Strategic Management of Complexity

Mastering of Complexity in small and medium-sized enterprises (SME) within a Balanced Scorecard (BSC) Analysis for the special case of the additional Perspective "E-Business"

Tesis Doctoral / Disertación , 2009 , 197 Páginas , Calificación: A

Economía de las empresas - Administración de empresas, gestión, organización

KAPLAN/NORTON suggested an enlargement or change of the BSC perspectives to be able to adjust the scorecard system to the individual situation of each company. They were aware that their four classic perspectives were not the central dimensions for every time, but need to be adjusted, when the economic environment of a company changes. Exactly such a change happened, when the digital economy appeared. That is a main reason, why a new perspective is important to consider the e-business strategy.
In practice most of the SME use only the four basic perspectives that are described in the fundamental literature. They do neither dare to create alterations of the perspectives nor to change or modify the shown procedure. These companies need a support, how to add the e-business perspective to consider the digital economy. For this reason it is necessary to give stimulation to the business practice, how to handle goals, structures and initiatives of such a new perspective. There is a permanently increasing supply of hardware and software solutions to support or partly take over the processes of the company.
The balanced scorecard respects soft facts in its calculations. In the digital economy these soft facts become more and more important. In former times the managing directors of SME often ignored the knock-on effect of soft facts. They orientated mainly about financial figures. But the digital economy has to consider different strategies. Some statistics depict that even up to 80% of a company’s profits in the digital economy depend on soft facts. Managers have to learn dealing with soft facts and intrinsic values. As DRUCKER says, the experience of every employee can be used as a source of value added. An employee can never be trained or involved too much, because he/she has a big financial stake in the outcome. When the traditional managers felt threatened by change, bothered by uncertainty, because they preferred predictability and wanted to inclined to change the status quo, now the entrepreneurial manager must be confident in his abilities and has to seize every opportunity for a restructuring.

Contents

Abbreviations

1. Introduction
1.1. Issues of the Thesis
1.2. Structure of the Thesis

2. Complexity as a typical Characteristic of Companies
2.1. Complexity as a Phenomenon of Nature
2.2. Typical Mistakes by Managing Complexity
2.3. Complex Qualities of Companies

3. Choice of a Strategic Framework
3.1. The Holistic Approach as a Framework for Analysis
3.1.1. Break with the Reduction of Complexity
3.1.2. Increasing Importance of the Soft Skills
3.1.3. Information Systems with Holistic Character
3.2. The Balanced Scorecard as a Holistic Approach
3.1.1. Fundamentals of the BSC Analysis
3.2.2. Transfer of the Strategy

4. Necessity of a Fifth Perspective “E-Business”
4.1. Reason: Complexity of the E-Business
4.1.1. E-Business as a Complex Managing Method
4.1.2. Complex Characteristics of E-Commerce (Internet)
4.2. Enlargement of the BSC-Analysis
4.2.1. Advantages of an additional Perspective and Formal Conditions
4.2.2. Consequences of the Enlargement for the BSC-Architecture
4.3. Fundamentals of a BSC-Analysis of the E-Business Perspective
4.3.1. Strategic Business Areas of the E-Business
4.3.2. Typical E-Business Strategies

5. Case Study of a Real Estate SME
5.1. Analysis of the E-Business Perspective
5.1.1. Strategic Business Areas of E-Business
5.1.2. Analysis of the Value-Chains that contain E-Business-Elements
5.2. Cause-and-Effect Relations of the E-Business Perspective
5.2.1. Relevant Goals System
5.2.2. Possible Measures
5.2.3. Choice of Initiatives
5.3. Implementation of the BSC-Analysis
5.3.1. Design of a Ratio System
5.3.2. Evaluation
5.3.3. Interpretation

6. Results and Outlooks

References

Appendix

Abbreviations

illustration not visible in this excerpt

1. Introduction

1.1. Issues of the Thesis

We stand at the beginning of the age of digital revolution. Now it is also time for small and medium sized enterprises (SME) to manage the step from the brickand-mortar structure to the click-and-mortar structure. Some of them should be able to adjust to the organization structure of virtual companies.

