Managing Complexity in Business– It’s a Mad, Wild, Complex Business World! Cause and Effect of Business Complexity

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Complexity in business is arguable the most insidious, hidden profit drain in today’s business world… Effects of complexity pertain to all business processes along the value chain and hence complexity management requires a holistic approach. Some experts suggest that effective complexity management is based on four pillars; sound strategy alignment with the overall company strategy… transparency over costs and values of complexity… total value chain that identifies the optimization benefits and related measures… sustainable infrastructure, incentives and processes… According to Celerant; complexity affects every aspect of global business… so much so, that economies of scale, scope and skills can often appear in danger of being checkmated by ‘economies of complexity’… Very few global organizations have really come to grips with the strategic challenge of improving market share, driving innovation-profitability, while managing complexity in the process. The good news is that excessive complexity can be reversed and prevented… and if you can identify the unique nature of the complexity in your company then a third of the task is already behind you… According to ‘Global Simplicity Index’; complexity is costing 200 of the biggest companies in the world 10.2% of their annual profits, and collectively it totals over $237 billion… According to Martin Mocker; not all complexity in business is destroys value… The key is focus on complexity that delivers ‘variety seeking, one-stop-shopping, customization or seamless integration’… Finding balance– keeping complexity of the processes and systems, both internal and customer-facing under control– is the way to manage business complexity toward a profitable advantage…

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A survey of 58 companies found that those companies that are able to create value from product complexity while maintaining simple processes were outperforming others… Some companies are able to excel by finding a balance between increasing business complexity to add customer value and decreasing inefficiency in company processes… Managing complexity to better serve the full range of customer needs and demands can provide a substantial competitive advantage. Reducing complexity can have a major impact on competitiveness by simultaneously lowering costs, improving customer benefits and cutting response times… Coping-with and thriving-in business complexity requires continuous efforts to identify and eliminate complications that add no value… According to Totem; there are three components to complexity: Business Complexity– business model, product model, business intelligence… Process Complexity: work efficient, systems integration, core processes and systems performance… Organizational Complexity: organization alignment, decisions making, key performance indicators, incentives that motivates the right behaviors… According to Pete Abilla; many have argued that there is an inverse relationship between business complexity and customer satisfaction– the more complex a business the less satisfied the customer tends to be. Yet, many businesses do little to curb their complexity woes... According to Chris Anderson; today, even the smallest companies are quickly becoming very complicated workplaces. The old rules of growing a business aren’t effective and the new rules are more complex than ever…

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In a KPMG study; more than 90% of senior executives across 22 countries say their organization’s success depends on managing today’s complex business issues, primarily the regulatory landscape and information management, but less than half believe the actions they are taking to manage complexity are very effective… Powerful forces have reshaped the global business landscape in the last few years, accelerating the rise of complexity as a source of challenge, change, risk, unpredictability and even opportunity…  This global study that consisted of interviews with 1,400 senior executives, found that at least seven out of ten executives believe complexity can create new opportunities for their businesses, including gaining competitive advantage, creating better strategies, expanding into new markets and improving efficiencies. Research indicates that although complexity and its challenges are placing increasing pressures on organizations, opportunities really do exist for those who can think differently and turn potential hurdles to their competitive advantage. Indeed, we see businesses that increase their focus on managing complexity are better positioned to capture opportunities… Some of the top findings of this global study also suggest the following:

  • Complexity is global– reaching across both mature and developing markets, as well as across industry sectors.
  • Complexity is increasing– three-quarters of respondents say complexity has increased for their organizations, and majority expects even more complexity in coming years.
  • Complexity is not static– about half of respondents expect the causes of complexity to shift, and majority says their companies must take different or additional actions to manage complexity.
  • Increased risk is the greatest challenge presented by complexity, along with increased costs and the need for new skills.

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In the article Attacking Business Complexity by John Boochever writes: After decades of product-service variations, channel diversification, geographic and operation expansion, all supported by layers upon layers of technology, many institutions are finally compelled to deal with a fundamental reality; their businesses are overly complex for the value they generate… Not only is this excess not valued by customers, it actually impedes the delivery of value by limiting the sales force’s ability to respond, increasing service and fulfillment costs, compounding operational risk, and making the organization much more unwieldy to manage: There is a siren call for a simpler ‘core business’… But when senior executives take the first steps toward ‘dialing down’ complexity, they rapidly come up against real immutable features that overshadow their ability to make change in their environment: Complexity is structural deeply embedded in the business and operating models of their institutions… Poorly understood network effects across functions and businesses create linkages and interdependencies that compound complexity… There is a general lack of transparency of features of complexity required to generate value versus those that do not… Eliminating complexity requires a ‘front-to-back’ approach that identifies-addresses the root causes of complexity and all of its network effects. As an example, by ‘eliminating 20% of non-profitable products’ it has shown to have limited impact, if it’s not followed through with systemic simplification of the supporting operations…The long-term rewards of minimizing complexity can be substantial, for example; improved customer experience, simplified operating model, reduced cost structure…

