Structuring Companies for Innovation and Operations

The appropriate structuring of companies is becoming more and more relevant as a mechanism for managing and enhancing their innovation capability. This article explores the concept of the Viable Systems Model (VSM) of Stafford Beer as a tool to better structure organisations for effective innovation and efficient operation.

Traditionally hierarchical and silo’ed structures are simply too cumbersome to deal with the modern imperatives of flexibility, integration and agility. Regular and transparent communication, of both the formal and informal kind, is generally lacking. This stifles innovation. Ask just about any person who works for a large corporate environment about the structure of their organisation. The chances are extremely good that you will not get a straight answer. This is not because they are avoiding the subject, but rather because the structure is not transparent to them. Ask more than one person and you are likely to get conflicting responses.

Matrix and other alternative structures have been instigated in companies to try and improve upon the inflexible, disconnected and opaque nature of these traditional structures and have proved useful at certain levels. The challenge remains that control structures continue to be extremely hierarchical in nature. But why is this problematic for innovation?

The need for ambidexterity

Innovation, inevitably, requires an organisation to change. Whether minor and incremental adjustments to the status quo, or a major and radical deviation from the norm, companies are required to change their modus operandi more and more often and in larger and larger increments to remain competitive. The traditional organisational structure is founded in an environment where success is achieved through:

  • role clarity – employees know what to do,
  • specialisation – employees know how to do it, do only that and do it well,
  • control – employees are coordinated and (micro-)managed by those “above” them, and
  • size – more revenue is created by larger organisations (mergers and acquisitions) controlled by deeper hierarchy.

These structures can be highly bureaucratic, slow to react, and lacking in connectedness between business units. Clearly, this is in stark contrast to the new imperatives for organisational success – flexibility, integration and agility. But, do these 3 attributes alone ensure competiveness? While they would support innovation, companies also need to be efficient in their current operations – their stream of revenue and immediate survival. Delivering value more cost effectively than the competition is vital. This requires “rigorous structures” that can be in direct conflict with the imperatives for innovation. Managing a production line for quality and efficiency and managing innovation share few similarities.
An ambidextrous organisation is therefore required – one in which operations and innovation can coexist. A mechanism that we use to describe how these conflicting activities can coexist, or rather flourish, is presented in the Viable Systems Model of Stafford Beer.

Basics of a “viable” system

Born in London in 1926, Beer was a theorist, consultant and professor in the fields of operational research and cybernetics. He was however best known for his application of cybernetics to organisational management, defining cybernetics as “the science of effective organisation”. It is in the works “Brain of the Firm” (first published in 1972, significantly extended in 1981), “The Heart of Enterprise” (1979) and “Diagnosing the System for Organizations” (1985) that Beer formulated and applied his Viable Systems Model. The basis for the model was established through Beers study of the human form in which he identified 5 primary sub-systems (see table and figure below). Beer postulates that these systems are fundamental to any higher-level system interacting with a complex environment – such as an organisation – if it is to be a viable (sustainable) system.

Human System Organisational System
System 1 The muscles and organs – performing the primary activities Operations – Primary activities, operations, project teams, quasi-autonomous
System 2 The nervous system – connecting and stabilising the activity of the muscles and organs Connection – Communication, conflict resolution, stabilisation
System 3 The base brain – overseeing and optimising the interactions between the muscles and organs Cohesion – Internal regulation, optimisation, synergy
System 4 The mid brain – providing a connection to the outside world through the senses Intelligence – Forward planning, strategy, innovation
System 5 The higher brain – representing the final decision making, identity and values of the human Policy – Ultimate authority, governance, identity

The intention of this article is not to reproduce the material. It is to (briefly) demonstrate that the VSM offers a solution to the challenge of organisational ambidexterity – creating an environment in which innovation and operations can flourish simultaneous.

At the core, the VSM states that each of the 5 sub-systems needs to be functioning properly and be in balance with its environment for the system as a whole to be viable. Further, from the diagram below, it is clear that the structure is a self-replicating one similar in concept to Mandelbrot’s fractals. Viable systems therefore exist within viable systems – known as recursion – as a mechanism for dealing with complexity and to ensure a certain degree of autonomy. This principle of recurring self-organisation is crucial to ensuring the desired level of flexibility and agility required for modern competitiveness.

In addressing the need for organisational ambidexterity, the VSM diagram below depicts the connections that exist between innovation (part of Intelligence, System 4) and operations (System 1) and the “positioning” of each. Through recursion, each business unit essentially has its own Intelligence function, providing forward planning, strategic direction and innovation for that unit in the context of its specific business. The higher-level innovation function is closely linked to this function and provides a perspective that is outside of the specific business of that unit. This combined top-down and bottom-up approach to innovation supports the need for consistent incremental improvement to the existing business to maintain competitiveness within a market and the occasional radical change to create new businesses and markets to survive over the long term.

