie. For their part of the contract, superiors avoid asking subordinates to take on responsibilities beyond their capabilities without having a valid, justifiable reason. For their part of the contract, if they accept the superior's charter, subordinates agree to accomplish what has been asked of them, applying the steel self-discipline that comes of fingerspitzengefühl and every last ounce of their effort to get the task accomplished as the superior expects it to be done. The subordinate implicitly trusts the superior not to ask more of him or her than they are capable of doing. The superior implicitly trust the subordinate to deliver what he or she has agreed to do without continually having to be checked or prodded. Schwerpunkt. (pronounced “SHVER-punked”) Literally, “hard or difficult point,” the real meaning is more like center of gravity, or focus point-the place where the majority of effort is directed. For the German panzers, this was the target of the main thrust of combat efforts. In the practice of constraint management [3], this is the system constraint. Two underlying assumptions are inherent in the concept of schwerpunkt. The first is that in a complex operation, some parts of the organization---the ones most directly responsible for the schwerpunkt---are more critical to immediate success than others. But going hand in hand with the schwerpunkt is the idea of nebenpunkt, or essential supporting activities. The classic (and most successful) example of the military application of the blitzkrieg---and schwerpunkt and nebenpunkt as well---is the German attack on France in 1940 through the Ardennes Forest. With French and Belgian troops massed in the Belgian plains against German Army Group A, German Army Group B moved quickly through the narrow roads of the Ardennes toward the city of Sedan. Thinking this approach improbable, the French defended Sedan with third-rate troops and reserves. As the Germans slashed through the Ardennes, the French defenders broke ranks and ran, even before the panzers completed their crossing of the Meuse River. Army Group B wheeled around to the north and enveloped the French and Belgian armies from the rear. (Turn this whole layout 90 degrees clockwise, and you essentially have General Schwarzkopf's “left hook” maneuver with the VII and XVIII Corps in Operation Desert Storm.) In the conquest of France, the schwerpunkt was the Ardennes penetration. The nebenpunkt was the supporting role played by Army Group A, whose primary function was to draw the attention of French and Belgian forces (which it did most successfully) while Army Group B circled around from behind. We'll examine this concept of schwerpunkt and nebenpunkt more in the fourth installment of this series. Leading by Intent The immediate benefit in einheit, fingerspitzengefühl, auftragstaktik, and schwerpunkt accrues primarily to the senior commander (the CEO, if you will). Rather than having to specify in detail everything he wants each subordinate to do, the commander can lead by intent. The leader of a blitzkrieg-oriented organization can describe the desired outcome and assign the resources to trusted team members, who, by virtue of their mutual trust, intuitive skill, and complete understanding and acceptance of the mission contract, can be utterly depended on to deliver the results. Subordinates are comfortable exercising their own initiative in their pursuit of the mission, and superiors are completely comfortable letting them do so. Summary What do the blitzkrieg and its underlying concepts have to do with a systems approach to management? As we saw in the first installment, the increasing complexity and size of the economic and political organizations in our world make an authoritarian control model impractical. No leader of such a system can possibly keep tabs on everything. In as unstable and dynamic an environment as we live in today, changes are demanded faster than their impacts can be analyzed---sometimes even faster than information about the need to change can be passed. Success depends on responsiveness and agility, which in turn depend on the independence of team members to act without constantly requiring approval. Such independence depends on their willingness to take initiative, which in turn rests on a climate of mutual trust (einheit), intuitive skill and capability (fingerspitzengefühl), the confidence and assurance of an implied mission contract (auftragstaktik), and an unswerving focus on the most important effort (schwerpunkt). In the future, all organizations will have to become faster, more responsive, more agile, and more unpredictable (to their competitors) or risk being relegated to “loser” status. And we know what losers do---they let things happen, or watch things happen and wonder what happened! We don't want that to be us, do we?

Tactical agility is the ability of a friendly force to react faster than the enemy. It is essential to seizing, retaining, and exploiting the initiative. Agility is mental and physical. Agile commanders quickly comprehend unfamiliar situations, creatively apply doctrine, and make timely decisions.[4]

ENDNOTES 1. Richards, Chet. Certain to Win. Xlibris Corporation, 2004. 2. Macksey, Kenneth. Guderian: Creator of the Blitzkrieg. New York: Stein and Day Publishers. 1975. 3. Goldratt, E.M. The Haystack Syndrome: Sifting Information from the Data Ocean. Great Barrington, MA: The North River Press, 1990. 4. U.S. Army Field Manual 3-0, Operations ---- (c)Copyright 2005,2006, H. William Dettmer. All rights reserved. Permission granted to Jeff 'SKI' Kinsey to reprint on SKI's Throughput on Command.

