Managing complexity in global organizations - IMD

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1 No. 141, February 2007 Managing complexity in global organizations How it all began proposition with partners. But the road to the Promised Land turns out to be more Complexity is today often considered demanding than expected, and complexity the latest business buzzword it reflects is the most common and pervasive a current common reality but not a lasting challenge that arises. Martha Maznevski one. When introducing the complexity IMD Professor of Organizational concept to executives in globally operating A core challenge of todays and tomor- Behavior. Director of IMDs Program companies, we hear: Yes, complexity rows companies, complexity cannot be for Executive Development is the real leadership challenge that I made simple, and it is not going away in and the Strategic Leadership face. How can I focus on my area when the near future. Managing complexity for Women program. everything else is connected? How can must therefore become a core compe- I be held accountable when everything is tency of top executives and management. interdependent? How can I sort this out? As a first step, it is crucial to understand Its overwhelming. Good questions with what drives complexity. few answers. We think complexity is much more than a buzzword, but a reality What generates complexity? that is here to stay. In our research, weve identified four When globalization entailed a far-reaching major sources that interact together to erosion of boundaries, a process which is create todays environment. Each of these still ongoing, complexity multiplied to its sources of complexity was created by the current heightened level. Many types of erosion of boundaries, but their effects are boundaries have faded: trade liberalization different from each other. Ulrich Steger allows for a substantially easier flow of Director of IMDs Building High goods, capital, people, and knowledge Diversity: Global organizations face a Performance Boards program. around the globe. The world has clearly complex set of challenges characterized moved beyond the key triad markets. by diversity both inside and outside the Internationalizing companies from devel- organization across every aspect of the oped and developing economies try to business itself and its strategy drivers. tap the benefits of globalization to an un- Inside the organization, executives must precedented degree and therefore face manage and respond to more diversity as well as contribute to the complexity of in the (internationalizing) HR pool; more eroding boundaries. Sometimes abolishing variety in the management systems; boundaries creates new homogeneity in more variation in the means and ends a larger area (e.g. the Euro currency), but ranging from simple financial goals to a mostly it doesnt. more comprehensive view; and different business models for different types of Various motives rank high on the list of business units. Outside the organization Wolfgang Amann possible drivers for foreign expansion, such there is higher diversity: heterogeneous Former Research as learning, spreading risk, gaining access customer needs; differing cultural values; Fellow, IMD. to new customers, realizing economies of a plethora of stakeholders with different scale and scope, or optimizing ones value claims (investors, customers, employees,

