This post is the first of a series named How Systems Thinking Helps with Running a Company
What is feedback?
One of the basic concepts in system theory is the concept of feedback. The essence of feedback is represented through continuously monitoring the system’s state (e.g. to measure the performance indicators of a certain system) and by comparing these measurement to our goals, decide on what adjustments we need to make to improve the outcome and obtain the desired result. In order to reach your goals you must implement a measurement process and keep track of the difference between the goals and the actual situation of the system.
Now let’s simplify. Why we need to measure?
Feedback is something that we use every day, all they long. The easiest way to explain feedback is through people’s sensory system. If you close your eyes, you don’t feel comfortable walking in an unknown environment, do you? If you are at home or in your office you might be able to move across the room based on your previous knowledge of the surroundings, but that is a different story, and we’ll discuss that in more details when we’ll talk about models and prediction. For the sake of simplicity, let’s say that you have closed your eyes and you have no idea where you are. Then, you are told to move towards the door. How do you feel? Confused? Well, your are not using your visual feedback, hence you cannot see the door. Once you open your eyes, it is a matter of seconds before you grasp the geometry of the room and calculate your fastest route to the door. Feedback is our sensory perception of the surrounding, and as for people that are trying to walk, feedback is also eyes analogy when running a business. It quantifies whether the implemented procedures drive the system towards the desired result or not.
Using the measured indicators we design the closed loop of control.
In systems theory, feedback is the differentiator between open and closed systems. Open systems represent a class of system for which we design a controller (a procedure) and after the implementation, there is no possibility to adjust the control law. Therefor, open system are usable only in what we will call “static environments”. In the real world on the other hand, everything is dynamic and ever-changing. To use the systems theory principles in the real world, one should be able to adapt and adjust according to the real world measurements. Closed loop systems represent a class of systems where at least one parameter is measured and feed back to the controller. The controller adjusts the control action, based on the difference between the goal (reference) and the output measurement (feedback).
Is having feedback enough?
Having feedback is not enough. It is really important to get feedback that is meaningful with respect to the results. Let’s go back to the human visual system analogy. If I allow you to open your eyes in a room, but I ask you that you only look upwards, will it be easy for you to quickly find a route to the door? I didn’t think so. As important seeing the system is, also important is where do you focus your eyes. Speaking in business terms, you must define and measure Key Performance Indicators (KPIs), because there are many parameters that you could measure, but will not bring any value to the control system. Measuring the correct performance indicators, may significantly reduce the time to reach our goals.
Feedback is used for reactive control.
Once you have your system set up, you must implement some kind of a control/management strategy and then you have to continuously measure with the right frequency and adjust the control action if the system does not behave as you want to. This concept classifies as reactive control, we take action only when we measure some offset or if we encounter some disturbances. This is not the best way to control your system (e.g. company). Much more effective way of control would be a predictive/proactive approach, used by most of the successful entrepreneurs, but let us start with the basics now, and in one of the next articles, will describe how that works to on a system level.
How does a closed loop work?
Having explained the basics, now we will explain what really a closed loop means through an example. Again we’ll refer to the human visual system as something that we’re clearly familiar of how it operates. If we find ourselves in an unknown room (system), we open our eyes and search for a door. This is the way we measure our environment, with our eyes being the sensor element here. After getting familiar with the environment, we set a goal, which in this case should be find the fastest route to the door and exit the room. Our mind (which represents the controller) continuously issues control actions like move towards the door, but in the same time it measures our interaction with the system. If the straight line towards the door, which by default is the fastest route, has some obstacles, it directs us to avoid the obstacles by moving our trajectory left or right. This procedure is continuously repeated by our mind until we reach the goal.
Now you may understand that this is almost the same in every controlled operation, and you are right. If you are running a business, you must know the environment in which the business operates (regulations, law, competition), you set up a goal (financial target, annual growth rate), and you constantly measure your company’s performance and compare it to your goal. If you encounter obstacles along the way, you design new procedure to overcome or to avoid the obstacles and to keep the course. Business owners and managers do this every day whether they have general understanding of systems or not.
So, why do I need to understand systems?
In real life, business decision makers (owners/CEOs) perform the controller task to the business process, and control is always better performed when we do understand the nature of the systems we engage. This means understanding your niche of operation, but also understanding of the basic concepts of systems in general. A good decision maker understands the interconnections of the process he is in control with; decides which are the right KPIs; and measures the output with the correct frequency. Thus, he eliminates making false conclusions and unnecessary changes. Therefor it is extremely important for decision makers to understand how systems work. The better their understanding, the faster they will achieve the desired result.
Instead of conclusion.
There is no better way of helping society than empowering SMEs to grow and develop. We will start doing so by publishing several posts on how understanding systems helps decision makers to run their business. Raising the awareness of systems concepts will help companies to grow faster and increase their market value. That is why knowledge and directions how to implement it are extremely important. Remember, change is inevitable, but progress is not!
- to push you even further if you’re running towards your goal;
- to move you in the right direction if you are stuck;
- to pick you up if you have fallen.