Managing in a Complex World

2.2 Value Creation as Organizational Achievement

When an organization or a network of organizations creates value through division of labor, we speak of organizational value creation. Precisely this organizational value creation is the key point of reference for management.

Organizational value creation refers not only to what private enterprises achieve for their customers. Depending on organizational value creation and the environmental context, other types of organizations can be distinguished (→ INT, 2.5): nonprofit organizations (e.g., a purchasing cooperative), nongovernmental organizations (e.g., the ICRC), governmental organizations (e.g., public administration, schools, railways, post offices, the police, or the army). Such types of organizations often appear in mixed forms.

Nowadays, organizational value creation mostly has four basic characteristics: (1) coordinated division of labor; (2) specialization; (3) spatial and temporal distributedness; (4) the institutionalization of reliable cooperation.

These four characteristics are closely interconnected.

• In terms of the value creation outcome, division of labor means that an end product (e.g., a car) is divided into modules, each performing specific subfunctions for overall value creation. Similarly, an insurance service can be split into specific individual tasks and modularized task bundles. In terms of the value creation process, division of labor means that overall value creation, i.e., the activities required to manufacture a product or provide a service, is divided not only among different people but also among different subprocesses or organizations, which cooperate with each other in value creation chains (Figure 2).

Figure 2: Textile value creation chain [23]

• Division of labor, i.e., dividing overall value creation into subtasks, subprocesses and subfunctions, has one major advantage: It enables specialization, i.e., developing and applying specialized knowledge and skills. A task is not only distributed identically among a large number of actors. These actors, whether individuals, communities or organizations, may and must consciously endeavor to specialize. While the involved actors now only master specific individual activities of overall value creation, their in-depth competence and experience means they excel at their task.

Actor specialization often coincides with specializing the overall resource configuration. By resource configuration, we mean all the prerequisites that are available over time and whose interplay leads to developing, producing, and providing specific products and services. Such preconditions include financial resources, physical and technological infrastructures, location conditions, knowledge and know-how, permits or rights (e.g., licenses).

• Another characteristic of organizational value creation, in its intra- and interorganizational division of labor and specialization, is its spatial and temporal distributedness. Thus, different value creation activities are distributed sequentially or in parallel, staggered over time, and performed in various places (e.g., locations, buildings, rooms).

• Labor-division-based value creation depends on reliable, well-functioning collaboration. Enduring, robust, and goal-oriented collaboration needs to be institutionalized within an organization. By institutionalization, we mean developing a certain, lastingly stable, and person-independent practice (e.g., in a democracy, popular votes and electing members of parliament). Repeated enforcement makes such practices collectively self-evident. They can be based on both implicit rules and formalized regulations (→ TRA, 2.1 and 3.1).

Thus, institutionalizing labor-division-based collaboration enables this cooperation to be practiced as independently as possible of specific individuals. To this end, organizations serve as structured spaces of action for lastingly stabilizing labor-division-based cooperation (Barnard, 1938).

2.3 Primary and Supplementary Value Creation

Products, services, and other value creation outcomes must create added value (benefit) for their target groups. Target groups are the key addressees of organizational value creation. They include certain customer groups (for companies), citizens (for public administration), students and research [24] partners (for universities), parties to a conflict (in courts of law), or patients (in hospitals). Thus, an outcome-centered understanding of value creation focuses primarily on how organizational value creation impacts target groups. Examples include material products (vehicles, computers, household items, textiles, semiconductor components, agricultural products, books, etc.) or immaterial services (financial services, overnight accommodation, educational services, etc.). We call target group-oriented value creation primary value creation.

This refers to those impacts of an organization’s activities that are related to its basic purpose, i.e., its core function. For example, an economic organization (enterprise) aims to satisfy customer needs, a political organization (e.g., party) seeks to form majorities, in order to meet public concerns, and a scientific organization (e.g., university) strives to generate new knowledge.

At the same time, organizations achieve much that extends beyond primary value creation and represents additional value creation: They create jobs, pay taxes, form a place of belonging, help establish meaningful employee identity, contribute substantially to occupational pension funds, and serve the common good. Thus, today’s organizations, as stabilizing institutions, are important pillars of modern society.

