Brexit : Resilience of British and EU Economic System

A resilience view as of September 2017; the purpose of this post is not to undermine democratic will of the GB citizens but rather a resilience view as of September 2017 prior to exit 1 April 2019 from a resilience perspective.

A referendum was held on Thursday 23 June, to decide whether the UK should leave or remain in the European Union. Leave won by 52% to 48% (72,2 % eligible voters voted) Furthermore critical areas such as Scotland and Northern Ireland and London areas voted in favor remaining. What were their reasons for wanting the UK to leave?

They said Britain was being held back by the EU, which they said imposed too many rules on business and charged billions of pounds a year in membership fees for little in return. They also wanted Britain to take back full control of its borders and reduce the number of people coming here to live and/or work.

Simply stated the EU is like enormous golf club with its facilities extending over the whole of the EU whereby membership allows access to the facilities. These facilities included common customs, certification and compliance agencies and full access to single 17 trillion market. EU contributions are used to invest in these facilities whereby bulk of investment towards new members or less advanced economies and 12-14% towards aid outside the EU. There are some constraints regarding how to play the game but success mainly dependent on individual players (or countries). Systemic issues within Greece or Italy are less related to EU rules and governance but rather internal inefficiencies. The EU budget is approximately 129 billion Euro where its expenditure mostly around specific projects and about 11 billion in expenditure outside the EU.

Some facts with respect to GB and EU economic relationship:

  • The main contributors 2017 ; Germany, France, Italy, GB then the rest.
  • About 44% of UK exports in goods and services went to other countries in the EU in 2016—£240 billion out of £550 billion total exports.
  • Trade in services will be particularly important, because about 80% of the UK economy comes from providing services.
  • UK trade with the EU is dominated by goods rather than services; in 2014, trade in goods represented close to two-thirds of all UK exports to the EU.
  • Financial relationship GB with the EU as of 2015:
    • EU expenditure within GB: 7,458 billion EUR
    • GB contribution to EU: 18,209 Billion EUR. A 10,7 EUR billion deficit
    • GB contribution to EU in relation gdp 0,72 %
  • Exports EU 27 members states towards GB account for 3% the GDP, while exports from GB towards EU 7,5% of gdp.
  • 814,000 people are employed in the UK auto industry, which in 2015 turned over £72bn and exported £34bn worth of products, with 56% of auto exports and 65% of components going to EU countries. While 44 % of parts used to make U.K. auto supplied from British suppliers while rest imported.
  • Some examples; Germany exports to GB 2,8% of its gdp, Italy 1,7 %, Belgium 6,8%, Ireland 6,9% Holland 6,3%. Remaining members all within l’1,5 to 3% range. Zero loss of trade implies worst case scenario for EU around 2-3% of gdp, while GB 7,5 % gdp.
  • GB public debt 100 % of gdp; 100% growth public debt from 2005; private debt 135% of gdp. GB total debt per capita 2nd highest second in the world. Its credit card debt is 3 x  Italy total private debt. GB external debt (debt to non Gb citizens) 290% gdp , nearly 3 x that of Italy
  • Exchange rate GB to Euro September 2017 close to parity.
    • 30/11/2015 rate 1 GBP = 1,38 Euro
    • 12/09/2017 rate 1 GBP = 1,09 Euro
  • As a member state GB key benefit include passporting system for banks allows GB banks to freely operate in Europe. Further benefit allows GB airlines such as Easyjet to operate between EU member states
  • First quarter 2017 EU growth 0,6% , US 0,3% , Gb 0,2%, Greece and Italy 0,4%, Germany 0,6%
  • A large percentage of investements in the GB from US is based on access to EU single market.

The above factors are critical to understand potential damage to both GB and EU and the impact on resilience once Brexit is actually executed or leading towards Brexit (individual economy state space with respect to resilience of what to what)

As of September 2017 18 months before D-day there is no direction in place with respect to future economic relationship between EU and GB.

The following options are possible:

  • Soft exit; this implies that EU bows to all demands and accepts GB to continue trading and part of customs without restrictions. This option is politically suicidal for EU in that  it encourage other EU members adopting the same route as GB and it further cause relationship issue with Norway and Switzerland. A possible flavor soft exit implies GB allow EU citizens unlimited entry and pay in a certain membership fee but have no political influence. This is least likely scenario in that May does not have political strength to accept this kind of approach and is contrary to stated objective article 50 notification and is contrary to referendum key criteria.
  • Hard exit; this implies leaving customs and single market as confirmed by May article 50  but continuing to trade under WTO with GB agreeing to meet financial obligation. This assumes that GB accepts paying its dues and treating EU nationals fairly. This scenario implies loss of trade between both parties specifically banking services which will be close to zero GB towards EU and volume for products will also reduce due to increased costs specifically auto industry impacted by tariffs and custom costs. Volumes from EU to GB will also reduce caused by unfavorable exchange rate.
  • No deal; worst case scenario. This implies trade between GB and EU close to zero; GB will loose all its access to certification agencies, travel between two parties will be limited due to flight issues. Political relationship between GB and EU will be very strained and trade if any would be under WTO rules.
  • Article 50 withdrawal ; GB request to withdraw article 50. Not a viable political option for both parties

As of September 2017 the most likely outcome is a no ‘deal outcome’ which also seems the preferred outcome for both EU and GB from a political perspective. The probability softexit are zero while hardexit (ideal economic perspective) least likely mainly due to political conditions in both GB and EU; specifically GB not wanting to accept financial liabilities dictated by EU.

