Sunday, 7 July 2013

The Dynamic Properties of Complexity and Business Resilience

Very few systems are static in nature. In fact, most systems encountered in Nature not only are dynamic, they are frequently non-stationary and their properties are constantly changing. The same may be said of complexity and of its bounds. As we know, complexity is a physical property of every system, just like for example energy. At the same time, for every single physical system, in addition to a value of complexity, it is possible to measure the corresponding lower and upper bounds of complexity. These bounds depend on the system's structure, the way information flows within it and on the intensity of this flow. The upper complexity bound is particularly interesting and it is known as critical complexity. Systems which function in the proximity of their critical complexities are dominated by uncertainty (chaos), their structure is weak and may easily behave in an unexpected manner. In the vicinity of the lower bound of complexity systems are more stable and predictable. Therefore, it is not a good idea to function close to one's critical complexity. It's like having a level of cholesterol which is close to the value suggested by your doctor.

Based on how close a system functions to its critical complexity one may infer its "state of health" or resilience. Resilience is of great importance since it reflects the system's ability to maintain functionality in the presence of sudden and unexpected events (shocks). Our turbulent economy will be characterised by and increasing number of shocks of growing intensity. This is because it is highly interconnected and, at the same time, fragile.

When it comes to selecting a strategy, making a decision or operating any kind of choice, intuition suggests that with all things being equal, the less complex option is better. However, it is not true that a lower value of complexity is always better. This is because complexity - which is measured in bits - not only quantifies the amount of structured information within a system, it also reflects a system's "potential" to accomplish various functions, to evolve and survive. In a biological sense, the fitness of a system is proportional to its complexity. This is why evolution pushes living organisms towards states of higher complexity.

So, is it better to be more or less complex? Like everything in life, also complexity is relative. It is the existence of critical complexity that helps us answer the question. In fact, it is only when we confront the complexity of a system with its critical complexity can we state if it is indeed highly complex or not. The mere value of complexity is meaningless until the corresponding critical complexity is specified.

There are three main types of scenarios which we will illustrate. These correspond to situations in which critical complexity:

  1. remains constant
  2. decreases
  3. increases

Let us analyze a corporation. In general, a growing and evolving business becomes more complex. The three types of scenarios are illustrated below.

A. Both complexity and critical complexity remain constant. An unusual situation. The resilience of the system remains constant.

B. As complexity increases, resilience falls.

C. If complexity decreases spontaneously, the business of the company may be shrinking even though its resilience increases.

D. A good example of voluntary business simplification. Resilience increases.

A. Critical complexity decreases, complexity remains constant. Resilience diminishes.

B. If the reduction in complexity is deliberate, the business is becoming more resilient but it also may be shrinking.

C. An unfavorable situation - a potentially shrinking business, which is also becoming progressively less resilient.

D. A potentially growing business but with rapidly falling resilience.

A. A stable business which, in virtue of a growing critical complexity, is becoming more resilient. Its potential for growth is underutilized.

B. A potentially shrinking business which is becoming more resilient.

C. A potentially growing business which is rapidly becoming fragile and vulnerable.

D. An ideal situation - a growing business with increasing resilience.