CHAPTER II

LITERATURE REVIEW

1.1 Introduction
Organizations are more complex today than in the past, in part due to their
structure, other times due to the increasing number of constrains in resources or
the increasing level of technology required to accomplish the augmented tasks and
interactions among different entities in the organization. Because of this
complexity, organizations are required to deal with an increasing amount of
information generated and processed by them, and the required time to perform
decision-making processes is extremely limited.
The need to understand and control the behavior of critical variables for the
organization is an increasing demand from managers and engineers in the attempt
to improve the decision-making process. This need to understand and control can
be applied to governmental entities as well.

The government requires

understanding on how economy is behaving to take better and more informed

decisions. While business organizations have applied several techniques to follow
up the critical variables, the Federal Government usually applies to economic
indexes, decision rules much more complex than a statistical control chart, as an
example of this, the following reference explains the way a recession is declared:
While a recessions is popularly defined as occurring when the real gross
domestic product (i.e., the inflation-adjusted GDP) declines for two quarters
in a row, the NBER actually considers a variety of monthly and quarterly
data before making a determination, including the GDP in current and
inflation-adjusted dollars, business sales, bank debits outside New York City,
industrial production, unemployment rate, nonfarm employment and hours
worked, and personal income. (Frumkin, 1998, p. 5)
Let consider economic variables or indexes, such as Gross Domestic Product
(GDP), Government Gross Investment (GGI) or Gross National Product (GNP), as
examples of a complex situations.

Complex econometric models have been

created in order to understand, and perhaps predict, the behavior for these
variables. The understanding on how the Gross Domestic Product (GDP) or any
other economic index for the USA behaves will help to define better economic
practices and policies. Unfortunately, there is no easy alternative to identify if GDP
(among others) is following a natural behavior or not. It is even more difficult to
establish if there is a solid reason for assigning a special situation when the GDP is
not behaving as usual.
To better manage complex systems as GDP it is imperative to
understand their components, their behavior and create a simpler scheme for
decision-making.

A systemic view of the organization can help with the

understanding of components and behavioral interactions of the system, while

statistical techniques, such as statistical control charts, can exist with the for
decision-making endeavors. Process behavior charts, or control charts, are
effective only when the manager can use the knowledge gained from the charts
(Wheeler, Advance Topics in Statistical Process Control, 2004).
For simpler processes, process behavior charts are a perfect tool to identify
points that are out of the natural behavior of the system. When the process is
more complex, there are other considerations to tackle such as the amount of data
available within a reasonable time period is limited, and considering that the
assumed growth in the critical variables is not constant.
This has led to the belief that in the GDP case, as in any other economic or
business index, there are three important elements to consider. First, the critical
variable can be considered as an indicator of a Living System (LS) due to its
nature. Secondly, the need for managers and engineers to have a tool that helps
to make the decision-making process easier. Thirdly, the presence of statistical
techniques used to identify situations to handle behavior that has an atypical
pattern for critical variables within the process.

This chapter presents information divided in three segments. The first one
look at the systems approach, more precisely Living Systems Theory (LST), to
understand their main characteristics and elements and how these are relevant to
the understanding of the process and the critical variable under study. The second
one is about the statistical techniques, specifically process behavior charts, that
exist to evaluate the behavior of critical variables and their comparison. The third
one concerns the modification required in current process behavior charts to
overcome the limitations presented in segment two and to propose an alternative
to evaluate the economic or business indexes such as GDP.

1.2 Primary Theories in Systems Approach and Historical Background

According to Bertalanffy (1969), a system is a set of elements that are

interconnected. This concept can be applied to practically any entity, whether it is
a machine or a living organism. Through time, the concept of a system has
changed. Table 2.1, provides a historical development of the original concept of
system initiated by Bertalanffy.
The focus of systems definition has changed through time but concur in a
system as a set of interrelated, interconnected, interacting elements that are
organized in such way that can achieve a specific purpose. More aspects on the
notion of system are:
a) A perspective (also called weltanschauung).
b) A concept of unity or wholeness.
c) A clear and definable boundary, among others.