Hardexit implies political difficulties within the EU specifically getting all 27 members to agree on a ‘type’ of relationship. For GB hardexit is also the most sensible outcome in that respects democratic wishes and lot simpler to apply and is also politically acceptable for EU and more important, it maintains political and economic relationship between GB and EU. Furthermore from GB perspectives it removes all possible constraints from EU. From EU perspective it has to agree on a fair and realistic exit bill that enables GB politically to accept. Furthermore it can provide some flexibility such compliance and certification GB products.

Summary as of October 2017 (probability):

  • Soft exit; 0 %
  • Hardexit; 10-20%
  • No deal; 90-80%
  • Article 50 withdrawal: 0%

One of the fundamental requirements with respect to Brexit is to minimize economic damage and govern resilience effectively; this can be minimized if both parties take action prior to actual ‘d-day’ specifically from a resilience perspective ‘of what to what’; therefore plan ahead for effective adaptation.

Resilience is defined as the capacity of a system to absorb changes and tolerate disturbances without collapsing into a qualitatively different state so as to still retain essentially the same function, structure, identity, and feedback” (Brian Walker)  .As systems lose resilience they also become more vulnerable to changes , hence, less disturbance is needed to push the system through its threshold (tipping point) into a new regime. The greater the resilience in a particular system the more it can resist large or prolonged disturbances.  If resilience is low or weakened, then smaller or briefer disturbances can push the system into a different regime , where its dynamics change.

As defined by Walker1 et al., “a ‘basin of attraction’ is a region in state space in which the system tends to remain (2004). In this basin of attraction system achieves its maximum possible performance based on combination of its state sets.

Both exogenous drivers (external drivers such rainfall, exchange rates, competitor value proposition, access to markets) and endogenous processes (plant succession, management practices and governance efficacy, relationship with trading partners) can impact resilience, its capacity to recover and restore its system performance potential.

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Resilience is not just about managing disturbance but also understand resilience question ‘of what to what’.

The size and shape of the basin of attraction indicates the resilience of the corresponding state and its ability to withstand disturbances and adapt to maintain maximum performance within resilience threshold.

  • The state space is dynamic therefore its topography is continuously fluctuating (changes in parameters and variables) which may affect the coordinates of the basin threshold (location and height).
  • When perturbed a system may escape the attractor, cross the threshold and reach alternate state (new regime) which results in a functional change and a different set of controlling processes and performance capacity.

Resilience is not just about managing disturbance but also understand resilience question ‘of what to what’. Considerations understanding dynamics of resilience:

One of the fundamental aspects about resilience is that once resilience is overwhelmed (resiliency threshold will be crossed) system enters a new state, restoration to original sate will be complex, expensive, and sometimes even impossible. Research suggests that to restore some systems to their previous state requires a return to environmental conditions of the same function, structure (resources), identity, and feedback well before the tipping point.  If the tipping point is crossed into a new regime then the dependency of having more favorable resilience threshold and performance/potential is dependent system experiencing less constraints and that its potential for output (will be at least be the same or higher than previous basin). Continuous negative regime shift increases exponentially resource requirements to enable system to bounce back to positive regimes (Greece example downward spiral)

Simply stated consideration for:

  • Positive Resilience Regime (higher potential)
    • EU constraints have prevented GB and other member states increasing its potential; therefore Germany and Italy gdp and excessive trade balance should even be higher. Cost of EU ‘red tape’ is estimated at 120 billion pounds (source economist free trade group) . This obviously applies to all EU member states. The red tape will impact German, French Italy ect.. output , trade balance ect…
    • EU constraints have prevented GB manufacturing sector to thrive
    • Foreign resources (investments) based in GB (US owned) that operate in GB and EU are disadvantaged
    • World markets potential is limited with respect to GB trade due to EU constraints
    • GB trade deals with rest of the world will be more favorable that EU trade deals
    • Saving GB contribution towards EU ; +- 9 billion (net contribution) can be used for alternate initiatives
    • The cost of customs facilities and setting-up its own compliance agency will be negligible
    • EU nationals in GB are a drain to the economic system
  • Negative Resilience Regime (lower potential)
    • GB trade deals will be less favorable and will take time to put in place
    • So called EU ‘red tape’ populist fabrication (http://blogs.lse.ac.uk/brexit/2016/07/08/is-red-tape-a-reason-to-quit-the-eu-hardly/)
    • High cost setting up customs facilities and recreating compliance agencies (time, cost and resources). Further aspect related to compliance implies recognitions; GB not only has to set-up it’s own compliance agencies but it formally needs to be recognized.
    • Replacing not only lost trade with EU but also secondary economy related to loss trade will take time and will be difficult considering that world has become extremely competitive. A trade deal does not imply that it will restrict competition from others
    • Perceived EU constraints with respect to GB manufacturing potential are not real but rather due to populist fabrication.
    • Loss of financial service with respect to EU not only implies direct trade benefit, but includes secondary economy (taxis, restaurant hotel ect..) and tax earnings

