Earn your certification as a Financial Modeling & Valuation Analyst (FMVA)™. Register today!

Systems Thinking

The process of analyzing how a system's different parts interrelate and how systems work within the context of other bigger systems

What is Systems Thinking?

Systems thinking is an approach to analysis that zeroes in on how the different parts of a system interrelate and how systems work within the context of other bigger systems. It is a holistic approach that can be used in many areas of research. It is also useful in many fields of study such as medical, political, economic, environmental, and educational systems.

 

Systems Thinking

 

History of Systems Thinking

Systems thinking started in 1956 when the Systems Dynamic Group was created by Professor Jay W. Forrester at the Sloan School of Management at MIT. It utilizes computer simulation and different graphs and diagrams to illustrate and predict system behavior. Some of the illustrations include the causal loop diagram, behavior over time graph, management flight simulator, and simulation model.

 

Systems Thinking in the Workplace

When it comes to managing organizations, many find systems thinking as an effective approach as it sees how different complex entities interact and influence each other and make up the whole system. Different divisions or teams within an organization connect with and affect each other. In effect, they work together towards a goal. Business leaders who are systems thinkers see the complete picture. It is what they focus on to maximize performance within the organization.

Aside from understanding how various components work and affect each other, systems thinkers know how their actions in any component can affect the system as a whole. There’s also the concept of supply and demand where systems thinkers know when and where their outputs will be needed as well as the external factors that will affect demand. They also understand the capacity of the organization to meet the demand.

Another essential component of systems thinking is focusing on feedback. Giving attention to relevant feedback enables business leaders to come up with solutions to problems to avoid wasting resources on approaches that can be counterproductive. Systems thinkers can also identify which resources are needed for more efficiency.

When business leaders are systems thinkers, they veer away from just giving instructions and controlling the system. They employ proper management style, recognizing employees’ performance as significant to the overall performance of the system.

 

Creating a Systems-based Organization

Not all leaders gain a systems perspective, partly because of the organizational structure. In many cases, each division or team has its own manager, goals, tasks, budgets, and KPIs. As a result, teams only focus on tasks assigned to them. Also, many organizations function in a top-down, command-and-control format. In systems thinking, business leaders allow employees to understand how the organization works and encourage them to improve processes to meet the overall goal.

 

Final Word

Are you a systems thinker? Taking a systems perspective is no easy feat. It involves not only the senior management – everyone in the organization needs to understand the business goals, and what processes to take to achieve them. It is essential to develop the behavior of seeing the system as a whole and taking actions that will be beneficial for the entire organization.

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

CFI's Corporate & Business Strategy Course

Learn to perform Strategic Analysis in CFI’s online Business Strategy Course! The comprehensive course covers all the most important topics in corporate strategy!