2.4 Value Creation in Environment-Organization Interaction

Organizational value creation arises from the coordinated interaction between an organization and its environment and must continuously evolve. Accordingly, developing and utilizing a specific environment is inseparably linked to organizational value creation.

An organization’s environment is not simply an undefined space surrounding that organization. According to the SGMM, that environment is rather the space of possibilities and expectations specifically relevant to an organization. Organizations need to purposefully open up this existence-relevant space and shape it entrepreneurially. This requires developing robust relationships with specific stakeholders, most of all with the organization’s target groups as its primary value creation addressees. For instance, establishing an innovation partnership with a technical university also opens up new product innovation possibilities for an enterprise. These possibilities need to be concretized in the product development process as innovative product characteristics and subsequently purposefully utilized. How an organization performs these tasks opens up its specific environment while new possibilities also arise for a university if its partnering enterprise [25] provides funding. Enterprise and university become relevant environments for each other. We understand their interplay, i.e., how these two organizations develop in relation to each other, as co-evolution.

Thus, organizational value creation, as a key point of reference for management, always focuses on design and on development. This dual focus encompasses organization and environment – with a view to enabling their sustainable co-evolution.

2.5 Types of Organizations

Not all organizations are identical. Essentially, an organization defines itself in terms of its primary value creation: What does this consist of? And which specific environment is this value creation oriented toward? The SGMM understands the primary environment as the environment toward which an organization’s primary value creation is oriented.

Primary value creation and the primary environment shape an organization’s identity and self-concept. This also includes how it deals with the concerns, interests, demands, and disturbances it faces. The terms primary value creation and primary environment also indicate that organizations can have several purposes or functions. They can be multi-purpose or multi-function systems required to cope with manifold heterogeneous expectations.

Overall, organizations can be typified in terms of three main distinctions: First, some organizations align their primary value creation with markets (the economy as an environmental sphere), while others provide a different type of primary value creation. Second, organizations whose value creation aims to achieve a financially realizable increase in value for their owners, while others emphasize other values. Third, some organizations are privately owned, others publicly.

On this basis, we distinguish six types of organizations:

• First, organizations are enterprises if they align their value creation with markets and thus with the economy as their environmental sphere. They generate added value for their owners. They are privately owned. Enterprise ownership is more or less fully tradable in the form of shares or other forms of participation.

• Second, organizations are public enterprises if the state is either the owner or at least a majority shareholder. Such enterprises must align themselves [26] simultaneously with two environmental spheres: politics and the economy. Typically, public enterprises include the state postal service, state railway, state providers of communication services or public water supply and waste disposal. Their value creation is (at least partially) state-regulated, e.g., if critical infrastructures or politically desired services (public service) are concerned.

• Third, organizations are public organizations if, in contrast to public enterprises, they do not orient themselves toward the economy, but instead create sovereign value (e.g., public security). Based on a government mandate, this type of value creation is oriented toward the environmental spheres of politics and law. Examples of public organizations include the army and police or public administrations (e.g., building authorities, citizen registration offices, inland revenue, etc.).

• Fourth, organizations are nongovernmental organizations (NGOs) if they are typically oriented toward the environmental spheres of the public and ethics, but if their value creation – in contrast to public organizations – is not legitimized by a state mandate. NGOs are oriented toward societal concerns (e.g., the protection of human rights, nature, or animals).

• Fifth, organizations are nonprofit organizations (NPOs) if their foundation and continued existence are motivated not by increasing value for their owners but by collective self-help or by added societal, cultural, symbolic, or intellectual value. Typical organizations include ones committed to their members’ concerns (e.g., cultural associations, sports clubs, neighborhood and elderly aid associations, etc.).

• Sixth, organizations are pluralistic organizations if several of the above organizational characteristics apply simultaneously (e.g., public hospitals or private universities). Their value creation is typically characterized by multiple orientations toward several environmental spheres, by heterogeneous notions of success, and often also by hybrid ownership. In such organizations, effective management as a reflective design practice is associated with special challenges.