1.2.1

General Systems Theory

Once the system concept has been clearly defined, it is time to explain
another important concept: the systems approach. This is a way of thinking to
create an integrated view of a total system(Churchman, 1979). Based on the
systemic approach the General Systems Theory (GTS) investigates the common
principles that is inherent in all complex changes in the real world (Chambers,
Piggott, & Coleman, 2001), in all complex entities and the models used to describe
them (Canto, 2007).
The GST concept was initiated by Bertalanffy, who started an effort to
counteract the oversight of disciplinary specialization by incorporating a holistic
worldview(Mulej, et al., 2004). Miller (1965) in his Living Systems, defines GST by
saying:
General Systems Theory is a set of related definitions and propositions,
which deal with reality as an integrated hierarchy of organizations of matter
and energy. General Systems Behavior Theory is concerned with a special
subset of all systems, the living ones (p. 193).

Table 1.1 Evolution of systems definition

Author

Bertalanffy
Rapoport
Ashby
Mesarovic

Forrester
Churchman
Bertalanffy

Concept

Set of elements standing in interrelation p.28

Entity which can maintain some organization in the face of
change from within or without p.
A set of variables selected by an observer p.
A set of implicitly defined formal objects; a set of elementary
transformations; a set of rules for forming the sequences of
transformations, and a set of statements indicating initial
forms of the formal object for use in generating new forms of
the objects p. 7
Grouping of parts that operate together for a common
purpose p.1-1
Systems are made up of sets of components that work
together for the overall objective of the whole p.11
A whole made up of interrelated and interdependent parts,
interacting to maintain that whole p.38

Time

1950
1953
1960
1964

1968
1968
1969

Table 1.1 Evolution of systems definition

Author

Ryan
Weiss
Bertalanffy
Katz &
Rosenzweig
Maturana
and Varela
Churchman
Ackoff

Boulding
Anderson
and
Johnson
Kossiakoff
& Sweet

Concept

Time

Set of objects or elements in interaction to achieve a specific

goal or mission Reference made by Jackson (1990) p.
A system is anything unitary enough to deserve a name
Referenced by Skyttner (1996) p.16
Set of elements standing in interrelation among themselves
and with the environment p. 417
is composed of interrelated parts or elements. This is true
for all systems mechanical, biological, and social. p. 450
Any definable set of components

N/A

A structure that has organized components Referenced by

Skyttner (1996) p.16
is a set of two or more elements that satisfies the following
three conditions: a) the behavior of each element has an
effect on the behavior of the whole, b) the behavior of the
elements and their effects on the whole are interdependent,
and c) however subgroups of the elements are formed, all
have an effect on the behavior of the whole but none has an
independent effect on it p.
A system is anything that is not chaos Referenced by
Skyttner (1996) p.16
A group of interacting, interrelated or interdependent
components that form a complex and unified whole p.2

1979

A set of interrelated components working together as an

integrated whole to achieve some common objective p.10

2003

1971
1972
1972
1979

1981

1985
1997

The main concern of GST is to provide a structure of knowledge that can be

applied to several scientific fields (Wang T. , 2004) so the development in one area
of knowledge can be applied to another completely different area.

Bertalanffy

coined the term isomorphism to refer to the common attributes that different
sciences have allowed for the creation of bridges among specialized knowledge
and then transforming them into a science of similarities (Mulej, et al., 2004, p.
49).
In 1968, Anatol Rapoport, presents a definition for the proprietary task of
GST saying:

In short, the task of General Systems Theory is to find the most general
conceptual framework in which a scientific theory or a technological problem
can be placed without losing the essential features of the theory or the
problem (p. 457).
According to Mulej, et al. (2004), Bertalanffys concept of GST is based on
the following ideas:
a) A concept relates to other concepts.
b) A concept melds of components of the unified entity.
c) A concept condenses components.
d) A concept is in a state of symbol in relation to other concepts (Pelko,
2000), (Mulej, et al., 2004, p. 49).
In order to create knowledge applicable to all sciences, GST discusses and
elaborates on two types of systems: close/nonliving systems and open/living
systems (Wang T. , 2004). Miller (1965) proposed the concept of nonliving and
living systems, while Bertalanffy (1969) proposed the concept of closed and open
systems in the middle of the 1950s. In both approaches, the open/living systems
tend to have a higher hierarchy as well as higher complexity.

