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Understanding and Mastering Complexit

March 23, 2012 • Business Process, Global Business, OPERATION, STRATEGY & MANAGEMENT

By Wolfgang Amann, Christoph Nedopil & Ulrich Steger

Complexity is re-emerging as a topic in top management. A combination of factors, such as the severe repercussions of the financial crisis and the acceleration of technological change, has reminded executives of the challenge in not only surviving, but also strengthening their companies’ foundations so as to fully compete against others. This article presents two frameworks to support both these undertakings. The first depicts the crucial drivers of complexity in order to better understand its manifestations. The second framework portrays the complexity competencies needed by those seeking to proactively manage complexity. Especially international companies are encouraged to consciously hone such skills since, for example, crossing borders to benefit from foreign markets often entails a unique mix of problems.

Complexity – what else?

Every year brings a new array of top management books promising easy recipes for corporate success. These bestselling titles themselves often seem to convey a sense of certainty in moving your company from ‘good to great’ or ensuring that it is ‘built to last’ without clearly highlighting the significant methodological weaknesses that much of this advice is based on. Those authors following a more rigorous approach – after all, Peters and Waterman admitted to have faked the data1– in understanding companies find many of today’s solutions having a shorter than ever shelf-life. By the time the authors are done compiling and publishing their books, the world may have fundamentally changed. The next crisis may have hit, the next disruptive technology introduced or the next mega-merger fundamentally altered the industry’s structure. Moreover, these solutions tend to be highly situational and therefore less and less generalizable across different settings. Too unique are the various settings we find in different companies. In this sense, any company interested in finding the answers to their strategic questions are well advised to understand that complexity may well be the meta-challenge of our times.

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What really drives complexity?


Based on our business and executive education research2, we identified four fundamental drivers of complexity that are of relevance to a broad variety of industries and career paths as portrayed in Figure 1. Although we describe them sequentially, bear in mind that they are often interrelated and can crop up simultaneously – thereby making it hard to follow a reliable pattern for success.

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Diversity is the first driver of complexity. It exists and grows exponentially in international companies both in their internal as well as external environment. While one may find similar features across different companies, for example maintaining a HR department, the differing contexts provide a set of unique challenges for decision makers in each company. Alternatively, the external environment can, at times, contain drastically varying customer tastes and expectations – a major challenge for marketing executives. BMW’s advertising campaign, portraying a group of well-built sportsmen running in the shape of a sports car, was well received in Europe and thus exported to China. However, in China the local customers could not understand why a group of sweaty (and therefore most likely somewhat smelly) sportsmen would be a great symbol for buying luxury cars. In times of tighter budgets, companies cannot afford such mistakes too often.

 

Interdependence is a second driver of complexity. Interdependencies have become a major aspect of business due to an increased scarcity of resources and the disappearance of market boundaries. Markets, technologies, industries continue to integrate. For the first time in decades, developed western countries such as the PIGS (Portugal, Italy, Greece, Spain) are teetering on the brink of bankruptcy. The fate of these countries – as another sign of these interdependencies – threatens in turn the economic well-being of other countries. The interdependence makes for a turbulent business environment and consequently companies face the difficult challenge of deciding if and to what degree, they must integrate activities across countries to safeguard operations and secure synergies.

 

Ambiguity is our third driver in understanding the meta-challenge of complexity. It concerns the realities in many up-and-running companies where few clear cause-and-effect relationships can be ascertained. Is your company profitable because it is innovative, or is it profitable and therefore innovative? Does market share lead to profitability or the other way around? In these aspects, one struggles to know what the true levers for operating the business ‘machine’ are. The Shell scenarios of 2001 are a spot-on example of ambiguity. At that time, Shell had the biggest, most experienced and most expensive scenario development team on the planet. In 2001, these experts proudly presented two major scenarios about the future of globalisation. Little would these scenarios help the company in coping with the events that were to follow a few months later-neither the tremendous corporate governance scandals nor the terrorist attacks of 9-11. When even the plans from the best experts working on future scenarios overlooked not one, but two major developments in the short term, let alone the financial and economic crises that were to follow, then this is perhaps telling of the uncertainty in our business environment.