Practical implications of viable systems theory

This article concludes with the following practical implications for structuring innovation within the organisation:

  • If the innovation mandate is not elevated to the appropriate level (as demonstrated within the diagram) it will not succeed. Innovation must be made part of the highest level metasystem – represented as the Intelligence function – and interact with the environment to identify high-level and latent opportunities not visible from an operations perspective.
  • Innovation has to have a place within each of the business units, as is demonstrated by the self-replicating structure – an Intelligence function as part of each business unit. This function would be focussed on identifying opportunities in the context of the particular market in which the unit is operating.
  • “Thick pipes” for communicating between these Intelligence functions (and all other functions) is vital to maintain the balance of regular incremental improvement to the existing business to maintain competitiveness within a market and the occasional radical change to create new businesses and markets to survive over the long term.
  • Operational business units, exhibiting the 5 sub-systems necessary for viability – with only the appropriate level of intervention from the highest level metasystem – will provide the required level of autonomy and agility necessary to successfully manoeuvre within a specific market and ensure their short-term competitiveness. Further, the bottom-up and incremental innovation emanating from the business units is not incompatible to the earlier mentioned “rigorous structures” necessary to deliver value in an efficient manner.
  • Higher-level structures – Policy, Intelligence and Cohesion – offer the appropriate level of intervention to ensure balance within the organisation, resolve conflict, offer additional perspective and opportunities external to specific markets, and identify synergies between units with the objective of ensuring long-term survival. Further, the creation of self-similar business units to address new opportunities offers the scalability necessary to rapidly grow the business.

By Heinz Essman, contributing editor, South Africa

About the author

Heinz is a perpetual student, having spent much of the last 9 years understanding how companies are built, run and renewed through innovation. He obtained his PhD in Industrial Engineering on the topic of assessing and improving organisational innovation capability. Heinz has more than 5 years of experience in deploying a variety of tools and methods for business building, improvement and renewal as a researcher, business engineering and programme manager at the Innovation Management firm Indutech. Clients range from new and small companies, new spin-off units focussed on innovation, to large corporates and government organisations. He also lectures to final year Industrial Engineering students at Stellenbosch University on the topics of Innovation Management and Enterprise Engineering.
  • Hans-Peter Stolz

    Hello Dr. Essmann,
    thank you for requesting my opinion on this topic. Organizing for innovation is always a challenge. Reseach shows, that different innovation types require different organization forms. That depends mostly of the size of the change required and the damage the innovation could do to those with the then “unneeded skills”. The size of the organization will also have an impact on the options realistically available.

    I am a little hesitant to adopt Beer´s thinking, in comparing organizations to the body. I would much prefer to use de ICMM to play around, to find the right solution to an organization problem. Have you tried that?

    Kind regards
    Stolz

  • Aubrey

    Heinz,
    We’re agreed that organizational structure can severely hinder a company’s innovation capability. Beer’s model at least get’s one thinking about these organizational structure components and how one could leverage these for innovation. The concept is thought provoking to say the least, so please keep us posted on the results of some real world scenario testing.

    Regards,
    Aubrey

  • Raj

    Heinz

    I think to be innovative and creative one must be able to think freely and holistically. I therefore believe you cannot say to somebody I want you to be innovative and creative and at the same time tell one how to follow a methodology in order to achieve entrepreneurship. I am more of a believer that one needs to follow systemic thinking concepts in order to achieve true innovation success.

  • Roviss

    Hi Dr. Essmann.

    I always had a huge interest on the use of nature to solve problems (Biomimicry). Comparing human body to an organisation would make a perfect study. Human body has been under many challenges and lots of studies have been conducted on how the body performs under these challenges. The human body has been a great innovator. It’s a great article. The million dollar question is how do top management buy in to this methodology and how is it accept in organisations.

  • Heinz Essmann

    Thanks for the comment Mr. Stolz. Regarding the ICMM you speak of, one of the 42 parameters therein speaks of developing a sufficiently flexible organisation to deal with the changes in a highly dynamic environment.

    The other challenge is that the same organisation also needs to achieve certain efficiencies, productivity and quality – for which conflicting structures are required. My feeling is that the VSM provides a framework for evaluating and finding a balance within the organisational structure to achieve these conflicting requirements based on the specific needs of the business.

  • Heinz Essmann

    Thanks Aubrey. Fully agreed. There have been several real world applications by Schwaninger and Espejo. The theoretical nature has however been a possible reason for the lack of widespread application. As a thought provoking tool, I think it extremely valuable.

  • Heinz Essmann

    Thanks for the comment Raj.

    I actually think that this approach is systemic in nature – it is all about the whole. Its is also about the parts and how they are part of the whole as self-similar entities that demonstrate the essential characteristics of a “viable system”. Most importantly, I think it is a mechanism to find the necessary balance between adaptability and efficiency – both requirements for viability, but often conflicting.

  • Heinz Essmann

    I agree with your sentiments Roviss! The human body remains the most amazing system we have to study and learn from!

    I think buy-in will come as top management realises that traditional structures continue to hinder organisational change – as is required more and more often. Such an approach needs also to show real and tangible benefits.

  • Ampie

    Heinz

    This article certainly provides an interesting perspective.I would agree that Innovation should become a higher order (more strategic) function within an organisation and it certainly goes some way to emphasise the value of a systems thinking approach rather than a mechanistic / linear view.One should not under estimate the impact of the external environment (broader system) on the Innovation that occurs within organisations. The contribution of Open Innovation would be key for me.

