The Organization Needs to Combat Entropy (disorder) to Survive

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Dr. John Psarouthakis, Executive Editor, The Business Thinker.

This is a brief summary of the issue of disorder in Dynamic Management of A business.

Every organization needs to combat entropy or disorder to survive. The natural course of the universe is toward further disorder, according to the Second Law of Thermodynamics. But on a local level, order can be restored. You can counter entropy within your own company by understanding how open systems fight chaos: Inputs are brought into the system, transformed in some manner, and then exit as outputs. These outputs (your products or services)—are then exchanged for new inputs. To counter entropy, this input-transformation-output (I-T-O) cycle must continually repeat itself during the life of the enterprise. The more efficient the transformation process, the more resources are left over for future use.

Consider the for-profit enterprise. Inputs of money, people, information and materials enter the system, and are transformed in a way that adds value to the inputs. When the finished products or services are sold, output is returned to the environment in exchange for more inputs (usually capital). The inputs used in the transformation process might be viewed as “costs” in operating the system. To operate efficiently, the ratio of outputs to inputs must be greater or equal to one. The system must operate efficiently over time, or it will eventually run out of resources. To operate effectively, the system must also add value to the inputs as they are being transformed or no one will desire the product. Adding value may take many forms: The manufacturer takes raw materials and converts them to finished goods; the distributor transports goods to a more central location; the retailer helps to build awareness of various product lines through advertising and by bringing product close to the end-user. In the service business, employee skills and information are combined to provide a service. Usually the biggest challenge at start-up is to get this cycle going—to determine a need to fill, to locate the resources to get started, to produce goods or services of adequate quality, and to build up a reliable customer base so that fresh inputs (typically money generated from sales) enter the system on a predictable basis. In most start-ups, this simplified model provides a sufficient explanation of the key challenges faced by the new business.

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