1.2.2

Principles, assumptions and concepts concerning systems

According to Bertalanffy (1972), the holistic notion of a system problem was

first stated by Aristotle (384-322 B.C.) when he said the whole is more than the
sum of its parts. Then Hegel (1770-1831) reformulated this statement into four
statements rephrased by Skyttner (1996) saying that:
a) The whole is more than the sum of the parts.
b) The whole defines the nature of the parts.
c) The parts cannot be understood by studying the whole.
d) The parts are dynamically interrelated or interdependent.

These statements coincide with the definition of a system that was

presented in the introduction for this section (2.2). Derived from those statements
some hallmarks of the systems concepts are presented in Table 2.2.
From these definitions, it is important to emphasize four concepts that are
related to complex systems, which are open system, living system, regulation and
equifinality.
First, the concept of open system refers to the continuous interchange of
matter, energy and information among system components and with the
environment in which the system resides. Open systems tend to have a steady
state creating stability in the system.

Table 1.2 Hallmarks of Systems Theory

Concept
Definition
According to Miller, any complex system requires specialized units to
perform specialized functions. Differentiation is the increased
Differentispecialization that occurs as systems grow in complexity (Katz &
ation and
Kahn, 1978; Bertalanffy, 1956) and Integration is the countering
Integration
process of coordination and centralization of the differing parts (Ford,
1987; Bertalanffy, 1969) (Vancouver, 1996).
Referred to as the second law of thermodynamics, entropy can by
Entropy
defined as the amount of disorder or randomness present in any
and
system (Skyttner, 1996) and Negentropy, in association with the
Negentro- previous definition, as negative entropy, which means the import of
py
energy, information or matter in order to create order or stability
(Miller, 1965).
In closed systems, the final state depends on the initial conditions in
the system. In open systems, the final state may be reached in spite
Equifinality
of the alteration of the initial conditions or changes in the process
(Bertalanffy, General Systems Theory, 1969).
Any system is formed by sub-systems creating a structure or hierarchy
in such way that the individual members (sub-systems) are, again,
Hierarchy
systems by themselves on the next lower level. This hierarchy helps
to sustain order and requires import energy to achieve it (Bertalanffy,
General Systems Theory, 1969).

Table 1.2 Hallmarks of Systems Theory

Concept
Definition
Presented in its primary form by Aristotle, this concept represents the
view of a system as a complete and unified unit, and the integrative
Holism
approach of systems to understand how the sum of parts is different
from the whole.
Presented by Bertalanffy in his definition of system, this concept
means the connection that exists among the elements of a system.
Interrelatio These connections make possible the interchange of matter,
nship
information and energy that is required by a system to survive (Miller,
1965).
The concept of connections in this segment includes
interrelationships, interconnections and interdependency.
Defined by Bertalanffy, this concept refers to the common attributes
Isomorph- or structural similarities in which different sciences can create a bridge
ism
among specialized knowledge and transform it into general system
principles (Bertalanffy, 1969).

Table 2.2 Hallmarks of Systems Theory. Continued

Living and
Non Living
Systems

Open and
Closed
Systems

Regulation

Teleology

Living systems are open systems, maintaining themselves in

exchange of materials with the environment, and in continuous
building up and breaking down of their components (Bertalanffy, The
Theory of Open Systems in Physics and Biology, 1950). A non living
system is a system which does not have the characteristics of a living
system (Miller, 1965).
According to Bertalanffy (1950) a system is closed if no material
enters or leaves it; it is open if there is import and export and,
therefore, change of the components. In open systems entropy level
may increase, decrease or remain in steady state while in closed
systems entropy generally increases.
This attribute implies the existence of feedback required for effective
control. In closed systems this attribute represents a steady state of
static equilibrium while in open systems represents a steady state of
dynamic equilibrium. A system must be regulated in order to achieve
the goals defined for/by the system. The tendency of a system to
sustain steady states is also called homeostasis.
Presented by Churchman, this concept implies the goal-seeking
requirement that Ryan mentions in his definition of a system.
Interactions and interconnections must result in some goal to achieve
or some final state to be reached.

