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Given this framework for "understanding the nature of the system", we will illustrate the notion by considering the dollar flow in a for‑profit engineering firm. You may not have any particular interest in an engineering firm, but the principles elucidated here would apply to any type of organization.
The dollar flow of the illustrative firm is shown in Figure 1.1. We will consider the business volume to be the causal variable, the net income to be the end‑result variable, and everything else to be intervening variables.
The business volume is broken down into these categories: labour, use of equipment and service centres, all other project costs, overhead (engineering department overhead, general overhead, and cost of capital), and fee. The general overhead is apportioned as direct expenses of engineering operations (funds allocated to the engineering departments) and indirect expenses (funds used to operate the company as a whole).
Effective managers understand the causal relations in this financial system. For example, they realize that increasing labour (time on projects) by one percent can have at least a 10‑percent impact on net income. They realize that a two‑percent overrun in project losses can cause a 20‑percent decrease in net income. Further, they realize that a fee increase of three percent can have a 30‑percent impact on net income. These multiplier effects are indeed noteworthy, and they are ever‑present in the mind of the effective manager.
Figure 1.1: Dollar flow in an engineering firm
Managers who understand this financial system also realize that it presents them with a number of important decisions. For example, will the return‑on‑investment with the marketing and proposals funds be better in the industrial arena or in the government arena? With the funds allocated for internal research and development, is it better to invest in a small number of really good ideas or in a large number of possibly promising ideas? With the funds for associations and publications, which particular associations and publications should be pursued? These are important questions, and the answers generated will determine the success or failure of the manager.
There are numerous other examples of important causal relations in the system, but these will illustrate the point that for you to be able to measure your unit's progress, it is essential that you understand the inner workings of the larger system.
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