Through the complexity of organizations

In the 50's, the average lifespan of listed companies (S&P500) was 60 years, today, it is less than 20. In an increasingly globalized, volatile and uncertain world, organizations face increasing challenges to survive and be successful in their business. Every day in any newspaper or social network, we find business success stories, such as Apple, Amazon or Facebook, just to mention some of the most prominent. But on the other hand, there are many times more cases of "failures", such as companies that have not met their expectations of growth, return on investment, or have even gone bankrupt. So, the question is obvious: what do we have to do to make our company successful? We regret to say that this question has hundreds of interpretations, but not a single answer, it is a topic that has generated and will generate many debates among experts and academics. In this sense, in this article from the Innova Institute we will reflect on "how" the way of understanding an organization and its strategies affect the results they obtain.      

With the irruption of technology, social networks and the digitalization of processes, organizations have become increasingly complex and their relationships with the environment more unpredictable and difficult to model. In this sense, one of the reasons for the many failures is the use of deterministic approaches that seek to simplify this complexity. But what does this mean? That every scenario can be reduced to a concrete set of variables whose relationship is linear, cause-effect (a change in A will produce a change in B); such as, for example, the frequently heard phrase, "investment in digital transformation will generate better operating results". These approaches are ingrained in our way of thinking and have been the drivers of major breakthroughs in many disciplines such as physics, chemistry or engineering. However, we wonder if they are just as useful and valid when analyzing complex organizations and their growth strategies, following Tsoukas' (1998) reflection:

"If nature turns out to be less deterministic than we thought, then perhaps the approach - hitherto deterministic - that we use to understand the disorder of the social world, needs to be revised".    

This is why, in recent years, a new academic current has proposed analyzing organizations and their processes as complex systems. That is, as a set of agents or systems that make up a whole and that their relationships are not linear, cause-effect, but of mutual causality. Without wishing to delve into the theory, we propose a set of empirical cases that allow us to understand complexity from a different perspective and thus better understand the reason for some business failures.

Case 1. Complex systems and the adaptation of a business model

When the market undergoes disruptions, for example the emergence of COVID-19 or the emergence of a competitor such as Amazon, companies know that they must adapt to the new circumstances and that some components of their business model will need to be adjusted to this new environment. It may be necessary to adapt the processes that manage the relationship with customers, it may be necessary to adapt the marketing channels, or it may be necessary to change the target audience, it depends on each case. 

But why do some companies fail to do so and die, and why do others try but fail?

The action of adapting any of the components of a business model to the changing circumstances of the market is called "Business Model Adaptation", as opposed to "Business Model Innovation", which is changing your business model so that you are the one who is going to disrupt the market. The VUCA environment in which organizations move today, characterized, as the name suggests, by volatility, uncertainty, complexity and ambiguity, together with the new economy brought about by COVID-19, requires an adaptation of the business model of most companies, especially SMEs.

Why is it so difficult to adapt a business model?

The adaptation of a business model requires the management of a complex structure of components, processes and teams of people, which in turn require different types of adaptation depending on their particular situation and the needs they have at any given time, without there being a direct causal relationship between the result that will be obtained and the actions that are carried out to carry out the adaptation. 

From the Innova Institute of La Salle - URL, analyzing the adaptation of a business model from the point of view of a complex system, we have determined three factors that are key to a successful adaptation:

1. The ability to learn and adapt to change of the members of an organization.
2. The successful implementation of the technology required for the adaptation.
3. The adaptation and leadership of its managers, i.e., the organization's governance.

In other words, for the successful adaptation of a business model, factors such as people's ability to learn, their predisposition to change and overcoming operational inertia are key to the human side of an organization. On the other hand, the adaptation of the business model, in all likelihood, will require the digital transformation of some of the processes of the components that are part of that business model, so there is a direct responsibility of the ICT areas in the success or failure of the implementation of the changes. And finally, the ability of the organization's management to get out of their comfort zone, synchronize the objectives of all areas so that the adaptation has coherence and their ability to lead the digital transformation of their company, also have a fundamental role in the adaptation of the business model of a company or organization.

From the Innova Institute we propose that only with this non-linear vision of the problem of adapting business models to the new economic reality caused by the COVID-19 will companies and organizations be able to successfully overcome the challenges that the change entails.

Case 2. Digital transformation 

When we talk about digital transformation, we understand that we are referring to the way in which current organizations are incorporating technology into their structures and processes. For example, when a company decides to collaborate with Amazon to sell its products, it must make a substantial change in the way it carries out its activities. For example, too, if a city decides to have a sensor system to detect free parking spaces or to detect those garbage containers that have reached their limit, a massive implementation of technology is taking place. Finally, if a supermarket chain proposes, with the customer's authorization, a system for monitoring the needs of its customers by analyzing their consumption behavior, using big data. These are all digital transformation actions.

