Business Transformation Through a Feedback Systems Approach

A Feedback Systems
Approach to
Business Transformation
Dr. Michael von Kutzschenbach
Global Business Transformation Manager-Training (Heidelberg, 2015)

Workshop Outline
A Feedback Systems Approach to Business Transformation
 9:00 - 10:00 A Shift of Mind
10:00 - 10:30 Coffee Break
 10:30 - 11:30 Building Blocks and Grammar
 11:30 - 12:00 Applying Systems Thinking
12:00 - 13:00 Lunch
 13:00 - 16:30 Applying Systems Thinking(cont’d)
14:30 - 15:00 Coffee Break
 16:30 – 17:00 Lessons Learned
Okt-15A Feedback Systems Approach to Business Transformation – Dr. M. v. Kutzschenbach 2

Be a Master in Business Transformation Management
Why a Feedback Systems Approach
However, most organizations approach change as
if it were a simple thing.
The world is complex. Change within any
organization is also complex.

You Want to …
 understand the “Feedback Systems Approach” so
that you can …
 be more effective in action
 be able to deal with uncertainty
 find better ways to achieve your aspirations
… master business transformation
initiatives more effectively

Introduction to Feedback Systems Thinking
Feedback Systems Approach: Why and What?
A Shift of Mind –
Introduction to
Systems Thinking

The Systems Perspective
Collection versus Systems
Kauffman, D.L. (1980). Systems One: An Introduction to Systems
Thinking. Minneapolis: Systems Education, Inc.

Definition - What is a System?
“A system is an interconnected set of elements
that is coherently organized in a way that
achieves something.”
Meadows, H.D. (2008). Thinking in Systems: A Primer.
Vermont: Chelsea Green Publishing.

Putting Systems into Context: “The Iceberg”
Multiple levels
of insights
Events
(Who does what to
whom)
What happened?
Patterns
(Recurring patterns of behavior)
What is happening over time?
Structure
(How the parts of the system are organized)
Why is this happening?
Mental Models
(Assumptions or
worldview)
In what way have our
mental models created
the structures that are in
place?
”Real” world
”Systems
Thinking” world
Sweeney, L.B.. (2001). When a Butterfly Sneezes: A Guide for Helping Kits Explore Interconnections
in Our World Through Favorite Stories. Waltham: Pegasus Communications, Inc.

Event-Oriented World View
The Standard Approach
RESULTS
SITUATION
GOALS
DECISION
Assumptions
Note: which are
rarely questioned
PROBLEM

Event-oriented View of Traffic Congestion
The Standard Approach
Congestion
Build New
Roads

The required approach: Feedback World View
Morecorft, J D.W (2015). Strategic Modelling and Business Dynamics: A feedback systems approach.
West Sussex: John Wiley & Sons Ltd.
Situation Goal
Problem
Problem
Decision
Action &
Results
Solution
Other
Situations
Other
Goals
Other Problems/
Discrepancies
Other
Decisions
Other Actions
& Results

Traffic Congestion
A Feedback View
road
construction
pressure to
reduce
congestion
travel
time
desired
travel time
B1
Capacity
Expansion
+
DELAY
-+
-
highway
capacity
+
Based on a figure from Business
Dynamics, Sterman 2000. Traffic
volume depends on congestion,
closing several feedback loops that
cause traffic to increase whenever
new roads are built.
population
and
economic
activity of
region
average
trip length
DELAY
-
+
+
Extra Miles
B3
Take the
Bus
B4
cars in
region
public
transit
ridership
cars per
person -+
traffic
volume+
trips per
day
attractiveness
of driving
Discretionary
Trips
B2
+
++
+
-
public
transit
fare
adequacy
of public
transit
+
-
+
Morecorft, J D.W (2015). Strategic Modelling and Business Dynamics:
A feedback systems approach. West Sussex: John Wiley & Sons Ltd.

The Danger of a Narrow World View
A Feedback View
The New Yorker Collection 1976 Arnie Levin from
cartoonbank.com. All Rights Reserved.

… leads to Unintended Consequences
A Feedback View
The New Yorker Collection 1976 Arnie Levin from
cartoonbank.com. All Rights Reserved.