The author was working as a managing director of a medium-sized enterprise in the real estate sector for many years and tried to bring the company from the brick-and-mortar status to a modern company that uses IT and business intelli- gence methods to restructure for the challenges of the new century. This thesis is about the author‟s experiences, when she introduced a new information system using e-business and tried to develop her company into a learning enterprise.

She saw that many SME failed in that restructuring and lost their market position because of ignorance against the need of the new market processes. Everything changed because of the introduction of digital economy. Most of the SME had no clear strategy for such a change and despaired with the choice of a strategic management tool for such a restructuring. They had to manage a lot of difficul- ties, like less qualified personnel, a low capital assets and capacities, and they had to overcome many internal and external barriers against a structural change of the business processes.

Many managers said that economic environment had become more complex and that it was easier in former days to manage changes in the company‟s conditions. The old leaders had made strategic decisions intuitively out of their experience or thumb-rules and the complex environment did not allow that any more. After the Basel II agreement of the European Union appeared, the banks demanded busi- ness plans and made rankings to grant loans. For many SME that was an abso- lute new situation. They had to change their managerial thinking completely. At this time many of the long-standing and famous family businesses in the real es- tate sector were closed down, some of them more than seventy years old, be- cause the owners or managers were not able to adjust to the new conditions.

The author thought about what could help her company to deal with a rising complexity and initiated new management strategies. She decided to enlarge the Balanced Scorecard (BSC) analysis, which was a new management method of the beginning century used by many companies to support reorganization.

Several arguments encouraged that decision.

It was an important criterion that the BSC analysis is a holistic approach, because after the credo of simplifying and reducing of business relationships the holistic approach had been again preferred in the strategic management. ¹ The return to holistic view in strategic management means a combination of partial analysis of the company‟s strategic business areas or departments and a consideration of their interdependencies. So synergies can be determined and taken into account by the planning.

In the late 1990ies the BSC analysis by Kaplan/Norton became a very popular holistic approach of the strategic management.² Also SME record experiences with that management tool. Meanwhile it established as a typical instrument of strategic management research. That is a good reason to use it as an example of a fundamental holistic method in the analysis. After more than ten years of practical experience with the BSC analysis there is enough literature about this method. In general it can be used as a framework to install an information system (IS) in the company and to analyze the complexity of the environment.

KAPLAN/NORTON suggested an enlargement or change of the BSC perspectives to be able to adjust the scorecard system to the individual situation of each company.³ They were aware that their four classic perspectives were not the central dimensions for every time, but need to be adjusted, when the economic environment of a company changes. Exactly such a change happened, when the digital economy appeared. That is a main reason, why a new perspective is important to consider the e-business strategy.

In practice most of the SME use only the four basic perspectives that are described in the fundamental literature. They do neither dare to create alterations of the perspectives nor to change or modify the shown procedure. These companies need a support, how to add the e-business perspective to consider the digital economy. For this reason it is necessary to give stimulation to the business practice, how to handle goals, structures and initiatives of such a new perspective. There is a permanently increasing supply of hardware and software solutions to support or partly take over the processes of the company.⁴

The balanced scorecard respects soft facts in its calculations.⁵ In the digital economy these soft facts become more and more important. In former times the managing directors of SME often ignored the knock-on effect of soft facts. They orientated mainly about financial figures. But the digital economy has to consider different strategies. Some statistics depict that even up to 80% of a company‟s profits in the digital economy depend on soft facts. Managers have to learn deal- ing with soft facts and intrinsic values. As DRUCKER says, the experience of every employee can be used as a source of value added. An employee can never be trained or involved too much, because he/she has a big financial stake in the out- come. When the traditional managers felt threatened by change, bothered by un- certainty, because they preferred predictability and wanted to inclined to change the status quo, now the entrepreneurial manager must be confident in his abilities and has to seize every opportunity for a restructuring.⁶

From this point it is only a short step to the company as a learning enterprise. It was too early to evaluate the enlarged BSC analysis about its contribution to change the company of the example to a learning enterprise, but meanwhile also SME of other business branches have recognized the need of some kind of IT perspective to manage the complex market conditions of digital economy and there is a huge mood for digital revolution.

1.2. Structure of the Thesis

Chapter 1: Introduction

The introduction deals with the issues of the work and its structure. It contains of both here in the report described sections 1.1. and 1.2.

