Executive Series #2
Complex Systems
Building a High-Performance Business requires some framing of the problem. There are a handful of key concepts that must be kept in mind at all times if you are to achieve High-Performance status for your business. The first of these is the idea that businesses are complex systems.
Complex systems are…well, complex.
“Complex systems are systems whose behavior is intrinsically difficult to model due to the dependencies, competitions, relationships, or other types of interactions between their parts or between a given system and its environment. Systems that are “complex” have distinct properties that arise from these relationships, such as nonlinearity, emergence, spontaneous order, adaptation, and feedback loops, among others.”
Wikipedia
The fact that a business is a complex system gives it all of the characteristics described above. However, it does not mean that efforts to guide, model, predict, organize, and otherwise put order to this chaos are fruitless. Treating your business as a complex system and understanding that this is a fundamental trait of the enterprise will help you unleash its power.
Emergence
Let’s explore one of the traits of complex systems – emergence. The concept of emergence sounds complicated, but it is not. It is simply the idea that the business develops characteristics that are distinct and different from its components (i.e. people, systems, assets, etc.). We see this every day in businesses, but we take it for granted. Emergence is exemplified in what we call a brand. Emergence determines whether the brand is good, or bad. As CEO, you cannot control the specific outcome of the emergence process, you can only guide it by carefully shaping the behaviors of each employee, designing systems and processes, and continuously evolving them to move in the right direction.
Complexity
If a business is a complex system, that would suggest that it is impossible to manage, right? Well yes, and no.
First, it is impossible to manage specific outcomes for a business. For example, you cannot predict a specific outcome a week from now; however, you can predict a range of outcomes and have a reasonable chance of landing in that range. Understanding these limits is a first step towards successfully guiding the business towards high-performance.
Second, complexity exists in degrees; the more degrees of complexity, the harder it is to guide a business. It takes more people, more cost, has inherently higher risk, and is less agile and adaptable.
An example of degrees of complexity can be found in your product (and/or service) lines. If you sell one product, that solves one problem, to one type of customer, your product line has the lowest level of complexity. As you add products, or problems that you solve, or types of customers, your product line complexity grows. The growing complexity of a product line is a normal evolution of a growing company, but it also will negatively impact your ability to build a high-performance company. You need to make it a strategic priority to succeed.
Apple had worldwide sales exceeding $260 Billion in 2019, yet you could lay out their entire product line on your dining table. The discipline in controlling the complexity of their product line over the years is directly connected to the $77 Billion EBITDA (29%) that went along with that revenue.
Reducing complexity should always be a priority for the leadership of any business. It should also be a core strategic consideration when planning for growth. The companies that have had the longest-running high-performance records also have been incredibly focused on driving complexity out of their business.
Complexity in the business will be a common theme throughout this High-Performance Business series. Driving out complexity is a core concept that you must embrace to win.
Networks
Complex systems exist because of networks. The individual components, which are the foundation of businesses (people and systems), connect to form networks and operate in what we routinely call processes. When multiple people and systems interact, the behavior that emerges displays the characteristics of complex systems.
These networks are dynamic. The outcome on one day is not going to be the same as another. One person may in a good mood one day, and bad another. Someone may change a configuration in a system, or step in a process. Even a perceived change in the outcome of a process, while the same as a week ago, can be perceived as different just because an external reference point (a competitor, for example, is doing something different), has changed.
Understanding this network effect is essential. You can’t control it, but you can guide it.
The Smooth Enterprise
Shaping the complex system of a business to create a high-performance business is what I call smoothing. I will talk about the concept of the Smooth Enterprise in more detail in future articles, but for the time-being understand that it is directly connected to the complex-system nature of businesses.
The idea of smoothing a business is to drive out resistance (or friction) for customers and employees. The core ideas embodied in smoothing are:
- Reducing complexity,
- Increasing and speeding transparent communication,
- Building value for customers and employees, and
- Making everything easier for everyone
I believe that building a Smooth Enterprise will be viewed as the strategic foundation of all High-Performance Businesses.
Aim to Nurture, not Manage
Business leaders have been taught management techniques for over a century. Embedded in this teaching has been the flawed idea that businesses are to be “managed” and controllable, like steering a car. I hope that I have shaped your thinking into recognizing businesses as complex systems that must be nurtured, instead of managed. You can’t force a plant to grow, but you can shape the environment that enables the plant to thrive.
Building a sustainable High-Performance Business requires a nurturing and evolving approach that accepts and embraces the complex nature of the enterprise. Keep this organic idea in mind as you dive deeper into making it happen.
Copyright © 2021 Douglas C. Fergusson