The second concept is living systems, which refers to a subset of open

systems that possess specific characteristics about critical subsystems (see Table
2.4). These characteristics make it possible to understand the organizations work
and how their behavior is related to systems approach.
Third, the concept of regulation refers to the feedback and self-regulation
property of living/open systems. Regulation marks the presence of equilibrium or
steady state (from section 1.1 p. 2). Equilibrium in a closed system is defined by
maximum entropy and minimum free energy (Bertalanffy L. , General Systems
Theory, 1969). Steady state is the ability of a system to sustain its operation even
when there is a constant interchange of matter-energy and information.
Bertalanffy (1969) explains, in General Systems Theory, that the concept for
steady state in open systems is where the system remains constant as a whole an
in its (macroscopic) phases, though there is a continuous flow of component
materials. (p. 125)
Equilibrium or steady state is an important concept in systems theory being
the self-regulative characteristic that allows a system to grow and develop.
Equilibrium can be achieved as static equilibrium, in the case of closed systems, or
as dynamic equilibrium when open systems are involved.

Static equilibrium is

present in a system when even some disturbances are involved; the resultant
behavior remains the same once the disturbance disappears. Dynamic equilibrium
is the changing yet finely-balanced condition which requires continuous
adjustments in order to maintain its present or stable state (Business Dictionary,
2007). Dynamic equilibrium means maintaining a certain order of processes when
some disturbances are present in the environment of the system (Bertalanffy L. ,
General Systems Theory, 1969). Another definition of dynamic equilibrium is the
property of the system that allows sustaining its present state under some
disturbances within the system. When the disturbance in the system is big it may

be possible to attain a different state than the initial state. This new state will
become the steady state in open systems with dynamic equilibrium allowing a
system to recover the trend, positive, neutral or negative, after a disturbance
occurs.
Another term related to regulation is homeostasis, which is the disposition
of living beings (and inanimate and approximately designed systems) to keep on
functioning at an optimum level, despite changes in the environment within certain
limits.

Homeostasis employs feedback mechanisms to maintain the dynamic

equilibrium of a self-regulating system. (Business Dictionary, 2007). Along with

homeostasis, autopoiesis, is the theory that living systems are 'self producing'
mechanisms which maintain their particular form despite material inflow and
outflow, through self-regulation and self-reference. Proposed by Chilean scientists
Maturana & Varela in late 1960s or early 1970s, autopoiesis combines the concepts
of homeostasis and systems thinking (Business Dictionary, 2007).
The fourth concept, equifinality, is the ability of the system to reach a final
state independently of the initial conditions and determined only by the system
parameters (Bertalanffy L. , General Systems Theory, 1969).
Bertalanffy confers a close relationship between equilibrium and equifinality
by saying It has been emphasized that every system attaining an equilibrium
shows, in a certain way, finalistic behavior, (Bertalanffy, General Systems
Theory, p.131). The finalistic behavior refers to equifinality as the goal and may be
reached even if different conditions and pathways are taken.
Homans and Curtis (1970) presented their own definition to Paretos dynamic
equilibrium:

This state is such... that if a modification were artificially introduced in it

unlike that which it in reality undergoes, immediately a reaction would be
produced which would tend to bring it back to the real state Under
'artificial changes, the old equilibrium is regained, but under more violent
changes a new equilibrium may be reached. (p. 271)
The interrelation of these four concepts (open systems, living systems,
regulation and equifinality) can be more appreciated in the Figure 2.1.
Another element that could be appropriate to mention as part of regulation
is feedback. According to Bertalanffy, the essential criteria for feedback control
systems are the following three:
a) Regulation is upon pre-established arrangements structures in a broad
sense.
b) Typical feedback system is linear and unidirectional.
c) Typical feedback or homeostatic phenomena are open with respect to
incoming information but closed with respect to energy and matter.

Figure 1.1 Interrelations among systems concepts

1.2.3

Living Systems Theory

Living Systems, according to Miller (1965), are made of matter and energy
organized by information. He defined a living system as a special subset of the
set of all possible concrete systems, composed of the plants and the animals (p.
203). Recall that a concrete system is a nonrandom accumulation of matterenergy, in a region in physical space-time, which is non-randomly organized into
coacting, interrelated subsystems or components.(Miller J. , 1965, p. 202).
Living Systems Theory is one of the best developed theories of GST. His
precursor, James G. Miller, developed a general theory, which oriented to deal with
structural and behavioral properties of systems. In his theory, Miller presents 20
basic functions or subsystems, besides the hierarchical structure of systems based

on its complexity (amount of interchange of matter-energy). The hierarchical

structure and a brief definition of the main function for that subsystem, is
presented in Table 2.4.
As shown, in Table 2.4 structure, Miller proposes that each level contains
the previous one. Along with the hierarchy, Miller proposed as a central thesis of
LST that living systems are open, composed by matter/energy, information, and
every system includes subsystems with processes that are essential for life. Those
living systems that carry out all the critical processes at their own level are called
totipotential systems(Suan, 2007).