Restructuring of SME to give them sustainable viability in the digital economy is a complex phenomenon of today‟s businesses and the management of complexity with the various management methods becomes more and more important for the enterprises. In former times most economies had fix and clear structured process- es. But due to the globalization and the proceeding technology modern companies are forced to handle more complex corporate structures, more complex process- es, more complex products and a more complex environment. They are all con- nected by complex relationships. Actual the holistic management methods are preferred in the literature to manage this complexity problem.⁷

An example for a typical holistic method of today‟s strategic management is the balanced scorecard (BSC) analysis. So the author came to the solution to use an enlargement of the BSC by a perspective e-business to deal with the restructuring of SME from brick-and-mortar companies to click-and-mortar companies.

The motivation for this thesis mainly came from two facts:

On the one hand a so called e-business management has formed. It would be important to integrate such an e-business management in the top-management of the companies and not outside by third parties that do not know the details of the companies situation and strategies so that they give wrong recommendations.

On the other hand the businesses need an example how to realize the additional e-business perspective of the BSC analysis consequently, e.g. which initiatives could be important to reach the goals, which indicators could be measured. Many SME are in fear to free themselves from the four fundamental BSC perspectives described by KAPLAN/NORTON and introduce other perspectives. So the scorecard system looses enormous flexibility and adaptability. They need examples and encouragement to add new interesting perspectives to the BSC analysis.⁸

Chapter 2: Complexity as a typical Characteristic of Companies

As described in section 2.1. complexity is a typical quality of natural systems. Diverse complex organisms or patterns exist frequently everywhere in nature.⁹ Until now humans are not able to explain exactly, how the single elements of such complex systems act together, which elements depend on each others and how the complex situations can be influenced from outside the system to achieve intended reactions. But scientists agree that complexity is a general quality of natural systems and need to be managed.¹⁰

Because of the fact that scientist do not understand complex phenomenon, they have to be satisfied with the description, definition and classification. Section 2.2. shows the criterions to measure complexity by MALIK (1984):¹¹

- Uncertainty (a process allows different results) - Variety (of relations and system elements)
- Capacity of Management (of complex conditions, for example: environ- ment)
- Situativity (many possible developments of a situation must be considered) Due to these criterions system categories of different complexity degrees can be formed.

But even when the management of complex systems could be possible, some important peculiarities have to be considered to avoid engrave mistakes. DÖRNER described already in 1975 which mistakes have to be avoided by the of complexity.¹² He found out, that typical mistakes in the handling of complex relations were repeated several times by different scientists. One of them is for example the disregarding of networks between the system elements by separating the critical data. So many cause-and-effects-relations get lost.

Only when the scientists will not merely describe the complex structures, but also give explanation to rule them, they achieve a real management of complexity. The existing approaches even pave the way for such a complexity management by the collection of knowledge about the behaviour of complex systems. Scientists all over the world try hard to resolve this challenge.¹³

Section 2.3. portrays the characteristics of companies interpreted as complex systems.

Already in the 1970ies ANSOFF was engaged with the fundamental characteristics of interdependencies. He called the found effects: synergies. He classified the synergies into effects that reinforce each other (positive synergies), effects that hinder each other (negative synergies) and effects that are independent of each other (neutral synergies).¹⁴

These results could be transferred to the interdependencies of companies. For example the reactions of single departments could influence each other by competition about resources (negative synergy) or by division of costs and findings of research and development (positive synergy).

Besides the internal effects a company is also influenced by external forces from the environment.

The environment describes the surroundings of the company. That is the superior system, where the company acts in. The limits of the surroundings blur due to system-overlapping value chains and processes. So an objective restriction of the system‟s capacity is difficult.¹⁵ Companies are in a permanent process of adaptation to the changes of environment.¹⁶

With the new “IGLOO”-concept the author shows which new influences ap- peared by the digital economy and how the companies had to adjust to the varying situation. The phenomenon of learning considers such adaptations to the envi- ronmental changes. The system becomes a learning system that can develop its own success factors and ability for self regulation by its broad knowledge base and collected experiences about methods and reactions of the system. ¹⁷

Due to the learning a system becomes adaptable and viable.

