How Complexity Theory can Enhance the Formation and Implementation of Strategy in an Organisation

Introduction

This essay discusses the nature of complexity theory and how it may enhance the formation and implementation of strategy in an organisation. Authors such as Michael Porter or Sloan have shaped the established conventional (or Classical) approach to understanding strategy and the analyses here consider how complexity theory contrasts and, yet, complements the Classical perspective.

Complexity Theory

Complexity theory applied to strategy originates from the study of complex adaptive systems in biological sciences, quantum physics and chaos theory. According to Open University (2014a, p.5), it “sees organisations and their activities as complex systems, which organically adapt themselves to changing conditions”. The two key defining characteristics of complex adaptive systems are:

  • Adaptive: Behaviour of interacting components changes in response to different events
  • Non-linear: The same stimulus (event or environmental condition) may produce different outcomes

Complexity theory highlights the interconnectedness and interdependency of a system’s elements, which contrasts the conventional focus on linear cause-and-effect. Complexity theory then acknowledges the limitations of deterministically controlling complex adaptive systems as illustrated by the remarks of Greenspan (2008) to approaching the 2008 financial crisis with conventional models which are “too simple to capture the full array of governing variables that drive economic reality”.

Pascale (1999) states that the “science of complexity has yielded four bedrock principles relevant to new strategic work” as summarised below where complex adaptive systems:

  1. Are at risk when in equilibrium – a precursor to death
  2. Have the capacity of self-organisation and emergent complexity
  3. Tend to move toward the ‘edge of chaos’
  4. Are characterised by weak cause-and-effect linkages

The principles are used in the remaining sections to highlight the implications of complexity theory on strategic management.

Holistic Systems View

The conventional approach to strategy focusses on “simplifying problems and using reductionist thinking, and objective models, methods, tools and techniques” – Open University (2014a, p.57). In order to understand the business through a conventional approach, the organisation is dismantled into functional components so that each can be modelled. The process risks developing isolated strategies because it inherently then views the organisational entity as consisting of practically discrete components. Using the Porter’s (1985) value chain analysis, focuses the analyst’s perspective on the value provided by each functional area but not necessarily the greater synergistic value of the system as a whole.

Complexity theory emphasises the interconnectedness of elements in an organisation (or organisations in an industry) and subsequently certainty in the strategic impact of small or large changes cannot be had. This author was recently responsible for the implementation of a customer relationship management to manage sales activity within a commercial organisation. An unanticipated consequence, however, was that operational personnel began using the system to make notes on customer interaction and as the system unintentionally became the de facto approach across the organisation to record customer interactions, the usefulness of the system toward increasing aftersales customer service emerged and salesman could then approach new business opportunities with existing customer.

Complexity theory inherently offers a more holistic perspective, than conventional strategy, to the organisation; which encourages managers to “accept complexity and subjectivity” (Open University, 2014, p.57) in their approach to solving problems. This interdisciplinary approach will aid managers by encouraging consideration of the potential extent of decisions. Pascale (1999) states:

One is wiser to acknowledge the broad possibilities that flow from weak cause-and-effect linkages and the need to consider the second- and third-order effects of any bold intervention one is about to undertake.

Facilitation, not Prescription

Complex adaptive systems are not governed by complex rules but their apparent complexity arises from self-organisation, or as Pascale (1999) states, from the “propensity of simple structures to generate novel patterns, infinite variety, and often, a sum is greater than the parts”.

Conventional approaches suggest that strategic formation is undertaken by senior managers in a hierarchical organisation who issue directives for the lower levels to undertake (a ‘top down’ approach) but complexity theory advocates emergent strategy. Pascale (1999) discusses the approach of Steve Miller, then group managing director at Shell, where he “put senior management in direct contact with the people at the grassroots level”. Miller’s view of strategy formation was that the customer-facing personnel “can do a better job of spotting opportunities and stepping up to decisions” and his approach was vindicated by subsequent growth and brand -positioning in Europe.

The complexity theory of weak cause-and-effect linkages between elements counters the conventional focus of deterministic control. Drawing from the roots of biological science, Pascale (1999) examples the unsuccessful attempts of intervention at Coyote population control and how the species, as an adaptive system, subsequently thrived in response to threat: “living systems are difficult to direct because of these weak cause-and-effect linkages”.

