ROBERT J.

MOCKLER

The Systems Approach to Business Organization and Decision Making

has had a revolutionary effect on business operations. Many an executive has found the revolution chaotic, for it has come in the form of the intrusion of the computer and computer personnel into his operations. He has felt his authority and control slowly stripped away by a movement he little understands and because of this has resisted it. The computer is not, however, the villain. What normally happens is that the introduction of the computer sets in motion a systematic re-evaluation of what the business is and how it can operate most efficiently. This re-evaluation exposes the real problemthe gradual fragmentation of decision-making systems within a company over the years. The exposure of the problem in turn leads to an effort to reestablish smoothly working, fully coordinated decision-making systems for the business. Systems theory provides a conceptual basis, as well as principles and guidelines, for establishing a more efficient system for planning, control, and operational decision making. The theory of systems. A system may be defined as an orderly grouping of separate but interdependent components for the purpose of attaining some predetermined objective.^ Three important aspects of systems are implied by this definition:
SYSTEMS THEORY

The arrangement of components must be orderly and hierarchical, no matter how complex it is. Since the components of tlie system are interdependent, there must be communication among them. Since a system is oriented toward an objective, any interaction among the components must be designed to achieve that objective.

Dr. Mockler has worked in management planning and control for International Paper Co., Time Inc., Dow Jones, and Famous Artists Schools. He holds a Ph.D. from Columbia University.

A number of authorities working in diverse fields of specialization have contributed to the development of systems theory. Four of the better known are Ludwig von Bertalanffy, Kenneth Boulding, Norbert Wiener, and Herbert Simon. A biologist, von Bertalanffy, is considered the originator of the general systems theory.- Disturbed by the increasing fragmentation and specialization of knowledge in this century, he attempted to find a unifying framework for the separate scientific disciplines. His work led to the development of a general theory of systems, which he felt provided such an integrating approach to the study and development of a wide range of scientific disciplines: "Tlie notion of a 'system' being defined as 'any arrangement or combination, as of parts or elements, in a whole' applies to a cell, a human being, a society, as well as to an atom, a planet or a galaxy."' Kenneth Boulding carried the general systems theory a step further by defining nine levels of systems, starting with the most simple and static (the anatomy and geography of the universe) and ending with the most dynamic (transcendental systems).* He thus conceived of a hierarchical arrangement of separate systems, which are in turn components of larger systems.

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Both Boulding and von Bertalanffy recognized the dangers that resulted from the increasing fragmentation of science into more and more subgroups and the growing difficulty of communicating among the scientific disciplines. One of the main objectives of the general systems theory was to develop "a framework of general theory to enable one specialist to catch relevant communications from others."^ Since systems theory focuses on tlie dynamic interrelationship and interaction of entities, information and communication theory are important to the development of systems theory. In his study of information theory and communication, Norbert Wiener drew many parallels between the communication processes in living beings and in the newer communication machines, such as computers. Both have special apparatuses for collecting information from the outside world, storing it, and using it as a basis for action. Through this mechanism both human beings and information-processing machines have the capacity to compare actual performance to expected performance and to correct any deviations by "the sending of messages which effectively change the behavior of the recipient."^ Thus, Wiener saw communication and information theory as a basis for understanding and e.xplaining the planning, control, and decision-making processes.'^ Herbert Simon, in his study of business management, considered "decision making" and "managing" as synonymous. He saw the business organization within which the manager works as a decision-making information system. Simon thus extended the scope of Wiener's information and communication theory and von Bertalanffy's general systems theory by applying them to business operations, where they can be viewed as vehicles for effectively achieving corporate objectives. Systems theory and tlie various applications of it explored by these four men are important to business managers primarily for these reasons: Since the systems concept is objective-oriented, systems organization automatically centers attention upon the objectives for which the finn has been established and helps to generate concerted and coordinated activity toward attainment of these objectives. Systems theory sti^esses the interdependence of elements, so that a manager is continually forced to view the business firm as a component of the over-all operating economy. From a systems theory viewpoint, therefore, a