Chapter 3: Choice of Strategic Framework

In section 3.1. the holistic approach is discussed as a framework for the analysis. Today the reduction of complexity is criticized, because usual instruments of re- duction destroy the network connections between the system elements. ¹⁸ This can cause wrong interpretations and the inset of wrong initiatives in the company. By that reason another change in paradigm of the strategic management happened. Instead of a reduction the holistic approach became more interesting again. In the holistic approach the part-analyses of the company are examined of network connections and interdependencies to work out synergies. So the complex net- work of the system should be kept. In this sense the scientists classify the method as a management and no longer talk about a reduction of complexity.¹⁹

A typical holistic instrument of the strategic management in our times is the balanced scorecard (BSC) analysis, which is described later.

A main quality of the BSC analysis is the consideration of soft facts besides the hard data of accounting. The importance of soft facts has increased in the last years due to the introduction of IT and the transformation in electronic business processes in the companies.

Studies have shown that in average the share of soft facts about a company‟s profit can amount up to 80% in the digital economy. So the soft facts are a less used potential. ²⁰

A main problem of soft facts is the measurement. Up to now the economists use cardinal scales that can only give rough estimates. The IT has brought out solutions to support the measurement and interpretation of hard and soft facts.²¹ The calculation of optimal solutions or relevant solution alternatives should support the management by choice of functional management initiatives.

But scientific research did not bring out a comprehensive and suitable decision support system for the strategic management right now. So at the moment strate- gic management still depends on the abilities and experiences of the top man- agement.

Section 3.2. discusses the BSC analysis as an holistic framework of the thesis.

The BSC is a scorecard system to evaluate complex relations of businesses. It summarizes the complex information to aggregates and condenses the data material for a better handiness. But it keeps the complex character of information.²² The BSC structures the information by perspectives. These are useful for part analyses, which are combined in a second step to a complete analysis of the whole company. The classic BSC analysis by the example of KAPLAN/NORTON shows the four perspectives: financial perspective, customer perspective, internal business perspective and innovation & learning perspective. ²³

In the thesis these four perspectives are added by a fifth one: the e-business per- spective.

The actual situation of the company can be discovered by its cause-and-effect- relations. They are analysed in adoption of the value chains to describe the val- ue-added-process. So both the actual state and the mechanisms to influence the internal processes can be uncovered. ²⁴ To separate the single elements of the value chain it is split into business areas and business units.

Due to enduring changes of the environment the company has to adapt permanently its behaviour and also its strategies to the environmental variations.²⁵ To control the suitability of present strategy the company defines goals to prove, if measures for the implementation of strategy are leading into the right direction. When the expected goal cannot be reached, this causes feedbacks and adaptations of the strategic methods.

Chapter 4: Necessity of a fifth perspective e-business

Section 4.1. describes why a new perspective e-business was added.

The e-business deals with the steering of companies by methods of the electronic data processing. These are the fundamentals for the management, so that the structure of the company has to be adapted by the possibilities of IT and infor- mation systems.²⁶

According to that the requirements include well-trained personal that is able to realize the possibilities of e-business and use them for all processes. That is important to develop the complete potential of the IT.

The e-business especially consists of the main area e-commerce.²⁷ In literature it is usually described as the trading by the Internet. The data transfer between the single instances happens by highest speed and the transferred quantities of data are gigantic. Internet is used by (nearly) all modern companies and the traditional business processes are transferred into electronic processes.

In section 4.2. the author discusses the formal requirements of a BSC enlargement by a new dimension.

The new perspective is assigned by several goals. These goals transfer the company‟s strategy. Typical goals of the perspective e-business could be: cost effectiveness, data quality, data security and data protection or the opening of new markets by inset of electronic supports.

Further the relation of a new dimension to the existing four perspectives of the scorecard has to be cleared. Because of the interdependencies between the perspectives, synergy effects are expected.

So this section analyses, if the effects of e-business reinforce by measures of the other perspectives, if they diminish or if they are neutral. For example the aspect of costs by building up an information system as a base for e-business manage- ment connects the e-business perspective with the financial perspective of the BSC.

In section 4.3. the fundamental balanced scorecard analysis of the perspective e-business begins with some general reflections.

At first typical strategic business areas of e-business are exposed. Certainly these business areas are different and individual for every company, so only a general analysis can be shown.