Intro to Systems Approach

This is the first of a series of 12 articles by our featured guest blogger, on systems thinking, a way of understanding complex organizations and society offering significant promise for improving the leadership and management of commercial companies, not-for-profit organizations, and government agencies. PART-1 An Introduction to the Systems Approach By H. William Dettmer "There is no question that in our age there is a good deal of turmoil about the manner in which society is run. Probably at no point in the history of man has there been so much discussion about the rights and wrongs of the policy makers…[Citizens have] begun to suspect that the people who make the major decisions that affect our lives don't know what they are doing… They don't know what they are doing simply because they have no adequate basis to judge the effects of their decisions. To many it must seem that we live in an age of moronic decision making." --C. West Churchman; The Systems Approach [Introduction] [1:vi] Sounds like Churchman is talking about us today, doesn't it? The preceding quotation comes from the introduction to his seminal book on systems thinking, The Systems Approach, written in 1968. That's sad testimony to the fact that few decision makers in the world have learned much about complex systems in the last 37 years. In the immortal words of Winston Churchill, “Man will occasionally stumble over the truth, but usually he just picks himself up and continues on.” We've been “continuing on” for four decades. It's time to go back and revisit that truth we stumbled over in 1968. We can snicker at the fact that life seemed so much simpler then. The world has “gotten smaller” as travel, communication, the information age, and the Internet have combined to connect people and societies as never before. As economies have evolved from regional to national to transnational to global, our organizations have grown in size and complexity. It is nearly impossible for the people running them to fully understand what goes on “where the rubber meets the road” in nations, governments, and companies. Analysis versus Synthesis Since the turn of the century (the 20th century, that is), the accepted approach to dealing with increasing complexity is to try to reduce it into manageable “bites” and address them in isolation. This approach is referred to as analysis. We analyze a complex situation or issue by trying to break it down into component pieces and consider each in isolation from the others. This kind of thinking has its roots in analytic geometry, where one basic axiom is that the whole is equal to the sum of its parts. Think about that for a moment. The underlying assumption behind this conclusion is that all of the parts are essentially independent of one another. But although this mathematical thinking might apply to bricks and other inanimate objects, it fails when applied to dynamic, homeostatic, or cybernetic systems [2:28-31]---which generally include any organic systems, or those where human beings have a role. And unfortunately such systems are the ones that exert the most influence on our lives. We see the failure of the analytical approach all the time: The Rohr Corporation's Riverside, California, plant recorded a 55% increase in profits in 1996. Great news, if all you focus on is short-term profits. When you look at the larger system, you see the reason for that increase is better “efficiency” (meaning cost cutting) temporarily had a greater impact than the 3% decline in sales. Or, as the corporate treasurer enthusiastically observed, “Costs have come down quicker than our revenue has decreased.” [3:G-1]. (I'm sure the 3,500 people laid off at Riverside by Rohr in the preceding few years are immensely gratified to know that!) The Rohr story is a classic example of self-delusion by analytical thinking. If an analytical approach to management is counter-productive, what should we be doing instead? A holistic, or whole system approach is considerably better suited to the kinds of complex organizations we usually encounter today. What's the difference between an analytical and a systems approach? The systems approach represents synthesis-thinking with an integrated perspective about the whole enterprise. Before one can synthesize, one must first analyze. In other words, we first take the system apart (usually conceptually-it's not often practical to physically deconstruct the systems we normally work with) to understand the functions of each link or component. Once the components are fully understood in isolation, we study the interactions among components to understand how the system as a whole functions. Understanding these interactions requires integrating the components into something larger and more capable than the components represent alone. In the fourth installment of this series, we'll examine analysis and synthesis in more detail. And in the ninth installment, we'll consider some tools to help us visualize and manage a system as an integrated whole. A Paradigm Shift In 1962, Thomas Kuhn introduced the word paradigm [4:x] to describe a pattern of knowledge, rules, assumptions, or thinking. The difference between an analytical approach to management and a synthesis approach might easily be characterized as a paradigm shift, or a significant change in the “rules of the game.” Paradigm shifts can be either evolutionary (i.e., a slow pace of change) or revolutionary-dramatic, short-term, and immediate high impact. The rise to primacy of air travel over ships was an evolutionary change. The advent of the atomic bomb was a revolutionary shift-almost overnight-in the way we looked at national defense. The shift from analysis to synthesis in the way we consider systems is assuredly an evolutionary paradigm shift. It's been under way for nearly 40 years. It started in engineering, where synthesis has been the source of creativity and innovation. Even now, an Internet search on “analysis versus synthesis” will turn up a preponderance of engineering references. But since Churchman's work, the concept of synthesis has begun a transition from the purely technical arenas to the sociological, ecological, environmental, and philosophical. So far, this transition seems to have been neither consistent nor continuous. In fact in some respects, as our