Actors in strategic formation and implementation can appreciate scenarios cannot be fully controlled and that behaviours can (unpredictably) emerge either in response to internal or external changes. The implications for managers is not to attempt to quash these future potentials by rigorous control but to encourage diversity and emergent behaviours that can then be filtered to promote desirable patterns and prevent the undesirable. As managers ‘loosen the reigns’, and foster cultures of learning and sense-making, staff will more readily report the failures (and threats) in a culture without condemnation. This aids implementation where Hrebiniak (2006) demonstrates that managers not being aware of issues in a timely manner is a significant barrier to implementation.

Innovation and Change

Open University (2014, p.42) argues that “organisational strategy is largely about making sense of change … and managing change”. Complexity theory questions the model of a ‘punctuated equilibrium’ (Romanelli and Tushman, 1994), whereby organisations make small incremental changes during periods of relative stability and more radical changes when the organisation’s current position is not aligned to its environmental needs. The complexity perspective views organisations as dynamic “because they are interconnected and constantly evolving together rather than in isolation” – ‘co-evolution’.
McMillan and Carlisile (2007) describe organisational stability and associated characteristics on a spectrum from random through to mechanistic, as illustrated below.

Figure 1 Types of system and degrees of order and stability, adapted from McMillan and Carlisle (2007)

Pascale’s (1999) third bedrock principle of entropy proposes that organisations tend toward the edge of chaos and “Enduring competitive advantage entails disrupting what has been done in the past and creating a new future.” Pascale et al. (2001) argue that “innovation is born at nexus of stability and chaos”.

This conclusion is drawn from observation that novel and effective strategies emerge from complex adaptive systems when threat pushes them to the brink of chaos. However, to tip an organisation into chaos would be counter-productive and Open University (2014, p.51) suggests “The key to keeping a complex system like an organisation productively sub-chaotic is to maintain an appropriate tension between flexibility and control, whereas traditional strategic thinking emphasises control only (usually through negative feedback).”

The key for actors involved in strategic implementation and formation is then to balance freedom and controls in order to encourage creative problem solving but ensure a direction is still pursued. The negative feedback control loops so ingrained with conventional strategic implementation should be ‘loosened’ to permit variety and supplemented with positive feedback loops to encourage emergent strategies.

Limitations to the usefulness of complexity theory

As a very recent perspective on organisational strategy, complexity theory is less defined than the widely-taught approaches grounded in conventional strategic management. Pascale (1999) discusses how the complexity theory contradicts traditional leadership style: Managers may be uncomfortable with increased exposure from increased interaction with and accessibility to various levels of staff as they could, themselves, be subject to scrutiny. As complexity theory requires an approach to facilitate emergent strategy, managers may be reluctant to relinquish control in order to provide guidance to enable ‘self-organisation’ and autonomy

Pascale (1999) does however counteract the perceived notion of less control: “What you don’t realize until you do it is that you may, in fact, have more controls but in a different fashion.” This author proposes further challenges that actors, involved with strategy formation and implementation, will face as discussed.

Transparency

Stakeholders (especially shareholders) often expect to see a deliberate strategic plan that attempts to mitigate threats and exploit opportunities in corporate and competitive strategies. Adopting a non-deterministic approach to fostering an environment where strategy may (or may not) emerge would require the proponent (e.g. a general manager) to engender a large amount of trust from stakeholders that are unlikely to be familiar with complexity theory’s perspective.

Conventional approaches provide stakeholders with a desired future focus (e.g. a 10% increase in market share) and a clear path of how the organisation will then achieve that future state from its current state using specified methods, tools and controls. Stakeholders can readily engage with this high-level optimistic story but complexity theory does not offer this same definite end-point. Complexity theory proposes that investing in the system (e.g. nurturing a learning culture) as a supportive environment will yield future potentials that can be selected from. This ‘dispersed’ view does not immediately provide the same focus which an organisation can immediately engage with and this reduced strategic transparency may mean the stakeholders are less willing to commit to initiatives derived from complexity theory.