2 regulators etc.); various political, eco- What are the repercussions? The practical consequence of complexity is nomic and legal environments; and that a managerial dilemma often shapes the finally, competitors differing strategies. Everything is diverse, and nothing is decision-making process when there are Most firms today increasingly face each stable, everything is in fast flux: two or more conflicting legitimate goals to of these types of diversity. Managing interdependence is flowing in changing meet demands. Both cannot be simultane- the differences is not trivial, and directions. The future is no longer the ously achieved with the given resources. reducing diversity often means being prolongation of the past industry less responsive. breakpoints, fundamentally altering the Companies in the financial service industry value proposition in industries, occur set up competing distribution channels, Interdependence: Companies must more rapidly. The variety of options could but expect far-reaching cooperation manage the effect of global interdepen- overwhelm traditional decision-making, across the company (shared services and dence to an unprecedented degree: as information often lacks clarity and is product platforms) to reap economics everything is related to everything else, ambiguous. Multiple interpretations of of scale. In manufacturing, one ongoing and the impact is felt more rapidly and the same facts are possible, depending on dilemma is between global standardization pervasively. Value webs have replaced the perspective or cultural framework. and response to local market needs. Any traditional value chains. Reputation, Shared understanding cannot be assumed required priority decision nevertheless financial flows, value chain flows, top per se, whether inside or outside the results in ongoing tension. As dilemmas management and corporate governance organization. Thus, interdependence, di- cannot be solved, they need to be managed issues have reached advanced levels of versity and ambiguity all in flux are continuously. interdependence. The less clear-cut the the building blocks of managerial com- boundaries of a company become, the plexity and explain why global companies Ways to cope more it is exposed to impacts on the have often been perceived as the most value chain flow through mistakes, fric- complex organizations. Global companies first reacted to this tions, reverse trends, or even shocks. complex business environment by creating Interdependence creates opportuni- Many people have tried to simplify com- complex organizations. This was consistent ties for globalization, but taking advan- plexity, and contemporary management with Ashbys law of requisite variety, in tage of these opportunities raises literature is misleading when trumpeting that the complexity of an organization difficult challenges. THE success factor. Studies typically internally must match the complexity of examine successful companies to see what its external environment. We saw multiple Ambiguity: The business world today managers did, then conclude that all axes of management: along product is characterized by too much information managers should do the same thing. As lines, geography, customers, functions with less and less clarity on how to unpredictability makes us uncomfortable, and projects. For example, ABB had a interpret and apply insights. A diversity delusions are created about performance six-dimensional matrix structure (for a of accounting standards renders financial as voluntaristic matter of choice (com- short time, at least, before they simplified figures ambiguous. Studies, scenarios, panies can choose to be great); we like the structure dramatically in their survey results, and reports become the certainty promised by these solutions. turnaround). The simple relation between less reliable due to an ever-increasing But in an interdependent world, much headquarters as strategic decision-makers uncertainty. Many businesses find it depends on contingencies, with no clear and subsidiaries as implementers is blurred more and more difficult to discover what correction between input and output. by centers of excellence or competence, their clear value drivers are. Are they Accountability of managers has therefore market responsibilities, joint ventures, etc. image, price, related services, privileged an arbitrary element: yes, managers are relationships, speed, knowledge, or responsible, but results are influenced by But structures and policies alone are something else? The cause-effect factors beyond their control. Navigating not the solution. The more complex the relationships become blurred. through this complexity requires a different structures and policies become, the more way of thinking, acting, and organizing than complex they are to manage. Eventually Flux: As if these three complexity drivers the typical control mentality. the organization implodes upon itself, were not enough, managers have to face spending more time managing the internal yet another one, flux or change. Even A long list of advantages lures companies complexity than interacting with the if you figure out temporary solutions into globalizing. Geographic expansion environment, where real value is created. regarding interdependence, diversity abroad offers the vast potential benefits of and ambiguity for your specific company, a much larger market arena, spread risks, Companies beginning to grapple with industry, and personal situation, the scope-, scale- and location-based cost complexity in effective ways interpret situation can change the next day. Todays advantages, and exposure to a variety of Ashbys law differently. They harness the solutions may be outdated tomorrow. new product and process ideas. complexity already inherent within the