world has become more complex, many leaders and managers seem to have retreated even more deeply into analytical thinking: “If our world is getting more difficult to manage, we need to analyze the situation more. We need more detailed information!” (Who was is that said “the definition of insanity is doing the same thing over and over, and expecting a different result”?) The Importance of Theory Theory can be a slippery word. Many (most?) people outside the science community don't really understand the meaning of the word. I frequently hear executives say, “I don't have time to worry about theory-I'm too busy dealing with the real world.” A similar comment one frequently hears is, “Well, that's only a theory.” Both statements indicate an erroneous perception that theory is no more than speculation, or a best guess. Nothing could be farther from the truth. W. Edwards Deming, one of the people who taught the Japanese the concepts of quality that they subsequently used to hammer the west economically for the last quarter of the 20th century, said this about theory: "Experience alone, without theory, teaches management nothing about what to do to improve quality and competitive position, nor how to do it…Experience will answer a question, and a question comes from theory." [5:19] And later: "Without theory, there is no learning…Theory is a window into the world. Theory leads to prediction. Without prediction, examples and experience teach nothing. To copy an example of success, without understanding it with the aid of theory, may lead to disaster." [6:106] Deming was not the first or only system thinker, but because of his impact on Japanese business, he happens to be one that many people pay attention to. Not long before he died, Deming proposed what he called his system of profound knowledge. [6: 94-118] Successful transformation of any organization, Deming suggested, depending on a thorough understanding of four components of profound knowledge. These components include appreciation for a system, knowledge about variation, the theory of knowledge, and an understanding of psychology. Grossly oversimplified, Deming was saying that if you don't see your environment as a system of interdependent parts, you don't understand the nature of variation within and among those parts, you have no clue about why or how you know what you know about your system, and you don't comprehend the psychology that drives the humans that make up your system, you haven't got a chance success-except by dumb luck. (And who would be comfortable depending on that?) In the sixth installment of this series, we'll see how Deming's idea of profound knowledge will help us understand and manage our systems as systems. The Scientific Method All of these concepts we've examined so far-analysis and synthesis, the importance of theory, and Deming's system of profound knowledge-represent the underlying foundation for an effective systems approach to management. But they are no more than a foundation without a methodology to follow. The scientific method is an excellent transition from foundation to practice. The scientific method begins with informal observation of discrete phenomena or events. The person practicing the method, sensing a connection of some kind among the events and using inductive logic, generalizes a hypothesis to explain the cause-and-effect relationship between them. This hypothesis is then tested either by experimentation or more intensive observation to confirm or refute the hypothesis. If the hypothesis is invalidated, it's usually “thrown away.” On the other hand, if there seems to be some confirmation in the experiments or observations, then the hypothesis takes on the characteristics of a theory: a proposition with some evidence to support it. As time goes on and more data on the subject is accumulated, some aspects of the theory may be reinforced, and some data points that don't fit the theory may be discovered. If these data can't be adequately explained in light of the theory or accepted knowledge, then the theory may be abandoned. However, it is more likely that the theory will be modified to fit the existence of the outlying data points. In this way, the theory is improved, and our knowledge of reality is enriched. In other words, we have learned something! This learning is at the heart of Peter Senge's classic management book, The Fifth Discipline. [7] The importance of learning in any endeavor cannot be overemphasized. George Santayana once said, “Those who cannot learn from history are doomed to repeat it.” This is another way of saying “Learn from your mistakes, or you'll have to do them over again until you get it right.” (Remember the definition of insanity, mentioned earlier?) Summary There is a paradigm shift underway, from analytical thinking to systems thinking. In time, it will transform the way business is done, in commercial enterprise, government, and the not-for-profit sector. You can ride the leading edge of this wave, or you can swim like the devil to try to catch up with it after it's passed. Over the next twelve months, we'll see how you can do the former, if you're so inclined. "We'll see how theory and sound methods will contribute to the challenge of learning more about our systems, how they function, and how to get improvement efforts right the first time. Winners make things happen. Losers let things happen, or watch things happen and wonder what happened." Unknown ENDNOTES 1. Churchman, C. West. The Systems Approach. New York: Dell Publishing Co., 1968. 2. Athey, Thomas H. The Systematic Systems Approach. New Jersey: Prentice-Hall, 1982. 3. “Rohr reports big increase in earnings,” The Riverside (California) Press-Enterprise, May 22, 1996, p.G-1 4. Kuhn, Thomas S., The Structure of Scientific Revolutions. Chicago, IL: University of Chicago Press, 1962. 5. Deming, W. Edwards. Out of the Crisis. Cambridge, MA: MIT Center for Advanced Engineering Study, 1986. 6. ______. The New Economics for Industry, Government, Education. Cambridge, MA: MIT Center for Advanced Engineering Study, 1993. 7. Senge, Peter. The Fifth Discipline: The Art and Practice of the Learning Organization. New York: Doubleday, 1990. ---- (c)Copyright 2005, H. William Dettmer. All rights reserved. Permission granted to Jeff 'SKI' Kinsey to reprint on SKI's Throughput on Command.