Table 1.3 Hierarchy of Living Systems. Adapted from (Miller & Miller, 1990, p. 3)
Level
Description
Cell
Organ
Organism
Group
Organization
Community
Society
Supranational

A cell is the basic form of a system, which represents the

molecules union.
An organ is the upwardly dispersed to organism(Miller &
Miller, 1990).
An organism is the conjunction of several organs that are
working together to conform a unitary entity.
A group is a collection of organisms able to create new
entities.
An organization is a chartering group(Miller & Miller, 1990).
A community is a group of interdependent organisms
inhabiting the same region and interacting with each other
(WordReference, 2008).
A society is an extended social group having a distinctive
cultural and economic organization(WordReference, 2008).
A supranational system is a conglomerate of societies with a
mix of cultural and economic organization but with a common
objective.

The critical processes that Miller describes in LST, are represented by the
twenty basic functions or critical subsystems that a living system has to have
(having those functions by itself or throughout symbiotic relationships with other
systems). The twenty basic functions are presented in Table 2.5.
The most relevant concept for this research is the characteristics of a living
system rather than its definition. According to Miller (1965, 1978), there are eight
distinctive characteristics that every living system has:
a)
b)
c)
d)
e)
f)

They are open systems.

They maintain a steady state of negentropy.
They tend to be more complex than they should be.
They contain genetic material, usually known as DNA.
They are composed of protoplasm (in most part).
They contain an essential function called decider, which controls the
entire system.
g) They contain other critical functions or subsystems. If not, they have a
symbiotic relationship with other living or nonliving systems, which carry
out these functions in order to have them completely.
h) These subsystems are integrated (to form a whole) to conform a selfregulating, evolving unitary system.

Table 1.4 Functions/Critical-subsystems of a Living System. Adapted from

Miller(1978), Merker(1985) and Suan(2007)
Function
1.
2.
3.
4.
5.
6.
7.

Reproducer
Boundary

Ingestor
Distributor
Converter
Producer
Matterenergy
storage
8. Extruder
9. Motor
10. Supporter

Process

Process matter-energy and information

Reproduces another similar system

Holds together and protects components of the system

Process matter-energy

Brings matter-energy across boundary from environment

Carries various inputs and outputs around the system
Changes inputs to system into more useful forms
Forms stable associations of energy and matter
Retains various kinds of matter and energy over time
Transports matter and energy out of the system
Moves system to its parts in relation to the environment
Maintains spatial relationships among system components

Table 1.4 Functions/Critical-subsystems of a Living System. Adapted from

Miller(1978), Merker(1985) and Suan(2007)
Function
11. Input
transducer
12. Internal
transducer
13. Channel and
net
14. Timer
15. Decoder
16. Associator
17. Memory
18. Decider
19. Encoder
20. Output
transducer

Process information

Process

Brings information markers into systems

Receives and transforms information markers from within system
Physical routs for transmission of information markers
Measures the passage of time
Alters information into an internally usable form
Forms lasting associations among items of information
Stores information within the system
Coordinates, control and guides the system
Alters information from internal private code to a public code
Puts out information markers from system to environment

The relevance of Living System Theory in complex systems, such as

business organizations, is important because the structure defined by Miller,
supports the understanding of the behavior for this type of systems.
The transformation processes, commonly used in complex systems, are
governed by the laws of thermodynamics, stability and feedback /control theory,
natural variation and uncertainty (Chambers, Piggott, & Coleman, 2001). Thus,
any organization can be described as a complex system if it follows these three
characteristics. Of course, business organizations have feedback cycles that help it
to create stability in their processes; the behavior of business organizations show
natural (common) variation as described by Deming (1992); and concerning the
laws of thermodynamics, it is clear that having physical elements that integrate the
organization, business organizations are no doubt ruled by them.
Once the business organization is recognized as a complex system, the next
step in the process is to look at it as a living system. Miller (1965) presents a
living system as a special subset of a concrete system that possesses all of the