Time-scales

For the organisation driven by conventional (and even mechanistic) practices, complexity theory proposes a cultural change across all levels dues to emphasis on facilitating the development of emergent strategies by “promoting effective learning processes, which lead to the questioning of assumptions, or by fostering the adaptive co-evolutionary complexity dynamics of self-organisation and emergence.” – Open University (2014, p.54). Cultural changes require time to pervade the entire organisation but organisations that have shorter periods of focus (e.g. corporate emphasis on quarterly results), the impact of cultural change may not be so readily evident nor quantifiable. This may exacerbate the already dubious faith stakeholders are required to have in a less transparent process.

Additionally, because the optimum position for an organisation is “at the edge of chaos”, it is quite conceivable that an organisation led by principles of complexity theory could, at least superficially, appear to get worse in its behaviours and business practices (and even results) and stakeholders could withdraw support at the detrimental time when an organisation is about to deliver the positive results born out of near chaos.

Appropriateness

For notability, academic theories must not only be significantly different to existing theories (which complexity theory certainly achieves) but must appeal to any new socio-economic context of the time. Porter’s, now regarded as conventional, perspectives appealed as a method to counteract the threats to US imperialism in an increasingly competitive global economy. The appeal of complexity theory may be limited to the current era of perceived turbulent change, potentially brought about by the digital revolution (and the emergence of industry disruptors such as Amazon or Uber) that perpetuates the increasing sense of economic uncertainty. This limits the generalisability, or even universality, of complexity theory as approach to strategic management.

Segal-Horn and Faulkner (2010) discuss “an increasingly homogenous global environment” as differentiators (e.g. geography) become increasingly less relevant. The evolutionary perspective as discussed by Mintzberg (1996) proposes that companies cannot effectively differentiate and adapt to markets so must focus on (cost) efficiency. Although complexity theory assisted Miller’s ambition to ‘shake up’ a complacent organisation, Shell, but it is questionable whether, for example, the approach would be just as effective within organisations that output into wholesales commodities markets (with no end retail division) where cost-efficiency and supply consistency are those industry’s key success factors.

Consideration for non-profit organisations must be made in the search for the universal benefits of a strategic approach. Public sector organisations with tightly regulated targets (e.g. housing, education) must rigorously control activities to ensure budgets are spent efficiently and targets must govern all activities for transparent accountability to the tax payers.

Conclusion

The usefulness of complexity theory is increased by the theory’s accessibility to those who adhere to conventional paradigms as complexity theory extends understanding of organisational strategy and does not merely replace conventional approaches – “not a polemic against traditional strategic approach, but an argument for broadening it” – Pascale (1999).

Complexity theory is useful because it deepens understanding of the behaviours within organisations in response to environmental or deliberate-internal disturbance. Complexity theory is useful because it also offers practical implications for strategists, justifying the confidence actors can have facing the unpredictability resulting from organisational dynamics, by suggesting an alternative to the decades-old futile battle managers undertake attempting to control complexity (and inadvertently quash future potentials): Embrace complexity by facilitating environments that nurture the emergence of novel strategies that could bring about sustained competitive advantage.

References

Greenspan, A. (2008) ‘We will never have a perfect model of risk’, FT.com,18 March [Online]. Available at http://blogs.ft.com/economistsforum/2008/03/wewill-never-havea-perfect-model-of-risk/ (Accessed 01 May 2016).

McMillan, E. and Carlisle, Y. M. (2007) ‘Strategy as order emerging from chaos: a public sector experience’, Long Range Planning,vol.40, no.6, pp. 574–93.

Mintzberg, H. (1996) ‘Crafting Strategy’, The Strategy Process, London, Prentice Hall

Pascale, R.T. (1999) ‘Surfing the Edge of Chaos’, Sloan Management Review, Spring 1999, pp. 83-94

Pascale, R. T., Milleman, M. and Gioj, L. (2001) Surfing the Edge of Chaos: The Laws of Nature and the New Laws of Business, New York, Crown Publishing/Random House.

Porter, M.E.(1985) Competitive Advantage, New York, Free Press.

Segal-Horn, S. and Faulkner, D. (2010) Understanding global strategy, Andover, UK, CENGAGE.

Romanelli, E. and Tushman, M. L. (1994) ‘Organisational transformation as a punctuated equilibrium: an empirical test’, Academy of Management Journal, vol. 37, no. 5, pp. 1141–66.

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