business organization can be viewed on one level as a complete, integrated decision-making system designed to achieve some specific objective, such as producing automobiles or paper products. On another level this internal business system can be viewed as a component or subsystem of a larger systemthe economic, social, and competitive environment within which the business operates. The environmental system. Looking upon the social, economic, and competitive environment as an integrated system, of which a particular business is a subsystem, aids management planning and decision making. 1 / In planning and operating a particular company its managers are led to give greater consideration to the political and social values of the environment and potential impact that these values, and tbe legislation they produce, have on the business. 2 / Managers become more aware of the economic forces influencing the business. Tbe company's longand short-range planning is thus influenced to a greater degree by such economic factors as supply and demand; population growth and labor force trends; gross national product and income estimates; technological development; trends in governmental receipts and expenditures; fluctuations in indush'ial production, price levels, business, and tbe economy in general; and seasonal factors.1" 3 / A company's managers are made more aware of the specific influences of the competitive system on their operations. As a result, a company's sales forecasting is improved, for greater consideration is given to such market and industry factors as anticipated market standing and share, competitive stiategy and action, and new product and market development. Projected profit levels, rates or return on investment, and specific production, marketing, and financial plans are also developed with more precise estimates of competitive conditions in mind. The effects of these external factors can then he weighed with other information on internal company resourcesthe strengths and weaknesses of the particular business under studyto develop final corporate plans and to make operating decisions. A business manager acquires such an approach to planning and decision making by following the principles of scientific business planning." However, the systems approach supplements and reinforces the disciplines laid down in scientific planning, by impressing upon the manager the relationship between his internal business operation and its economic and social evironment. The relation of systems theory to business organiCalifornia Management Review

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zation for decision making. Systems theory has had an even greater impact on the internal organization of, and the decision-making processes within, individual business enterprises. The systems approach forces the manager to look upon his business organization as an information network, with the flow of information providing the decision makers at varying management levels with the information needed to make decisions of all types. As a result, business information systems, which were once considered mainly accounting record-keeping systems, are now being called upon to support all the planning, control, and operational decision-making processes within a company. As such, these systems are required to store and process not only information concerning internal operations, but also information concerning competitor plans, strategies, programs, and performance, as well as significant information on the economic and social environmentin short, all the information needed for executive decision making. These information-communication systems necessarily link together the components needed to operate a business successfully, i.e., the people, plants, and machines assembled for the purpose of achieving both the general corporate objective of making money and the individual corporate objective of making money by engaging in a specific type of profit-making business enterprise. In organizing the components of a business to achieve its objectives, traditional business organization theory has emphasized the relationships between people by focusing on tlie tasks to be performed, the job positions related to performing these tasks, and the appropriate authority and responsibility for each job position. In Management Systems, McDonough and Garrett'- give some of the principles of organization that show the traditional, people-oriented approach to organization: 1 / Be sure that adequate provision is made for all activities. 2 / Group (departmentalize) activities on some logical basis. 3 / Limit the number of subordinates reporting to each executive. 4 / Define the responsibilities of each department, division, and subdivision. 5 / Delegate authority to subordinates wherever practicable. W I N T E R / 1968 / V O L . XI / N O . 2

6 / Make authority and responsibility equal. 7 / Provide for controls over those to whom authority is delegated. 8 / Avoid dual subordination. 9 / Distinguish clearly between line authority, functional authority, and staff relationships. 10 / Develop methods of coordination. These principles clearly focus on the person-toperson relationships within an organization, and on the physical and functional departmentalization of the business unit. The commonplace block-diagram organization chart reflects this concept. Such relationships are, of course, important in thinking about organizations, but overemphasis of these relationships can obscure the information and communication links so vital to effective decision making witliin tlie corporation. When changes are introduced within the traditional organization structure, new departments or units are normally added or new responsibilities given to existing departments. Sometimes these additions or changes are made to meet new business needs, sometimes to take maximum advantage of an individual executive's particular combination of talents, and sometimes merely to adjust to the personalities of individual executives. Such a fragmented development process almost invariably leads to some decrease in the effectiveness of the decisionmaking processes within an organization. The systems concept of organization attempts to avoid tliis problem by focusing on the dynamic interaction and intercommunication among components of the system. Systems theory subordinates the separate units or departments of a business to decision-making information and communication networks. Understanding this difference is fundamental to understanding how systems theory has affected business organization and decision making. The initial chart picturing a business organization restructured around the information flows, instead of around the authority and responsibihty units, does not look substantially different, for during the first phases of the changeover only a few departments have been added and some job responsibilities shifted. The change in basic organization philosophy has a profound effect, however, for it creates major changes in the way an organization functionschanges that affect the lives of all the individuals operating within the business system and changes that after a period of time produce major 55

adjustments in the structure of the business organization. Both in theory and in practice, therefore, the theory of systems is revolutionary for an established business. The revolution has in fact occurred in most larger companies, for the introduction of electronic data processing, with its enormous capacity for storing and processing information and its enormous expense, is forcing business to use a systems approach to organization development. The computer has in a sense been the catalyst for re-evaluation and change. For some companies the transition has been smooth; for others it has been chaotic. When introducing a computer, many companies tend to approach the changeover in the traditional waypiecemeal, department by department. Such an approach only reinforces the fragmentation and disruption of information and decision-making systems.

