1 A Formal Model of Organization

1.1 Introduction
This chapter will present a formal model for interorganizational issues. An orga-
nization is a complex system of interconnected human and nonliving machines
(subsystems). As such, it is a natural candidate for what is referred to as the
systems approach, i.e., a holistic perspective taking into account as many facets
as possible yet within a manageable framework. The systems approach has been
used in numerous studies of organizations such as those by Drenick [5], Kast and
Rosenzweig [7], and Takahara and Mesarovic [12].
An organization is formed for a purpose, to achieve a certain goal. It is there-
fore also a natural candidate for a cybernetic perspective in which cybernetic
refers to a study of information and control (decision making) systems of "man
and machine." The cybernetic approach has also been the subject of the study of
organizations [2,6].
The objective of this chapter is to introduce a cybernetic framework for the
study of organizations using mathematical general systems theory (MGST).

1.2 Systems Approaches in Organizational Theory

1.2.1 A Systems View of Organization Theory
According to Kast and Rosenzweig [7], who adopted the systems approach to an
organization, an organization is a system which is characterized by:
1. An open socio-technical system
2. A contrived system
3. A hierarchical system
4. Negative entropy
5. Steady state or dynamical equilibrium
6. Feedback mechanism
7. Adaptive and maintenance mechanism
8. Growth through internal elaboration

3
S. Takahashi at al. (Eds.), Applied General Systems Research on Organizations
© Springer-Verlag Tokyo 2004
4 1. A Formal Model of Organization

9. Equifinality of open system

10. Managerial system
11. Role of manager

An organization is an open system which interacts with environments. It is

affected by the environment and, conversely, it affects the environment while
maintaining its functions in proper states.
The external behavior of an organization is, therefore, modeled as an
input-output system. The inputs of an organization in this book can be typically
classified into two types. The first type is a resource input such as personnel, mate-
rial, money, energy, or information. The second is external managerial informa-
tion related to customer demands, consumer behaviors, marketing conditions,
economic situations, etc. The organization transforms the resource inputs into
products or services and transmits them to the environments as an output. The
transformation, which usually requires support of a specific technology, is a
primary activity of an organization.
In the basic formal model, which is shown below, it is assumed that the resource
input is a controllable input and hence it can be treated as one component of the
internal decision variable or as a constraint to the management. It will not be
tr eated as a real external input to an organization because an external input in
systems theory is an uncontrollable one. On the other hand, because the exter-
nal information input is assumed uncontrollable, it will be treated as the only real
input to an organization.
An organization is a stable system. If it were unstable, it would become extinct.
There are two types of stability: behavior stability and structural stability.
The behavioral stability is sustained by a feedback mechanism. On the other
hand, the structural stability, or the practice of keeping characteristic parameters
of an organization constant, is realized by higher level management activities
mentioned below.
People claim that importing negative entropy also contributes to structural
stability. A typical example of negative entropy is a newly recruited employee.
Without the import of negative entropy, it is asserted that an organization cannot
avoid thermal death. The stability provides a steady-state behavior of an
organization.
An organization is a contrived system. It is an artificial system that is pur-
posefully designed to realize a preassigned goal, which will be referred to as an
organizational goal. The existence of an organizational goal is a fundamental
characteristic of an organization.
An organization is a managerial system whose management activity is to
control the primary activity of transformation so that the organizational goal is
realized. The management is done by a human and the transformation is
performed with help of technological tools. An organization is essentially a
man-machine system.
It is usual that the control of the transformation is achieved with the collabo-
ration of more than two persons (specialists). Then, a higher level management
 1.2 Systems Approaches in Organization al Theory 5