following characteristics: open system, persistent negentropy, it also contains

genetic material, composed of protoplasma, self-controlable, it contains other
critical subsystems or possesses symbiotic relationships that allows self-regulating,
developing and reproducing unitary systems with purposes and goals (Miller J. ,
1965).
Any business organization can be described, in systems terms, as a living
system. Three of the most relevant distinctions for living systems are non-zero
slope growth, dynamic equilibrium and non-normal behavior. These aspects are
not usual assumptions in statistical techniques that are stated based on
independence, normality, and in most cases, zero slope assumptions.

1.2.4

Technorganic systems

Technorganic

systems

are

formed by both

human

and machines

representing the close interaction and interdependence of living systems and

technological systems.

Furthermore, business organizations are considered

technorganic systems.
Any business organization can be described as the combination of at least
one of the following systems: technological, human activity (structure), social, and
human(Bertalanffy J. &., 2008). Organizations are systems composed of
subsystems (in other cases also called systems considering the System of Systems
Theory) with very specific functions. Recall that living systems (section 2.2.3)
concept states that the system has specialized subsystems or functions(Miller J. ,
1965). In the business organization case, these functions are performed by the
technological, human activity, human and social systems.

Technological systems are composed of technical entities such as

equipment, machinery, information systems and telecommunication networks.
These kinds of systems have as their main functions to support the organization in
their activities through hardware and /or software and to create the infrastructure
in which those activities are going to be performed.
Human activity systems (HAS) are formed by all activities required by the
system to fulfill the goals (Banathy, 2004)(Bertalanffy J. &., 2008). Its main
function is to create the structure of what is required for the organization.
Social systems are the conjunction of living components, their interactions,
interconnections and relations among them, as well as the interactions with the
environment and with the systems structure characterized by a specific
organization (Bertalanffy J. &., 2008)
As the final component of a technorganic system, humans are the people in
charge of executing the activities (established in HAS) and making decisions about
the infrastructure (technological system) and the structure (HAS) taken as the
frame of the culture of the organization (social system).
Figure 2.2 presents the connections among Technological, Human Activity
and Human Systems. In this figure, as is any system, feedback is represented by
dotted lines. It also shows how the culture becomes the context in which the
decisions are made, and the activities and technology are selected and performed.
The concept of technorganic systems is to describe and understand that
humans support the creation and improvement of technological implements in
order to facilitate the execution of activities within the system. It is also important
to consider that technological implements facilitate the augmentation of social
networks and the way the organization culture is understood.

Figure 1.2 Conceptualization of business organization as technorganic system

[Adaptation of exhibit 2 from (Bertalanffy J. &., 2008)]

The relevance of technorganic systems, in this research, is to understand

how a performance measurement indicator could be integrated in a control system
to give statistical follow up to continuous processes for trended systems.

1.2.5

Trended Systems

In section 2.2.3 it was shown that living systems have inherent growth
(increasing behavior) or decline (decreasing behavior). Business organizations as
any living system generally present a natural growth through time.
Organizations are meant to have certain growth, which can be designed,
given by the environment situations or defined by a benchmark with similar
systems. If it is the designed growth case, the organization defines some metrics
and strategies that allow the company to achieve the designed goal. In this case it
is important to have a tool that follows the trend and helps on deciding if this goal
is been achieved.
On other occasions, when a plethora of factors is involved, the environment
gives the growth trend and historical data that should be used to define the trend
used to evaluate if there is an anomalous behavior.

This is the case in most

economy indexes, such as GDP (Gross Domestic Product) or GNP (Gross National
Product).
Finally, the growth trend could be defined by a benchmark with similar
systems, in this case competitors market share or the knowledge gained from past
analysis are some of the ways to set the trend and with it, evaluate if the behavior
is not the usual.
When the behavior is anomalous or not usual, it is time to define corrective
actions. Actual statistical tools are based on assumptions of normality, non-trend
(non-zero slope) and non-correlated relationship. These assumptions are rarely
fulfilled in the practical environment. Thus, an alternative should be organized in
order to be able to make decisions based on statistical tools.