In sum, different organizations are characterized by different environmental orientations. These environmental orientations also exhibit specific notions of valuation and success. While efficiency and productivity standards are hugely important in the economy, other criteria are central in politics (e.g., obtaining a majority, increasing power). Key criteria in public administration, as such oriented toward politics and law, include the rule of law, equality of rights, and legal certainty. [27]

Consequently, these organizations have different identities, rationality criteria, and performance measures with regard to gauging and evaluating appropriate, meaningful, legitimate, reasonable, and desirable action (Schedler & Rüegg-Stürm, 2014).

2.6 Organizational Value Creation as Management Focus

Every organizational value creation first needs to “settle down” (i.e., find its place) in a complex world, in order to occur with a certain self-evidence. Changes in an organization’s environment and new opportunities mean that its value creation also needs to be constantly scrutinized, reflected on, and further developed. Precisely this is the responsibility of management. Accordingly, the SGMM defines management as a reflective design practice.

This demand – to reflectively design organizational value creation – must include management itself and is crucial for two reasons: Not only is management becoming more important from a societal viewpoint, but also ever more demanding and controversial. Thus, organizations and scholarship need to develop a differentiated understanding of what constitutes effective and responsible management.

The SGMM addresses this pressing need by describing the multifaceted nature of management and its manifold prerequisites both linguistically and visually. Our aim is to enable managers to carefully reflect on their own management practice.

3 The St. Gallen Management Model (SGMM)
3.1 What are Models for?

Models are created if interrelations are either not obvious or very complex, and if no robust understanding of a subject can be taken for granted, but instead calls for explicit collaborative reflection and orientation. Models serve to better understand complex interconnections and to simulate future possibilities. They support anticipating or reconstructing possible developments through purposeful abstraction and simplification, and thus help strengthen our imagination. [28]

For instance, terrain models help gauge a new highway’s acoustic and traffic impacts prior to construction. Architectural models serve to assess a building’s aesthetic and functional qualities in advance. The same applies to aircraft models. Formal econometric models help assess the impact of economic policy measures before implementation. Chemical and physical models are used to estimate the functionality and dynamics of novel substances before production and usage.

Thus, models help collaboratively develop a better understanding of complex interrelations. At the same time, they involve simplification and abstraction so as to clarify important relationships and dependencies. The SGMM also needs to be understood in this sense. It represents a frame of reference that includes helpful descriptive categories, a “Leerstellengerüst für Sinnvolles” (Ulrich & Krieg, 1972). The SGMM aims to open up the interplay of management practice and organizational value creation for a dynamic environment to close scrutiny, be it in management practice (by managers) or in teaching (by teachers and students).

3.2 What does the SGMM achieve?

The SGMM does not represent an idealized corporate reality. It endeavors, instead, to strengthen the collective imagination of those facing management challenges. We intend the SGMM to help actors jointly recognize new impact dynamics and possibilities, by enabling careful reflection and by anticipating cause-and-effect relations hard to fathom. Thus, the SGMM contributes to focusing attention on how management becomes effective. It does so through conscious selection and simplification. In this sense, the SGMM cannot be “implemented.” Rather, it needs to be understood as a perspective and as a way of thinking that helps organizations shape and develop themselves.

We also see the SGMM as a language that facilitates understanding and (collaborative) reflection. As such, it helps to understand the complex nature of management and to practice it responsibly – both in general and in very specific situations.

The SGMM describes fundamental aspects of management. It spells out perspectives on management in context and provides corresponding visual illustrations. It enables actors to carefully consider their experiences of management practice. This makes the SGMM one of the few management models to explicitly subject management as such to reflection. The SGMM understands such reflection as an essential prerequisite for effectively and responsibly designing organizational value creation. [29]

Thus, the SGMM has two key functions: description and reflection / design. We intend the SGMM to enable critically and constructively reflecting on and advancing management practice. Our aim is that the model will as such effectively and responsibly expand not only an organization’s entrepreneurial repertoire of possibilities for action and development but also the management practice responsible for creating those possibilities.