Sometimes these actions are easy, sometimes difficult, sometimes impossible. The difficulty of succeeding in digital transformation actions is never usually a problem that lies in the technology. In general, the technology can be assumed to be sufficiently proven. Nor is it usually, nowadays, a problem of rejection by the people in the organization. Most of us are familiar with the technology. Despite all this, the success rate for this type of project is less than 70%. In other words, out of every euro invested, only 30 cents of the money spent is spent on successful projects. What is the reason for this high failure rate? There is no single answer. 

These difficulties are studied from the perspective of the technological impact on our organizations. In other words, what must be taken into account to foresee how technology is going to impact the organization? That's right. Technology is not innocuous. When it is implemented in an organization it can have perverse effects and damage the profitability and competitiveness of the organization. Despite many years of study on technology impact, we still do not have solid methods to overcome the 70% failure rate mentioned above. 

In a first line of study, researchers said that technology forces the organization to change and that if the organization did not make these changes it implied the failure of the performance. In a second line, the opposite was said. That is, it is the technology that must adapt to the organization. If it did not or could not do so, there was a high probability of failure. It seems that, according to the latest studies, the right way is neither the first nor the second, but both at the same time. In other words, it is necessary to find the balance between adapting the technology and adapting the organization that best responds to each case of digital transformation. Finding the balance is not easy.

Worse still, the achievement of these balances is only obtained after the organization has learned which is the best one. In other words, there is no recipe book of potential "trade-offs to apply". In short, the problem of organizational impact has three components, the technology, the organization and the way the organization learns. In addition to the three components, it is not clear what the causality between them is.

In short, the study of organizational impact leads us to propose complex systems formed by the way in which technology is implemented, the way in which the organizational structure adapts to the technology, and, finally, the way in which the organization learns to relate technology and organization.

Case 3. Ecosystems 

Understanding organizations from a complex system approach makes it possible to recognize the properties that emerge from an intentional combination of elements, which are organized in a specific way to generate the best results. This intentional organization makes it possible to take advantage of the resources from their combination, but it also implies the loss of some of their individual potentialities (Moran, 1990). In other words, by deciding to use the element for a specific purpose and in a specific organization, the possibility of using it for other functions is limited.  

This implies that an organization must ensure the productive process or the provision of the service it offers in its social purpose, but it must also create the elements for its survival, either by defining how to organize itself to fulfill that purpose, or by being attentive to changes in the environment and making the pertinent adjustments, which is called a self-production function. In this sense, the complex systems approach makes it possible to understand that there are multiple causalities in an organization: a linear one, which refers to the production or service provision function, which can be controlled; a retroactive circular one that limits the organization's decisions, since it forces it to regulate itself and adjust in response to external needs and signals; and a recursive one that refers to the effect that the organization causes in its environment. 

Traditional thinking states that the conditions of the environment can be determined to facilitate the operation and improve the results of organizations based on economic models, programs and public policies. It also states that by knowing how to manage and organize the company's resources and capabilities, strategies can be devised to outperform the competition. However, these approaches have been limited in describing the behavior of organizations, even more so in turbulent and changing environments such as those we live in the 21st century. 

Aspects such as technological developments that eliminate the barriers of cost of ownership, location and response time; in combination with the increase in society's concern for social, environmental, psychological factors, and the care of the so-called common home, in addition to the constant improvement of the individual capabilities of human beings, and their constant dissatisfaction and desire for change, have generated various behaviors and proposals by organizations and their members, which can be interpreted from the complex systems approach. 

It can now be perceived that the excessive accumulation of capital in the hands of the owner of the means of production or investment is limited when business models based on collaboration emerge, giving rise to modalities of use by contract, temporary use, donation, exchange of time or products, and the search for common causes and feelings of belonging. The innovation processes, which were supposed to give results according to the size of the investment, mutate towards actions of permanent improvement thanks to the contributions of independent developers, who feel attracted and recognized by these business models, and by the absence of contractual ties. An increase in the action of civil organizations to mitigate the negative environmental impact of traditional processes is identified. The impotence of some guilds to limit the emergence of agile and flexible initiatives that adapt quickly to the needs and whims of the users, through micro contracts, and a wide offer of proponents and a great capacity for adaptability, is also recognized. 

These changes highlight the need to identify and develop new capabilities in order for organizations to survive and perform well.

Case 4: Collaborative projects.    

