How to think strategically: systems and shocks

When considering threats, look for "actors and factors" that could force changes

Quick summary:

• There are reasons why the status quo exists: it indicates an equilibrium point

• Using systems thinking helps conceptualize complexity and how changes occur

• Thinking in systems helps leaders identify key “actors” and change “factors”

• Stakeholders generally act because of incentives that are found within a system

• It is hard to shift motivating factors; often, an external “shock” is required

• When formulating a strategy, create stories about possible shocks to assess threats

Use systems thinking to find “actors and factors”

I am far from an expert on systems thinking, but one of the most insightful books I’ve read in my life is Thinking in Systems by Donella Matthews. Looking for systems (which are all around us) and diagramming them helps me gain insights into why certain behaviors occur, especially when they are unexpected. Earlier this month, I wrote Forestview articles on the need to develop a holistic worldview and how to distinguish between meaningful mega-trends from fleeting fads as part of your strategy formulation process. When thinking about your organization, its purpose, and its activities from a high-level perspective, it is valuable to identify all the significant actors (i.e., stakeholders) involved and the factors that motivate each. I previously wrote about the adage “you get what you measure” and how success metrics significantly shape corporate culture. In addition to the limitation of metrics as motivators, overcoming our human tendency to take comfort in the status quo is hard. Most people with significant experience in their job have attained a large amount of tacit knowledge and mastered their roles. These employees are hard to win over when attempting to motivate change from within your walls, absent a crisis.

I recently came across the example of higher education to illustrate this challenge. In their book Academically Adrift, authors Richard Arun and Josipa Roksa argue that American colleges and universities fail to adequately provide the necessary critical thinking, writing, and reasoning skills that employers are demanding in our highly competitive global economy. (Note that some of their research findings have been subsequently disputed, and debates continue to rage about the relative performance and value of post-secondary education.) In particular, more and more students are attending colleges to obtain their undergraduate degrees in hopes of improving their earning potential after they graduate, yet providing a quality undergraduate education doesn’t often appear to be a top priority at most schools. Instead, universities are building much more lavish dormitories and campus amenities for students. At the same time, more and more courses are taught by graduate students and adjunct professors. By contrast, tenured faculty interactions with undergrad students are de-prioritized in favor of time spent on research, publication, peer reviews, and grant proposal (not to mention endless staff meetings and administrative tasks).

While the authors contend that the quality of undergraduate education is declining in the U.S., the costs to attend college continue to rise for families with no end in sight, leading to a $1.7T student debt crisis. The current student loan forgiveness program announced by President Biden is currently on hold, awaiting oral arguments next month before the U.S. Supreme Court. Even if these initiatives end up going forward, however, it may prove to be the case that reforms to student loans may increase the amount of debt that future students incur. This is precisely the opposite of what we might expect to occur with a policy change! If the federal government - heavily involved as a “buyer” in providing grants and subsidizing student loans - is not going to change the post-secondary education system meaningfully, what will? Arun and Roksa argue that no actor in the current system has a clear incentive to change the costs or quality of undergraduate education in the United States.

Changes from external shocks, not internal shifts

In Academically Adrift, the authors provide a myriad of economic and sociological evidence to argue that our post-secondary education system in the U.S. is heading in the wrong direction. Students are expressing buyer’s remorse for their college education. Employers are unhappy with their choice of recent college graduates. Student debt is a drag on the overall economy and can create increased income inequality. Yet, Arun and Roksa contend that despite numerous attempts to sound alarms and push for reform, the system is not likely to change from within. Why? Because each of the main actors remains incentivized to continue to act in similar ways. Arun and Roksa argue that the mission of higher education has shifted over the past decades. Intended initially to instill moral values and critical reasoning skills in young adults to shape them as citizens and prepare them to be active participants in democracy and civil dialogue, today’s colleges are much more focused on “credentialism.” In other words, the degree from a university is the “product,” and students are “customers,” with schools competing as “suppliers” in a marketplace to offer their services.

What do these customers want? Well, most students wish to minimize their time studying and maximize their time socializing and pursuing recreation. Colleges help in this process by ensuring faculty do not require excessive academic demands on students and offer stimulating activities such as rock climbing walls or lazy rivers on campus. One way to influence faculty members is to base their evaluation on student survey feedback and to employ fewer full-time tenured faculty and more adjunct professors whose status is more tenuous. Parents are happy to go along with this state of affairs because they want their children to enjoy their college years before the reality of the “real world” hits home, where daily lives prioritize time in the workplace. It all adds up to what one university president cited as their primary objectives: “parking for the faculty, sex for the students, and athletics for the alumni.”

Invest in scenario planning to hone your strategy

Now that I’ve diminished your view of higher education, my larger point is that, absent an existential crisis threatening institutions' ability to survive or a “burning platform” for short, building a mandate for change from within is tricky. It often takes one or more external factors or shocks to force change upon organizations. Creating a healthy culture of continual reinvention is challenging, as I outlined in my story about New York City last summer. In that example, the bankruptcy of the City in the 1970s led to a crisis that forced major changes, subsequently leading to a stronger sense of community that allowed NYC to weather further shocks such as 9/11.

Shocks can be political, economic, technological, or environmental. (They can be demographic, but these usually play out over a more extended period unless caused by political forces, such as refugees and immigration crises sparked by violence and war.) Competitive threats, such as a new entrant into a market in which your organization competes, could also serve as a shock but are generally easier to foresee and plan for. For example, when Kia first entered the marketplace for vehicles, their cars were aimed at the price-sensitive consumer, far from the target audience of luxury brands like BMW. Over time, Kia moved more upscale in their offerings while BMW and other luxury brands lowered the price of their entry-level offerings to capture a larger market. The firms suddenly were competing in a similar space. (This is one illustration of The Innovator’s Dilemma that can be seen as a shock but is a predictable pattern that repeatedly occurs.)

So how can you identify possible shocks before they disrupt your business? First, organizations can attempt to improve sub-optimal systems by finding leverage points that can serve as a small window that leads to broader change. Second, leaders can identify potential threats, discuss and prioritize them, and engage in scenario-planning “what-if” exercises as a team. I recommend creating stories for each factor and seeing how these stories impact your overall strategy. Ask questions such as:

• What factors would change the incentives (behaviors) of actors in our system?

• What are the sources that could lead to the emergence of these factors or shocks?

• What is preventing each shock from occurring today?

• What condition(s) would have to hold for these factors or shock to materialize?

• What warning signs should we look for that external changes may be coming?

• How should we respond broadly to a given shock? How soon do we need to?

• Are there any major risks or unknowns in our responses? Can we reduce them?

• Are there changes we can make internally now to mitigate external shocks later?

Finally, ensure that an individual or team is responsible for monitoring for external factors that could threaten your organization, identifying the potential ramifications of a shock, and when to trigger your response plans. Too often, these scenario planning exercises are held as part of a robust strategy development session with senior leaders and then are subsequently forgotten about or ignored as day-to-day demands take over again as they inevitably do.