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Complexity Management

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Entries

Entry done as an activity of the course: Odyssey of Philosophy and Informationheld in Munich University of Applied Sciences

Marie-Christine Rath (11.06.2019) 
Julia Kölm (11.06.2019) 
within the course "The Odysee of Philopsophy and Information" facilitated by J.M.Díaz) 

 Overview:
1 Complexity Management
1.1 History of Complexity Management
1.1.1 Adam Smith and David Riccardo
2 Models for managing complexity
2.1 Network Theorie
2.1.1 information in network theory
2.1.2 illustration in network theory
2.2 Balanced Scorecard
2.2.1 The perspectives
2.2.2 Strategy mapping
2.3 BCG Portfolio Matrix
2.3.1 The four states
2.3.2 The Matrix
2.4 Zero-Base-Budgeting
2.4.1 Product complexity
2.4.2 Organizational complexity
2.4.3 Process complexity
2.5 Complexity Reduction
2.5.1 How Complexity Reduction works
3 Complexity and philosophy

Abstract:Management of information in times of digitalizitaion has become more and more complex. Mass customization more specifically, has evolved tremendously over the last few years. Since the early pioneers of an exchange relationship, as shown by Adam Smith and David Riccardo and primarly explained, there have been a variety of systems today to manage the flow of information to organizations. The new models that will be presented in the following are the network theory, which helps to simplify complex structures, the balance scorecard, aiming to reconcile the different target relationships in a company and their conflicting goals, the BCG Portfolio Matrix, which is one of the most common methods used to deal with complexity in companies by prioritising products and brands into four main categories, the Zero-Base-Budgeting, that is being used for analyzing the stage of complexity by starting from a base of zero and finally the Complexity Reduction as a tool to deal with complexity.

Having the right and decisive information (transforming big data to smart data), is a component that enables companies to respond to their customer needs and thus to operate successfully on the market and withstand the competition. The philosopher John Bateson, who once said: "Information is the difference that makes the difference," had already recognized this in an abstract but overall suiting context.

Yet, relying on the most recent technological advances, these new business models often increase the level of complexity in management. The creation of added value and market differentiation are a direct result of one’s ability to manage this complexity. Hence, since operational excellence is strongly correlated to the ability to simplify complex entities, good managers must have an intuitive feel for this characteristic, understand it, and work hard to reduce it where possible.


Acknowledgement:New discoveries in various scientific fields of study since the twentieth century showed that the true nature of reality is not knowable by explaining the mysteries of nature by means of simplifying it to its essential elements. An acknowledgement of the complexity of nature and the various ways in which nature and humans interact with one another led to what is now generally known as complexity theory. Understanding that the world is constituted by complex phenomena introduces a new way of looking at and thinking about the natural and social world.

Achieving a sufficient understanding of complex phenomena remains a scientific task that requires innovative ways of doing research. Internationally, complexity theory has established itself over the last two decades as a discipline of central importance, engaging in groundbreaking ways with problems of paramount importance in the human and natural sciences. Complexity theory is recognized worldwide as a theoretical framework with crucial implications for the way we understand the world and how we act in it, specifically in the light of the failure of traditional scientific theories that aim to explain complex phenomena with methods that deny their complexity.

1 Complexity Management

According to Schuh, the management of complexity is “the design, development and control of business activities regarding products, processes and resources. By managing complexity it is aimed to dominate diversity along the whole value chain so that customer satisfaction as well as organizational efficiency gets maximal” 

It can be further detailed as follows: lean management is an answer to increased complexity of the production program and the manufacturing techniques, whereas business process reengineering focuses on organizational complexity. Variant management as the third method concentrates efforts of product complexity and customer complexity. 

Complexity means that there are more elements in a system than it can link precisely. A system must therefore choose which elements it places in relation to each other and how. This circumstance is also called contingency in sociology. People must therefore choose how they combine elements with each other.

1.1 History of complexity Management

Between 1500–1700, there was an important and dramatic shift in the way that people in Europe perceived and understood the world. Through the works of thinkers such as Francis Bacon, Galileo Galilei, Johannes Kepler, Rene Descartes, and Isaac Newton, the Western world underwent a scientific revolution. This resulted in a shift from a worldview governed by the Church and Christian theology and ethics, to that of an inanimate, machine-likematerial world governed by natural forces and exact mathematical rules.

Rene Descartes  - a brilliant philosopher, mathematician, and scientist — paved the way into this new way of thinking. His method of analytically breaking down problems into smaller components, and solving and organizing them in a logical fashion has become an essential characteristic of modern scientific thought. Descartes believed that the universe could be described and understood in terms of exact mathematical laws and relationships; this vision was reflected in his landmark development of analytic geometry, or the use of algebra to describe geometric shapes.

1.1.1 Adam Smith and David Riccardo

Since the beginning of the national economy at the end of the 18th century, research has been conducted into the causes and determinants of the international division of labor. Even if two countries produce the same goods, e.g. coal and wheat, there are often considerable absolute differences in production costs (e.g. due to different climate zones).