is needed to coordinate the collaboration. The management of an organization

should have a hierarchical structure. An organization is a socio-technical hierar-
chical system more than a simple man-machine system .
Coordination management is also required because each member of an orga-
nization is assumed to have his or her own goal. This is another fundam ental
assumption about an organization. A member is not a robot. Therefore, there can
be conflicts among members and between the organizational goal and those of
its members. The resolution of these conflicts is a basic problem of organization
th eory.
An organi zation must ha ve an ability to surv ive and grow in a ch anging and
ho stile enviro nment and to properly address the managerial information input.
Thi s ability is called ad aptation ability or self-organization ability. Then, th ere
mu st be a layer in the man agement hierarchy that is re sponsible for adaptation
or self organization.
Conventionally, three hierarchical layers have be en recognized in organization
theory: the technical lev el , the or ganizational level , and the institutional level.
Kast and Rosenzweig [7] suggested th at the three layers ar e structured lik e a
she ll as shown in Fig. 1.1.
The technical level , wh ich is th e inne rmost layer, is protected from the e nvi -
ronment by th e other levels and is concerned with the primary op erational task
of an organi zation, or th e tr an sformation of th e resource input int o o rganization

institutional
level

organizat ional
level

technical core :
input output
closed system ;
primary activity

closed system

open system

FIG. 1.1 Three layers of organization

6 1. A Formal Model of Organization

product. Its activity is characterized by economic-technical rationality by

forming a closed technical core. Because the uncertainty of the environment is
irrelevant to this level, a closed system view is applicable.
The institutional level, which is the outermost layer, faces the environment or
the information input and absorbs the uncertainty characteristic of openness and
adapts to the environmental change by modifying organizational parameters and
the structure. This level constitutes the ad aptive and maintenance mechanism of
an organization. The organizational goal is transformed into an operational goal ,
called the global goal, by the institutional level depending on the state of the
environment.
The organizational level is a mediator between the institutional level and
the technical level. The global goal provides a guideline for the activity of the
organizational level which coordinates the behaviors of the technical core by
controlling the allocation of resources to the technical level.
Each level has managers and their roles are characterized according to the
functions of each level. Managers of the technical level are task oriented with a
short time perspective. They are concerned with the efficiency of the transfor-
mation (production) that is evaluated by economic-technical rationality under a
given technology.
Managers of the organizational level are, as mentioned above, mediators
between the other levels. Their activity is to find an optimal compromise between
harmonization of lower-level activities and an upper-level demand which is
represented by the global goal.
Managers of the institutional level should have a broad conceptual frame of
reference about the organization. They control organizational behavior and
structure, and adapt them to environmental change. Their activity is judgmental
due to the uncertainty of the environment.

1.2.2 Management Cybernetics

There is a management philosophy which advocates application of the cybernetic
concept to management. It provides a more specific view of the management
functions [2,6]. The view is modeled as VSM (viable system model) by Beer [2].
Figure 1.2 shows the VSM.
The VSM is a hierarchical system consisting of five layers. It is an open system
that interacts with its environments. The first layer or system 1 carries out the
real task of an organization or the transformation of management resources. It
is assumed that the task of the first layer is departmentalized and consequently
the layer consists of local operational units. Each local operational unit is com-
posed of two components: a local process and its operator. Local processes inter-
act with each other to constitute the total process and are assumed to be open
to their environment.
In the VSM, because the local operational units are allowed to have
autonomous behaviors, conflicting situations can arise. A coordination scheme is
needed to resolve these conflicts. The scheme produces a coordination plan after
 1.2 Systems Approaches in Organizational Theory 7

Level5

Level 4

Level3

Level I

FIG. 1.2 Viable system model (From [2], with permission)

a negotiation process between the first layer and the third layer. Each local oper-
ational unit is associated with one local system unit which implements a given
coordination plan through a local feedback mechanism.
Because the associated unit of each local operational unit has to negotiate with
other associated units to execute the coordination plan, it can be considered to
be an interface of the local operational unit. The combination of a local opera-
tional unit and its associated unit will be called a local operational level man-
agement unit.
The third layer or system 3 is responsible for resolution of internal conflicts
and for the solution (decision making) of short-range problems. It must produce
a coordination plan by negotiating with the first layer. Coordination is usually
planned by the control of management resources.
The derived coordination plan is executed by the second layer or system 2
under the supervision of the third layer. The second layer actually implements
the plan faithfully by working with and controlling the associated units of the
first layer. In this sense, the VSM defines the function of the second layer as
regulatory and antioscillatory.
8 1. A Formal Model of Organization

