Managing Complexity in Global Organizations
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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 today’s and tomor- Behavior. Director of IMD’s Program companies, we hear: “Yes, complexity row’s 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 It’s 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, we’ve identified four When globalization entailed a far-reaching major sources that interact together to erosion of boundaries, a process which is create today’s 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 IMD’s 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 doesn’t. 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 one’s value claims (investors, customers, employees, 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 Ashby’s 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. Today’s advantages, and exposure to a variety of Ashby’s law differently. They harness the solutions may be outdated tomorrow. new product and process ideas. complexity already inherent within the 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 Thoreau’s to determine priorities in dilemmas, help engage complexity in the way most