[su_pullquote]Fast flux is the greatest driver of complexity. It depicts a reality in which not only the overall speed of change is accelerating, but the number of directions in which we see change is multiplying.[/su_pullquote]

Fast flux is the fourth driver of complexity in the presented framework. It depicts a reality in which not only the overall speed of change is accelerating, but the number of directions and areas in which we see change is multiplying. Fast flux materialises in increasingly shorter product life-cycles, thus new dominant players can emerge faster than before. Groupon, the new kid on the block when it comes to impulse shopping already perceives itself as the new operating system of economies3. Hardly anybody would have anticipated that the rise of these daily email offers with substantial discounts would lead to these companies being valued in billions, in the case of Groupon currently at an astonishing 12.5 billion Euros within only three years of operations… In essence, fast flux is the greatest driver of complexity. Even if you have figured out an answer to dealing with diversity, interdependence and ambiguity, these solutions may be outdated the next day.

[su_pullquote]A holistic and proactive management team should start with a thorough reality check on a company’s as well as key individuals’ competencies in the area of complexity.[/su_pullquote]

How to manage complexity in practice?

A holistic and proactive management team should start with a thorough reality check on a company’s as well as key individuals’ competencies in the area of complexity. Figure 2 presents a framework with different levels for respective competencies. Complexity management initiatives must be in line with the company’s available or developed competencies. It is a journey of discovery as well as purposeful leadership development which must take place before companies really compete instead of merely surviving or muddling through complexity.

 

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Level 0 – endured ignorance: Leaders and managers stuck on this level continue to think and communicate that everything is perfectly under control. They ignore complexity within or outside of their company and thus find no inclusion in Figure 2. They may wonder where success really comes from or, in the case of failure, would blame competitors, the market, ‘red tape’ or ‘headquarters’ instead of seeking transformation. Complexity is often not understood holistically, but too narrowly, e.g. as being about cutting product variety or standardization of core processes or the offer in general. At this level, marketing colleagues fear that managing complexity means limiting the variety of products offered, thus lowering the chances of marketing success. Colleagues in research and development would reject it similarly as the latter frequently see their own as well as their company’s success being built on ‘the pride to invent.’ Complexity management may well limit the room to manoeuvre and runs counter to previous success principle of being innovative at this level. The inability to change such a mind-set as well as the lack of seeing complexity management’s real potential characterizes the situation of competencies at this superficial level.

 

Level 1 – acceptance and comprehension: Representatives here at least acknowledge that there are complexity problems. In addition to some limiting and thus at times demotivating elements, they see the potential of a complexity management version 1.1, which no longer looks backwards to erase variants in production and marketing offerings alone. Version 1.1 is looking ahead and adopts a proactive approach to planning product varieties and organizational complexity in general. Version 1.2, in contrast, moves towards a perception of complexity management as a strategic weapon4, the critical success factors. Developers see no longer restrictions, but more opportunities to innovate and self-actualize. The finance colleagues appreciate growth opportunities while cost can be cut. Version 1.2 thus receives the nature of something close to a panacea – if managed well! Leaders and managers at this level are also able to create transparency about the very drivers of complexity most active in their companies. They understand the ‘complexity hotspots’ in their companies – those areas and aspects which, if mastered, would have a significant positive impact on the competitiveness of their firms. Competencies at this level are rather limited to creating and spreading an understanding about the potential of complexity management. Building company-specific solutions, in turn, requires additional competencies.

