Systems create capital

Productive Thinking

Systems create capital

A prior release of Productive Thinking introduced the three aspects of the leadership game:

  • The game is capital creation
  • The game is played by creating systems to transform capital from one form to another
  • The modern style of the game is digital networking

This issue addresses the second bullet — leaders create systems to transform capital.

Key thoughts

  • There are five fundamental systems in every organisation
  • Performance improves by creating a virtuous interaction between systems

The origin of five essential systems

Humans developed five essential systems over millions of years. First, our early ancestors learned how to engage with others because collaboration increased their chances of survival. About three million years ago, early humans developed a system of production for making a simple cutting blade. When speech and advanced human behaviour emerged about 50,000 years ago, our forebears had the cognitive skills and the information system of speech to frame their opinions and understanding of the world. They learned how to argue to justify a point of view.  Writing, another information system, was invented by the first agricultural societies to record obligations, such as a farmer storing grain in a merchant’s granary. Writing, a system of record, was applied to many other facets of early civilisations, such as recording laws and astronomical observations. Finally, systems of inquiry emerged about 2,000 years ago when early scientists analysed recorded data to justify explanations.

Types of system

TypePurposeMechanisms
EngagementCollaborate and coordinate activitiesTouch, gesturing, speech, and writing
FramingJustify the reason for behaving in a particular way or promoting a particular opinionUse of a mental model to focus discussion, justify a viewpoint, and generalise knowledge
InquiryGenerate knowledgeUse of reproducible methods to justify or validate an inference
ProductionCreate and transport products and servicesStandard operating procedures to increase the efficiency of product and service creation, lower transport costs, and enhance transport punctuality
RecordRecord and retrieve dataTables, ledgers, and written reports

Operational systems

In every organisation, systems of engagement, production, and record determine the efficiency and sustainability of daily operations.

Systems of engagement

A system of engagement is a set of shared symbols that enables two or more humans to share intentions and achieve a common goal. In business, shared symbols are often spoken language, documents, tables, and diagrams.

Sales, marketing, customer relationship management, and public relations are typical systems of engagement. They connect an organisation with its key stakeholders and support collaborative action. Selling a product, for example, is a system of engagement because two parties must collaborate to meet a common goal of exchanging two forms of economic capital, namely a product and money.

Systems of production

system of production is a repetitive sequence of coordinated actions that might be divided among actors to achieve a goal. Production usually evokes an image of a factory, but transportation is also a production system. Moving a good from producer to consumer requires repetition and coordination across multiple parties.

Systems of record

Broadly, a system of record is a mechanism for recording and recalling details of obligations and events. It stores and retrieves data collected by systems of engagement and production.

Systems of record are required for operational systems, such as processing customers’ orders or keeping track of exchanges with clients. Typically, such data are stored in databases,  document repositories, and other data sets an organisation might maintain. These data are input for its system of inquiry.

A critical development in recent years has been to tighten the linkage between systems of record, inquiry, and framing. Consequently, the data or evidence-driven organisation gains a performance advantage because decisions are based on data analytics rather than a hunch.

Strategic systems

An organisation’s future is determined by its systems of inquiry and framing. You can’t develop a strategic plan without analysing trends in citizens’ needs and technology. A system of framing is an interpretation of such analyses to justify operational or strategic decision-making.

Systems of inquiry

In the last decade or so, some enterprises have learned that data-driven decision-making, a system of inquiry, increases their capital productivity. Physicians have discovered the advantages of evidence-based medicine, another system of inquiry.  A system of inquiry is a mechanism for converting observations into general statements about cause and effect. It generates knowledge by applying accepted methods to justify or validate an inference. It should produce knowledge that positively impacts an organisation’s future. 

The scientific method is perhaps our best and most successful system of inquiry because it focuses on creating reproducible and explainable findings. Organisations should endeavour to follow the same principles, though the pressure to make quick decisions can hamper the efficacy of systems of inquiry.

Systems of framing

A system of inquiry produces information for a system of framing. These can be generic external frameworks, such as the business model canvas, or internally generated data analytics on a specific organisational issue. The system of framing is typically the board of directors and senior executive team.

A system of framing justifies the reason for behaving in a particular way or promoting a particular opinion. It intertwines language, setting, and shared culture and knowledge to justify and attract adherents to a viewpoint.

For today’s organisation, justification should be supported by the findings of a system of inquiry. Arguing without data is not generally a path to success in a data-driven organisation. Basing decisions on ideology rather than insightful analysis belongs to politics, not enterprise decision-making.

A system of inquiry should continually generate successive frame improvements to advance incremental and radical innovation.

A virtuous interaction among systems

A modern economy is primarily concerned with producing goods and services. We often see systems of production as its core feature. These systems receive inputs from systems of engagement (e.g., orders) and create data (e.g., resources consumed) for systems of record. In a typical manufacturing company, for instance, systems of inquiry (data analytics) process data from systems of record to identify problems and opportunities. An organisational system of framing determines how the results of a system of inquiry might be used to adjust a strategy or tactics. As a result of IoT, many companies are converting their value proposition from making a product to delivering service (e.g., Rolls Royce sells jet engine hours).

Ultimately, your system of framing is the most critical of the five systems because it determines your value proposition and the actions taken to meet its claim. For example, Apple’s decision-making is driven by its focus on the customer experience. Walmart built a world-class logistics system to fulfil the promise of everyday low prices.

To refine or change the value proposition, organisational leaders might pose use cases to the system of inquiry experts. For example, Mastercard’s executives tested a use case, the co-branded credit card, with a system of inquiry mathematically describing relationships in the credit card industry. Sometimes, requests from the system of framing will require changes to the system of record to collect new or additional data to feed into the system of inquiry to support the senior leadership’s framing of the organisation’s future.

A virtuous relationship between systems is depicted in the following figure. Of course, there can be multiple virtuous and non-virtuous interactions among the systems depending on the industry and environmental turbulence, and they don’t always follow the same path.  Furthermore, these interactions are not confined within the bounds of a single organisation, and there are many organisations with diverse interacting systems. Nevertheless, organisations should ensure their systems are linked to deliver their value propositions.

Virtuous interactions among systems

Critical reflections

  • How can you improve the linkage of the five essential systems to improve the delivery of your value proposition?
  • How often do you review your value proposition?
  • Are you collecting the necessary data to ensure you have the right value proposition?

Rick Watson

Research Director

Digital Frontier Partners

Email

Comments and conversations are welcome.

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