GB View

What is certain apart from ability to manage resilience (both from GB perspective and EU) GB will move to a different resilience regime while EU will tend to remain in its current basin attraction. This due to the fact that Brexit will change its structures, functions, feedbacks, and therefore identity. The trajectory most probably push system to a less favorable regime (resilience basin) not just due to trade losses (primary and secondary economy)  but also due to robustness factors such as low economic growth , low investments and uncertainty will guide trajectory to unfavorable regime. The high level of private and public debt futher constraint that will limit ability to influence trajectory to a more favourable regime. Time will be GB biggest enemy with respect to containing system trajectory within favorable regimes rather than negative regimes.

The change in relationship will influence GB economic system configuration whereby its basin of attraction is shifted by external conditions such as access to EU single market which in turn will impact industrial output and internal conditions such low confidence, high public and private debt. The system trajectory to the relevant regime will depend on strength specific variable that prevail which will impact economic system performance (production output, deficit, debt, gdp).

The new regime will be a less favorable with lower performance / potential ; its resilience resistance and latitude  will depend on many factors while precariousness; the current trajectory of the system momentum con result in further less favorable regimes (downward spiral). Its ability to adapt to a more favorable regime’s in order to reach pre-exit state (bounce back) or better depends on the following factors:

  • Internal production and governance efficacy maximizing potential
  • Public and private to fund resources considering total external debt already at 283% gdp
  • Robustness of local and world economic situation
  • Ability to recover losses with new trade deals; new trade deals need to be more favorable than what it has with the EU in order to impact output. The derived benefit must not only cover trade losses with EU but also secondary economic losses (loss of pharma agency typical example secondary economy)
  • New markets should have at least same per capita income from an affordability perspective

The permanence in the new regime will depend on system sate, its trajectory, momentum, resilience depth and its ability to stabilize trajectory within time constraints. Time will be GB biggest enemy in that it has to re-determine trading markets and new relationship to be able to generate enough production output to replace lost production due to exit from single market without shift to an even more negative regime.

The dynamic conditions of the economic system within the new regime will also have fundamental impact on gdp growth, employment, public and private debt, and consumer confidence. Its severity will impact trajectory and tipping points leading to less favorable regimes within the stability landscape.

Even after signing trade deals, competition from EU and other players will still remain impacting the ability to generate trade volumes. The new basin of attraction of the associated regime may dynamically change due to other external factors (war, bank crisis, downturn world economy).

EU view

EU will suffer some form of trading loss considering that it trades with surplus, at the same time the loss will be overcome by gains generated by new opportunities such as services (banking ) and redistribution of EU owned companies operating in GB. EU does not need to reconstruct reltationships; it has trade deals in place, compliance agencies customs ect.. implying that from system perspective there will be no change other than disturbance to its performance within current basin of attraction. Its recovery depends on its ability to react timeously via adaptation initiatives and that there are no exogenous shock that could impact its resilience basin shifting system to a new regime.

EU has to decide increase internal funding towards EU buget (8-10 billion p.a) and/or postpone, reduce funding towards projects and external aid.  Shortfall can be resolved by reducing/eliminating external aid and keep existing EU based projects as is.

Brexit is important for EU; chaos normally triggers fundamental change. The EU has many faults but at the same time the EU has created in general for most member countries to have one the best standard of living in the world; considering its income, quality of health, services , education system and security . Past 10 years, EU economy grown by 3 trillion, longevity increased on average by 3 years. EU economy has not grown due to toxic finance but rather sound growth; investments and quality products without resorting to excessive government or private debt (while UK explosion of public and private debt) . EU bureaucracy may be excessive but at least citizens are guaranteed quality food in supermarkets. The EU bill might be excessive but if one analysis in detail there is in general overall system benefit for all concerned. Most EU initiatives go towards newly joined countries whereby internal economic leverage creates general system benefit, plus there are saving such as customs, central bank, compliance agencies.

Some member countries have not performed adequately such as Italy and Greece but if one analyses systemic deficiencies; 99% cases internal rather than imposed by EU.

EU needs a Brexit without a deal to prevent any further member countries adopting same strategy. So far this has worked in that ‘exit’ is completely off the table. Even populist parties have their changed attitude.

