Reference Points

Practitioners of complexity How well-established companies have long used complexity principles and why they are increasingly relevant.

Scandinavian pioneers Why it is that the trend to abandon budgeting is so strong in Scandinavia.

Change is changing The ‘phase transition’ in the nature of organizational change brought about by the accelerated flow of information.

Reinforcing loops and lock-ins The contradictory laws of increasing returns and co-evolution.

Why it matters The need to move the strategic focus from planning to ‘learning and imagining’.

Embedded accidents Why organizations need to encourage more mistakes.

Old management assumptions work for fewer and fewer organizations each day. Soon they will work no longer for anyone. Those who persist with traditional command and control and corporate planning will be more and more frustrated. If it hasn’t hit you yet, it’s coming soon.

The new world needs new ways of thinking, new ways of managing. Chaos and complexity theory can give us the basis of the new rules of success.

theory is about self-organization, interdependence and co-adaptation.

and contributed actively to the technical development of the service. They created a complex system.

Complexity is not new. It is nature and has been the way that the world and all systems within it have evolved. Complexity is more than complicatedness. A machine may be complicated, in the sense of having many pieces and connections, but it is predictable and ordered. A system is complex when simple rules and relationships produce emergent behaviour. A plant or animal is complex. So are bacteria, ant colonies and beehives.

Many people think of their organizations as machines and to try to run them accordingly. A label such as ‘reengineering’ can only be conceived in the paradigm of the machine. Reengineering has failed so many times when people have ignored the rich complexity that really constitutes the business and have sliced through it in one dimension, achieving efficiencies but stripping out all the relationships that allow creativity and adaptability to emerge. The reengineered organization is typically excellent at doing a very narrow range of things in a prescribed way, but not good at adapting or being a nice place to be.

flexibility. It allows processes to emerge and adapt. It is natural. This type of reengineering works by weeding out the choking processes and dysfunctions that typify controlling, bureaucratic functionally-split organizations.

Practitioners of Complexity

holding to its corporate ethos and value set.

In a complex system, strong values are a critical success factor because you have little else to guide you. At the same time, values must be critically re-assessed regularly to ensure they remain based on a sound mental model of beliefs and assumptions. The valuing of control and hierarchical position made sense in an environment where long-term planning seemed possible and loyalty was measured in years rather than results. Today, new values are needed.

Complexity theory is increasingly relevant to business because we operate in a system of close connections. And in recent years the connections have become much closer, more extensive and – crucially – much faster. This is like water warming in a pan, simmering and coming to the boil. As it heats up, bubbles rise, the water starts to boil, steam rises, then suddenly it erupts, churning and turning. Every so often a tiny rise in temperature causes a big change in bubbling. It’s a non-linear effect. The same input does not produce the same output; it all depends on the circumstances.

measurements and extrapolate. Got a real planning problem? Take lots of measurements and extrapolate in great detail, using all the computing power you can find. No, don’t. It won’t work, it will paralyse the business; by the time you get the results it will be too late and the results will be wrong anyway. The plannable days are long gone. These are the days of learning and adapting.

Classical, reductionist science has been hugely successful in understanding deep mysteries by analysis, isolating particles, observing and measuring them. With electron microscopes and particle splitters we can separate water molecules, isolate the hydrogen and oxygen atoms and split those atoms apart to the essence of matter. But we are left with two problems. Firstly, we can understand the bits, but it helps little in understanding the flow of a river. Secondly, when we get to the smallest, sub-atomic measurements we discover that we cannot measure them fully and the act of measuring them changes the thing we are measuring. This is of fundamental importance.

forecast meaningfully.  Citicorp, one of the world’s biggest banks, has stopped trying – six quarters is as far as it will ‘plan’ and even then it is fairly sceptical about the last two quarters.

Note the words; you cannot plan. No how. No way. It is not you who are failing; this is not a measurement or a computing problem. It simply is no longer do-able, so an organization that lives by its plans, budgets and controls is actually out of control.

Far from being bad news this is actually very exciting, but it does need a new way of thinking – a way few managers have got to grips with “Applying the sciences of complexity to business is not a trivial matter. It requires a new mind set, vocabulary, and openness to fundamental change,” says Susanne Kelly, vice-president of Citicorp. “My own introduction to complexity has been simultaneously a humbling yet empowering experience. We can no longer hide from taking personal responsibility for our individual actions.”

Scandinavian Pioneers

bank, or SKF, the world-class manufacturer of bearings. Volvo is in the process of giving up on budgets (although the Ford influence may change that). IKEA gave up on them in 1992, preferring that its managers work with guidelines according to the unfolding reality in front of them and which they create. In the UK, Boots is becoming a non-budget company.

These are key conditions for complexity theory; broad equality of power and connectivity.

were doomed within seconds to eternal separation. Tiny differences at the outset led to huge gaps shortly thereafter. Completely unpredictable, except that we could say broadly where they would be and broadly what state they would be in (Stockholm, in the water and wet) – in other words, there were boundaries on their state that we could predict. We could take broad measures and act accordingly even if we could control little.

evaluations of the future, but we should not try to forecast in detail. Over-control merely represses possibilities, detailed forecasts are meaningless, but the fact that developments emerge outside our direct control does mean we are powerless or that we are headed for chaos and disaster. We need to watch closely to see what trends we can identify. We need to let things happen and guess the potential in the emerging patterns.

