Apr 16, 2012

How to deal with business complexity?

Business and state organizations face today a multitude of historically grown complex structures on which they depend for execution of processes. Examples range from technical infrastructure for communication to regulatory rules operating in bureaucracies. At the same time technological and associated social changes demand increasing speed, flexibility and adaptability of organisational structures and processes. How to cope with this situation that puts increasing stress on economic, social and political members of advanced and less advanced societies?

In the past numerous re-engineering projects have been executed to cut down on the jungle of organisational processes with limited success improving short-term figures, often creating images of short-term or even fake successes (e.g. through rules put into accounting systems) and increasing stress and susceptibility to failures. What if the jungle is a complex eco-system of organisational processes whose relations have been insufficiently understood and messed with?

The 'obvious' solution is to rationalize historically grown large scale organizational systems in meaningful ways by streamlining their structures based on an organic understanding of the important interlinkages among their 'modules' and their historic development. This view subsumes and at the same time limits a rational, analytic view of the world (as will become clear in the section on the decomposability of systems).

However, what that obvious solution entails is less clear. The above description entails a number of value judgements, whose resolution can only be based on very generally principles to be most widely acceptable. One of these values should be the long-term survival of the enterprise. Depending on the regulatory environment that entails a certain level of risk acceptable for an organization, which is related with specific degrees and processes of change.

The answer to the issue depends on our model of the world and its development. Fusing economic and evolutionary views, economic survival and even more economic success is about the realization of new chances and optimization of existing structures, i.e. two forms of adaptation. Competitive advantage as ex-post measure of 'realised' economic fitness is a relative measure of how an ensemble of organizational modules (e.g. departments, business units, legal entities) with certain characteristics that work better than other such ensembles (together).

The development of a complex systems, such as organizations, is a path-dependent build up of complex forms of organization glued together by information flows. The organizational build up takes places through learning about what does not work in markets captured in hierarchical structures and controlled by regulation of information blocks in modular components. It is based on an evolutionary process of learning about what survives in 'the environment' and reflection in organization characteristics, which is followed by a subsequent optimization process that leads to a more or less heterarchical entanglement of structures and processes.

Organizations can thus formally be seen as hierarchical systems with departmental modules that allow execution of functions through specific capabilities concentrated in particular departments. This confers economies through separation of work but also leads to interpretation and filtering problems in non-standard or changing situations as interpretative blindness and inertia are fostered. Therefore, (informal) organization structures need to be heterarchical in order to cut across departmental and disciplinary boundaries to successfully deal with the increased complexity and speed of change. This requirement is reflected in informal structures, which change the seemingly simple, modular hierarchy to a heterarchical form interlinked across hierarchical levels. Heterarchical structures allow faster and broader interpretation of information, but also demand higher interpretative capabilities by management. Given process and product related capabilities, these interpretative capabilities ('dynamic capabilities') determine to a large extent the success of an organization.

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