The Catalyst for Change

Instead, as most companies sooner or later discover, before major decisions concerning computerization are made, management must step back and re-evaluate the entire ffow of business, not merely the individual operations being computerized, in order to isolate the major decision-making areas, their interrelations, and the information needed to make these decisions most effectively. In other words, the systems approach has proved in practice to be the best one. For example, in a large mail-order business which has recently been changing to computerized order processing and information handling, the first incli-

nation was to write programs in steps, first for marketing, then for order processing, billing, inventory control, and so on, for each of the components or departments currently operating in the company. It soon became apparent that this was not the best approach. At this time management directed the systems group to study the nature of the business in which the company was tlien engaged, the business in which the company hoped to be engaged within the next five years, and the environment in which the company would operate in the future. The group next constructed a chart of the flow of the business operation, starting with the coupon-advertisement offering the product and asking for the order, and following the customer's order through processing and billing until the product is shipped, the merchandise restocked, and the bill paid. For each phase in the flow chart a supplemental list was made of the significant planning, control, and operational decisions necessary to perform that phase well. The information needed to make these decisions and the form in which this information was needed was then determined. Only after the above studies were completed was a decision made as to which aspects of the business process could most economically be computerized, which would best be done clerically, and which were of suflSciently minor importance to the over-all functioning of the business that they would be done in a less than ideal way or not be done at all. As a final step, the actual organization of the operation was restructured around the picture of the business which had been developed in the systems studies.

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The diagram of the restructured organization may have looked to the casual observer like the traditional organization chart of the former organization, for there were departments for marketing, order processing, billing and credit, product procurement and inventory control, and liaison among all these operations. But the changes made to bring the organization into line with the known decisionmaking needs of the business were enormous. On closer examination it was clear that the new organization set up to handle the business had little relation to the old organization. Pockets of personal strength had been wiped out, and antiquated reporting relationships had been changed drastically. Major adjustments had been made in the daily interworkings between departments and in the groupings of functions within each department. For example, advertising was now a marketing department, order processing included customer service, and product procurement and warehousing were combined. In other words, what is commonly called an "authority" organization structure had given way to a "systems" organization structure. The re-evaluation showed that the organization had not grown dynamically with the business but was a conglomeration of old operating procedures, compromises made to accommodate personality differences, and the like. Although tlie changeover was painful, it revitalized the operation. The advantages of following the systems approach may seem obvious to the reader. Yet it is still an approach rarely followed in practice. In an existing business concern the tendency is to look at the business as a series of departments, with department heads who perform various functions, the totality of which is the "business." What this business is, how it fiows, and how its parts interrelate is likely to be known only by those who grew up with the business and now head it. And even they may not have a clear understanding of some of the newer aspects of the business. The mail-order company cited in the example above was fortunate. In spite of the problems caused by the introduction of systems thinking into the organization, the company finally adjusted to and profited from the systems approach. Many companies faced with computerization have taken the easy way out. Instead of starting with a thorough re-evaluation of their businesses from a systems viewpoint, they have computerized their operations

piecemeal. Letting presently established organizational structures control the systems study and development creates problems, among them: it leaves the antiquated organization structure intact and hinders the development of an effective mechanism for improved decision making; and it leads to inefficient use of the new, automated, computerized processing equipment. The systems approach is revolutionizing business decision making, for it can provide more comprehensive information, faster, at the point and in the form it is needed to make better business decisions. Adapting the organization to the information systems needed for effective planning, control, and operational decision making enables a company to take advantage of new facilities for storing and processing information, which can in turn lead to competitive advantages and greater profits.

Control and Expansion

Conclusion. Drastic organizational changes do not necessarily have to occur at the time a study of the business system is made, for a company may have grown and developed in tune with its growing business. But this is the exception. Some changes will always occur, and over the long run they are usually major. The executive familiar with the fundamental changes in business philosophy forced upon business by the introduction of electronic data processing and the development of systems theory will be better prepared to meet the challenges they present. He will not be confused by the continuing change brought about by the systems approach to organization and decision making, nor will he consider electronic data processing a threat to his position. Instead, he will be able to control and guide that change in the most profitable directions and at the same time expand his capacity for more effective management performance.

