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How to manage complexity in global organizations

By Professor Ulrich Steger, Christoph Nedopil and Wolfgang Amann - March 2011

If there was any further need to prove the interconnectedness of our global economy, the biggest financial and economic crisis since the Great Depression has delivered it. In previous crises a variety of boundaries (in the housing, banking and industry sectors, as well as between nations, or at least regions) confined and limited the impact of actions and decisions to a defined space. This is no longer the case. As companies are forced to operate across borders (nothing has stopped that trend), the complexity they need to manage escalates dramatically – as does the opportunity to get overwhelmed.

But how can business leaders effectively manage complexity without being overwhelmed? Can a complex organization truly operate with more simplicity? As the topic of complexity has been at the forefront of research priorities, our new book, Managing Complexity in Organizations[1], outlines areas that leaders can address to obtain solutions to managing complexity and outperforming. Three of these key areas (each summarized below) include implementation, standardization and leadership.

Beware the implementation trap – your work is not done with the plan
General observation shows that the genesis of most corporate failure happens in the implementation phase more so than in the conceptual or planning phases. Nowhere can this be better seen than in the well-researched area of mergers and acquisitions (M&As). Depending upon the benchmark, between 50 and 80 per cent of all major M&A actions fail to create value. The majority failed not necessarily because they were the result of an ‘empire builder’s’ quest but because they failed during the implementation phase. Key details were overlooked; leaders didn’t consider the softer sides of management and applied inconsistent approaches. The necessary steps to successfully manage, or reduce, complexity are similar. Though the entire leadership team must get countless details right, the many decisions they will need to make should be guided by a consistent strategic logic, which must be implemented over time.

Successful management is not, despite some current rhetoric, about ‘leading the revolution’ or ‘thinking outside of the box.’ Instead, it really centers on the discipline of making hard choices during the daily grind and under uncertain circumstances. It is also about having the readiness to observe, learn and correct mistakes, when needed. In most cases, the key success factor is consistency of implementation and being guided by a common set of operational criteria throughout the organization. Otherwise, the detailed decisions within an organization contradict and, most likely, neutralize each other – not to mention the confusion that can be created as a result. Priorities should be complemented by a desire for simplicity because organizations and processes are already complex enough. Every leader should be self-confident enough to fight for simplicity.

Standardize the product or service offering
A second way to simplify is to reduce the complexity of the product portfolio by standardizing, or modularizing, key product components to reduce variance and with that the number of different parts. Companies as diverse as the German automaker Volkswagen (the leader in platform strategy, originally invented by General Motors in the 1960s) and the British detergent and cleaning products manufacturer Reckitt Benckiser demonstrate how to simplify the value-creation process and generate economics of scale. Once the key criteria are defined (such as standardizing all car parts within a certain size range that have no visibility or brand-specific value differentiation), the framework for many detailed decisions will become clear, including all commodities (cables, batteries) being bought centrally, motors being used in a variety of products and the like. Sourcing and production can, therefore, be standardized.

The fish starts to smell bad from the head first
Ultimately, behind reducing complexity is the issue of leadership. Can management convince? Do colleagues follow with enthusiasm? The alternative is the ‘firefighting pattern,’ which can be seen in many bureaucratic organizations. In that case, management tries to cope with complexity on an ad hoc basis and, as such, is too often frustratingly running behind the market.

Consistency and calculability is the first requirement for leadership in complex environments. Leaders must not add confusion by erratic behavior, perpetually changing decision criteria or using fashionable but alien buzzwords. Simultaneously, a leader has to credibly play different roles. He or she must be coercive in crisis situations, authoritative when build a new business, affiliative in moderating situations, or able to coach, for example, in an effort to move towards certain behaviors.

Once the right solution for a specific situation is found, communication – pertinent and consistent with a focus on the right questions that may be wrapped in a well-told ‘story’ – is clearly essential. The CEO of one of the most global MNEs has imposed the following rule: no presentation can have more than five slides and the first slide should always be the ‘mother of all slides’ – the core strategy. As the CEO used to say, “If you cannot explain your solution on one slide, you don’t have one.” The other four slides should then explain the suggestion or investment contribution, which leads to the strategy’s successful implementation.

The art and science of management has gone through many phases. In really creating success and taking a path that leads to outperformance, we suggest looking into smartly managing complexity – proactively, before it overwhelms and performance deteriorates!

Ulrich Steger is a professor at IMD leading research on complexity, sustainability and global corporate governance. Along with Christoph Nedopil, and Wolfgang Amann, Professor Steger is author of the new book Managing Complexity in Organizations – Text and Cases, Palgrave Macmillan, 2011.

[1] Nedopil, Christoph, Ulrich Steger and Wolfgang Amann: Managing Complexity in Organizations – Text and cases. Palgrave, 2011.

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