Typical business areas of the e-business are for example the administration of the company, which uses the IT especially to support routine jobs, the distribution by the internet as a distribution channel and the possibilities of marketing by e- business measures.

Then representative business strategies of e-business are described. Most business strategies were transferred from the conventional business to the level of e-business. Sometimes little modifications were necessary. At the beginning of the millennium many analyses were done to prove if e-business is ruled by other regu- lations than conventional business. The studies showed that the regulations and laws of economy are the same in both kinds of business that means electronic and conventional businesses. Following by that the strategies of conventional business generally can be used also in e-business.²⁸ The most famous strategy in e-business is the diversification of different product types. Typical forms of the diversification are the one-to-one-marketing, the branding and the creation of lock- in effects. Other highly important e-business strategies are the speed leadership and topic leadership. They replace the dichotomy of cost leadership and the quality leadership, described by PORTER, in many e-business areas.

Even though fundamental questions are cleared up for e-business, the analysis of an example is carried out in the next chapter.

Chapter 5: Single Study of an SME Real Estate Company

Section 5.1. starts with a corporate analysis and environmental analysis of the company.

At first the strategic business areas have to be clarified. Some typical business areas of the inset of IT, like administration, distribution and marketing, were shortly explained in section 4.3.1. But these business areas were general ones. Here the business areas are described in detail that can be found in the analysed company. They are the typical strategic business areas of SME that work in the real estate branch, e.g. purchase and sale or management of resident homes.

In a next step the relationships of the company are discovered and translated into a network of value-chains. Therefore the strategic business areas are split in their business units that are depicted in form of value chains. The single elements of the value chain have to be analysed about their possibilities to use the e- business activities.

Section 5.2. describes, how cause-and-effect-relations of the balanced scorecard analysis are derived by the strategic goals.

The e-business goals are referring to a list of e-business factors by ÖSTERLE as cost-cutting, optimisation of the resource-input, improving of quality, speed, flexibility and security.²⁹

When the goals are listed and described, follows the choice of measures for the strategic goals depending on the business units. The managers of the company developed measures that can be used to assess the utilization of e-business initia- tives. The measures are mainly times, costs and amounts, because other indicators are hardly to record.³⁰

At last the initiatives of the company have to be considered to implement the strategic goals in the company. For example in the real estate company uses the homepage for the presentation of the real estates to improve the quality of their offers. Besides the cost saving by inset of IT also for example the data security has an increasing important role. Not only big businesses, but also SME try to pro- tect their information systems against attacks from outside, espionage of data (meanwhile also by the governmental instances) and loss of data by sabotage. Especially the computer‟s internet access keeps a high risk, because it represents a main connection of the system to the environment and so it must be protected by a fire wall for instance against computer-viruses to enter the system.

Section 5.3. shows the implementation of the balanced scorecard system resp. of the perspective e-business in the company.

At first the scorecard analysis of the single business areas is done for concrete examples of initiatives that are chosen for the analysis and targeted by the managers. The set targets represent the manager‟s expectations for a successful initiative within a period.

In an evaluation the targets are compared with the up-to-date figures of the company at the end of the period. Every strategic goal is represented by one initiative that is considered by one measure. Some of the initiatives succeeded, others failed the target, what had to be commented.

The method of the BSC analysis needed an interpretation according to the estimation by the company‟s managers. The managers of the analysed company installed the BSC analysis for the improvement of their strategic management. Some important relationships between the e-business goals and the other perspectives were uncovered.

Chapter 6: Results and Outlook

After analysing the company that way and working out special initiatives, the question appears what the results mean to the management of complexity.

The suitability of the BSC analysis is justified according to the “mistakes” by DÖRNER that were described in the beginning.³¹ By the structuring of the BSC analysis the relation network and the pattern of the company were discovered. So the relations were accessible to a processing and an interpretation.

The complex relations are kept by the using of measures. Complexity is not reduced, but only compressed into indicators for a better handling. This method avoids the complete loss of important connections.

In the end the managing of complexity always deals with the identification of significant cause-and-effect-relations.

Since most companies keep only the four classic perspectives by Kaplan/Norton, suitable indicators for a perspective e-business presently have to be collected and catalogued for the several business areas. This analysis should enlarge the amount of indicators for the additional perspective e-business.