Of course managers have real problems with this. The story is told of a truck manufacturing plant in the US which used a complexity theory algorithm in its computer to allocate trucks to bays to be painted. Although it was successful in reducing the time and cost of painting the trucks, the managers discontinued it because they could not control the process. They preferred a less efficient and effective way that they could ‘manage’.

Change is changing

predictability. Change is no longer something ordered and controlled by the top, but can range from a surging convergence of tides sweeping through a community (East Germany and the collapse of the Berlin Wall in 1989) to a sudden unravelling of an apparently well-ordered system after the tiny failure of an apparently innocuous detail (would the First World War have started if Archduke Franz Ferdinand’s chauffeur had not made a wrong turning in Sarajevo?).

behaviours and it can be hard to see exactly which state a particular part is in, but there is wide turbulence and uncertainty. Phase transitions occur as a result of a change of energy flows or inputs into a system.

It is not just happening fast. There is more of it. Bandwidth (the amount of information that can be carried simultaneously) is increasing exponentially in every communications channel. This is bringing continuing instability and unpredictability. It is a feature of chaotic systems that tiny changes create huge effects when there is repeated feedback.

Reinforcing Loops and lock-ins

A feature of complexity theory that runs directly counter to much economic teaching is that instead of the laws of diminishing returns, there is often a law of increasing returns as systems ‘lock-in’ to a particular pattern due to a tiny influence at the beginning. The development of video recording cassettes is an example of lock-in and increasing returns. Betamax is the ‘better’ system, but VHS got the early edge, so more films were copied to VHS, which made it more attractive so more films were put on VHS, which made it more attractive so more people made VHS recorders which made them easier to buy and cheaper which made more people put films on VHS….

consider that by the end of 1997 there were perhaps 30 million internet users but that new users are now signing on at the rate of 18 million a month.

Long-term successful competition is about winning, not defeating. In a complex system, it is usually harmful to kill off your competitor. It may well be bringing you hidden benefits, such as stimulating the market, bringing new ideas, keeping regulators away, providing you with allies in competition with other industries, forcing innovation. Successful competition is about using competitors to create advantage for yourself. When several companies are doing this, the whole system benefits from accelerated learning and change. This is a fundamental paradigm shift for many competitors. The best aim is not to do down your competitors, but to help them thrive, just a little less than you. A competitor who is doing well is increasing market size and awareness and is unlikely to do anything silly in desperation to hurt you. A big competitor who is hurting badly can do immeasurable damage to its competitors and itself as it flails away in its distress – as British Airways showed with its attacks on Laker and later on Virgin.

Why it matters

Atlantic and a network pioneer in his own right, explained why his company’s much-celebrated merger with cable giant Tele-Communications, Inc (TCI) fell apart just four months after it was announced. Bell Atlantic had agreed to the merger with TCI so that it could build a nationwide network capable of delivering interactive content to the home. But the merger plan, heralded as dramatic evidence of the coming of the information superhighway, triggered a massive wave of infrastructure announcements from other companies. This wave of investment meant that the new Bell Atlantic/TCI would face more competition than its plan anticipated. More important, it reduced the strategic urgency for Bell Atlantic to build its own transmission network. “We could ride on the systems built by other telephone companies,” Mr Smith said.

Talk about out-of-kilter expectations. A bold strategy to shape an industry’s future triggers a chain of events that within months renders that strategy’s rationale obsolete. The answer? Adapt to the new developments, scuttle the deal, develop a new plan – and overhaul the way you think about strategy.

future. Strategizing today has to move from planning to learning and imagining. Strategies must become much simpler, giving the briefest of ‘life-rules’ that allow for the most flexible local interpretation. These life-rules must be as simple as ‘Think long-term’ or ‘Service above profits’ or even ‘Never give a sucker an even break’ if you are that type of organization. Virgin has thrived on ‘Staff above customers, customers above investors’ and ‘Try everything – back early winners cut early losers’. Hewlett-Packard lives by ‘Values stay constant, change everything else as fast as you can’.

The simplest of organizations evolves towards a critical state in which small changes or incidents happen all the time. These instabilities are an inherent part of the organization’s adaptation to its environment and external stimulus. If you try to over control this, it will just build up to a super-critical point where it becomes extremely unstable.

Organizations face this issue when they repress mild dissent or alternative thinking and create real resentment through lack of consultation or consideration. Repressed problems will only get worse and will erupt at the most inconvenient of times.

Complexity theory explains how a new leader – who changes some connections and communication flows, who alters a few values a little, who seems to have no effect outside their circle of power – nevertheless makes enormous changes.

Embedded Accidents

Penicillin was discovered as a result of chance. Columbus was not looking for America when he hit it. Post-it™ notes were invented as a by-product of the quest for a new glue for a totally different purpose. Organizations need to encourage constant experimentation, to encourage the mistakes that occur from curiosity and trial. They need to find ways of embedding and spreading the knowledge that they gain from this activity. You do that by celebrating failure, not criticising it, by rewarding people who take risks rather than restricting them. You have to do it for real. As a senior manager in an organization

that supposedly includes risk taking as one of its core values put it ironically, “That’s so long as the risk doesn’t prejudice your numbers”.

demonstrated that long-term success depends on the ability to adapt quickly, to allow new possibilities to emerge and to win without making others lose. Learning and agility with a solid values base are the hallmarks of success.

Complexity Theory and Chaos Theory explain why and how the world is the way it is and they offer tools to managers about how to succeed. As all new approaches they require learning, practice and application. When applied though, they make management much easier and less stressful for both managers and the managed. They allow new possibilities to develop and they generate authentic engagement of all stakeholders in the change process.