Adam Smith therefore justified the advantages of specialization through international division of labor in an illustrative example in 1776: A family father who acts farsighted, follows the principle of never trying to produce anything he can buy cheaper elsewhere. That means the tailor doesn't cobble his shoes himself, but buys them from the cobbler. And likewise the cobbler does not sew his clothes himself but buys them from the tailor.

In the Two-Goods-Model with a labor input of 8 hours, two countries such as Spain and Germany can produce wine and grains in the units indicated in the table.

Table 1: division of labor

Both countries could of course produce both goods, but if Spain produces more wine in the same working hours than Germany, labor productivity in wine production in Spain is 33 1/3 % higher than in Germany. Vise versa for Germany with grain: If Germany produces more grain in the same working hours than Spain, labor productivity in grain production in Germany is 60% higher than in Spain. In conclusion, if each country specializes in the production of goods for which it has absolute cost advantages, total production can be increased through international division of labor.

But what happens when a Country A has cost advantage within the production of both goods. Is there no further division of labor threw country A and B? 

David Riccardo was an English economist and set up the theorem of relative cost advantages which analyzes exactly this problem. Assuming Germany increases its labor productivity in the production of wine from 6 to 9 units in the same time and can now produce both goods itself more cheaply, but grain cheaper than wine. Thus, Germany has absolute cost advantages in the production of wine and grain but relative cost advantages in the production of grain, as this can be produced more productively than wine. The division of labor between the countries is therefore nevertheless profitable.

Table 2: Opportunity costs

The opportunity costs for one unit of wine would be higher, expressed in units of grain, which would have to be sacrificed. Therefore the production of grain gives Germany relative cost advantage. 

Conclusion: If each country specializes in the production of goods for which it has relative cost advantages over another country, total production can be increased through international division of labor.

2 Models for managing complexity

2.1 Network Theory

2.2 Balanced Scorecard

2.3 BCG Portfolio-Matrix


3 Complexity and philosophy

The science of complexity is based on a new way of thinking that stands in sharp contrast to the philosophy underlying Newtonian science, which is based on reductionism, determinism, and objective knowledge.

Newton once said that to understand any complexity, you need to take it apart. You need to look at each component of the complex system or problem as an individual. If those are still complex, you need to analyse the components. At some point you will end up with the smallest possible parts – the atoms. Once you are there, their evolution will turn out to be perfectly regular, reversible and predictable, while the knowledge you gained will merely be a reflection of that pre-existing order.

Newtonian ontology is materialistic though: it assumes that all phenomena, whether physical, biological, mental or social, are ultimately constituted of matter.

Nowadays we know, that we cannot apply the ontology to all business models. For managing complexity within an organization we need methods that consider all the given components and sections of an organization.




References

  • Capra, F., & Luisi, P. (2014a). The Newtonian world-machine. In The Systems View of Life: A Unifying Vision (pp. 19–34). Cambridge: Cambridge University 
  • Höpner, Martin; Krempel, Lothar (2004): The Politics of the German Company Network. Competition & Change 8, 4: 339–356.
  • Krempel, Lothar (2005): Visualisierung komplexer Strukturen. Grundlagen der Darstellung mehrdimensionaler Netzwerke. Frankfurt: Campus Verlag.
  • Krempel, Lothar (2008): Die Deutschland AG 1996–2004 und die Entflechtung der Kapitalbeziehungen der 100 größten deutschen Unternehmen. In: Karl Siegbert Rehberg: Die Natur der Gesellschaft, Frankfurt.
  • Hahn, Dieter/Taylor (1997). Strategische Unternehmensplanung – strategische Unternehmensführung: Stand und Entwicklungstendenzen. 7. Aufl., Physica-Verlag, Heidelberg
  • Olbrich, Rainer. (2006) Marketing, Eine Einführung in die marktorientierte Unternehmensführung. 2., neubearb. Aufl., Berlin
  • Schneider, Dietram. (2005). Unternehmensführung und strategisches Controlling – Überlegene Instrumente und Methoden. 4. Aufl., Hanser Verlag, München 
  •  Carl W. Stern. (2006). The Boston Consulting Group on Strategy: Classic Concepts and New Perspectives. Wiley; Auflage: 2. New Jersey
  • Ludwig, Björn. (2001) Management komplexer Systeme. Edition Sigma
  • Schuh, Günther. (2017).Produktkomplexität managen. Strategien – Methoden – Tools. Carl Hanser Verlag, München
  • Stüttgen, Manfred. (2003). Strategien der Komplexitätsbewältigung in Unternehmen. Ein transdisziplinärer Bezugsrahmen. 2. Auflage
  • Marti, Michael. (2007). Complexity Management: Optimizing Product Architecture of Industrial Products. Gallen
  • Lindemann, Udo; Braun, Thomas. (2009). Structural Complexity Management: An Approach for the Field of Product Design. Berlin
  • Allen, P. (2011). The SAGE Handbook of Complexity and Management. London





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