What is complexity (in business and management context)?

What is complexity and why we need to understand it.

For Jin Sook Chang and Do Wan Chang life was a blast from 1984 to 2015, or at least that what they thought. The new store they opened in LA reached $700K sales and they started to expand their business in the states and in the world. By 2015 they had 251 locations, 43,000 employees, $4.1B in revenues and they entered the list of the richest people. What a happy time!

Regretfully for them, the trend turned upside down and in 2019 they filed chapter 11 for their forever 21 stores. There was one core root cause of their struggle, complexity. They didn’t take into account that spreading around the world require dealing with different laws, employment regulation, people test for fashion, and even the unique needs of the supply chain for such an operation. The root cause isn’t Amazon, or spending fortune on stores, just complexity, or misunderstanding of complexity.

Complexity is one of the main challenges companies must deal with, but what do we really know about complexity? How do we handle something that we do not understand?

Oxford dictionary defines both complexity and complicated as “made of many different things or parts that are connected; difficult to understand”, but to truly understand complexity, we must define how complexity differs from complicated.

Both the complex and the complicated are composed of many parts and therefore difficult to understand. The difference is that complexity is hard to predict. An old watch is complicated, has many parts and it takes time to understand, but its’ behavior is always predictable. Humans are made of many organs, but our behavior is unpredictable. 

What makes complex systems unpredictable and hard to manage?  Complexity is unpredictable due to autonomous (can take their own decisions and action), diverse (sees the reality in different ways), and interlinked entities that compose a company, group of people, or any other system.

Complexity is not a state of mess, disorganization, or randomness. Complexity is one stage out of four (order, growth, complexity, and entropy) that any group of people is experiencing in endless loops. It’s a necessary stage that has its advantage and disadvantage, a stage we prefer to ignore. Complexity introduces fourteen different attributes that differentiate how companies are operating while they are in a stage of complexity.

Deep root cause analysis to many challenges found complexity and the lack of management tools to deal with complexity as the main causes of so many problems. Those challenges impact companies’ ability to increase their efficiencies and reach the full potential of their business success (net profit). Most of those reoccurring challenges started to impact organizations in the last 20 years.

Complexity introduces major challenges to strategic management (https://www.investopedia.com/terms/s/strategic-management.asp), which is a common approach to management. Strategic management promotes creating strategies to be prepare for the future, defining tactic plans, and then execute those plans. All the above steps are based on some predictability of the ecosystem an organization operates within. Complexity reduces predictability that is crucial for this management system to operate.

Complexity does not just impact the ability to predict what will happen, it also has an impact on the ability to go backward in time and understand how actions we took in the past impact current reality. One of the implications of complexity is delays. Delays can be significant and as they are longer, they create difficulty to connect a cause and an impact. The difficulty to connect cause to impact creates a challenge to find the root cause of a problem, which impacts present as well.

One of the attributes of complexity is nonlinearity. This attribute creates quite a few challenges for leadership and people when they need to deal with current problems. Nonlinearity is not guaranteed the same level of impact from the same level of effort. It also indicates that any cause and impact between two elements in an organization is bi-directional and not one-directional. The result is a failure to deal with nonlinear situations due to misunderstanding of the reality.

In Aug 25 2017 hurricane Harvey hit Huston and left a $10B distributer without their main offices and with a disaster recovery plan that was never really tested. The implications of Harvey on this distributor could be disastrous. Five years before the event the distributor IT team started to invest time and effort in understanding complexity and preparing people to be able to deal with complexity.

In three days, this IT group manage to restore a datacenter and all of the critical business applications. This attempt saves the distributor from any interruption to business (the effort took place over a weekend). This unique ability to deal with uncertainty wouldn’t be available if the group didn’t spend time, effort, and frustration to learn how to deal with complexity.