Your Business is a Complex Adaptive System

This is a general guide to post-pandemic business management.

A complex adaptive system, as the name implies, is firstly a system that is so complex in terms of interactions and relationships. The system itself is capable of adapting. Adaptiveness refers to the ability of the system to evolve in response to changes in its environment.

There are plenty of examples of Complex Adaptive Systems. The human body, a flock of birds, an ant colony, and financial markets are common examples. A business can be viewed with the same lens. The post-pandemic business manager should be aware that any business is a Complex Adaptive System. The business manager needs to be familiar with complex adaptive systems and apply a business management system that acknowledges that the business is a complex adaptive system.

Within a complex adaptive system, there are relationships between the agent, rules, and the environment, especially nearest neighbours. An agent is an individual part of the system. An ant in an ant colony, a trader in a financial market, or an employee in a business. A department can also be viewed as an agent.

Traditional business management theories in existence today are largely reductionist, that is to say, in order to understand a system, you have to break it down into its individual parts and study the behaviour of each part. In a complex adaptive system, the behaviour of the system is sometimes so complicated that it cannot be fully described by the behaviour of the individual parts. Complex Adaptive Systems call for understanding each small part (agents) but within the greater scope of understanding the system as a whole. The system is viewed as collective. The system itself has traits, behaviours and characteristics. The system behaves like a living being. For example, an ant colony looks alive.

Complexity has been built into almost every business these days, large and small. The relationships and inter-connectedness are numerous and complex. Applying lessons from the study of complex adaptive systems, the business manager needs to view the business as a whole when making decisions, especially when formulating the rules that guide agents.

Most businesses are organized along functional lines, with similar activities being grouped together into departments. The resulting structure is that of a complex web of interaction within departments and across departments. Complexity is built into businesses via the organisational structures, communication systems, and technologies applied.

The business manager must embrace complexity, take it as a given, and understand the complex adaptive systems. This approach will minimize unintended consequences.

Examples of Unintended Consequences triggered by not understanding that a business is a Complex Adaptive System

• Higher sales and higher losses — relentless pursuit of growth lead to ever-increasing sales coupled with an unintended consequence of ever-increasing costs and losses.
• Cost Cuts and productivity — cost cuts leading to lower productivity.
• Leads Quantity trade-off with Leads Quality.
• Pressure on the Marketing department leading to higher sales but very high bad debts and very high returns.
• Emphasis on quality improvements on the product or service, leading to strained employees across the organisation.
• Price to Volume trade-off — you lower the price expecting volume to pick up, then it doesn't.

Higher Sales and Higher Losses

A business manager pokes the complex adaptive system in order for the system to gravitate towards a higher sales level. The goal is to harvest more profits at that higher sales level. After hitting the sales mark, there are no profits to talk about. Instead of profits, the complex adaptive system generates losses. Why?

The system is adaptive. It changes due to changes in the environment. The goal was to raise sales to a new level, the unintended consequence was that costs also raised themselves to a new level, whereby costs are higher than sales. Suppliers, employees, landlords, business partners, grab an increased share of the increased sales. Labour costs more, new rental space costs more, diseconomies of scale creep in, et cetera. The system is complex and adaptive.

It's not always the case that bigger is better because at some levels being big is not optimal in terms of profitability. Growth should not always be a metric to measure success. The growth needs to be critiqued. Growth should come at a reasonable cost. There is no point in breaking the bank, spending an arm and leg on Google ads just to attain that growth, and yet fail to be sustainably profitable at higher sales levels. Sometimes, it is okay not to grow super-fast. It is okay to prioritise profitability ahead of high growth.

Costs Cuts and Productivity

Now, this happens all the time. When a company grows too big and is unprofitable, the business manager pokes the system, and pushes it, so that it produces profits. Cost-cutting measures are introduced. These measures are supposed to make the organisation lean, profitable and efficient. Instead, an unintended consequence of low productivity emerges. The system becomes less productive and less efficient. The system is adaptive. The business managers think she can tinker with some things whilst holding other things constant. The system is complex because all things are interrelated.

To control costs, the business manager(s) decide not to give an annual bonus that employees grantedly expect every year. In response, employees adjust their level of input. Employees are agents acting on simple rules, after all. Employees have a tendency of exerting effort that is commensurate with their perceived remuneration. It is more of a question of justice. In restaurants, employees even go to the extent of stealing kitchen utensils that they are never going to use or resell elsewhere, just to fix the employer. The idea is to make the employer incur a loss that covers up for the “underpaid” gap. Some office workers would deliberately be inefficient after putting in certain hours or effort, claiming that, “they have already put in work that is commensurate with their remuneration, they are not going to go beyond that”.