The SME should learn how to introduce and to work with the new perspective. It is suitable for an interim stage between the traditional economy and the digital economy to help SME with the adaptation of new markets, economic strategies and goals. If SME do not lean, how to manage the e-business side of their businesses they risk to be sorted out of the market. The use of e-business can be described as an important success factor of the digital economy.

2. Complexity as a typical Characteristic of Companies

2.1. Complexity as a Phenomenon of Nature

The phenomenon “complexity” is a central problem of natural sciences since many decades. That is why management approaches for complexity exit in many fields, like informatics, mathematics, biology, etc.³²

Here some examples of management of complexity in natural sciences:

- Physics

Physics for example uses the analysis of complex, non-linear dynamic sys- tems like the development of storm whirls, the motions in a water drop, the behaviour of a jumping rubber ball, etc. Dynamic systems are in a perma- nent state of disequilibrium, also called continuous flow equilibrium. Caused by that, they make possible new processes of adjustment and learning.³³

- Biology

The natural science Biology describes the development of populations, the behaviour of wandering herds, etc. In 1951 BERTALANFFY was the first biol- ogist who used to explain processes in living organisms with cybernetic regulation cycles.³⁴ He tried to transfer the results on general relations in systems. His explanations were formalized very general. The contexts are reduced to universal demonstrable types and patterns. That way BERTALANFFY used to compress the complexity and worked out the general conditions that are basic for every complex organization.³⁵

- Mathematics

In many models complexity is reduced by analyses and division of system elements into small units that are easier to handle. Caused by that form of

complexity reduction many relations are lost. That initiates mistakes in in- terpretation, if synergies influence each other and reinforce or abolish the reactions.

Out of that ASHBY diverts the connection between variety of the managed system and the number of potential disturbances (Law of necessary variety). It reveals that the number of variables used in the models must be equal to the number of potential disturbances.³⁶

The mathematics also has a department that deals with so called “complex figures”. The root by such complex figures is negative (-1). The interpretation of that is very complex.

- Informatics and Computer Science

The IT is often used to analyze the collected mass of data and to evaluate complex relationships by algorithms. The scientists developed hardware (e.g. personal computers, mainframes, automats, robots) and software (ap- plication bundles, standard software and customized software) to support the calculation of difficult interactions. Newer methods to manage complex tasks are for example the technique of neural networks³⁷ to interpret pat- terns and structures and the tools of fuzzy logic³⁸ that use expert knowledge to deal with unclear problems.

As shortly mentioned above the complexity can generally be interpreted positive and negative, what reflects the attitude of the authors towards the management of difficult relationships. In the positive interpretation the basic theory is called complexity theory and in negative interpretation its name is chaos theory.

The complexity theory³⁹ tries to explain complex phenomenon by dividing the complex system into smaller units of inspection and also in a modern form in a combined dynamic relation. The scientists assume that every complex relationship

is founded on patterns. When these patterns are identified, the complexity can be managed, e.g. by information technology.

A fundamental statement of the chaos theory lies in the assumption that arranged systems bring out chaotic non-predictable patterns by accidental distributions. From that chaos a new natural arrangement with new regulations originates. So the distributions include for instance new chances for creativity.⁴⁰

In economy and business studies the theory of complexity arrived very late. The economic conditions were relative stable for long periods. So there was no need to manage any complexity. In the 1970ies the computer-aided design and manu- facturing (CAD/CAM) brought automation to the production plants. The complexity theory was used in connection with robots and mainframe-technologies. Also spe- cial applications, like expert systems and simulation models used the complexity theory as an additional theory for the management, but with less success in prac- tice.