In the article The Focused Company by Mark Gottfredson writes: When companies attack complexity they nearly always begin with a specific pain point, an element of the business that seems to be costing too much or causing some kind of delay and what they often find is that they don’t want to stop there. Bringing focus to just one-dimension of the company typically reveals sizable opportunities for simplification elsewhere. Most companies are finding that multi-dimensional approach is far more effective than tackling one element at a time, but it also means that building a focused company is a big challenge… Complexity is like a weed, insinuating itself into every nook and cranny of an organization. Rooting it out requires a serious commitment of time and resources. But it can be done, and the payoffs are significant, for example; costs decline, sales rise because customers are less confused and find it easier to buy, sales force is more focused, marketing can invest more effort in each product line… People in the organization can make better decisions, make them faster and implement them more effectively. The performance of companies that build focus into their everyday operations shows ‘power of simplicity’: It’s almost always a hallmark of great companies…

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Complexity is not necessarily bad for business… there are different types of complexity and the problem for many executives is that they’re not always sure of the type that’s in their organization. According to Julian Birkinshaw and Suzanne Heywood; despite widespread agreement that organizational complexity creates big problems by making it hard to get things done, few executives have a realistic understanding of how complexity actually affects their companies… When pressed, many leaders cite ‘institutional’ manifestations of complexity that they personally experience, for example; number of countries they operates in, number of brands, people they manage… And in contrast, relatively few executives consider the forms of ‘individual’ complexity that the vast majority of their employees face– for example; confusing role definitions, unclear accountability, poor processes… According to Terry Kirkpatrick; business success today increasingly means connecting diverse constituents– customers, suppliers, partners… in real-time… which means complexity is inevitable… According to Ron Ashkenas; some people seem to be more prone to creating complexity than others. Instead of cutting to the heart of an issue, they tangle it further; rather than narrowing down projects, they allow the scope to keep expanding; and instead of making decisions, they defer until there is more data and better analysis. These behaviors are characteristics of people are called ‘complexifiers’… complexifiers seem to leave complexity in their wake making it difficult for subordinates, colleagues, customers…

The companies that are proving most successful in addressing the growing challenges of business complexity are taking steps to prioritize the various categories of complexity in terms of their impact on financial performance; then, they are attacking it on two fronts: rationalization and simplification… The progressive companies in complexity reduction have come to realize that it’s impossible to entirely eliminate complexity and that some forms of complexity will never be eliminated or even substantively reduced, and in these cases they must build mechanisms-processes to rationalize these categories of complexity.  According to Pieter Klaas Jagersma; many companies have expressed serious concerns about their capability to successfully manage complexity and have striven to simplify their business, retrenching to a stable portfolio of core products and processes. Others have attempted to manage complexity through systems, structures, procedures, complex organization, and group decision-making. Only a few have come to grips with the strategic challenge: they have learned to manage a complex business in simple ways improving both share of market, innovativeness and profitability in the process… According to Thomas Butta; complexity, by its very nature, creates obstacles between– where you are and where you’re going… complexity gets in the way… complexity makes everything it touches a lot more difficult… and a lot more confusing. According to John Hagel; biggest threat to business most often comes from too much complexity rather than too much simplicity… Recall old saying ‘keep it simple, stupid’ it’s not a bad rule for management too, simple-minded though it may sound…

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About Joe DePaola

Bizshifts is about business change through-- the art of creative business story telling, transformative business strategies, and framework of creative thinking, re-thinking, and forward thinking about the subtle shifts in business, strategy, leadership, management, innovation, organization... Bizshifts business transformation is based on a fundamental framework for thinking about the power of brand, secrets of business success, differentiation, disruption, strategic negotiation, global strategies, zombie companies, risk factors, yin-yang of selling... BizShifts provides the knowledge base, strategies, tactics that jump-start the business in tough time and powers it forward in good times... Bizshifts provides the latest and trusted global business research, intelligence, concepts, ideas... That identifies what constitutes value for the customer, defines the customer’s value stream and the activities that create value; and accelerates the customer’s value stream flow by innovation and ridding it of waste and redundancy... According to Joseph DePaola; Bizshifts idenities key strategic business shifts that have the most impact on business results with the least effort: They are the little hinges that swing big doors...
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