A system is any interconnected set of elements working together to accomplish a broader purpose. Systems thinking is the ability to understand what kind of system(s) are useful to consider in a given scenario, how those systems work, and how to direct the systems to shape their behavior.
The interesting thing about systems thinking is that, once you have grasped the fundamental concepts, you start seeing systems everywhere (because systems are, in fact, everywhere).
Just like with knowledge management, a good understanding of systems thinking is essential for any knowledge worker working on even moderately complex problems. Needless to say, strong systems thinking skills are a critical aspect of good leadership.
Thinking in Systems is an excellent read on the subject.