Even when the prices of hardware fell and performance was paired with minimiza- tion, the use of personal computers became usual in normal offices. Then the in- formation technology was accepted as a regular tool of management in the com- panies to collect data and support complicate managerial problems. A new level was reached by the Internet. The companies have to deal with a rising amount of data and growing networks. IT helps them to filter the relevant information and to manage global cooperations.⁴¹

Complexity as a phenomenon of organization can also be shown about the con- nections of the Internet. DRUCKER⁴² says that the IT revolution is the fourth infor- mation revolution in history. The first was the invention of writing in Mesopotamia, also in China and Central America. The second revolution was the copying of writ- ten books in China and afterwards in Greece. The third one happened, when Gu- tenberg invented the book printing and movable types around 1450. Each infor- mation revolution was reducing the expenses and the distribution of information more successful and created more social connections. Though does the Internet. Between 1992 and 2002 the size of the Internet nearly doubled every year. It became a more and more complex network.⁴³

All activities in the Internet are dominated by so called super nodes. That applies to the behaviour of creatures.⁴⁴ In 1999 the brothers FALOUTSOS⁴⁵ calculated the frequency distribution of the super nodes in the Internet. They found out that nodes with the double amount of connections are five times rarer to find than oth- ers. The Internet is the hardware network of computers. The world-wide-web (www) is the corresponding software-link system. Both have a similar small-world structure (special type of network structure). For example in the www sites with the double amount of links are five times rarer. The graph of this distribution looks like the normal distribution by GAUSS, but one site falls slower against zero.

BARABÁSI⁴⁶ considered the diameter of the www. He found out that in the www you need nineteen steps to reach any document. The steps depend on logarithmic on the number of documents. When the number rises by 1000%, then the diameter of the www increases to twenty-one steps.

There can be summarized: the Internet is organized by a natural order. The distribution of the connections follows the potential laws and the architecture is a smallworld, what means it consist of clusters dominated by some super nodes. This architecture is very complex and difficult to manage.

2.2. Typical Mistakes by Managing Complexity

MALIK (1984) uses the systems theory to define the most important characteristics of complexity as:⁴⁷

illustration not visible in this excerpt

Figure 1: Characteristics of Complexity

- Uncertainty

To describe and define that important characteristic ULRICH/PROBST compare the terms complexity and complication. The complication of a system bases on the quantities and the differences between the elements of the system. Complexity includes complication and additional that the system often modifies the situations in a period.⁴⁸

Complex systems rank with the non-trivial systems. In a complex system there can be many possibilities to transfer a decided input into different outputs. So the exactly output cannot be forecasted.⁴⁹

- Variety

The variety of situations is determined by the many possibilities of interaction between the system elements. One problem can be seen in the filtering of the forecasted situations, because many situations are possible, but not every possible situation is useful.⁵⁰

- Capacity of Management

Companies‟ environment becomes more complex. So companies have to adjust to the permanent changes of the situation. Those adjustments are the main problem of strategic management in our times.⁵¹

Modern organizations increasingly have to join time in managing problems due to dynamic of the environment. They are in a dilemma, because on one hand they need enough time to analyse the complex situation and on the other hand they have less time for reaction when market transparency and intensity of competition increase.⁵²

- Situativity

Predictions of the development of key competencies are comparable with the weather forecast. In our times weather forecasts depend on short term measuring methods and can only be made a small number of days in advance. Even today many bad catastrophes are not recognized in time.

At present a similar situation can be seen in the strategic management. Many economists started to analyse the alterations and their continuing cycles to be able to forecast and simulate new probable situations and give advices to the companies´ management, which developments can be expected in the following months and years. Unfortunately the economists are not able to forecast all developments of the economical situation.

These characteristics are not accepted by all scientists. Some of the critics reject the search about a general complexity theory, because complexity does not re- gard to a special form of organization. That is the reason for the many singular- dimensional analyses.⁵³ Other scientists define the complexity theory negative as a chaos theory, because they regard as a characteristic that complex relationships are not predictable and cannot be structured.⁵⁴ In general terms a strategic deci- sion becomes more and more difficult with increasing complexity. The main prob- lem contains that the time and logical reactions of a system cannot be predicted because of its complexity.⁵⁵ That means: the usual deterministic forecasts are not suitable to estimate reactions of such a complex system. The derivation of strate- gic alternatives leads beside the real situation and amounts no meaningful results. VESTER found out, that simulations of such situations end nearly always to a cha- os.⁵⁶

The analyses of DÖRNER show, that a number of reasons cause the missing suita- bility of usual forecasts to manage complexity.⁵⁷ He specified the reasons as:⁵⁸

- Neglect of general aims

Instead of following priorities, executives of complex companies often frit- ter their time away with managing little problems or work on partial as- pects. They often loose the general aims of the meta-level out of sight.