It needs Brexit as a test case to test its resilience. This test will determine sooner than later if the EU is a sustainably political and economic entity. Its ability to deal with the disturbance (economic damage ) caused by Brexit is fundamental for long term existence and strengthens its governance. It needs Brexit to strengthen EU political system considering so called ‘allies’ such as USA are not really ‘allies’ (Trump stated policy to work towards downfall of the EU) . It has to consider its own defense and not rely on USA or NATO.

EU needs to grow its ability in financial services; Brexit provides a perfect opportunity to grow this industry within the EU. This industry has high potential, high income and high leverage.

The relocation of pharma agency to Europe also provides influx of skills and economic growth.

Brexit is a given therefore fundamental for both parties to minimize damage and capitalize on the situation. Trade can either drop to zero (no deal) or unknown volumes. Industries such as banking will reduce its volume to zero in that British banks will lose passporting rights.

Within hard exit agreement the key impact will be on trade volumes and cost. Cost will play bigger role for GB in that not only tariffs and custom increase cost but devaluation of the sterling will further increase costs impacting volumes. From EU perspective costs will also increase but offset by devaluation of the sterling.

  • GB has to declare its approach to hard exit and keep some form of relationship with the EU accepting financial liability. This will then reduce economic uncertainty and provide specific direction and the way forward. It also removes constraints from the EU. GB will lose substantial output (mainly banking) and products such as automobiles; specifically low cost vehicles that have low margins and have a dependency on imported components (Ford Fiesta, Nisan , Toyota) while limited impact Rolls.
  • The EU in turn has to quantify loss of trade and how that trade can be recovered. Germany main impact will be auto sales, but on the upside Europeans can start favoring German rather than British luxury vehicles and moving banking services from GB to EU will also leverage the economy. EU also has to identify strategic products which are mainly in pharmaceutical and military environment. Each case, strategy needs to be put in place to either replace or continue trade relationship at higher cost.

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Managing populism from a Cybernetics perspective

If the individual or their organization are incapable of associating effects with their causes, then learning and adaptation is not possible and both will go on repeating the same error increasing disenchantment among the populace and fueling populist movements.

Wikipedia: Populism is a political doctrine that stems from a viewpoint of struggle between the populace and a ruling faction.

Populism is most common in democratic nations. Political scientist Cas Mudde wrote that, “Many observers have noted that populism is inherent to representative democracy; after all, do populists closely connected ‘the pure people’ against ‘the corrupt elite’? Leaders of populist movements in recent decades have claimed to be on either the left or the right of the political spectrum, there are also many populists who reject such classifications and claim not to be “left wing,” “centrist” or “right wing

Michael Kazin, author of “The Populist Persuasion”, comes close when he describes populism as “a language whose speakers conceive of ordinary people as a noble assemblage not bounded narrowly by class, view their elite opponents as self-serving and undemocratic, and seek to mobilize the former against the latter”.

Some consideration regarding populism:

  • Populist can easily augment disenchantment of the populace by exploiting human weakness (ignorance) via propaganda specifically via social media. Social media such as blogs and Facebook perfect tool for disseminating propaganda. Ample evidence found during run-up to Brexit with respect to EU or recent Italian referendum.
  • There is a clear evidence of systemic consequence when populist movements become the ruling faction in Venezuela and Philippines. Venezuela classical example of how a populist became the ruling faction and destroyed the economy
  • Populism has surged in US, GB and currently Italy
  • Populism can actually be positive if managed correctly.
  • In Italy the main populist movement is the anti-establishment, anti-business, anti-euro Five Star Movement, a party founded just seven years ago by TV comedian  Beppe Grillo ( convicted criminal manslaughter)
  • Farage fundamental populist succesful in promoting GB Brexit without explaing clearly consequences of the Brexit
  • Most populist movement leaders once becoming the ruling faction have proven to be selfish and self-centered only interested own interest rather than interest of the populace
  • Social media has helped to accelerate acceptance of populist views among the populace
  • Successful populist leaders are extremely competent in exploiting social media specifically twisting the truth or accentuating lies. Italy M5S extremely successful exploiting social media via the founder blog and is used as springboard within the social media sphere. Italy populist leader blog structured in such a way that there is no accountability of what is posted in the blog from facts to lies to pure propaganda
  • Contrary to the written media or news there is no accountability within social media.  Social media (example Facebook) can be simply exploited by publishing false information, twisting the truth or failing to put things in context without any form of accountability. Social media provides real-time immediate mass invasion across the social network. The published post spread like wildlife through organized real and fictitious social media accounts to generate anger among the populace giving rise to the populist movement.
  • Adopted policies will fail: Abandoning the euro by Italy (key strategy of some the major parties) will not make the nation more prosperous considering that the real problems are systemic: low potential, viability and resilience excessive criminal activities
  • Possibility of revolt: once in power populist governance can result in serious revolts either due to failing to deliver what’s promised or actuating what’s promised causing serious damage. GB dilemma: Brexit will cause a revolt if not implemented and will cause a revolt once implemented due to possible internal economic damage. Reality is that within a system, patterns of behavior emerge that trigger system archetypes. Italy M5S intention to exit the Euro and possibly the EU will trigger certain emergence of specific archetypes.
  • Emergence of populist movement are directly connected to disenchanted populace in weak systemic environments where governors “ruling faction’ have failed to understand and address the disenchantment. Italy traditional ruling class failed to adapt and address  social concerns. The evidence is the lack of economic growth, high un-employment serious problem within the Italian banking system.

