The VSM Guide

An introduction to the
Viable System Model
as a diagnostic & design tool
for co-operatives & federations

Jon Walker

Version 3.0 (2006)

Section 0: Cybernetic Eyes
Section 1: The Quick Guide to the VSM
Section 2: Case Studies
        Hebden Water Milling 1985
        Triangle Wholefoods 1986
        One Mondragon Co-operative 1991
Section 3: Preliminary Diagnosis
Janus interlude
Section 4: Designing Autonomy
Section 5: The Internal Balance
Section 6: Information Systems
Section 7: Balance with the Environment
Section 8: Policy Systems
Section 9: The Whole System
Section 10: Application to Federations

Appendix 1: Levels of Recursion
Appendix 2: Variety


In this Section you will be looking at the way that your enterprise deals with changes in the environment in which it exists.

There is no point in having a superbly organised internal environment if the enterprise as a whole is completely out of touch with the environment in which it operates. The rate of change of technological advance continues to accelerate, and businesses cannot afford to stand still and ignore the changes in the market. Currently, computer software designers consider themselves lucky if a particular program leads the market for more than a year.

The focus for these issues is System 4 which is responsible for future planning in the context of environmental information which it gathers.

System 4 must provide the balance between the internal Operational units and the outside world, and must ensure that the organisation can adapt to change.

Graphical Overview

The following diagram illustrates the relevant parts of the VSM involved in this Section.

It shows:
  • the external environment on the left hand side

  • the connection between the external environment and System 4

  • the intense involvement between Systems 4 and 3 shown by the large semi-circular arrows

  • the over-seeing of the System 4-3 involvement by System 5 (policy)

  • the connection from System 3 to the Operational units which was covered in the preceding Sections of the VSM Guide.

The issues which will be addressed in this Section are:

  • How does System 4 keep in touch with the outside world?

  • What capabilities does System 4 need in order to formulate its plans which are needed to ensure that the enterprise can adapt to the changes in the environment.

  • What is the role of System 3?

  • What is the role of System 5?

Connection to the External Environment

System 4 is charged with dealing with future planning in the context of the external environment. Clearly, the first job for System 4 is to decide which part of the (infinite) external environment is of direct relevance.

The VSM distinguishes between two kinds of external environment:

The first is the Predictable which can be monitored. Trends may be identified and decisions made accordingly.

The obvious example of this is the way that a market is changing.

In most businesses it is clear that as market trends alter, the business must adapt. Most large corporations spend enormous amounts of money on Market Research and on running experiments in selected areas to assess the mood of the consumer.

The second is the Novel. Things may be proceeding just as you expect and then someone invents the light bulb. Clearly every Viable System must have some provision for coping with the novel, even if it's only being aware of development programs in the relevant areas.

Connection to the Internal Environment

System 4 has to be an integrated part of the Viable System. Its main internal connection is through System 3 which is charged with stabilising and optimising the internal environment.

The intense interaction between Systems 3 and 4 was mentioned in the Preliminary Diagnosis. This is essential as all plans must evolve in the context of both external threats and opportunities, and of the internal capabilities of the System-in-Focus.

The example of a new warehouse was given earlier - System 4 needs to look outwards (at possible sites, financing options, etc. etc.) and to look inwards (necessary square footage, headroom, hygiene standards, etc.) and to make a decision in the light of both sets of information.

In practical terms this means that the need for good communications between Systems 3 and 4 must be recognised.

There is no point in having these two essential aspects of viability working in isolation.

  • The people making future plans must be in touch with, and take account of, the internal capabilities of the organisation

  • The people charged with the overview of the internal environment must be aware of the plans being formulated by the future planners.

The Role of System 5

It's clear that at some stage, decisions will have to be made about the investment to be made in System 3 and System 4.

If the balance is not made correctly disaster may ensue:

Too much emphasis on System 3. Internally, the systems may work wonderfully, but without System 4 the products may become irrelevant E.g. perfectly designed and manufactured Sedan Chairs.

Too much emphasis on System 4. The future planning may be impeccable but the Inside and Now may be incapable of producing the goods. In this case, the kind of product may be exactly what the market needs but their quality or price may make them unsaleable.

An example of this kind of imbalance is illustrated by Clive Sinclair's production of electronic calculators. His research and development was superb, but the organisation was not viable as his production cost were too high. Too much System 4: not enough emphasis of System 3.

It should be noted that his next venture got the balance right. The ZX computers were well conceived and well produced.

It should also be noted that his Electric Cars displayed his first error in System 4: they were not what the market wanted and despite good quality and prices were (in the UK at least) a complete flop.

The decisions about the investment in Systems 3 and 4 have to be made at the policy level. The decision will have to be made in terms of the nature of the business, and the speed with which the market changes.

This is a job for System 5.


System 5 must also play a crucial role in over-seeing the interplay between Systems 3 and 4.

System 5 is responsible for policy and as such defines the ground rules, or ethos, within which everyone must function. System 5 says "We are the kind of organisation which works like this, so you can do this but not that."

System 5 should not interfere in the day to day running of the organisation, but it needs to keep an eye on what is happening, and to ensure it is within the guide lines it has established.

Thus System 5 oversees the interplay between Systems 3 and 4 as they formulate plans in the context of both the external and internal environments.

Step 13 Design the Balance with the External Environment

13.1 Look at your methods of finding out what's happening in the external environment which is of direct relevance to your organisation. Do you continuously monitor changes in the market? Do you attempt to identify areas in which novelty may have a direct impact?
13.2 In the light of the information about the external environment, look at the way your System 4 formulates plans which are meant to ensure your organisation can adapt to change. Does System 4 have enough resources? Does it have a focus for continuous Operation? Can it simulate possible future situations?
13.3 Look at the communications between Systems 3 and 4 (the external and internal eyes). Do the future planners have a thorough and up-to-date model of the Operational parts of your organisation? Is System 3 regularly consulted in the formulation of future strategies?
13.4 Make sure that this process is monitored by the Policy bodies to ensure that future plans are within the guide lines specified by System 5.
13.5 Look at the allocation of resources between Systems 3 and 4. Is there a balance between the needs of an efficient internal environment and the need for an effective System 4 to ensure adaptation to change?

Example 1: Small Co-operative

In a small co-operative most of this is taken care of through the mechanics of thorough discussion.

Systems 3 and 4 are the same people and so the necessary communication is straightforward.

The System 4 plans will be made with thorough knowledge of the capabilities of the Operational units.

Allocation of resources must be performed by deciding to put time aside to look at markets, and to formulate plans.

But, basically the system can work well, as long as the need for these functions is recognised.

Example 2: Large Co-operative

The perceived need for a System 4 in large co-operatives seems to vary enormously.

Some co-ops seem to function without any continuous focus for future planning and with sporadic bursts of activity when the need becomes obvious. Most of these co-ops function in markets which are not in a rapid state of flux, and have survived without a well defined System 4. Their viability depends upon the markets continuing in this mode, or upon the realisation that continuous future planning is a necessary function.

Other co-ops recognise the need for System 4, which is often carried out by one of the founder members.

Example 3: Mondragon

At every level, the Mondragon co-operatives take System 4 functions very seriously.

They monitor market trends, and technological advances and ensure their production techniques are state-of-the-art. They do their own research and development and from the evidence I had from my visit, they are fully adapted to the external environment.

Currently one of their main preoccupations is with the unified European market, and how it will affect their market position.

It is difficult to assess their allocation of resources without a thorough study, but their seem to put equal emphasis on their future plans and simulations and upon the need for efficient production techniques.