3.3 Overview of the SGMM

The SGMM holds that the key point of reference for management is to design and advance organizational value creation. Value creation, so the SGMM, occurs through an organization’s interaction (co-evolution) with its environment – including avoiding unwanted side effects (e.g., stress or environmental burdens). Depending on its history, environmental embeddedness and value creation, an organization requires a very specific management practice to design and advance its organizational value creation.

The SGMM distinguishes two perspectives on organizational value creation: a task perspective and a practice perspective. This distinction pertains to the historical development of business administration, i.e., management science.

The task perspective assumes that an organization’s core – task-centered, labor-division-based human interaction, between individuals with different qualifications, educational and professional backgrounds – quite simply functions. Further, this perspective assumes that organizational value creation and its development can be influenced, unproblematically, from the outside. The founder of German-language business administration, Erich Gutenberg, formulated this idea in his groundbreaking postdoctoral thesis (Gutenberg, 1929: 26; our translation and emphasis):

“Hence, the enterprise as an object of business administration cannot directly be the empirical enterprise. The assumption must be made that the organization of the enterprise functions perfectly. This assumption eliminates the organization as a source of its own problems and removes it from its scientifically and practically significant position to the extent that it can no longer create difficulties for theoretical deliberations.”

Many business models, concepts, and frameworks are dominated by an economic approach to organizations. As such, they emphasize efficiency, i.e., cost-benefit considerations. [30]

From a task perspective, organizations are clearly identifiable entities consisting of tasks and problems capable of being systematically captured analytically and processed rationally. This perspective also suggests that concepts and “instruments,” such as the marketing mix, five-forces analysis or financial ratio analyses, if correctly understood and applied by the responsible employees, contribute to good decisions and thus sustain an organization’s success. Hence, the task perspective relies on the unproblematic possibility of organizations being rationally designable and controllable. The blind spot of this perspective is the demanding preconditions for management to become effective.

However, already Gutenberg realized the shortcomings of this perspective (Gutenberg, 1929: 26; our translation and emphasis):

“Assuming such a perfectly functioning organization, which ensures smoothly executing the basic business processes, does not mean negating, but only neutralizing the organization’s problems. The stance presented here will give rise to a wealth of arguments that privileges research questions about the organization.”

Gutenberg’s demand is addressed by the SGMM’s practice perspective. This second perspective focuses on what the task perspective, by assuming that organizations simply function, largely leaves unmentioned: the complex socio-cultural preconditions and practices of labor-division-based cooperation. Concretely, it is anything but self-evident that communication succeeds, or that timely, robust decisions keep being made and take effect in daily business, or that organizations can innovatively change and develop entrepreneurially. All of this instead requires particular reflective and communicative efforts while carefully heeding complex, ephemeral, confusing, and often elusive organizational events.

The SGMM’s two perspectives view environment, organization, and management in different ways. Consequently, certain descriptive categories appear in both perspectives, sometimes with slightly different meanings – similar to looking at the same object from different angles.

• The task perspective applies an analytical and design process that focuses on facts and contents. This process contributes to elaborating a differentiated sense of the possibilities for successfully advancing existing organizational value creation while accounting for diverse influencing factors and effects. This analytical and design process enables using diverse business concepts and frameworks. [31]

• The practice perspective, on the other hand, helps critically reflect on the manifold resource-related and cultural prerequisites for effectively realizing convincing design options. This enables developing ways of working simultaneously on the necessary preconditions for and means of realizing existing design options, as well-considered and as effectively as possible.

Figure 3: The interplay of the task and practice perspectives (M.C. Escher’s “Drawing Hands” © 2019 The M.C. Escher Company-The Netherlands. All rights reserved. www.mcescher.com)

Figure 3 shows that both perspectives are equally important and complementary. Concrete entrepreneurial challenges require using both perspectives systematically. Hence, the SGMM addresses environment, organization, and management from both perspectives and constructively interrelates them. Our long-standing observations in management research, executive education, and management practice unmistakably demonstrate how effective and responsible management practice needs to oscillate between – and productively interconnect – these two perspectives. [32]