REFERENCES
1. Many variations of this definition exist, e.g.. Warren Brown, "Systems, Boundaries, and Information Flow," Academy of Management Jaurnal, IX:4 (Dec. 1966), 318, defines a system as "a group or complex of parts (such as people, machines, etc.) interrelated in their actions towards some goal," and Richard A. Johnson, Fremont E. Kast, and James E. Rosenzweig, The Theory

WINTER / 1968 / VOL. XI / NO. 2

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and Management of Systems (New York: McGraw-Hill Book Company, Inc., 1963), p. vii, state that "a system may be defined as an array of components designed to achieve an objective according to plan." 2. Johnson, Kast, and Rosenzweig, p. 6, n. 1, assert that von Bertalanffy was the first to use this term. For further information on von Bertalanffy's systems theory, see his Problems of Life: An Evaluation of Modern Biological and Scieiitific Thought (London: C. A. Watts and Co., Ltd., 1952) and a series of papers by von Bertalanffy, Carl G. Hempel, Robert E. Bass, and Hans Jonas, published as "General Systems Theory: A New Approach to Unity of Science," in Human Biology, XXlllA (Dec. 1951), 302-361. 3. von Bertalanffy, "General Systems Theory," 303. 4. Kenneth E. Boulding, "General Systems Theory The Skeleton of Science," Management Science, 11:3 (April 1956), 197-208. 5. Ibid., 199. 6. Norbert Wiener, The Human Use of Human Beings: Cybernetics and Society (Boston: Houghton Mifilin Company, 1950), p. 8. 7. Ibid., p. 15. 8. Herbert A. Simon, The New Science of Management Decision (New York: Harper & Row, Publishers, 1960), p. 1. 9. A number of recent authors have studied the application of systems theory to business operations: Robert N. Antbony, Jobn Dearden, and Richard F. Vancil, Management Control Systems: Cases and Readings (Homewood, 111.: Richard D. Irwin, Inc., 1965); John Dearden and F. Warren McFarlan {Management Information Systems: Text and Cases (Homewood, 111.: Richard D. Irwin, Inc., 1966); Daniel O. Dommasch and Gharles W. Laudeman, Principles Underlying Systetns Engineering (New York: Pitman Publishing Corp., 1962); Donald G. Malcolm and Alan J. Rowe, Management Control Sy.stems (New York: John Wiley & Sons, Inc., 1960); Adrian M. McDonough and Leonard J. Garrett, Management Systems: Working Concepts and Practices (Homewood, 111.: Richard D. Irwin, Inc., 1965); Heniy M. Paynter, Analysis and Design of Engineering Systems (Cambridge, Mass.: M.I.T. Press, 1961); and Thomas R. Prince, Information Systems for Management Planning and Control (Homewood, 111.: Richard D. Irwin, Inc., 1966).

10. A review of the kinds of environmental information needed for business planning, control, and operational decision making can be found in the following: V. Lewis Bassie, Economic Forecasting (New York: McGraw-Hill Book Company, Inc., 1958); Elmer Glark Bratt, Business and Cycles and Forecasting (5th ed.; Homewood, 111.: Ricbard D. Irwin, Inc., 1961); Jobn F. Due and Robert W. Glower, Intermediate Economic Analysis: Resource Allocation, Factor Pricing, and Wel fare (5th ed; Homewood, 111.: Richard D. Irwin, Inc., 1966); and Milton H. Spencer, Colin G. Glark, and Peter W. Hoguet, Business and Economic Forecasting (Homewood, III.: Richard D. Irwin, Inc., 1961).

11. The following is a simplified statement of the planning process: (1) Define specifically what the company's planning effort is expected to achieve and to what use the plans will be put; develop an approach (including organization and management planning policies) to carry out the planning function within the corporation. (2) Determine the key factors (planning premises) which will have a major influence on planning, through a study of both the environment (the economy, society, public policy, industry, and market) and the company's strengths and weaknesses. (3) In tbe light of the planning premises, develop and evaluate alternative directions the company might follow over the long range and select tlie corporate objective (i.e., kind of company) which will enable the company to most profitably exploit the market opportunities identified during tbe premising stage of planning. (4) After developing and evaluating alternative policies and programs which wiU achieve the objective, detennine the policies, programs, and procedures that best fulfill the corporate objective and still meet market, industry, and company criteria (premises), and establish a suitable organization structure and adequate budgetary and operational controls. (5) Review and refine the program periodically. For further infoimation on the approach to scientific planning, see: Melville G. Branch, The Corporate Plan ning Process (New York: American Management Association, 1962); Preston P. LeBreton and Dale A. Henning. Planning Theory (Englewood Gliffs, N.J.: Prentice-Hall, Inc., 1961); Bruce Payne, Planning for Com pany Growth (New York: McGraw-Hill Book Gompany, 1963); and Brian W. Scott, Long-Range Planning in American Industry (New York: American Management Association, 1965). 12. McDonough and Garrett, p. 9.

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