A case in point of a company in need of honing its level 1 competencies is Wal-Mart. After burning a billion Euros in South Korea and another 1 billion Euros later in Germany, the company exited both markets. The CEO was recorded as saying in a press conference, “Did you know? The Germans use a different pillow sizes than we do.”5 A centralized procurement department located in the US bought goods destined for Germany without considering the local market differences. Needless to say, the German shoppers were not satisfied with these products on offer. In hindsight many such blunders could easily have been avoided since enough experts and market research companies were available at reasonable cost levels to conduct the needed homework.

 

Level 2 – concentrated interventions: Leaders and managers at this competency level move beyond a cognitive acceptance or true ‘verstehen’ to the actual doing part. The focus of attention thereby moves to isolated areas at level 2 to the corporate level at level 3, and to the cluster level later on. There is a noticeable embrace to build solutions in dealing with complexity. On the basis of a few criteria, they measure the success of change taking place locally in a simplified way. Such change, though, is often limited to one function, one business unit or the technological core of the company. To ensure success, the leaders involved in these interventions have understood that one-dimensional skill profiles will surely not suffice. Beyond, for example, the technological acumen, strong change skills as well as project management expertise is needed. Without properly motivating people, results will not materialize. The leaders have understood that they are not only in the business of creating solutions, but developing people and talent. They must lead by example and allow the lower level managers to rise to the challenge. Leadership moves beyond mere goal-setting, monitoring, rewarding or punishing. It is about playing larger and varying roles, requiring individuals at times to be visionary, the source of inspiration, or the challenger – without being consumed by these high demands.

An example of a company stuck at level 2 competencies may well be HP.6 Active in implementing ERP software solutions in other companies, its management failed in installing such a system in its own company. Believing technological solutions are enough, the assigned project managers believed their job ends with designing a project plan and then moving straight to implementation. Understanding the changeability of the company or clear barriers in some departments was not on their radar. A technology or IT perspective alone will not suffice. Centralized, standardized software can be a great simplifier, but concentrated interventions represent at times an insufficient solution for complexity management.

[su_pullquote]Centralized, standardized software can be a great simplifier, but concentrated interventions represent at times an insufficient solution for complexity management.[/su_pullquote]

Level 3 – integrated pervasive solutions: Leaders and managers at this level seek for cross-functional, cross-unit solutions to address complexity challenges. They must exhibit even higher levels of communication and stakeholder management skills to convince alpha-type personalities with substantial accountability and autonomy to join new ideas. Integrating, for example R&D and marketing, to provide open innovation solutions online can however be very challenging, since such actions change the level of autonomy and reshape the previously established roles. Such transformational change bears a complexity of its own. Needless to say, companies that successfully embark on developing such competencies – and make good progress on learning curves – can grow their returns on such transformation processes exponentially.

A role model of this would be Daimler’s efforts in restructuring its global procurement activities in their commercial vehicle division. After purchasing a variety of brands internationally and thus reaching a truly global scope, the company managed to install one IT system, supplemented with a single reporting culture embedded in a procurement organization spanning several procurement centers around the globe. Each had their own main responsibilities. Consequently, their members felt highly motivated as there was sufficient decentralization. The company hit a well-defined sweet spot on how much to centralize and decentralize. A reasonably complex governance and coordination scheme with the board, country managers, R&D colleagues, enterprise-wide talent management and product unit executives co-evolved. Within three years only, the transformation was completed and the scale could provide additional profits. The harmful impact in having different IT systems was ended and the company was able to leverage its available talent globally, to name but a few of the advantages.

 

Level 4 – network and cluster solutions: These companies represent those that are determined to not only survive, but to develop winning recipes at this level for corporate boundary management and the potential of value webs play a critical success factor. They know their internal resources and those of other players well enough to imagine valuable combinations beyond the traditional corporate boundaries. While feeling comfortable with such more complex setups, they remain alert to complacency and diverging interests at different life-cycle stages. Energy and focus are highly concentrated on the complexity hotspots located in each situation. Yet, there is sufficient patience and expectation management carried out to harvest the first fruits, which may take longer given that now two or more organizations have to co-evolve. Complexity measurement systems become broader. Leaders and managers here acknowledge that they are not operating a machine with levers. They provide guidance, a corridor for organizational co-development. They regulate if need be with the right degree of diplomacy and perseverance.

