BCG Henderson Institute

Thriving in an Interconnected World: The Systems of Business

In an increasingly interconnected world, business leaders should not merely focus on a narrow set of financial variables and transactional relationships. Instead, they must observe, adapt to, and shape the broader set of political, economic, social, and biological systems upon which business depends. This requires a shift in business thinking.

We put blinders on racehorses to ensure they conduct their singular task as effectively as possible—they have to stay focused on the track ahead without getting spooked by their surroundings. For similar reasons, as managers, we often put figurative blinders on ourselves—focusing only on the most immediately relevant employees, functions, products, competitors, or customers. This narrow approach views businesses as insular machines working to maximize near-term financial returns. Such an approach was pragmatic in the pre-globalization, pre-digital, and pre-sustainability era, when the connections of one business to another and to the natural and social systems beyond were limited, and when the environment was relative stable and predictable.

But today’s context is less like a racetrack and more like a jungle: Complex, uncertain, and deeply interconnected. Successfully navigating this environment relies on the art of seeing the forest and the trees, as environmental scientist Donella Meadows described in her seminal work Thinking in Systems. As such, businesses need to develop a holistic understanding of the multiple systems they operate in: Their complexities, redundancies, and feedback loops.

In this article, we discuss how businesses can unlock value by adopting a multiple systems-centered view of their world and outline the steps they can take to do so.

The advantages of adopting multi-systems thinking

As one of the first disciplines to adopt a systems lens, biology illustrates the value of systems thinking—even when it comes to our own bodies. Research indicates that bacteria living in our gut actively shape the operation of our metabolic, immune, and nervous systems as part of the gut–brain axis. This microbiome has been implicated in disorders ranging from digestive illnesses to anxiety, depression, and autism. Charged with this new understanding, medicine is adopting a more holistic focus—one that considers lifestyle, diet, environmental exposures, genetic predispositions, and microbiome composition—to achieve greater effectiveness.

What advantages could multi-systems thinking unlock for businesses?

1. Treating externalities as a source of advantage

Externalities are factors that are not priced into a transaction or market, such as social and ecological impacts. They are the very factors that constitute the connections between the narrow business system comprising product, company, competitor, and consumer, and the broader systems of business ecosystem, society, and nature.

An awareness of the broader effects of their activities can help businesses recognize frictions, pressure points, or misaligned stakeholder interests. Addressing these can not only mitigate risk but also unlock value and competitive advantage. For example, IKEA, realizing that environmental sustainability was imperative to its own long-term viability, worked extensively with its supplier network on a variety of challenges ranging from energy efficiency in supply chains to sustainability in sourcing. The furniture giant not only catalyzed its top-line growth in the short term by innovating new lines of sustainable and energy efficient products, but also created a new source of long-term competitive advantage, as constraints on fossil fuels and non-sustainable materials increase and consumers increasingly value sustainable attributes in their purchases.

Moreover, businesses can use systems perspectives to identify and take advantage of positive externalities. For example, when Microsoft developed Windows in the 1980s, its primary aim was to enhance the accessibility of personal computers by providing a graphical user interface, rather than one based on command lines—which would increase the popularity of the PC and demand for Microsoft’s other software products, such as Word and Excel. This move created positive externalities by establishing a software ecosystem that enabled many other businesses to develop and sell their applications. While some of these new offerings competed with Microsoft products, the expansion of the software industry as a whole around Windows cemented the dominant position of Microsoft for decades to come.

In more recent times, the success of conspicuous precedents like Amazon and the availability of digital platform software have fueled the rise of digital ecosystems, which permit the dynamic collaboration of hundreds of enterprises to create a common offering. In such cases, the central question of strategy no longer revolves around how an individual company can create a competitive advantage, but rather around how a company can create an advantaged position with an advantaged ecosystem.

2. Enhancing resilience through diversity, modularity, and redundancy

Resilience is the measure of a system’s ability to not just withstand but also recover quickly from shocks and thrive in new circumstances. It is an innate property of natural ecosystems—which businesses can learn to emulate to enhance their resilience in our volatile world.