3 Managing complexity in global organizations organization people and relationships, Once this is understood it leads to the fiefdoms. With decentralization consistent and so on to work for the company values, the business shoulds and oughts, with core processes, local managers can rather than against it. They add Thoreaus to determine priorities in dilemmas, help engage complexity in the way most effective advice to the recipe: simplify, simplify! But focus actions and provide consistent for them. they choose carefully what they simplify, patterns of behavior over time. Companies without making the organization or its best at dealing with complexity never Unpredictable situations processes too simple. have more than three or four core values, an early awareness system never to be compromised and therefore In our book published in March 2007, consistent with a compelling business logic. Chaos is a degree of complexity in which Managing Complexity, we advise on A longer laundry list of values is confusing few of the rules and drivers are understood. focusing on the professional quality of at best and provides rationale for any Compare it to a weather forecasting decision-making. We encourage the action at worst. At the same time, it is system: never completely right, but rarely simplification of organizational processes helpful to have a few behavioral values completely wrong. And early awareness in specific ways, rather than predicting the beyond the core that guide the how of doesnt need sophisticated systems and outcome and simplifying ones picture of the the execution; behavioral values can be much manpower. It is more than anything environment. compromised, but must be explained. A else a mindset, a sensitivity that allows clearly defined and well accepted set of weak signals that indicate emerging Simplify a few key issues: core values plus a guiding set of behavioral change and foresight to be understood. To Use complexity as an values therefore allows diversity at deal with complexity, identify the variables opportunity elsewhere the periphery, local empowerment for that create predictable outcomes when adaptation, learning and experimentation, theyre within a particular range, and Weve identified four key issues around the existence of additional values per unpredictable outcomes when they are which companies must simplify: purpose region, unit, profession as long as they do not. As one executive recently told us, and values; core processes and decen- not contradict the core values. We track hurricanes. As long as they stay tralization; early awareness systems; and outside of this range, we dont pay much leadership. Once these are clear and Core processes and attention or put anything into action. But consistent, managers in different areas of decentralized authority as soon as they hit inside this range, we the company can respond to complexity start to put our contingency plans into according to their own needs and Core processes are those used by the place. When facing complexity, managers realities. entire company. These vary from business need to identify which hurricanes they to business, but most managers know need to track, and which levels or ranges Purpose and values what is vital. In a consulting firm, core should trigger contingency plans. processes might be knowledge sharing The purpose, our reason for being in this and recruiting; in a heavy manufacturing Leadership business, provides a guiding star on the firm they might be capital budgeting and horizon, a framework for prioritizing goals. logistics; in a pharmaceuticals firm they Leading a complex organization requires Every business book talks about the impor- might be research and development and an entirely different mindset. Hierarchy tance of purpose and values, so perhaps go-to-market processes. A firms core works if every level is doing something this is nothing new. However, in simple and processes should always be standardized distinct and specific. However, due to stable environments, even if the vision is a (not necessarily centralized) and based the interdependence in complexity, this wishy-washy vague statement, it can pro- on comprehensive, accessible information is impossible in todays organizations. By vide enough guidance for people to man- platforms. As this imposes cost, one has simplifying and clarifying vision and values, age well. But, in a complex environment, to be very clear what is needed as core. core processes and decentralization, and the guidance provided by a focused, even Such processes might change over time, early awareness systems, hierarchy can discriminating statement of purpose and and more often than the business model or be complemented by heterarchy, the values what NOT to do is absolutely the core values. It is therefore important interdependent, networked organization critical. Every manager in the company to erase old processes when introducing in which every part reflects a different should understand clearly and deeply what new ones. But only standardized processes perspective of the whole and which is really drives the business, the fundamentals generate the transparency key for ac- needed in todays global business world. of the businesss profitability, and why the countability on levels further down the The boss no longer needs to tell the company is in business. This might be dif- organization. With such transparency and team members what exactly to do, but ficult for a diversified multi-national, but at accountability, therefore, decentralization rather depend on their initiative, creativity least has to be achieved at the level of a is possible without the company breaking and competence for success. Leadership Division/Strategic Business Unit. down into political silos and bickering in a networked organization means not

4 only providing different leadership roles the world. (The famous notion that every and styles depending on the situation (but engineer at Toyota can work in every always consistent with the purpose, values, Toyota factory of the world without having and core processes), but also leading adaptation problems, is probably slightly different parts of a networked organization exaggerated, but only slightly). to work together to create value. A similar set of elements are found in The leader of a complex organization must other global companies: family businesses, create and communicate understanding a luxury goods business (due to the of the different roles managers, teams, identification with the product) or Dupont, business units, and bosses play in the known for strong values on safety. R&D inter-dependent structure, otherwise driven industries, such as the pharmaceutical confusion is intensified. Leadership cannot industry, are known for focused business be repetitive, but should be predictable. models (if they have not overcompensated Permanent communication is therefore this by seize-through mergers). Energy the leadership survival tool in complex companies, especially Exxon Mobile, are organizations, but much more in terms driven by standardized global processes, of storytelling, interpreting context and whereas fast-moving custom goods and meaning, and investing in relationships than the food industry are known for strong in transferring dry facts or ultimatums. regional decentralization, but bound together they have shared processes across Mastering global complexity business lines. Although no company may ever master complexity completely, it is We have not yet come across a company possible, using these principles, to at least having mastered global complexity navigate through complexity and even to perhaps there are none, perhaps there take advantage of it. never will be any! However, various sections of Managing Complexity point to several global companies highlighting various aspects of managing complexity, or the effects of not managing it well. IMD The decade-long difficulties of General P. O. Box 915, CH 1001 Lausanne, Motors (GM) and to a lesser degree Switzerland Tel.: +41 21 618 0111 Ford clearly have their roots in the long Fax: +41 21 618 0707 traditional control mode, leading to GMs [email protected] vast bureaucracy and a typical outcome: http://www.imd.ch mediocre products due to risk aversion, mistrust of management (reflected in IMD, February 2007. No part of this publication the high degree of unionization), high may be reproduced without written authorization. transaction costs and slow response. An opposite example is Toyota, with a very clear value set (which is now challenged as it becomes a truly global company), a simpler model of core business processes and standardized processes throughout

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