Cybernetics always consider a systemic view: A system consists of interconnected set of elements (sub-systems) that are coherently organized and work in coordination with each other to achieve a desired goal or overall objectives of the whole. These elements derive their strength by means of association and influence with other elements whereby collective contribution of the system is greater aggregate individual elements: this is known as systemic synergy. Cybernetics recognizes that a ‘whole’ system exhibits emergent properties that are not found in its parts and each part has properties not possessed by the whole.

Cybernetics is about governance, trying to ensure that goals established by the organization are achieved: it is also referred to steersman placed at the helm of a ship to steer towards desired destination by ensuring that the system reaches its potential, that the system is viable and that it is resilient.   By doing this it populism has no reason to exist or they do they can effectively managed.

Cybernetics is a trans-disciplinary approach for exploring regulatory systems, their structures, constraints, and possibilities. Cybernetics key objective is viability: Viable means capable of independent existence and implies both maintaining internal stability and adaptation to a changing environment. “Internal stability” and “adaptation” can be in conflict, particularly if the relevant environment is changing rapidly

Management Cybernetics key role is to assit management (command and control) understand:

  • How the system (organization) works or does not work
  • Why it works in a specific way
  • What to do about the system (organization) to influence the outcome in a way which is beneficial to the purpose being served

Cybernetics provides strategies direction for both preventing or combating populist movements which can be extremely damaging or actually helping populist movement to succeed. Cybernetic fundamental governance criteria are based on viability an sustainability which will then ensure that:

  • The rise of populist movement can be avoided by effective systemic adaptation thus avoiding disenchantment of the populace
  • Populist movement can be effectively overcome by adopting Cybernetics criteria and effectively addressing disenchantment of the populace.
  • Populist movement in adopting Cybernetics fundamental governance criteria actually succeed in improvising general conditions of the populace and effectively address adaption and change.

The emergence of mass TV, internet , social media has increased human probabilism in turn increasing complexity and ability of the governors or “ruling faction” to manage intended outcomes (desirable outcomes). Probabilistic behavior exists when the behavior of some the elements of the system are considered partially random: the variety (complexity) of the world is increasing as the number of actions and interaction increases. Social media has exponentially increased actions and interactions; the mechanism to manage this complexity can be found within ‘Ashby law of requisite variety’ by applying variety engineering. In a nutshell: in order to effectively manage complexity and increasing probabilistic behavior, the governors (ruling faction) must command as much variety it seeks to control probabilistic behavior with two methods:

  1. Reducing variety of the system to be controlled (variety attenuators or filters)
  2. Increasing the variety manage unit or governor (amplification)

Variety engineering should be undertaken in a manner which is suitable for the particular system under study (organization, state ect..) and should contribute to the achievements of its purpose and goals.

This implies firstly: applying variety engineering to effectively manage complexity  which in turn will avoid disenchantment and rise in populist movement and responding to false and distorted propaganda (when it exists) eliminating from populist movements.

Typical response to populism:

  • Brexit referendum: Government failed to set up independent experts to filter false or distorted view’s. Failed to put in place adequate information management to display these view in effective manner.
  • Italy failure to address mass migration from Africa and other areas by failing to provide a clear message (amplification) that Italy doors are not open to uncontrolled mass-migration

Information Technology from a Systemic Perspective

A system consists of interconnected set of elements (sub-systems) that are coherently organized and work in coordination with each other to achieve a desired goal or overall objectives of the whole. These elements derive their strength by means of association and influence with other elements whereby collective contribution of the system is greater aggregate individual elements: this is known as systemic synergy. Cybernetics recognizes that a ‘whole’ system exhibits emergent properties that are not found in its parts.

A key consideration is that complexity is a property is a property of a system when examined is the product of the interactions of four main aspects: the number of elements, their interactions, their attributes and their degree of organization. The number of elements refers to the number of sub-system responsible for transformation (input, transformation, and output) contained in system. The interaction describes the richness of the connectivity between these elements. Attributes refers to individual properties of the elements that is their particular nature and features. The degree of organization is the extent to which interactions and attributes are guided by predetermined rules.

