Systems Thinking: Managing Chaos and Complexity: A Platform for Designing Business Architecture / Edition 3

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In a global market economy, a viable business cannot be locked into a single form or function anymore. Rather, success is contingent upon a self-renewing capacity to spontaneously create structures, functions, and processes responsive to a fluctuating business landscape. Now in its third edition, Systems Thinking synthesizes systems theory and interactive design, providing an operational methodology for defining problems and designing solutions in an environment increasingly characterized by chaos and complexity.

The current edition has been updated to include all new chapters on self-organizing systems, Holistic, Operational, and Design thinking. Gharajedaghi covers recent crises in financial systems and job markets, the housing bubble, and environment, assessing their impact on systems thinking. A companion website to accompany the book is available at

  • Four NEW chapters on self-organizing systems, holistic thinking, operational thinking, and design thinking
  • Covers the recent crises in financial systems and job markets globally, the housing bubble, and the environment, assessing their impact on systems thinking
  • Companion website to accompany the book is available at

Audience: Successful businesses with a desire to maintain their leadership position Organizations faced with turnaround situations Startup businesses formed around new technologies Participants in Corporate Executive Programs Academic students International corporations.

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Editorial Reviews

From the Publisher
Einstein once wrote, "Without changing our pattern of thought, we will not be able to solve the problems we created with our current patterns of thought." Jamshid develops a pattern of thought that will yield solutions to those problems.-Russell Ackoff, Professor Emeritus, The Wharton School, University of Pennsylvania

Gharajedaghi challenged us to think backwards from an ideal competitive position instead of forwards from our existing position with all its constraints. The result was bolder thinking about change. Jamshid forces a realistic assessment of a company’s strengths and weaknesses, an idealistic view of what it could be, and creates the path from point A to point B.-Bill Tiefel, President, Marriott Lodging

Gharajedaghi was perfect! He had passion and brilliance. He could challenge our traditional thinking and make us see our actions and opportunities from a different perspective.-William G. Poist, President and CEO, Commonwealth Energy System

"This volume on business management explores the development of complex systems and advocates for iterative design principles as a foundational philosophy for dealing with complex, chaotic systems. The volume discusses system theory and changes to traditional paradigms in light of emerging technologies and business methodologies and explores case studies from industry leaders that showcase these systems philosophies."—SciTech Book News

Gharajedaghi (president and CEO of INTERACT) goes beyond the simple declaration of the desirability of systems thinking and provides a practical orientation along with a theoretical depth. He operationally deals with the art of simplifying complexity, managing interdependency, and understanding choice using a novel scheme called iterative design. Twelve chapters discuss systems philosophy, theories, methodology, and practice. Annotation c. Book News, Inc., Portland, OR (
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Product Details

  • ISBN-13: 9780123859150
  • Publisher: Elsevier Science
  • Publication date: 7/13/2011
  • Edition number: 3
  • Pages: 376
  • Sales rank: 586,450
  • Product dimensions: 6.00 (w) x 8.90 (h) x 1.10 (d)

Read an Excerpt

Systems Thinking: Managing Chaos and Complexity

A Platform for Designing Business Architecture
By Jamshid Gharajedaghi


Copyright © 2011 Elsevier, Inc.
All right reserved.

ISBN: 978-0-12-385916-7

Chapter One

How the Game Is Evolving

The most stubborn habits, which resist change with the greatest tenacity, are those that worked well for a space of time and led to the practitioner being rewarded for those behaviors. If you suddenly tell such persons that their recipe for success is no longer viable, their personal experience belies your diagnosis. The road to convincing them is hard. It is the stuff of classic tragedy.

The Dow Jones Industrial Average recently marked its 100th anniversary. Of the original companies listed in 1896 only GE had survived to join in the celebration. In the mid-1960s, Jean-Jacques Shreiber, in his best-selling book, American Challenge (1967), told his fellow Europeans: "Swallow your pride, imitate America, or accept her dominance forever." But in late 1970s, it was "Japan Inc." that somehow posed the greatest competitive challenge to corporate America. It took 300% devaluation of the dollar to ward off this challenge.

Fourteen of the 47 companies exemplified in Tom Peters' much-acclaimed book of the 1980s, In Search of Excellence (1982), lost their luster in less than four years, at least in the sense that they had suffered serious profit erosion.

