Leaders have a unique challenge in the 21st century. The ecosystems (the countries, markets and industries) their organisations operate in are increasingly volatile, uncertain, complex and ambiguous. And missing critical signals amongst the increased noise risks exacerbating existing fault lines in their organisation. What should leaders do?
Subject matter experts solve complicated issues at functional levels. But complex questions (e.g. top line growth, corporate culture, change or risk management) cut across specialised silos. Complexity therefore is always escalated up; making managing complexity the key strategic challenge for executives in the 21st century.
Yet complexity remains widely misunderstood; described as something ‘very complicated’ or confused with chaos theory. Complexity science itself ascribes distinct characteristics (non-linearity, emergence, unpredictability) that render traditional 'solutions' (e.g. best practice, ideal leadership styles) entirely context dependent.
To face a complex issue means to deal with a ‘brownfield’ context - never a ‘greenfield’. Complexity is located in the system (e.g. the organisation, market, population) and always has a history, yet is constantly evolving. And as we engage with it, it changes - often in unpredictable ways. This is why answers in a complex system often appear only in hindsight - though this doesn't lead to foresight (e.g. it seems obvious now that sub-prime mortgages were a bad idea, but likewise, today's Quantitative Easing is variously described as the only thing saving the global economy or creating an even bigger future crash. Only time will tell).
In a complex world context is king.
Idealised futures are an illusion - as are strategies based on certainties designed to get you there. The collapse of Michael Porter’s Monitor Group in 2012 showed that while rigorous strategic analysis can help explain how excess profits were created in the past, it's a poor predictor of how to generate them in the future. Even the best formal strategising can trap leaders into believing the future will be an extension of the past. But if the future fails to conform to expectations we are left naked and fragile, exposed to the elements.
Like King Canut ordering back the tide, we discover powerful natural forces defy command and control.
Yet, the natural world itself - of which man is a part - has adapted wonderfully to exploit complexity. Evolution works through a process of increasing variation (of options), basing selection on what works now, and replication (or starvation) of options based on hard evidence of suitability. Can leaders learn something from nature about adopting a rigorous external focus, increasing awareness of options through rapid trial and error, and creating mechanisms to amplify or dampen options in order to thrive?
Effective horizon scanning uncovers emerging signals that signal where and what to act on before its too costly or too late. Technology is a great enabler in this, if one caveat is kept in mind: technology without human interpretation is meaningless. Google may find anything you ask, but can’t tell you what to ask for. Uncoupled from humans technology merely increases the noise surrounding the signals. Data is dumb - to become meaningful information human knowledge must be applied.
Humans should be at the front and back end of technologically-aided decision-making - defining the issues to explore and discovering its real meaning. Technology therefore must be designed to fit the human - the way we are now, rather than the way we'd like us to be. It must augment our natural sense-making abilities, which have supported human evolution through millennia (a best practice case?).
Critical knowledge flows through organisations in human networks. Navigating these flows effectively can reveal the origins and dynamics of change. And as humans share such knowledge naturally, extrinsic rewards aren’t required to tap this. Humans naturally create and share knowledge in the form of narratives - ‘micro-stories’ - that are both universal (every culture has them) and democratic (no barriers exist to sharing). These are the 'water cooler’ stories that spread insights and enable other people to make sense of the world around them so they can act better in it. Harnessing these narratives is critical to making sense of and navigating complexity.
Critical knowledge can be leveraged at little extra cost.
Leaders must create the conditions for contextually-appropriate knowledge to emerge. Managing for serendipity (‘pleasant surprises’) means seeking fresh insights, rapidly field-testing coherent ideas and replicating success. But as genuine breakthroughs don’t come from established thinking patterns. Leaders must learn how to break through the hard-wired autonomic brain we rely on - which seeks first-fit, rather than best-fit, solutions - and instead become receptive to novel ideas. Strategic leadership is less about engineering future visions than it is about increasing awareness of the critical factors in our ecosystem, 'identifying the biggest challenges in them and devising coherent approaches to overcoming them'. Real strategy is about seeking the truth of the current position.
Navigating and exploiting complexity means leaders must take multiple perspectives to discover genuine insights. Going beyond objective numbers to understand the why. Rapidly testing coherent ideas as ‘safe-to-fail’ experiments. and feeding success, whilst starving failure of resources. No-one can ‘cut through’ or ‘simplify’ complexity - nor should we want to. Complexity contains rich opportunities in a changing world. Leaders employing naturalistic approaches can exploit complexity profitably.