At the execution stage of the coordination plan, the third layer controls the
first level units by auditing their activities.
The important feature of the third layer is that it is assumed to be isolated from
the uncertainty of the environment. This isolation is also assumed for the first
layer. The third layer is mainly concerned with the internal and current state of
the organization. It is separated from spatial uncertainty (the environmental
uncertainty) and uncertainty about the future.
The fourth layer or system 4 takes care of the long-term uncertainties of
the environment, both spatial and temporal, and produces a strategy for
organization adaptation. The key function of this layer is self reference or self
organization.
The fifth layer or system 5 is the brain of an organization which resolves the
conflict between the third layer and the fourth layer, and produces a policy for
the organization. The third layer is concerned with the current efficient opera-
tion of the primary activity of an organization, while the fourth layer is concerned
with adaptation for future activities. Although both are important, they can
produce conflicts.
The hierarchical structure constitutes a chain of metafunctions if an adaptive
function is introduced. It is assumed that the chain is terminated by the fifth layer.
Every organization theorist admits that an adaptation concept is indispensable
to organization theory. However, in many cases there is no definite statement
about what the adaptive function really means. In the VSM, however, adaptation
is specified by the variety concept. Ashby [1] proposed the law of "requisite
variety" as a system theoretic law, which insists that a system must have at least
the same degree of behavioral variety as its environment in order for it to survive.
That is, the number of behaviors a system can exhibit must not be less than that
of the environment.
The VSM uses the requisite variety concept as the fundamental principle to
design and explain management activities. It claims that a viable system should
satisfy the following principle, as stated by Beer [2]:
"Managerial, operational, and environmental variety, diffusing through an
institutional system, tend to equate; they should be designed to do so with
minimum damage to people and to cost."
Beer [2] asserted that a surviving organization has functions to decrease the
variety of environmental input by some "market research" mechanism. This
serves to reduce information input according to organizational objectives and to
increase the variety of organizational behavior by appropriate market means.The
former function is called variety attenuation while the latter function is known
as variety amplification. In this wayan organization can adapt to environmental
change.
When the VSM is compared to the systems approach of Sect. 1.1, the local units
correspond to the technical level, the third layer to the organizational level, and
the other layer to the institutional level. The VSM presents a detailed image of
the management function of the management hierarchy.
 1.3 A Formal M odel of Organization 9

r -- - - -- --- -- - - --- ----- - ~

1 I
I
I
1 self-organization &
1 growth/open
1 adaptation layer
I adaptive
1
1 /maintenance
1
1
I coordination /coordination
I
~ layer i
1
1
1____ _ _ - - - - - -
------ --- --

optimization &
feedbac k
regulation layer
/closed
~
process

FIG. 1.3 Multilayer model of ge ne ra l syste ms theory

1.3 A Formal Model of O rganization

1.3.1 Complex Systems Model in Systems Theory
A hierarchical layer struc tur e is proposed in gen er al syste ms th eory (G ST) as a
model of a complex syste m, which is given by Fig. 1.3 [10].
Th e origin of this model came principally from control enginee ring. Th e hier-
archy of GST has th e four layers: process, regulation/optimization, coordination ,
and adaptation/self or ganization. These layers are identified by th eir control
functions.
Th e process layer cor responds to the operation layer of th e YSM, and is
supposed to consist of subpro cesses which are mod eled as input- o utput system s.
They usuall y interact with each other.
The regulation/optimization layer corresponds to operational control. This
layer is responsible for control of the process layer and is concerned with
optimum efficient op eration on an economic and rational discipline. This layer is
also made up of subunits according to th e subprocesses. Th e subu nits are called
decision mak ers or controllers, and th e regulation function is usu ally impl e-
mented by a feedback mechani sm. The regulation/optimization layer reli es on
the closed-s ystem hypothesis for its oper ation.
Because int eractions exist among the subprocesses, th e regulation/optimiza-
tion layer cannot perform its function without proper information regarding
10 1. A Formal Model of Organization