The collapse of savings and loans and real estate, along with the fall of the defense industry in the late 1980s, could have led to a disastrous 1990s, but counterintuitively, these phenomena resulted in a restructuring of the financial and intellectual resources in America, which may very well have been a coproducer of one of the longest periods of economic expansion and prosperity in America. Ironically, in mid-1998, worries about Japan's economy were the nagging concerns of American investors. Collapse of the dotcom bonanza (late 1999 and early 2000) and the housing bubble and the subprime and financial systems fiasco led to the troubling question: What is going on?

The game keeps changing, but this is hardly news. By now it is a well-known and even a tired secret that what contributes to the fall of so many great enterprises is that somehow their recipe for success becomes ineffective. There seems to be a devil at work here, and the name of this devil is success.

Each one of us can recall cases of great powers, nations, organizations, or personalities rising and falling. This phenomenon occurs all too frequently to be dismissed as coincidental. So what underlying forces convert success to failure? Let us start with the following observation. The forces that make a failure out of success form a five level hierarchy (see Figure 1.1). Each level represents a distinct tendency, but together they form an interactive whole in which higher levels provide the context for the lower levels. At each level success plays a critical but different role.


Operating at the first level, imitation is the most basic force. Competitive advantage is by definition a distinction. Successful distinctions, in time, are eroded by imitation. At that point, exceptions become norms and lose their advantage.

Although imitation has been present at all times, today its significance for American business has changed by an order of magnitude. Advances in information technology, communication, and reverse engineering have increased the product technology's vulnerability to imitation. Any technological distinction in a given product is now fair game for potential imitators who can learn, copy, and reproduce it in practically no time. Such easy imitation has been significant for American industry. While product technology has traditionally been the cornerstone of the American competitive game, countries with an advantage in process technology have gained a dual advantage.

First, it is difficult to copy a distinction in process technology because its critical elements are knowledge workers. Second, competency in a process technology makes it simpler to transfer knowledge from one context to another, easing the operationalization of new knowledge. The results are dramatic: much faster time-to-market performance, a lower break-even point, better product variety, and faster response to change.

In the late 1970s, a well-known equipment company in America realized it had a 40% cost disadvantage in comparison with its direct Japanese competitor. The company, ironically, was the technological leader in the lift truck industry. Its cost structure was 40% raw material, 15% direct labor, and 45% overhead. Overhead (transformation cost) was simply calculated as 300% of direct labor.

The company decided to reduce the cost by 20%. It was assumed that a 5% reduction in direct labor would automatically reduce overhead by another 15%, resulting in a 20% cost reduction. After a whole year of struggle, direct labor was reduced to 10% without any reduction in the overhead. When we were asked to deal with the situation, this was our first reaction: Why does anyone want to reduce the cost by 20% when there is a 40% cost disadvantage? Where did the 40% cost advantage come from? It was obvious that even if the workers gave up all of their wages the company would not survive.

Then we realized that the competitive product only used 1,800 parts while our product employed 2,800. The difference in the number of the parts perfectly explained the difference in cost. The surprising element in all of this was that a lower number of parts was achieved by the competition by utilizing technologies that were developed by our client over the last 10 years. The problem was that our client had patched each one of its newly developed technologies into an old platform, which resulted in a complex and inefficient product, whereas the competition started from a clean slate and took full advantage of the potentials that each technology offered.

The moral of this story is that once in a while one should pause and reflect on oneself and begin anew.


Inertia is responsible for all of the second level tendencies and behaviors that delay reactions to technological breakthroughs. For example, sheer inertia by the Continental Can Company provided the opportunity for two-piece can technology to replace the three-piece can technology and destroy the once mighty Continental Can. Five hundred factories all over the United States and 45% share of the three-piece can market could not prevent a delayed reaction to two-piece technology from destroying Continental Can in fewer than three years.

Ironically, the likelihood that an organization will fail to respond to a critical technological break is directly proportional to the level of success it had achieved in a previously dominant technology. In other words, the more success an organization has with a particular technology, the higher its resistance to the prospect of change. The initial reaction is always denial. We do have an amazing capacity for denial in the face of undeniable events, but the real danger arises when the organization finally decides to patch things up. Patching wastes critical time. It provides the competition with a window of opportunity to disseminate the new technology and dominate the market. Patching, moreover, increases the cost of the operation and reduces the quality of the output, producing a double jeopardy.