Diversity. Nature uses spontaneous mutations and mating to create genetic diversity, thereby enabling adaptation to a changing environment and heightening the chances of a species’ long-term survival. In businesses, diversity of thinking, procedures, products, and business models enhances resilience and strategic optionality. For example, Expedia enhanced its resilience by looking beyond its core industry of hotels and vacation packages in 2015, acquiring private accommodation and vacation rental platform Vrbo. This diversifying move enabled Expedia to pivot its offering quickly as COVID struck and travel demand shifted towards socially distanced private accommodations: Holding a large inventory of whole-home properties in vacation markets catalyzed Expedia’s rapid recovery from the shock—40% faster than competing online marketplaces and travel agencies.

Modularity. A modular structure helps prevent a collapse of natural systems by containing the effects of any disturbances to one part of a system. Our brain is an example of this: Injuries to the cortex or any of the individual lobes will only affect the specific functions associated with that region, rather than perturb the entire organism. In a single business, modularity can be created operationally (for example, geographically distributed manufacturing facilities) or financially (for example, separating high-risk assets from regular business). Advantages of systems-level modularity were apparent in the great financial crisis, from which Canadian banks emerged largely unscathed due to a higher ratio of retail deposits (enhancing modularity in terms of funding sources) and limited investments in foreign assets (isolation from the rest of the global financial system).

Redundancy. In nature, many systems rely on redundancy. For example, plants may attract multiple kinds of pollinators—such as bees, butterflies, birds, or bats—to ensure that even if one species of pollinators declines, other species can step in. Businesses often shun redundancy in the quest for efficiency, but this puts them at risk. For example, relying on a single source for procuring key components spelled trouble for mobile phone manufacturer Ericsson in 2000, when a fire incapacitated a microchip plant from its sole supplier, Philips. Looking beyond a firm’s boundaries and organizing in multi-company ecosystems can help build redundancy. Different businesses take on specialized roles and then connect, interact, or exchange resources with one another, maintaining the viability of a common offering. During a crisis, one or more failing participants can be swiftly substituted by others to ensure that customers are served without disruption.

It is interesting to note that these three characteristics of resilience can all be viewed as drivers of inefficiency from a narrow, static perspective—illustrating the need for a shift in mindset to accompany the use of such tactics.

3. Harnessing system embeddedness to drive change

Creating systemic change beyond the legal boundary of a company is hard, as frictions and misalignments among actors can easily lead to a stalemate. Recognizing their embeddedness within and dependence on a larger system—a supply chain, industry, business ecosystem, or society—is the first step for businesses towards identifying the mutual benefits of systems change.

A salient example is Tesla: In its early days, the company struggled to ramp up production numbers and improve quality control on its Model S premium sedan while competing with Nissan’s mass-market Leaf, which was the world’s best-selling all-electric car from 2011 to 2014. However, Tesla recognized that the success of electric vehicles would depend strongly on the availability of charging infrastructure, to alleviate potential buyers’ “range anxiety.” In other words, Tesla was aware that its success would not just rely on its product, but also on the system in which that product would be embedded. Its significant investments into a coast-to-coast supercharger network have paid off many times over, making Tesla the world’s most valuable auto-maker even with leading incumbents such as BMW, VW, and GM entering the EV fray. Today, Tesla is monetizing its proprietary charging network by partnering with other automakers in addition to shaping EV industry charging standards.

4. Using leverage points for outsized impact

Finally, interconnected systems provide opportunities for catalyzing change via leverage points—places where a slight change can lead to a large shift in system behavior. For example, creating a culture of psychological safety can potentially lead to multiple benefits (employee wellness, inclusion, resilience, and innovation) from a single leverage point. Another example is Walmart using its strong position vis-à-vis its suppliers to create, cascade, and embed sustainable practices, incentivizing suppliers to improve their environmental and social track record with its Sustainability Index and Supplier Scorecard programs.

How can leaders and managers develop a multi-systems mindset?