We live and work in systems of circular causality -
but feedback paths and consequences are not
obvious or are hidden:
 Supply chains – the bull-whip effect.
 Hotel showers – elusive comfort.
 Motorways – mystery hold-ups.
 Fisheries – where are the cod?
 Oil – price volatility at the pump.
Fun with Feedback
Feedbacks are Everywhere
Source: Morecroft, J (2008)

 Policies that cause unintended side effects.
 Efforts to stabilize a system actually
destabilizes it.
 Our decisions provoke reactions from others to
restore the balance we upset.
“Anything that can go wrong will go
wrong.”
- Murphy’s Law
Counter-Intuitive Behavior

Some common causes …
 Our tendency to interpret experience as a
series of events – leading to event-oriented
approach to problem solving.
 We do not understand the full range of
feedback loops operating in the system.
 We act as if cause and effect are always
closely linked in time and space.
Policy Resistance

 Exogenous point of view …
 My wife is always mean to me.
 It’s all her fault.
 If she would just be nicer, my life
would be better.
 Endogenous point of view …
 Maybe there’s something I’m
doing…
A Feedback Systems Approach Perspective
Endogenous Point of View

The deep foundation is the
ENDOGENOUS point of view
The foundation applied:
A Feedback Systems Approach is the mental
effort to uncover endogenous sources of
system behavior.”
 “System dynamicists use systems thinking, management
insight, and computer simulation to hypothesize, test,
and refine endogenous explanations of system change.”
The Central Distinguishing Feature of System Thinking …
Endogenous Point of View

Building Blocks and Grammar
Feedback Systems Approach: Thinking in Loops
Building Blocks
and Grammar

Causal Mapping
Representing Structure in Complex Systems
 Causal mapping is a
powerful tool for
representing structure in
complex systems.
 Arrows indicate causal
influence.
Quality of city life
Crime rate Retail outlets
Neighborhood
health clinics
Absentee
landlords
PopulationInmigration Outmigration

 What is Feedback?
 Results of our actions define the situation we face
in the future.
 The transmission and return of information.
 Two basic types of feedback:
 Positive Feedback: Self-reinforcing
 Negative feedback: Self-correcting
What is Feedback?

Feedback Loops
 A feedback loop exists when decisions change the
state of the system, changing the conditions and
information that influence future decisions.
This is what caused your morning shower to
be such a dramatic experience!
Decisions State of
the system
Action
Perceptions

Examples of Feedback Loops
Quality of
communication
Quality of
communication
between teams
Quality of
communication
within teams
TeamworkRisk taking
Trust
Solvency of
a Bank
Perceived solvency
of the Bank
Deposits Withdrawals

Two Kinds of Feedback Loops
 Reinforcing loops
 Growth producing
 Destabilizing
 Accelerating
 Positive: an even number of -’s
 Indicated by…
 Balancing loops
 Counteracting
 Goal seeking
 Stabilizing
 Negative: an odd number of -’s
 Indicated by…
…also called Negative feedback
loops.
…also called Positive
feedback loops.

Balancing Loops
The Great Stabilizer
“Balancing feedback loops are equilibrating or goal-
seeking structures in systems and are both sources
of stability and sources of resistance to change.”
Meadows, H.D. (2008, p. 30). Thinking in Systems: A
Primer. Vermont: Chelsea Green Publishing.
…, pushing stability, resistance, and limits

Examples of Balancing or Counteracting Loops
Desired amount of
water in glass
Water
in glass
Pouring rate
Fraction
filled
+
–
-
+
Population Outmigration
+
–
Gypsie mothsGypsie moth
net growth
Wasps Wasp net
growth
–
+
+
+

Typical Counteracting Loop Behaviors
20
15
10
5
0
0 10 20 30 40
Filling a Glass
10,000
7,500
5,000
2,500
0
0 25 50 75 100
Population and
emigration

Reinforcing Loops
The Engines of Growth and Collapse
“Reinforcing feedback loops are self-enhancing,
leading to exponential growth or to run-away
collapses over time.”
Meadows, H.D. (2008, p. 32). Thinking in Systems: A
…, when small changes become big changes

Examples of Reinforcing Loops
Population
Births per
year
+
+
Performance
Motivation
+
+
Number of private
businesses
Tax base
Tax rate
Expected profitability
of business
Attractiveness
for business
+
+
+
––

Typical Reinforcing Loop Behaviors
20,000
15,000
10,000
5,000
0
0 25 50 75 100
10,000
9,000
8,000
7,000
6,000
0 25 50 75 100
Population and Births Loop
Businesses and Taxes Loop

Tips for Determining Link and Loop Polarities
Loops and Labels
 For each link, determine the effect of an increase in
the variable at the tail of the arrow:
 If the variable at the head increases, assign a plus.
 If the variable at the head decreases, assign a minus.
 For each loop, count the number of negative signs:
 An even number of negative links is a reinforcing (R) loop.
 An odd number of negative links is a balancing (B) loop.
Most important: For each loop, tell a self-reinforcing or
balancing/counteracting story, and check that the story
matches the loop polarity.