Whilst cost control is the goal, inefficiencies and lower productivity is the outcome. The system adapts and evolves.

Lead-Quantity versus Quality

The leads quantity versus quality trade-off seems obvious but many business managers overlook it. An emphasis on generating more leads results in a heavily diluted batch of leads which obviously lowers lead quality. If it is a company that separates Sales from Marketing, the marketing team would have ticked their KPI of generating X number of leads per month. But the Sales team, tasked with converting those leads, would have to work extra hard to convert those leads. Because of low quality, most of the leads fall along the way, and only the quality ones convert, but effort is being exerted on the whole batch. The Sales team now sits with a problem. The team is now working harder for less reward. In response, the team can get demotivated, which further affects the team’s productivity, leading to allotting less time and care to the quality leads. Thus, the conversion of the few quality leads within the big batch becomes less than it was before the number of leads increased. The end result is lower sales, which is the exact opposite of what was intended.

The problem here is that of not looking at Marketing together with Sales as one complex system. The business manager was looking at Marketing as an independent function, and predicting the results based on the siloed view. Even though the two are siloed operationally, the reality is that they are inter-connected.

The above example can also manifest in a different way. The sales team could be successful in converting a whole bunch of leads, leading to higher sales. But the sales would be of poor quality. Returns and bad debts soar. Returns would be high because you are convincingly and cleverly selling something to people that do not really want that product. Bad debts would be high because of the poor-quality leads. In order to attain more sales, you loosen your credit criteria, and sell to people who do not afford your products. They struggle to pay, and your collection efforts quadruple. Eventually, you have to write off some of the debt (oops, unintended consequence).

Emphasis on Great Customer Service leading to Poor Customer Service

An unreasonable emphasis on quality improvement on the product or service can stress everyone around that product or service. This then leads to a lower product quality or a lower service quality. This is because the manager is not viewing the business as a complex adaptive system, whereby the system itself is capable of evolving, adjusting, and adapting to a change in the environment.

One area where this manifests patently is retail trade, where the “customer is king” phrase reigns supreme. Shop attendants and cashiers are abused by “Karens”, and they have to take in the abuse because the policy of the company says the customer is always right. Well, apparently, this Karen is wrong this time. One encounter with a Karen in the morning spoils the rest of the day for the cashier to the extent that she cannot effectively offer great service to the 99.9% of good customers that she has to serve. Overall, the employee ends up offering not-so-great service to 100% of the customers (oops unintended consequence). The intention was to offer great service to all, at all times.

The intention was unreasonable. You cannot offer great service to all customers at all times. You will never be able to satisfy the Karens, no matter what you do. Those are situations where the business manager has to empower employees to tell Karen to go away and take her business elsewhere, and also tell her that she will not be able to speak to the manager and its final. Empowering employees in this way, for these special circumstances of abuse from a client, will make employees feel better, and preserve the energy they need to service the good 99.9% of customers.

The business manager needs to view these things as a complex adaptive system. There are numerous feedback loops. They all need to be assessed, in terms of how they will react to a change in one aspect of the environment. You cannot adopt one dogma such as the customer is always right and operate accordingly. The management theories that focus on, ‘the customer is always right” were formulated a long time ago before we discovered that businesses are complex adaptive systems, and before we baked complexity into each and every system we have on earth.

The customer is king thing is emphasized in most management books. Generally, there is an avalanche of terrible business management books.

Round-Up

There are plenty of examples in business. The above are merely illustrative. The principles of complex adaptive systems that the post-pandemic business manager ought to know are simple. The manager does not need to be an expert on systems analysis. He or she simply needs to be aware that the business is a complex adaptive system that needs to be looked at as if it was a living creature.

The business manager needs to know the following:

• Feedback loops
• Emergence
• Self-organisation

The business manager needs to monitor the vast feedback loops embedded in the business. Feedback loops are the most important feature of complex adaptive systems. The business provides plenty of them. Thanks to technological advancement, there are emerging ways to observe, capture and monitor most of the feedback loops. There are even models that can simulate how a complex adaptive system operates based on simples sets of rules.

Beyond feedback loops, the business manager ought to understand that complex adaptive systems are emergent. An emergent property is a property that a complex system has but individual members do not have. These emergent properties lead to unpredictable outcomes. This is why a systems approach is usually better than a reductionist approach in managing a business.

Beyond emergence, self-organisation is another property that the business manager ought to understand. Understanding this will help the manager to structure the business as somewhat of a DAO (Decentralized Autonomous Organisation) depending on the strength of the self-organization property in that business.

Ciao!