Exaggeration — the fallacy that if "X" is good more "X" is even better — is at the core of the third level processes that effectively destroy a proven competitive advantage. A tendency to push one's strength to its limits transforms the strength into a destructive weakness. Unfortunately, many stories follow the same line: a winning formula gains adulation, and the heroes or heroines who shaped it become the sole authorities. One right answer prevails. An increasingly monolithic culture produces an ever-decreasing set of alternatives and a narrow path to victory. This limited set redefines the corporate culture, the assumptions, the premises, and the common wisdom that bounds or frames a company's understanding of itself and its industry and drive its competitive strategy.

An interesting treatment of this phenomenon can be found in Danny Miller's book, The Icarus Paradox (1990). Miller refers to Icarus of Greek mythology who became emboldened to fly higher and higher until he came so close to the sun that his wax wings melted and he plunged to his death. Miller explains how craftsmanship and productive attention to detail by the Digital Equipment Corporation turned into an obsession with minutia and technical tinkering. Exaggeration was also at work when the innovative capability of CDC and Polaroid escalated into high-tech escapism and technical utopia. Miller's list of firms that have been trapped by this phenomenon includes IBM, Texas Instruments, Apple Computer, General Motors, Sears, and many of the most acclaimed American corporations.


Change of the game, or transformation of the problem, is at the heart of a counterintuitive process that converts success into failure. In other words, the act of playing a game successfully changes the game itself. Failure to appreciate the consequences of one's success and tenacity in playing the good old game are what create tragedies. Once success is achieved, or a problem is effectively dissolved, the concerns associated with that problem are irreversibly affected. Dissolving a problem transforms it and generates a whole new set of concerns. That is why the basis for competition changes and a new competitive game emerges as soon as a competitive challenge is met.

The role of success is quite different in the third and fourth level processes. When it is exaggerated (third level), success works against the nature of the solution and diminishes its effectiveness. By contrast, success in handling a challenge (fourth level) transforms the nature of the problem. In other words, it changes the game. Henry Ford's success in creating a mass production machine effectively dissolved the production problem. A familiar concern for production was replaced with an unfamiliar concern for markets. The once unique ability to mass-produce lost its advantage through widespread imitation. This event changed the competitive game from concern for production to concern for markets, which required an ability to manage diversity and growth.

Henry Ford's refusal to appreciate the implication of his own success and his unwillingness to play the new game ("they can have any color as long as it is black") gave Alfred Sloan of GM the opportunity to dominate the automotive industry. Sloan's concept of product-based divisional structure turned out to be an effective design for managing growth and diversity. The new game, artfully learned and played by corporate America, became the benchmark for the rest of the world to copy (Womack, 1990).

In an attempt to duplicate the American system, Ohno, the chief engineer of Toyota, came up with yet another new design. His introduction of the lean production system changed the performance measures by more than an order of magnitude. While it took the American auto industry three days to change a die, Toyota could do it in only three minutes. Once again, success transformed the game. This time the differentiating factors were flexibility and control.

But corporate America was too overwhelmed and overjoyed by its own success to even notice the emergence of the new game. This inattentiveness provided Japan with an opportunity to launch a slow but effective challenge. The insidious manner in which the new game evolved underscores another important principle of systems dynamics, which is exemplified by the story of the frog that boiled to death by sitting happily in water that gradually grew hotter.


Excerpted from Systems Thinking: Managing Chaos and Complexity by Jamshid Gharajedaghi Copyright © 2011 by Elsevier, Inc. . Excerpted by permission of MORGAN KAUFMANN. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Part I: Systems Philosophy: The Name of the Devil

Chapter 1: How the Game Is Evolving

Part II Systems Theory: The Nature of the Beast

Chapter 2: Systems Principles

Chapter 3: Socio-cultural Systems

Chapter 4: Socio-cultural System 2

Part III: Systems Methodology: Logic of the Madness

Chapter 5: Holistic Thinking

Chapter 6: Operational Thinking

Chapter 7: Design Thinking

Chapter 8: Design Thinking (2), Formulation of mess

Chapter 9: Designing thinking (3), Business Architecture

Part IV: Systems Practice: The Gutsy Few

Chapter 10: Oneida Nation

Chapter 11: Butterworth Health System

Chapter 12: Marriott Corporation

Chapter 13; Commonwealth Energy

Chapter 14: Carrier Corporation


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