Multi-systems thinking is not yet part of the standard management toolkit. Historically, taking a narrower perspective was pragmatic, not just because the world was more stable and insulated, but also because business had more limited technological and informational capabilities to understand and navigate the complexity of the systems with which they interacted.

Today, we find ourselves in a much more volatile and interconnected world. But the data and AI revolutions are also transforming our ability to track, analyze, and adapt systems-level data to inform business decision in real time. However, data science is not enough. Managers must also adopt a multi-systems mindset and expand their field of vision beyond the single firm.

When the boundaries of a system are expanded, the ability to completely understand and manage it in a predictable manner decrease. The comforting techniques and paradigms we apply in a more predictable engineered environment cease to be as effective. While we can’t therefore simply supply a different set of tools or rules for “managing” expanded systems, we can nevertheless guide leaders on the facets of the new mindset required.

Observe, understand, then tinker: Complex systems must first be observed. Understanding emerges from seeing what the various elements are and how they interact, as what we observe may defy simplistic, linear cause-and-effect thinking. Starting with the behavior of the system also helps one focus on dynamic analyses: “How did we get here,” “what’s working well and what’s not,” and “what are the potential intervention points”? This provides the fodder for imagination and the groundwork for tinkering. Develop your perspectives and actions iteratively. Embracing error is the condition for learning and organizations need to be much more willing and able to recognize and share their errors to learn faster and better.

Defy disciplines: Understanding complex systems requires a willingness to discard narrow functional lenses when they limit to distort our perspective. Seeing systems holistically is not just interdisciplinary, but rather consilient; it is based on the convergence of evidence from different disciplines to form a more comprehensive understanding. Behavioral economics is a good example, where the classical homo economicus notion has been replaced by a more nuanced and sophisticated understanding of how individuals make decisions and choices by integrating insights from economics, cognitive psychology, social psychology, and neuroscience.

Expand your boundaries in space and time: The power of systems thinking depends critically on setting the boundaries appropriately. Managing a world of complex systems invariably requires expanding our traditional narrow horizons. For example, today, we routinely see how conflict or climate catastrophes in one part of the world drive immigration and economic instability in other parts.

Manage for the good of the whole: In any hierarchical system, one can lose track of the overall purpose, as subsystems may have diverging goals. While decomposing goals into smaller units that can be cascaded down an organization is managerially convenient, it can lead to a syndrome of optimizing the parts at the expense of the whole. The same applies beyond the system of the company: Although more complex, it is invariably more powerful to manage for the good of the whole system, rather than, for example, to optimize only for one product while neglecting other considerations.

Focus on what is important, not just what can be measured easily: While certain metrics like diversity, trust, happiness, or system health are harder to quantify accurately than inventory or profits, they may still be foundationally important. As a leader, think about what you want to focus on and then see how you can best measure it, rather than biasing towards what is easily or already measured. For example, rather than purely relying on GDP, Bhutan has been tracking and developing a Gross National Happiness index—which incorporates factors such as psychological well-being, health, education, cultural and ecological diversity, as well as living standards—in order to ensure that advancements in economic productivity and accompanied by social progress and environmental sustainability. The index, introduced in the 1970s, continues to be refined in terms of data collection and variable definition. Managing broader systems will inevitably require innovation in what is measured, what data is required and how such new measured can be used effectively.

Use feedback to learn and adapt: Operating in dynamic, self-adjusting feedback systems with static, unwavering policies or processes is not a recipe for success in a dynamic environment. What you need are small steps with constant learning and monitoring, a willingness to change course, and a humility to acknowledge what you do not know. Ensuring timely and accurate feedback can help nudge the system iteratively in the right direction. Designing and operating such feedback loops is a pre-condition for success.

In an increasingly complex and dynamic world, the comfortable and simple path—of managing a narrowly defined business system using a handful of variables—no longer leads to success. As the interconnections between businesses, and between business systems and societal and natural systems become more prominent, a more holistic approach is required, which requires a shift not just in definitions and practices, but also a new way of observing and understanding the multiple systems of businesses.

Sources & Notes