Isolate and Identify Link Polarity
Loops and Labels
Attractiveness f or
business
Number of private
businesses
Tax base
Tax Rate
Expected
prof itability of
business

Loops and Labels
Attractiveness f or
business
Number of private
businesses
Tax base
Tax Rate
Expected
prof itability of
business
+
(Always trace an Increase)

Loops and Labels
Attractiveness f or
business
Number of private
businesses
Tax base
Tax Rate
Expected
prof itability of
business
+

Loops and Labels
Attractiveness f or
business
Number of private
businesses
Tax base
Tax Rate
Expected
prof itability of
business
–

Loops and Labels
Attractiveness f or
business
Number of private
businesses
Tax base
Tax Rate
Expected
prof itability of
business
+

Completed Loop
Loops and Labels
(Now tell the story)
Attractiveness f or
business
Number of private
businesses
Tax base
Tax Rate
Expected
prof itability of
business
+
– –
+
+
(R)
- or -
+
- or -

Delays
The Hidden Troubelmakers
Delays are “interruptions between […] actions and
their consequences.”
When things happen … eventually
Senge, P. (2006, p. 88). The Fifth Discipline: The art and
science of the learning organization. New York: Doubleday.

Feedback Systems Approach: Thinking in Loops
Putting it all
together: System
Archetyps

Applying the Feedback Systems Approach
Business Transformation Matrix
Analyze Understand Design Transform
Pattern
Structures
Mental
Model
Events
(Real
World)
(“Systems
Thinking”
World)
IncreasingLeverage
andComplexity
Phases of the Learning Cycle
As Is To Be
Zone1
Zone4
Zone3
Zone2
Modified from J. Shibley (2006)

Systems Archetypes
Dynamic Theories of Business Transformation Management
Senge, P. (2006, p. 88). The Fifth Discipline: The art and
“The purpose of the systems archetypes is to
recondition our perceptions, so as to be more able to
see structures at play, and to see the leverage in those
structure.”
… reveal an incredibility elegant simplicity
underlying the complexity of management issues.
Senge, P. (2006, p. 93 f). The Fifth Discipline: The art and

 Fixes That Fail
 Shifting the Burden
 Limits to Success
 Drifting Goals
 Growth and Underinvestment
 Success to the Successful
 Escalation
 Tragedy of the Commons
Systems Archetypes
Seismology for leaders - Signals from the Underground
For more info see:
Kim, D.H. and V. Anderson (2011).
Systems Archetype Basics: From Story
to Structure. www.leragenetworks.com:
Leverage Networks, Inc.

Systems Archetypes - Fixes That Fail
Causal structure
In a “Fixes That Fail” situation, a problem symptom
cries out for resolution. A solution is quickly
implemented, which alleviates the symptom.. However
the solution produces unintended consequences that,
after a delay, cause the original problem symptom to
return to its previous level or even get worse.
Fix
-
+
+
Problem
Symptom
Unexpected
Consequences
+
t
B1
R2
Signals

Systems Archetypes - Shifting the Burden
Symptomatic
Solution
Fundamental
Solution
Problem
Symptom
Side-effect
-
+
+-
+
-
R3
B2
B1
In a “Shifting the Burden” situation, a problem symptom can be addressed by applying a
symptomatic solution or a fundamental solution. When a symptomatic solution is implemented,
the problem symptom is reduced or disappears, which lessens the pressure for implementing a
more fundamental solution. The symptomatic solution often produce side-effects that further
divert attention away from more fundamental solutions.
Causal structure

Systems Archetypes - Limits to Success
In a “Limit to Success” scenario, growing actions initially leads to success, which
encourage s even more of those efforts. Over time, however, the success itself causes
the system to encounter limits, which slows down improvements in results. As the
success triggers the limiting action and performance declines, the tendency is to focus
even more on the initial growing action.
Causal structure
Limiting
action
-+ +
+
Performance
Constraint
Efforts
+
B2R1

Systems Archetypes – Drifting Goals
In a “Drifting Goals” situation, a
gap between desired
performance and current reality
can be resolved either by taking
corrective action to achieve the
goal or by lowering the goal.
The gap is often resolved by a
gradual lowering of the goal.
Over time, the performance
level also drifts downward. This
drift may happen so gradually,
even without deliberate action,
that the organization is not
even aware of its impact.
Causal structure
Goal
Actual
Gap
-
+
+
+
-
+
Pressure to
Lower Goal
Corrective
Action
B1
B2

Perceived Need
to Invest
Demand
Impact of
Limiting
Factor
-
++
+
+
-
+
+
Capacity
Growth
Effort Performance
Standard
Investment
in Capacity +
t
B3
B2
R1
“Limits to Success”
System Archetypes - Growth and Underinvestment
Causal structure
In a “Growth and
Underinvestment” situation,
growth approaches a limit that
could be eliminated or
postponed if capacity
investment were made.
Instead, as a result of policies
or delays in the system,
demand (or performance)
degrades, limiting further
growth. The declining demand
then leads to further
withholding of investment or
even reduction in capacity,
causing even worse
performance.