The strategic alliance between Renault and Nissan emerges more and more as an exemplary company of level 4. During the perceived ‘endgame’ in the global automotive industry a decade ago with mergers and acquisitions reaching unprecedented heights, the two alliance partners made two smart choices. While Daimler and Chrysler merged and split within years, destroying 50 billion Euros in shareholder value, the French-Japanese alliance did not attempt to integrate fully since the two had very different national and organizational cultures. After all, mergers of equals hardly exist. Specifically, the pride among employees was kept intact by avoiding the perception of subordination of one company to the other. Integrating platforms and R&D on a global basis is of course challenging. The alliance is still not without its moments of frustration. Yet years after learning how to deal with each other, annual synergies across the value chains pass 2 billion Euros.7

 

Level 5 – creative destruction: Leaders and managers at this level never rest on their laurels. They may well be proud of their work, but never fall helplessly in love with their current achievements. They have understood that every new business year, at times every new month or week, brings along its own challenge. Schumpeter’s creative destruction characterizes best what the competencies at this level produce. Leaders and managers are able to openly acknowledge that their previous best results may simply be outdated sooner than they may wish for. They can creatively destroy existing solutions to complexity challenges – before the competition or the customers force them to do so. Managing complexity at this level can even go as far as to fully replace the deep assumptions on how complexity should be handled within the company. Leaders and managers at this level drive complexity and especially flux for competitors. They adopt ‘dynamic complexity capabilities’, i.e. the ability to rapidly adapt new complexity skills and unlearn old ones. They know their organization and network partners well enough to understand when and where the seeds of innovations are best placed.

When it comes to an example from the corporate world, easyJet emerges as a case in point. For 10 years, the company was built on simplicity. One type of airplane lowers training cost for pilots as well as maintenance. Point to point flights and consciously avoided integration of IT systems with European booking systems avoiding complexity cost. Its headquarters continued to be small, showing very few and small extensions only, although sales grew exponentially. After a decade, after really learning how to master simplicity, the company embarks on complex and expensive IT integration and an additional layer of (billable) services. The result is a more complex value chain to operate flawlessly. What would clearly have been vetoed only a few years ago is now perceived as a necessity for future success. The fundamental, underlying assumptions have been profoundly changed.

[su_pullquote]Only after reflecting and assessing each competency level while bearing the internal and external issues in mind, can the specific complexity management steps be taken.[/su_pullquote]

Do we need a contingency approach to complexity management?

As a consequence of the different levels of competencies in international companies, the ‘right’ complexity management thus turns into a very situational challenge. Only after reflecting and assessing each competency level while bearing the internal and external issues in mind, can the specific complexity management steps be taken. Consider the four generic strategies to simplify organizations as an illustration of this contingency approach8:

• Common goals and behaviours: Up to 95% of managers in mid-sized to large companies do not know the specific part of the overall company strategy that is relevant for them.9 There are issues with communication (e.g., confidentiality). By establishing common goals and behaviours certain values take shape within the organisation acting as guiding stars for those in doubt and therefore drastically simplifying the internal environment.
Focus: Bruch and Goshal10 found that only 10% of individual managers in mid-sized to larger companies actually have sufficient energy and focus on the few projects that could increase their teams and their company’s performance. Adequately placing a focus on where it is highly needed in organisations represents a promising avenue towards success.
Decentralisation: is a third generic strategy that also indicates how focused projects should be managed – by those closest to where the main tasks are delivered. In mid-sized to larger companies, as a general rule of thumb 75% of employees suffer from inner withdrawal – a lack of real care concerning the company. Decentralisation can help to keep your colleagues more motivated and out of the boredom-zone, which can easily affect up to 66% of staff11.
Standardisation of core processes: Each company and industry is likely to have its own opportunities regarding how to manage its core processes. Different standards lead to unacceptable inefficiencies. Usually, the unbearable feeling of having to reinvent the wheel time and again can be a good indicator of where to start looking for the possibilities to implement core processes.