Self-regulation describes the ability of a system to ‘manage’ itself (feedback) towards its purpose or goals despite environmental disturbances based on ether balancing or reinforcing feedback:

  • First order feedback whereby the goal is determined externally to it
  • Second order feedback where system is capable of choosing between variety responses to environmental changes in order to achieve its goal
  • Third order system is one that is capable of changing the goal state itself in response to feedback process determining the goal internally s opposed to externally

System behavior can either by deterministic where its behavior can be known in advance as any input to the system will generate predictable outcome. Probabilism exists where there are elements of the system whole behavior is at least partially random: where ‘most likely’ outcome of the predicted variables are uncertain. (Variety engineering)

System Effectiveness and efficiency are attained through interaction of the sub-systems in pursuit of the purpose of the system in its environment via sub-systems.

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Being effective is about doing the right things, while being efficient is about doing things right are both fundamental in achieving goals related to potential, potentiality and capability.  This is only possible if there is total cohesion by all the sub-systems with respect pursuit of system purpose. Within a system there is Information Technology Infrastructure which acts as mechanism supporting each sub-system. From a system perspective IT has a fundamental role in that:

  • It impacts the function of the sub-system elements responsible for transformation
  • It impacts the relationship between sub-systems
  • It impacts attributes and properties of the sub-system
  • It impacts variables of attributes and their goal state
  • It impacts efficacy synchronization of the various elements
  • It impacts ma agreement ability to control and carry-out decisions

Based on the role IT has, it is then fundamental that it does not impose constraints, that is adaptive in that relationship between elements and their properties are adaptive due to changing environmental conditions and that it leverages efficiency, capability and potentiality.

System Information Technology Infrastructure (ITI) consists of combined set of hardware, software, networks, facilities, etc. (including all of the information technology store, retrieve, transmit, and manipulate data ), in order to support sub-system ability to realize system purpose by managing its platform, processes, devices and data.

IT infrastructure refers to the composite hardware, software, network resources and services required for the existence, operation and management of an enterprise IT environment.

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IT management is the discipline whereby all of the information technology resources of a system are managed in accordance with its needs and priorities. These resources may include tangible investments like computer hardware, software, data, networks and data center facilities, as well as the staff who are hired to maintain them.

Enterprise Architecture is a discipline for proactively and holistically leading enterprise responses to disruptive forces by identifying and analyzing the execution of change toward desired business vision and outcomes. EA delivers value by presenting business and IT leaders with signature-ready recommendations for adjusting policies and projects to achieve target business outcomes that capitalize on relevant business disruptions.

From a Systemic perspective ITI needs to be in total cohesion with the overall purpose and overall goals/objectives of the whole (system) by:

  • The Information Technology Infrastructure must support the various system functions in achieving its purpose and must ensure cohesion towards total system purpose and goals
  • The ITI sub-system must be an enabler for viability.
  • The ITI sub-systems must enable achievement of effective potentiality and capability
  • The ITI sub-systems must contain effective feedback in order to optimize system processes
  • The ITI sub-systems must be able to co-ordinate and synchronize  effectively  the sub-systems responsible for the primary transformation activities (delivery products / services ) The ITI must be able elevate conflict with respect to co-ordination various function due to constraints
  • The ITI sub-systems must be able to generate alerts timeously with respect to deviations from stated goals of critical variables goal sate
  • The ITI sub-systems must be adaptive: must be adaptable to changing business requirements
  • The ITI sub-systems must responsive : must be able to respond to business needs timeously
  • The ITI sub-systems must be flexible (rather than rigid) : must be flexible to changing system needs

The ITI sub-system must be managed so that it is efficient (cost and resource perspective) and effective: therefore the right IT technology.

 

Feedback

A System is defined as a set of interrelated components that work together to achieve common goals, accepting input data (input) and producing results (output) in an organized transformation processes.

Self-regulation describes the ability of a system to ‘manage’ itself (feedback) towards its purpose or goals despite environmental disturbances based on ether balancing or reinforcing feedback:

  • First order feedback whereby the goal is determined externally to it
  • Second order feedback where system is capable of choosing between variety responses to environmental changes in order to achieve its goal
  • Third order system is one that is capable of changing the goal state itself in response to feedback process determining the goal internally s opposed to externally

The properties of the whole are superior to and different from combined properties of the parts.

A system consists of the following functions:

  • Input and Output

    • Involve collection / acquisition and assembly of the elements that enter the system to be processed.
    • Example: raw materials, energy, human effort are basic components of the production system;
  • Processing (Processor operations)

    • Involves the transformation process which converts the input data into a finished product
  • Output

    • The result of the transformation process, for example, the finished product or service
  • Control

    • What control a process
    • Working procedure
    • Feedback
  • Mechanism

    • Resources used for the conversion process
    • Equipment and facilities
    • People
  • Environment

    • Customer, vendors, controlling authorities, competitors
  •  Feedback

    • Is the return or influence the outputs cause the entrances to balance the functioning of the system

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The feedback mechanism is a communication between the output and the system input and the main functions of feedback is to control the systems output, maintain the balance and survival.

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Feedback is a method of controlling a system by reinserting into it the result of its past performance (Norbet Wiener).