interactions. Furthermore, if the regulation/optimization layer is given autonomy,

coordination is necessary for conflict resolution among the controllers. The co-
ordination function of the third layer provides the second layer with information
regarding interaction, and integrates the behaviors of the second layer to realize
the goal formed by the upper level.
The adaptation/self-organization layer, the fourth layer, absorbs the uncer-
tainty of the external input and transforms it into a tactics with certainty which
is transmitted to the third layer as a systems parameter. An operationalized goal
of the organizational goal is an example of a system parameter.
If the combination of the coordination level and the adaptation/self-
organization level corresponds to the management layer of the three-layer model
of VSM, the GST hierarchical structure becomes a restatement of the VSM.
Various formal theories have been developed for the hierarchical layer model of
GST when it is applied to an engineering system. The regulation function is a
principal target of the control theory. The optimization function has been exten-
sively studied in the control theory and the management science. The coordina-
tion function is provided with formal results by multilevel systems theory [10].
The study of the adaptive function has a long history in control engineering,
within which system parameter adjustment is the main topic of adaptive control
theory.
Although these formal theories have rich results, they cannot be said to satis-
factorily address problems of an organization because they are mostly developed
for well-structured systems in a quantitative way. In reality, organization systems
are typically ill structured, at least quantitatively. This difficulty leads to qualita-
tive approaches and simulation treatments. The work of Takahara and Mesarovic
[12] pursues qualitative development different from the conventional formal
theories.

1.3.2 Basic Formal Model of Organization

The starting point of the development of a formal model is the hypothesis that
because an organization is a special system, if general concepts used in GST are
properly specialized, usable mathematical theories based on the results of GST
can be obtained.
Figure 1.4 shows the basic model of an organization. The model is derived from
the GST complex model and is modified for an organization.
The model characterizes an organization as follows :
1. Externally, an organization is an input-output system that is open to its
environment. There are two types of input from the environment, resource input
and managerial information input. The resource input is assumed to be control-
lable, and hence it is not a real input. It is a part of a decision variable or a con-
straint to decision making. The managerial information input is assumed to be
uncontrollable. Furthermore, if an uncontrollable aspect exists for the resource
input, it is included into the managerial information input as one component. A
 1.3 A Formal Model of Organization 11

Management Level
x,.- D
..:::..,

Observation Institutional Organizational

level:Global goal :
1+---
(intelligence) goal:G(u.,y)
G.(y)

External Organizational Go(r): Coordination goal

information level Direction(v) or
input:uncontrollable
Coord ination(r)
Tn (Vn)
Operational level
,,r----------- --- ----------,
G ,
,, ,
n ,

,, ••••••
___ ________________ _ J,
I

----------
r--------- ----------,
I
I
I
Yn i
,
Output: y

t---+
•••
Process

,I
I level
K

,,, Interaction

,
I

---------------------f--------------------
management resources

FIG. 1.4 Basic model of organization. See text for det ailed explanation

real input to the organization is hence represented by the managerial informa-

tion input. The managerial input can be further divided into two types: environ-
mental process information and environmental structure information. They are
observed by specific observation mechanisms which can exist as real objects or
may be in the mind of a decision maker. The observation of the process infor-
mation input can be used for tactical adaptation, while that of the structural infor-
mation input can be used for strategic adaptation. The observations are subjects
of organizational learning. The output of an organization is called a product.
2. An organization is a dynamic system. Variables which describe an organi-
zation are assumed to be time functions.
3. Internally, the model has four levels, the process level, operational level,
organizational level , and institutional level.