The underlying premise of any organization is to create value. Historically, firms have done so through engineering ever greater efficiency. By honing internal processes, optimizing the supply chain and reducing product inventories, managers could improve margins and create a sustainable competitive advantage.
That’s created a bias for simple, linear thinking. Adding extra variables to any process is bound to increase errors and diminish quality, so generations of managers have been trained to wring complexity out of the system in order to create streamlined operations. “Keep it simple, stupid” has become a common corporate mantra.
Yet in today’s networked marketplace, agility trumps efficiency. Innovation has become the primary driver of value, which means that you need to constantly identify and incorporate new ideas, many of which do not fit into neat little boxes. That’s why managing complexity is emerging as a core business skill. You can’t create truly new value without it.
The first step to managing complexity is to understand that there are different types of complexity. The first, the complexity of an entity, like steps in a process, almost always should be reduced for the same reasons that you’re high school math teacher insisted that you factor down your answers. Simplifying entities makes them easier to understand.
The second type of complexity, that of a system, is unavoidable and often leads to nonlinearity, such as accelerating returns. This facet of complexity can be troublesome because it makes it easy to dismiss disruptive events. Yet these often advance at an exponential rate, as seems to be happening now in energy.
The final type, emergent complexity is what happens when chaotic interactions between entities combine to create something completely new and unexpected, such as in a Mandelbrot set, the swarming patterns of birds or the pattern of activity in an organization. We can—and often do—minimize this type of complexity, but we shouldn’t.
While many companies work hard to keep things linear and simple, innovative firms work hard to embrace emergence. Bell Labs, for example, designed its workspace to encourage random interactions. Steve Jobs did so as well. Google encourages its employees to work on their own projects. It is this type of complexity that we want more of, not less.
In Why Information Grows, MIT’s Cesar Hidalgo argues that emergent complexity is a primary driver of value. The reason is that products and services are far more than the result of a particular set of inputs and processes, but derive their value by “crystallizing imagination.”
To see what he means, take a company like Apple. Its first hit product, the Apple II, crystallized the imagination of not only Steve Wozniak and Steve Jobs, but also that of the other members of the Homebrew Computer Club, whose meetings they attended. Later, the imagination crystallized at Xerox PARC helped lead to a second hit product, the Macintosh.
At the same time, while the linear thinking at Xerox led to a highly efficient corporate machine that made the world’s best copiers, it’s failure to embrace the ideas coming out of PARC led it to miss important opportunities. Sure, it seems foolish now, but at the time, Xerox executives were following a time tested, simple formula for success—optimizing processes for predictability, rather than for emergence.
Innovation is never a single event, but tends to follow a long and twisted path. It’s what emerges when complex networks of ideas combine to solve an important problem. That, in essence, is how value is created.
A Failure in Complexity Management
The need to embrace complexity is fairly obvious in high tech industries, but Zeynep Ton argues in The Good Jobs Strategy that the same principle also holds true in industries that we wouldn’t ordinarily associate with creativity and innovation. According to her research, the same type of linear thinking that doomed Xerox also impairs performance in high volume, low cost retail.
Conventional thinking in the industry says that to protect margins, labor costs must be minimized. So it is common for retailers to pay low wages, invest little in training and reduce the number of people working in the store at any given time to the absolute minimum. Yet Ton, an operations expert, found exactly the opposite.
The problem is that low paid, poorly trained and overworked staff tend not to contribute many ideas that can improve a business and when you set up an organization to only crystallize the imagination of those at the top, you are limiting your capacity to create new value.
For example, when the recession hit in 2008, Mercadona, Spain’s leading discount retailer, needed to cut costs. But rather than cutting wages or reducing staff, they asked their employees to contribute ideas. The result was that they managed to reduce prices by 10% and increased their market share from 15% to 20% from 2008 to 2012.
Interestingly, Ton also points out that that many successful retailers are reducing complexity in some places so that they can embrace it in others. Trader Joe’s, for instance, limits the numbers of products it carries, partly because that allows its employees to become experts on the products the store does carry and manage complex customer interactions.
Competing in A Networked Economy
Clearly, the marketplace has been transformed. Earlier generations of managers were trained to engineer efficiency by optimizing value chains. Processes needed to be standardized and streamlined so that they could achieve maximum efficiency. That, in a nutshell, is how you built a sustainable competitive advantage.
Yet today, as processes become increasingly automated, gains from efficiency are harder to achieve and the ability to collaborate is becoming a key source of competitive advantage. It is no longer the assets that you own and control that will determine what you can achieve, but those you can access.
These days, we need to access ecosystems through platforms. In other words, value is created at the center of complex networks and the center of any network is always a chaotic place. Apple, for example, cannot simply dictate terms to the developers on its App Store, any more than retailers can bludgeon their workers to come up with creative solutions to problems.
And that’s why managers need to embrace complexity. Not because it will make their enterprise more efficient—it won’t—but because that’s what will allow them to create maximum value in an increasingly complex marketplace.
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Greg Satell is a popular speaker and consultant. His first book, Mapping Innovation: A Playbook for Navigating a Disruptive Age, is coming out in 2017. Follow his blog at Digital Tonto or on Twitter @Digital Tonto.