Feedback key propose is also to ensure homeostatic balance: maintaining stability. Negative feedback is a central homeostatic and cybernetic concept, referring to how an organism or system automatically opposes any change imposed upon it. Negative feedback arises out of balances between forces and factors that mutually influence each other. To illustrate several of its important characteristics, we can regard a car and its driver as a unified, complex, homeostatic or “goal-seeking” system in that it seeks to keep the car moving on track.

Oscillation is a common and necessary behavior of many systems whereby abrupt negative feedback, however, usually over-corrects. A negative feedback, if it is as large as the disturbance that triggered it, may become an impressed change in the direction opposite to that of the original disturbance. Negative feedback takes time and such a time lag is an essential feature of many natural systems. This may set the system to oscillating above and below the equilibrium level.

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A feedback loop where the outputs of a process are available as causal input to that process. The causal input (cause and effect of related elements) influencing the process. The influence can either be reinforcing (positive) or balancing (negative).

Feedback loops control a system’s major dynamic behavior. A feedback loop is a series of connections causing output from one part to eventually influence input to that same part. This circular flow results in large amplification, delay, dampening effects, which is what causes the gross behavior of the system. Every part is involved in one or more feedback loops. Systems have more feedback loops than parts, which causes unimaginable complexity. Feedback loops are the main reason a system’s behavior is emergent.

Systems contains only two kinds of feedback loops: reinforcing and balancing, also called positive and negative feedback loops. Complex systems are typically composed of multiple interacting feedback loops: some negative some positive.

Positive feedback result in escalation/growth while negative feedback result equilibrium/homeostasis and oscillation.

A feedback loop occurs when a change in something ultimately comes back to cause a further change in the same thing. If the further change is in the same direction it’s a positive or reinforcing loop. If it’s in the opposite direction it’s a negative or balancing loop, also called a goal-seeking loop.

Understanding Feedback Characteristics enables efficient design of feedback:

  • Positive feedback

    • Increasing returns
    • A small change is amplified not corrected by feedback
    • Changes grow without limit until some other factor intervenes
    • Pairs of positive feedback systems can oscillate between two unstable states
    • Examples
      • Interest rates
      • Birth rate
  • Information Flow

    • Control Information
      • Information about what has been achieved in the output is fed back to allow the process to be tuned
      • Without this information no learning or improvements can take place over time
      • The cost and energy involved feedback effect the efficiency of the system
      • Within social process feedback has to be interpreted
    • Issues
      • Only reasonably linear processes benefit from simple feedback
      • Discontinuation in system behavior may be more important than continuous
  • Gain and Delay

    • Delay : The delay that is introduced between the output to when its feedback into the input. Long delay creates system instability so that it cannot be controlled by its mechanisms impacting resilience. Medium delay produces oscillations while short delay gives smooth response converging on the desired output.
    • Gain : The gain of negative feedback process is the scale of the version of the output fed back into input
  • Simple Feedback

    • Process Control: Information from downstream process is fed back upstream. From simple input-process-output model measure the output and compare with desired output values. Use the feedback to adjust the input for subsequent process
    •  Example
      • Mechanical – thermostat controlling a central heating system
      • Economics – Equilibrium of supply and demand via price
  • Goal directed behavior

    • Establish the goals
      • Establish set of measure or observations that indicate progress towards the goal
      • Verify what has been achieved in achieving the goal
      • If necessary change the goal or change the measure
      • Carry-out actions that converge towards the goal
    • Examples
      • Central heating system
      • Targets in managing the economy
  • Controlling Systems

    • Useless Controls
      • Control action that only seem to produce the required behavior
      • Control action working against the logic of the system (its purpose)
      • Control actions that are subverted by other actors in the system
    • Subtle intervention
      • Adjustment or additions simple rules (variety amplifies)
      • Making the connections between actions and system purpose more transparent
  • Emergent behavior

    • The behavior of the system cannot be predicted on the basis of the behavior of the elements
    • Intervention in the system have inherently unpredictable outcomes
    • If individuals or their organization is incapable of associating effects with their causes then learning and adaptation is not possible and both will continue repeating same errors

Causal Relationship related to Feedback Using System Model

According to this model the function of price in a market system is as follows:

  • It is an effect of given relationship between Supply and demand
  • At the same time it is a causal relationship the levels of supply and demand

feedbacks-7

Thus sometime the market forces have the effect of balancing supply and demand and stabilizing prices.

Understanding the limitation of system model:

  • Sometimes difference in prices are not reflect to changes to demand and supply
    • It can be elastic: responds quickly
    • Inelastic : responds weakly, slowly or not at all
  • Sometimes changes in supply and demand are not reflected in the prices
  • Sometimes there are other systemic stuff (market turbulence) going on that the effects of market forces are obscured

Designing feedback:

According to Goetz, a feedback loop involves four stages:

  1. the data, a behavior or evidence.
  2. relaying the information to the person in a context that makes it emotionally resonant or relevance.
  3. the paths ahead the information illuminates, or consequence.
  4. the moment when the individual can recalibrate a behavior, and take action.