A collaborative project is one carried out by several organizations -independent of each other- that collaborate over a period of time to achieve a common goal. A clear example of these are the European projects, an initiative led by the European community, which aims to solve a problem or take advantage of a relevant opportunity at European level, in which different organizations (research centers, SMEs, startups, large companies) from different countries work together to develop an innovative and novel idea, whose ultimate desire is to stimulate innovation and technology transfer to society. The fact that they seek to develop an innovative technological solution, in a collaborative way and among different types of organizations, makes their management more complex and their objectives more difficult to achieve.     

To manage these projects, many experts recommend using traditional approaches - focused on the "project plan" - such as the well-known PMbok. These are proven to be effective in the vast majority of projects, but given the complexity and uncertainty of collaborative projects, assuming that following PMBOK best practices would generate positive results could be a big mistake. Several studies support that applying traditional practices to collaborative projects can be counterproductive and generate negative results.

If we use another approach, that of complex systems, we are allowed to understand these projects in a holistic way and see that the interactions of their agents are not a simple cause-effect (i.e. good practices generate good results). That management techniques depend on the number and type of collaborators involved, and in turn, on the technological complexity of the product to be developed. The interaction between these three subsystems is what will generate that the result of the project meets the expectations in terms of product and, at the same time, that it is efficient in the use of resources.   

The type of project management goes hand in hand with the type of product to be developed and the team of collaborators, forming these three, a single complex system. It is the result of the mutual interactions between the three systems that will generate the results of the project. The project management system will use more traditional or more agile techniques depending on the type and number of collaborators and how innovative the product to be developed is. The number of collaborators involved and their type (companies, universities, etc.) will clearly depend on the type of product to be developed. The technological product will be the result of the integration of the knowledge of the team members and the management tools that make it possible. The result of the dynamic interactions between these three subsystems (product, management and team) throughout the project, generates the final product, which can range from a new scientific knowledge, an innovative product in the market to a technological solution to an existing social problem.  

Traditional project management practices have been (and still are) very useful in environments of low uncertainty, in which it can be assumed that the fact of applying a particular management model will generate better results in the project. But when the environment is more complex and uncertain, this assumption can lead us to make bad strategic decisions. That is why, due to the complexity and uncertainty in which collaborative projects are developed, understanding them as a complex system will allow us to see more clearly the interactions of its components and thus be able to define certain patterns and combinations for each of the subsystems that maximize the overall outcome of the project.

Case 5. Internationalization of companies. 

Being able to sell our products or services in another country, gaining access to new markets that make it possible to increase a company's turnover, has been one of the central desires or needs in the business strategy of the vast majority of companies over the last 50 years. Thanks to globalization and advances in logistics systems over the last 50 years, a large number of companies have been able to internationalize their businesses. Among them, we highlight the case of Apple, which has more than 300 stores in 20 countries and markets its products in more than 140 sovereign states. Another resounding case is that of Facebook, which has more than 2.5 billion users worldwide. In the fashion industry, the Spanish giant INDITEX, which has more than 7,000 stores in 96 countries, including brands such as Zara, Pull&Bear or Bershka and in turn, markets its products in 90% of the countries. These examples, already well known by all, show us how crucial it is to internationalize the brand for any company with growth expectations. Now, we have only mentioned the most relevant success stories, but behind them there are thousands of situations of strategic failure. A study conducted in the fashion industry (Chiva, 2014) shows that the strategy of internationalizing a company is very complex, and that its results depend on several interrelated factors. 

Traditionally, internationalization has been related in a cause-effect manner as, on the one hand, the result of the organization's ability to learn and adapt to another country, and on the other hand, the ability to innovate in new markets. In other words, it is deterministically associated that the better the learning capabilities, the more effective the internationalization strategies will be, and likewise, the more innovative the company is, the better results it will obtain when internationalizing its products. However, what happens in reality is much more complex and uncertain, therefore, assuming these causal relationships can lead us to strategic errors when taking our company to foreign countries. 

Given the complexity of this scenario, studies have found that these relationships can also be the opposite. In other words, internationalization generates organizational learning of different types and, on the other hand, it also contributes to improving the company's innovation capabilities. Thus, these three subsystems are articulated as a complex system, where the causality of the relationships is mutual and dynamic over time. There are empirical examples that support this approach. For example, two Spanish textile companies, in their desire to internationalize their brand, have learned and innovated differently while expanding their business to other countries, whose turnover results were also very different.   

Company managers should understand that learning, innovation and internationalization work as a complex system, whose relationships are mutual and dynamic. Changes in any one of these will impact the other two and vice versa. This understanding will help them to take their companies to global scales, generating radical innovations and deep learning; or on the contrary, to have a minor impact on international markets, generating incremental (non-radical) innovations and superficial learning. The way in which this system is understood and how each of the subcomponents and their relationships are worked on will lead to very different results in terms of scope, profitability and turnover.