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Wednesday, April 07, 2010

Does Real Competitive Advantage Lie in Complexity?

Or are large businesses becoming too complex to be managed and their business models too hard to understand?

by Idris Mootee

Does Real Competitive Advantage Lie in Complexity?My friend Mark Ury sent me a link to a piece on "The Collapse of Complex Business Models". I couldn't help but put my thoughts on the next post. There are so many myths about business strategy and business models. People used these words casually.

What is a strategy? Difficult question indeed and often a business strategy is very complex. Sometimes they are very simple, the business strategy for Walmart is to buy cheap and sell cheap and create market power based on scale and probably the most advanced supply chain information systems (and the lowest possible operational cost structure). The business strategies for Google, Sony or GE or Apple (with the exception of Jobs himself) are complex indeed and even senior executives inside the company may not be able to articulate them in 15 minutes.

Strategy is so closely linked to strategic foresight. The question of how much visibility one can have into the future and how different futures can have impact on business models. It is a matter of foresight horizon, that is how far ahead, and how much disruptions are showing up under the radar. And how much complexity an organization's system can handle. When the very structure of the firm's world is undergoing rapid change, and interpretations about company business strategies and firm boundaries are characterized by ever increasing ambiguity, in that case the foresight horizon can be very complex.

I believe that strategy in the face of accelerated change and complexity should mean organization learning the on-going new practices of strategic foresighting, it is the scanning, interpreting, sensing and constructing the relationships that comprise the universe in which the firm acts or reacts. The many different parts of an organization that foster generative relationships within and across their boundaries - relationships that create new sources of value that need active re-imagination and re-configuration.

Business models are usually not the sole source of competitive advantage and value because of the reason that they can easily be copied, and many believe that is should be kept secret. But is is almost impossible since employees, financial market analysts and business partners need to understand the business models. In the modern information age where business activities are becoming more transparent, it is naive to think that you can run an effective business where only the top executive team can have a deep understanding of the business, or where partners or suppliers "don't need to understand what we do". No one can keep a company's business model secret for long (if at all).

People talk about how business strategy is so complex these days and how most strategies are difficult to understand and/or to manage from a risk and operations perspective. Often it is these complex ecosystems that hold value and make it hard to be replicated. Strategic competitive advantage is created by the combination of strategy, culture, systems, brands, products and services and the by the people that operate throughout the organization. This creates a complex ecosystem that extends beyond the boundaries of the boardroom and indeed the business units.

Many large organizations are so complex that it is hard to fully understand what's going on, particular if you take a system view. They are almost on autopilot. These big enterprises have software systems that interact with specialist systems that form the central nervous system of an organization. But, there is a problem when software behaves in unintended fashion when they get too big and there are too many. There will be unpredictable system behaviors when something is triggered and creates ripple effects. Whether software is to blame for Toyota's recent crisis or not, it does raise a critical question: is software complexity out of control and what toll will its inherent bug exposure exact when millions of lines turn into billions or tens of billions.

The question goes beyond software to that of larger enterprises' decision making processes - everything today is too complex. There's a good piece written in the Boston Globe arguing that some systems, like some businesses, are too complex to be allowed to fail - and therefore this complexity should be averted or abolished in some way by regulators. The idea, in a sense, is that dangerously complex systems are too complex to exist. And bigness is an implicit culprit.

While some talk about the collapse of complex business models, there is a philosophical argument, from an investor point of view, about whether it is better to invest in companies whose business models are easy to understand versus those that are overly complex. But complexity can also be an advantage, and often a very big one. Companies that are successful in leveraging advantageous complexity and eliminating disruptive complexity in their business strategy can enjoy a sustainable competitive advantage over others. In fact, research shows that there is a direct correlation between the successful management of complex business operations and overall company performance and return on capital.

Which do you favor, simplicity or complexity?

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Idris MooteeIdris Mootee is the CEO of idea couture, a strategic innovation and experience design firm. He is the author of four books, tens of published articles, and a frequent speaker at business conferences and executive retreats.

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Blogger Will said...

Great post--fascinating to come across it immediately after writing about emergence this evening (http://crosscutcommunications.com/will/2010/04/dotspots-and-other-emergent-forms-ty-pinkhollyhock/). Complexity is here to stay, and the speed and extent of information exchange are accelerating, so we're only going to face more of these Strategy Paradoxes. Again, great post!

8:51 PM  
Anonymous Michael said...

Intresting thoughts : 1 note about Wallmart : their strategy might be simple but their competitive advantage lies within a business model, which is so comlex, that not even wallmart it self managed to recreate this competitive advantage in Europe.

8:09 AM  
Blogger David said...

Simplicity is the solution for the complicated. Complexity is something else, aka emergence. The examples you have given speak to the complicated.

In an emergent strategy, many uncoordinated things would shape the outcome. Management with its command and control structures, centralization, and measurement are contrary to emergence. This being the case, there really isn't any reason to worry about complexity, because it doesn't happen in the world of business strategy--not yet anyway.

10:18 PM  

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