 

Feedback cannot influence the past but only the future: therefore feedback design must consider those transformation processes that that need to be adjusted to achieve desired objectives.

Organizational Cybernetics: Viability

According to Beer the following characteristics are essential for any social, economic , industrial management system to ensure viability:

  • The ability to grow (maximize potential)
  • The ability to renew
  • Ability to ensure robustness against internal breakdown and error
  • Ability to continuously adapt in a changing environment and ability to survive under unexpected conditions
  • The ability to learn from repeated  experience and ensure optimum response to the stimuli
  • The ability to maintain systemic equilibrium via multi communication connections with the environment

The Viable System Model (VSM) of Beer is an approach of Organizational Cybernetics that aims aims at the design and diagnosis of complex organization. By applying this approach weakness of structure , function, communication and interaction can be easily revealed and adaptation initiatives realized to maintain viability.   According to VSM organizational system shall have normative, strategic, auditing, coordinating,  operative management and alarming functions that operate and interact in order to maintain organizational viability.

Systemic Throughput

Generally most KPI are a waste of time and effort. Most are ‘so what’ KPI. They are isolated KPI that do not contribute to real business benefits. Some are mainly output related rather than throughput related; Example case is inventory versus throughput.
The key difference is that throughput is based on what is actually billed and delivered, while output is something produced and sitting in inventory providing zero value to the organization. Fundamentally throughput relates to cash flow, productivity and profitability; the key elements of any success factor of an organization.
Having throughput as a KPI measure provides the ability for any organization to achieve its goal; the goal of being profitable and ability to grow. The rest has no relevance.Throuput pic

Throughput also directly influence productivity, net-profit; all those fundamental elements that are critical to any organization but strangely never really measured correctly.

Measuring throughput on its own provides limited value without linkages to the organizational elements resources, markets, teams and process which are all part of the system. Throughput is the outcome of a system. System Thinking considerations:

• A system is greater than the sum of its parts

• A system is not the sum of its elements/parts – it is the sum of their interactions. IT interacts with other areas. In order to maximize manufacturing, the objective is not output but rather throughput (what is made and sold). The parts that interact can be the following:

    • Manufacturing Equipment, tooling
    • Skilled resources
    • Manufacturing execution system
    • Manufacturing planning and control system
    • Management structure
    • Policies

Fundamentally each one needs to consider how they interact with each other. The performance of the system depends on how well the parts fit together

Therefore to maximize throughput it is important to optimize the interaction between the various elements of the system.

Introducing multi-dimensional throughput KPI measurement , will ensure the visibility of direct contribution of related elements (the system) that have an impact on throughput:

  • Resources
    • Manufacturing Plants
    • Throughput for actual manufacturing site
    • Productivity for actual manufacturing site
    • Manufacturing equipment / System
    • Throughput for actual key constraining resources
  • Markets
    • Geographical area
    • Product Brands
    • Customer groups
    • Organizational Teams
  • Sales
    • Marketing
  •  Information Technology
    • Manufacturing
    • Supply Chain
    • Finance
  • Process
    • Design
    • Order
    • Make
    • Sell

Business Transformation projects sometimes fail because apart from change management there is no clear indication how it will contribute to real benefits; how will it contribute to increasing throughput.

Concepts:

• Throughput (T) is the rate at which the system produces “goal units.” When the goal units are money (in for-profit businesses), throughput is net sales (S) less totally variable cost (TVC), generally the cost of the raw materials (T = S – TVC). Note that T only exists when there is a sale of the product or service. Producing materials that sit in a warehouse does not form part of throughput but rather investment. (“Throughput” is sometimes referred to as “throughput contribution” and has similarities to the concept of “contribution” in marginal costing which is sales revenues less “variable” costs – “variable” being defined according to the marginal costing philosophy.)

• Investment (I) is the money tied up in the system. This is money associated with inventory, machinery, buildings, and other assets and liabilities. In earlier Theory of Constraints (TOC) documentation, the “I” was interchanged between “inventory” and “investment.” The preferred term is now only “investment.” Note that TOC recommends inventory be valued strictly on totally variable cost associated with creating the inventory, not with additional cost allocations from overhead.

• Operating expense (OE) is the money the system spends in generating “goal units.” For physical products, OE is all expenses except the cost of the raw materials. OE includes maintenance, utilities, rent, taxes and payroll.

Organizations that wish to increase their profitability should consider the following:

1. Increase throughput? How to increase, in what areas?

2. Reduce investment (inventory) (money that cannot be used)? How?

3. Reduce operating expense? How?

The answers to these questions determine the effect of proposed changes on system wide measurements:

1. Net profit (NP) = throughput – operating expense = T-OE

2. Return on investment (ROI) = net profit / investment = NP/I

3. TA Productivity = throughput / operating expense = T/OE

4. Investment turns (IT) = throughput / investment = T/I