SenseMaker® - an innovative technology first deployed by the Singapore government to detect weak signal terrorist threats - taps into mass organisational knowledge flows and helps join up disparate information from silos to form actionable knowledge. It presents whole network perspectives leaders can rapidly see and understand, helping unlock the organisation’s present evolutionary potential.
For more information about how to make sense of, navigate and exploit complexity for organisational success contact firstname.lastname@example.org
Thailand’s political landscape is drawn along class lines. In 2011, the party of the poorer north made a populist election pledge to “put money into poor farmers’ pockets and stimulate domestic demand” which helped drive it to election success. But what happened next exemplified why leaders shouldn’t try to command or control complex systems like markets.
The election pledge was promptly implemented by the new government. They would buy rice from poor farmers at twice the market rate. To cover the losses of this extreme intervention the government stockpiled the rice - 18 million tonnes worth, or half the annual global trade - in an attempt to push up global prices before selling on its reserves. Thailand’s position as the world’s biggest rice exporter contributed to it’s belief that it could 'make the market' in such a manner; yet it's failure to understand how actions in a complex system are never isolated or reactions so simply predictable has contributed significantly to Thailand's recent problems.
First to respond were other major rice exporters, India and Vietnam, who quickly increased their supply to meet global demand - containing the global price of rice. In fact, the only thing to rise dramatically was the Thai rice mountain, which left the government in a ‘stick or twist’ quandary: sell the rice at a huge loss or continue to stockpile further and wait out the market. But while the Thai government waited out the market, the market out waited it, sure in the knowledge that as the quality of the stockpiled rice deteriorated so would it's market value. When the poorer-quality rice flooded the market, prices struck rock-bottom. The market won because it was resilient - it had options. Thailand did not. The rice mountain policy cost it $12,5 billion in the first year and $15 billion in year two - equal to 4% of GDP.
Beating the market is beyond the ability of many organisations and almost all governments. The market is complex - it has almost infinite variation from which an optimal solution can be selected - while organisations are limited to a few ‘good’ or ‘best practice' options that can become obsolete in a moment when changes in the wider eco-system gang up on them. Jack Welch, former GE Chairman, warned that “if the rate of change on the outside exceeds the rate of change on the inside, the end is near.” It’s a lesson learned too late by Thailand and others, not least the former US Federal Reserve Bank Chairman, Alan Greenspan.
In his testimony to Congress on October 24th 2008, following the collapse of Lehman brothers and a global slump that wiped “no less than $12.8 trillion” from the US economy alone Greenspan expressed ‘shocked disbelief’ at a fallout ‘much broader than anything I could have imagined’ because his subscribed ideology - that informed the mechanisms by which the US economy was regulated - had been working ‘exceptionally well for 40 years or so’ he explained.
Yet hubris reigned in financial services - innovation had not perfected the management of risk and unprecedented occurrences were more likely to occur because of the financial innovation that more tightly coupled the global economy. Cleverness doesn't trump complexity - it merely makes it more exponentially likely that something that has never failed before will do so now as we take our eye of the ball. Alan Greenspan and Thailand learned the third lesson of complexity too late and too hard ...
The third ‘rule’ of complexity is that it changes as we engage with it
The 20th century’s ‘great acceleration’ brought global change at unprecedented scale. Medical advances spurred population growth; rapid urbanisation generated enormous consumer demand; and mass industrialisation and production, combined with technological advances, brought the capacity to exploit this. Yet, it also brought increased levels of complexity; the unruly off-spring of modernisation.
Today’s fragile global economy heightens the risks organisations face. Government attempts to mitigate these risks focus on regulation that may have prevented the previous crisis, but arguably not the next one. The effect of new regulation will be to increase short-term business costs and systemic risks due to a widespread failure to comprehend the role complexity plays.
Regulatory costs to business are well-documented: since 1998 the cumulative cost to UK business alone has been estimated by HM Treasury at 90 billion pounds; while compliance with even a few sections of the US Dodd-Frank law have been estimated at $100-150,000 per firm (The Economist, ‘Too Big Not to Fail’. Feb 18th, 2012). While costs are predictable, the risks of unintended consequences - of which history is worryingly replete - are not.
Designing the future to be an improved version of the past often has critical impact in the present:
The first ‘law’ of complexity is that hindsight doesn’t lead to foresight
Title is attributed to Niels Bohr, the renown physicist
Shape the Future
Don't just adapt to it