[su_pullquote]Companies are encouraged to consciously track and hone their complexity competencies. Complexity management can thus materialize its potential as a strategic weapon.[/su_pullquote]

However, such insights alone will not suffice in the implementation phase. Merely experimenting can easily turn into a ‘bet the company’ risk. The question for companies at level 1 thus becomes how to enhance their skills. In turn organizations which managed complexity interventions in isolated areas or throughout more units are by no means ready to succeed in cross-company deals. In fact, most mergers and acquisitions fail and in these settings leaders and managers have usually substantial formal authority over what decisions are taken. This is not necessarily the case in networks, which require yet another set of competencies.

 

Conclusion

We have outlined what drives complexity. Establishing a joint frame of reference is already the first step crucial in understanding and managing complexity. An honest situation analysis of what competencies exist within the company must ensue – with the pending challenges in mind. It is likely that future business environments will by no means represent a stroll in the park. Companies are therefore encouraged to consciously track and hone their complexity competencies. Complexity management can thus materialize its potential as a strategic weapon, moving beyond the negative connotation and implications perceived by an outdated complexity management version 1.0 as outlined above.

*The article is based on materials from Managing Complexity in Organizations: Text and Cases, by Nedopil, Chr., Steger, U. and W. Amann (2011). Palgrave Macmillan.

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About the authors

Dr. Wolfgang Amann graduated from Harvard University’s Institute for Management and Leadership in Higher Education as well as with a doctorate from the University of St.Gallen in Switzerland. He held several leadership positions in business schools and serves now as a member of the managing board of Schuh & Co. Komplexitätsmanagement AG in St.Gallen.

Dr. Christoph Nedopil is Managing Director of the award-winning innovation consultancy YOUSE. Christoph Nedopil has previously been research associate at IMD for more than three years and has been engaged in academic and business research, as well as in the development of numerous executive education programs. He finished his PhD on the topic of corporate governance in emerging economies at the Technische University in Berlin.

Professor em. Dr. Ulrich Steger has worked for IMD, leading the research and educational programs in the disciplines of complexity management, sustainability management and corporate governance. Before entering academia, he was active in politics as Minister of Economics and Technology in the State of Hesse and in the German Federal Parliament. He is an experienced board member.

 

References

1.http://ffbsccn.wordpress.com/2010/10/
19/the-halo-effect-a-book-review-by-bob-morris/


2.Nedopil, Chr., Steger, U. and W. Amann (2011). Managing Complexity in Organizations: Text and Cases, Palgrave Macmillan.


3.http://www.spiegel.de/netzwelt/web/
0,1518,810946,00.html


4.Acknowledging fruitful discussions on versions of complexity management with colleagues at Schuh & Co.


5.Amann, W. (2007). Managing complexity in global firms starts by understanding global businessenvironments. In: Henley Manager, Summer 2007, p. 14.


6.Verma, D. and P. Gupta (2009). ERP Imple-mentation Failure at HP. ICMR case study.


7.http://blog.alliance-renault-nissan.com/media-resources/presskit


8.Nedopil, Chr., Steger, U. and W. Amann (2011). Managing Complexity in Organizations: Text and Cases, Palgrave Macmillan.


9.Norton, D. and R. Kaplan (2005). Creating the office of strategy management. Working paper.


10.Bruch, H. and S. Goshal (2002). Beware the business manager. In: Harvard Business Review, Vol. 80 (2), pp. 62-69.

11.For a full review on the bore-out zone and ways forward see Krueckeberg, K., Amann, W. and M. Green (2011). Leadership and personal development. IAP.

 

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