    I am a strong beliver that Innovation is part of the DNA of any successful organisation.The challenge is to create an environment where this inherent potential can be unlocked.

  • Heinz Essmann

    Regarding the impact of the external environment, the approach is essentially focussed on dealing with the complexity of the environment and dealing with it in a manner that ensures the long-term viability of the organisation. Unfortunately with such a short article, only tit-bits of such an approach can be discussed.

  • Willie Krause

    Hi Heinz
    Great article – thought provoking indeed. From a practical perspective – how would you sell this idea to a top executive in order to adopt the thinking, without scaring them off with the “academic methodology”? How does one simplify the complexity?

  • Heinz Essmann

    Very valid point Willie. Our challenge, indeed, is to make such tools and methods more pragmatic and applicable. This we are working on. My gut feeling is however, that should the top executives be experiencing severe “pain” in their business due to a lack of dynamism and flexibility, then the concept at least should sell fairly easily.

    I think its less about simplifying complexity and more about portraying only what is necessary and doing so in a simple manner. If one reads further into this method, it is made very clear that simplicity is not the solution to deal with a highly complex environment (variety is the only way to deal with variety – a basic premise of this approach from the field of Cybernetics). But, simple depiction to “sell” it is vital I agree.

  • Hilton Calder

    Hi Heinz, I really enjoyed your article and am a fan of the systems theory. I have 2 comments/questions:
    - Some companies have introduced open structures to promote innovation but possibly implement the necessary behaviours in a mechanistic manner, resulting in showcase functions that do nothing.
    - I suspect there is still a ‘missing link’between people/organizations, innovation, and meaningful change.
    Your comments will be appreciated.

  • Heinz Essmann

    Regarding behaviour implemented mechanistically, I agree that this can be a hindrance. I think the reason may be that the people are accustomed to behaving in a mechanistic fashion, so to realise the change, it is implemented in this “familiar” manner. The challenge is then (for leaders) to create the environment that allows the behaviours to become more natural, more “organic”. As the culture then changes, so to will the performance. Its a process we follow from “formalisation” to “internalisation”.

    On the missing link between people/organisation, I agree, this model is “lean” on the people side. It is intended to be organisation focused, but this could present an interesting opportunity for expansion. Finally, in my opinion at least, this model is not necessary and sufficient for innovation, but I do think certainly necessary.

  • A man from East

    INFORMATION SYSTEM:
    (System 1 ) The muscles and organs – performing the primary activities Operations – Primary activities, operations, project teams, quasi-autonomous

    KNOWLEDGE SYSTEM:
    (System 2) The brain/nervous system – connecting and stabilising the behaviour of the whole Connection – Communication, conflict resolution, control

    MIND SYSTEM:
    (System 3 ) The Mind – overseeing and optimising the interactions between the muscles and organs Cohesion – Internal regulation, optimisation, synergy

    WISDOM SYSTEM
    (System 4 ) The Conduct – guiding to the outside world through the patience, Intelligence – Forward planning, strategy, innovation

    PEACE & HARMONY SYSTEM
    System5 The whole – representing the final decision making, identity and values of the human

  • Heinz Essmann

    Hello man from East

    Thank you for the summarizing titles. An interesting perspective. I would have to group “INFORMATION SYSTEM” under System 2 however, and call System 1 the EXECUTING SYSTEM – fulfilling the primary purpose of the whole.

    Thoughts?

  • Paul McDowall

    The VSM model represents some interesting ways of thinking about organizations, and as such it is much like many other perspectives on organizational dynamics and management theory. As a tool, however, I have a hard time believing that any senior leader would spend more than 30 seconds listening to someone try to describe this, let alone actually spending time to figure out how to adopt and adapt it to their organization. Its just way too theoretical, and senior leaders want to be known as practical, hard-driving leaders, as per Henry Mintzberg’s saviour-leader model. The challenge for anyone wanting to take the VSM beyond the intellectual candy stage is to draw keys from it and transform it into something truly practical that ‘speaks’ to organizationl leaders. no small challenge

  • Heinz Essmann

    A challenge indeed Paul. I don’t think, however the saviour-leaders (practical and hard-driving) can be successful indefinitely. At some point(I and others speculate), that we will need systemic-thinking leaders – ones that can see the value in this and similar approaches in dealing with increasing complexity. I suppose only time will tell.

    Nevertheless, your point on making the VSM more practical, maybe more “tangible”, is a very valid one! Thanks.

  • Paul McDowall

    It seems to be a most unfortunate but all too often irony that when we increasingly need systemic-thinking leaders in worlds of increasing complexity and uncertainty, but the risks and the pace of change seem to severely restrict their development. Unfortunately the faddish management pop literature does nothing to help this situation, drawing their ‘best practice’ example of leadership from the 1950′s style of leadership models.

    I would love to see some truly insightful writer produce a best-seller management monograph drawing on insightful leaders who employ 21st century leadership styles and models. Now that would be worth the price of admission.

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