Business complexity has globally increased in the last three decades. Scope and diversity of products, services, processes and stakeholder relationships have significantly grown.
The growth of complexity has come at a price: The world’s largest companies are on average losing more than 1 billion dollar each due to unnecessary complexity. At least this is what the Simplicity Partnership and Warwick Business School found out in a study conducted in 2011. [Mick James: Putting a price on complexity, Consultant News, 17 March 2011]
Factors Driving Complexity
A number of factors have contributed to surge of business complexity. The main drivers have been the growing interdependence of companies and markets in a globalized economy as well as digitization and the Internet, which have enabled globalization and accelerated the pace of global business.
The ability to cope with complexity has become a central success factor for all businesses. What makes it challenging is that complex systems do not behave in a linear predictable way, but are rather non-linear and unpredictable. That makes decisions in a complex environment rather difficult.
The American computer scientist Alan Jay Perlis (1922 – 1990) half-jokingly summarized the options people choose for dealing with complexity as follows: “Fools ignore complexity. Pragmatists suffer it. Some can avoid it. Geniuses remove it.”
All responses mentioned by Perlis usually don’t work in today’s economy. Ignoring business complexity comes at the price of lower effectiveness and competitiveness. Just suffering and not doing anything about it leads to the same result. Avoiding complexity is practically impossible for most businesses. And removing complexity is next to impossible as well, even for geniuses.
In order to better understand the options businesses have for dealing with complexity, it is important to first understand the different types of complexity. There are basically two.
Internal and External Complexity
Internal complexity means the complexity inside a company as distinct from external complexity, which relates to complexity outside of a company in a business sector, country, or region.
Factors driving internal complexity include organizational structure, type and number of processes, a silo-oriented corporate culture, and business activities like product and service development and mergers & acquisitions.
External complexity, on the other hand, is often caused by regulation, new technologies, and market developments as well as environmental and political changes. In contrast to internal complexity, executives even of large companies usually only have very limited influence they could leverage for reducing external complexity, for example by softening regulation impacting their business activities.
Internal complexity, however, can be directly influenced and reduced through executive decisions on structures, processes, personnel, and products. Especially in large companies, restructuring has often led to unnecessary complexity which negatively impacted the bottom line.
Strategies for Dealing with Complexity
In order to cope with complexity, you need to define and implement adequate strategies.
There are three basic strategies you could apply for dealing with internal and external complexity:
- Avoid increasing complexity
- Reduce complexity
- Adapt to complexity
Let us have a closer look at how to apply these basic strategies in practice.
1. Avoid increasing complexity
Imagine you are the CEO of a small company that is growing quickly in terms of turnover and employees. At some point, you will no longer be able to make all major decisions and need to rethink your company structure. This is the point, where quite often unnecessary organizational complexity is added. Do you really need another management layer? Consider an alternative that avoids increasing complexity, like, for example, empowering team leaders to take more far-reaching business decisions instead of inserting a middle manager between them and you. There is no universal solution to this challenge. Just make sure you avoid adding unnecessary complexity.
2. Reduce complexity
One of the major problems Nokia had until recently was that its product portfolio in the mobile phone domain was too large and diverse. It added huge organizational complexity, undermined marketing, and confused consumers. Apple, in comparison, just offered one mobile phone, the iPhone. It kept the organization focused and facilitated branding.
3. Adapt to complexity
In many cases, you will not be able to contain external complexity. In this case, the best option you have is to adapt to it. Take, for example, environmental standards in manufacturing. If your company is not one of the big global industry players, your chances of influencing regulation are rather slim. The only reasonable choice you have is to know and understand regulatory changes early in advance and adapt your production processes and outputs accordingly. Adapting early and efficiently to external complexity that you cannot control will give your company a competitive advantage compared to those industry players who are dragging their feet in implementing new regulation.
It is up to you, whether you allow complexity to undermine the effectiveness and profitability of your organization by letting things happen, or if you choose to take the bull by the horns and actively tackle complexity. Companies like Apple that have demonstrated how to conquer complexity can serve as benchmark for your own strategies for coping with complexity. To a certain extent, complexity is inevitable in a globally networked economy. Where you establish a competitive advantage is in how much of the unnecessary complexity you can avoid or remove.
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