Things Are More Complex Than You Think
Have you heard someone say it’s too complex and noticed the resulting emotion? Yes, that look. It’s doesn’t seem very positive, right? Well, you’re not alone. A large majority of people who experience complexity in business and life, in general, do so because they can’t grasp multiple moving parts, and of course, if they can’t understand they can’t act.
Take the following fact. When we look around, we get information about our environment at the speed of light, roughly 299 million meters per second. However, the speed of our nervous impulse, which is meant to process information, is several orders of magnitude lower, around 120 meters per second. So, biologically, we quickly get overwhelmed by our environment. We are cognitively limited to process all information about our environment. Luckily, through hundreds of thousands of years of evolution and adaptation, we developed heuristics that helped us compensate for that shortcoming, most of the time without even having the full understanding of what's going on. Still, the modern human wants to understand to act, which seems logical at first sight.
So, in the face of complexity, the common strategy is either to reduce the dimensionality or decompose the problem into small understandable pieces. It called in common jargon, let’s simplify. I am pretty sure that you've heard that too. By dimensionality I mean multiple factors impacting a situation. For example, you are dealing with a low business unit margin whose cause can be many, internal and external, which are neither mutually exclusive nor completely independent, and also changes as time goes by. Internal factors can be low productivity, high direct or fixed costs, leadership, technology, organization and many more. External factors can be customers and their bargaining power, presence of service or product substitute, market maturity, competition and so on and so forth.
Instead of looking at all factors, which you can't because it's complex, you focus on what you can control - costs. So, you decide to cut costs. You start first with fixed costs because they are very easy to cut, then you move to direct costs. You probably have some way of determining what level of costs to cut. You benchmark, you compare with other companies and other industries. For example, you would say the gross margin is too low for that business unit or the HR spending ratio is too high. The interesting thing is that as an executive, you don't really need any experience or any specific competency to say, 'I figured it out, we need to cut costs.' It's as basic as it gets.
Another way to address a low-performance business unit is to plot it on a two-by-two matrix and decide the related action. There are several matrices being used in management, or just take whatever two factors and you have four quadrants. Size of the market and internal capabilities. Or the business unit strengths and weaknesses along with the company vision. One would decide the fate of the business unit as the outcome of the matrix exercise.
This is what we call reducing drastically the dimensionality of the situation to very few ones, usually one or two, so the head can grasp and then act accordingly and simplistically. In other words, one goes from high dimensionality where a multitude of inter-dependent internal and external factors are at play and whose importance is mostly unknown to one or two factors, usually selected conventionally or arbitrarily, to determine what needs to be done. Here, one can easily recognize the extensive use of these matrices in business.
The other way of dealing classically with complexity is to break the issue into manageable components. It's called reductionism and it has a long history of practice since the scientific revolution. We will come to that later. The basic assumption behind reductionism is that the whole is the sum of its parts. Take a country as a market, for example, a company with different product or service lines would attempt to devise an individual product or service strategy usually managed by different people reporting to other people within a matrix organization, then assemble the whole as a country strategy, sometimes ending up with multiple strategies impacting the same customers.
Typically, what happens in those situations is that either the 'simple' action is not feasible, or if it is, it leads to multiple unintended consequences. Hello complexity again. To sum things up, you want to get rid of the complexity 'only in your head,' but it comes back to haunt you. Very interesting, isn't it?
While this can be useful in very specific situations, reducing dimensionality artificially is, in general, a huge mistake because one does not know a priori which dimensions are the most relevant and the consequences can be dire. Well, I see you coming, we need to do something, we need to act when the situation is not good. This is what we do as executives and managers. What do you suggest then? Ok, not so fast. First, it is crucial to understand that things are more complex than you think and by simplifying the understanding, this complexity does not go away. Let me repeat that again. complexity does not go away when you simplify. Okay? Because doing so you just ignore a fundamental feature of business and life in general.
This very fact is painfully difficult to get absorbed by many executives. It's going to take time, but we'll get there, hopefully. This is because they ignore what complexity is and how it is generated. And this is fundamental. Complexity has given rise to a lot of interest during the last 50 years for reasons that I will mention later, but unfortunately not enough in the business world, and as the world is becoming more complex than ever, there is no hiding away.