Systems Archetypes - Success to the Successful
Allocations to A
instead of B
Resources to
B
Success of
B
Resources to
A
Success
of A
++
+ -
-+
R2R1
Causal structure
In a “Success to the Successful” situation, two or more individuals, group s, projects,
initiatives, etc. are vying for a limited pool of resources to achieve success. If one of
them starts to become more successful (or is historically already more successful) than
the others, it tends to garner more resources, thereby increasing the likelihood of
continued success. Its initial success justifies devoting more resources while robbing
the other alternatives of resources and opportunities to build their own success, even if
the others are superior alternatives.

Systems Archetypes - Escalation
Causal structure
Quality of A’s Position
Relative to B
A’s
Results
B’s
Results
Threat
to B
Threat
to A
B2B1Activity
by A
Activity
by B
In an “Escalation” situation, one party (A) takes action to counter a perceived threat.
These actions are then perceived by the other party (B) as creating an imbalance in the
system that then makes them feel threatened. So, B responds to close the gap,
creating an imbalance from A’s perspective, and on it goes. The dynamic of two
parties, each trying to achieve a sense of “safety,” becomes an overall reinforcing
process that escalates tension on both sides.
+
+
+
+
+
+-
-

Systems Archetypes – Tragedy of the Commons
Causal structure
+
+
+
+
+
+
+
+
-
-
-+
Resource
Limit
A’s
Activity
B’s
Activity
Total
Activity
Gain per Individual
Activity
Net Gains
for A
Net Gains
for B
In a “Tragedy of the Commons”
situation, individuals make use
of a common resource by
pursuing actions for their own
enjoyment or benefit, without
concern for the collective
impact of everyone’s actions.
At some point, the sum of all
individual activity overloads the
“commons,” and all parties
involved experience diminishing
benefits. The commons may
even collapse.

Lessons Learned
A Feedback
Systems Approach - Lessons
Learned

Be a Master in Business Transformation Management
Masters in Business Transformation Management
work on the system not in the system!
The world is complex. Change within any
organization is also complex.

Places to Intervene in a System
12. Numbers - Constants and parameters such as subsidies, taxes, standards
11. Buffers - The sizes of stabilizing stocks relative to their flows
10. Stock-and-Flow Structure - Physical systems and their nodes of
intersection
9. Delays - The lengths of time relative to the rates of system changes
8. Balancing Feedback Loops - The strength of the feedbacks relative to the
impacts they are trying to correct
7. Reinforcing Feedback Loops - The strength of the gain of driving loops
6. Information Flows – The structure of who does and does not have access
to information
5. Rules - Incentives, punishments, constraints
4. Self-organization – The power to add, change, or evolve system structure
3. Goals – The purpose or function of the system
2. Paradigms – The mind-set out of which the system – its goals, structure,
rules, delays, parameters – arise
1. Transcending Paradigms
IncreasingLeverage
Meadows, H.D. (2008, p. 147 ff). Thinking in Systems: A

Business Transformation Matrix
Analyze Understand Design Transform
Pattern
Structures
Mental
Model
Events
(Real
World)
(“Systems
Thinking”
World)
IncreasingLeverage
andComplexity
Phases of the Learning Cycle
As Is To Be
Zone1
Zone4
Zone3
Zone2
Modified from J. Shibley (2006)

Still interested? For more information …
Readings:
 Meadows, H.D. (2008). Thinking in Systems: A Primer. Vermont: Chelsea Green
Publishing.
 Morecorft, J D.W. (2015). Strategic Modelling and Business Dynamics: A feedback
systems approach. West Sussex: John Wiley & Sons Ltd.
 Sterman, J.D. (2000). Business Dynamics: Systems Thinking and Modeling for a
Complex World. McGraw Hill.
Training:
 Check out: http://www.fhnw.ch/business/continuing-education/seminar-
managing-digital-transformation
Contact:
 michael.vonkutzschenbach@fhnw.ch,
T: +41 61 279 17 70; Twitter: @MvKutzschenbach
What to Do on Monday?
Be a Master in Digital Transformation
… or better yet, visit our “Seminar Managing Digital
Transformation” in Spring 2016!

Thank You
Stay Humble – Stay a
Learner

Business Transformation Through a Feedback Systems Approach

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