- Disregarding of synergy effects

Taken measures include positive or negative synergies that become obvious in interaction with preceded measures. The measures can bring about mutual reinforcement or reduction or they are neutral to each other. If these synergy effects are not considered in advance, the reaction of the company cannot be forecasted rightly.

- Too much regulation

Caused by the time-lags in complex situations the effects of measures are not directly clear. Also many executives reinforce the taken measures or repeat them. That behaviour causes extreme reactions that have to fight against moreover extremely. The company does not find rest, but begins to oscillate between the extremely situations.

- Unsatisfactory implementation

Plans are often not consequently implemented in the companies. If difficulties appear in the phase of a strategy‟s implementation, the executives regularly change to a new strategy without considering the previous results. This way every strategy has to fail.

- Abuse of power

Executives abuse their possibilities and influence the company for their own sake. The higher the level of complexity the harder to discover such behaviour. Personal pursuit of power grows in dependence on individual‟s authority. Additional instruments are necessary to control it.

In usual analysing methods these main points cannot be adequately taken in consideration and faults cannot be eliminated.

Companies that are not able to handle the described main points are not in a position to take advantage of their complete key competencies. That causes disadvantages for competition. Their market position and their existence at the market get into danger to disappear.

A systematic management could soften that problem.

2.3. Complex Qualities of Companies

Complexity is a natural characteristic of many relationships. You can find it in natural sciences as well as in social sciences. Physical object, e.g. a human body, can be described as a complex system with neural networks, structures and inter- actions with the environment. That matches for social systems, like governments or companies, as well. Modern companies are often very complex systems that have to manage a lot of internal and external relationships. These relationships can be uncovered by an analysis of the company itself and its environment.

A typical method to uncover the relationships is the SWOT analysis. It shows the company‟s internal strengths and weaknesses, and its external opportunities and threats. But in the Internet economy with its very complex relationships it is very difficult for a normal SWOT analysis to regard to the high complexity of the net- work. So the usual tools of the SWOT analysis are not enough to uncover all rele- vant factors.⁵⁹

The amount of a company‟s relationships has risen enormously in the last years since the information technology (IT) and particularly the Internet economy ap- peared. Regarding to the Internet economy the economists talk about a “death of time” and a “death of distance”. The access to the Internet is available from eve- rywhere and anytime. So on the Internet typical restrictions of the traditional econ- omy are obeyed. Knowledge now is available to a much larger number of persons in a global economy all over the world.⁶⁰ Some economists compare that devel- opment with the social and economic changes after the introduction of the book- printing by GUTENBERG.⁶¹ This new technology also had many complex effects in different areas and initiated a progress in many fields, like sciences, art or litera- ture. The growing knowledge led people to revolutionary thoughts in politics and at last to historian revolutions. The initial impact lay mainly in the technological inno- vation - similar to the actual development of IT and Internet technology.⁶²

The new technology Internet is accessible not only by the industrial countries, but also by the less-developed countries. The main part of the populations of theses countries, especially in Asia and Africa, now get a better access to education. These people have been separated from knowledge and information for many centuries. But now they are learning to close the gap to the industrial countries. Particular China and India catch up in education.⁶³ With the help of IT and Internet technology they train many high-skilled employees for the global markets and offer modern technologies and production plants much cheaper than the industrial countries. That is a reason why the so called less-developed countries have be- come such big competitors to European and American states since the last about ten to fifteen years.

European companies have joined those new technologies to survive at the mar- kets, because the international competitors do more often appear not only at the global markets, but also in local areas. So for example in Paris many small sellers of the famous French fashion are suppressed by the cheaper offers of Chinese fashion store chains.

As described by many authors of the Internet economy, last years‟ technological revolution of the IT causes changes mainly in the following areas:⁶⁴

a) Information Technology ΔI

The IT initiates permanently new innovations in methods and technological tools of information, communication, automation, data processing, computer technology, etc.

b) Globalization ΔG

The new technology allows companies to enter new markets. The amount of trading transactions has increased. Also new competitors appear in the domestic markets. New communities are built, e.g. European Union, North Atlantic Free Trade Area.

c) Laws and Regulations ΔL

The increasing trade makes it necessary to manage the behaviour of the traders. Some of the traders come from other cultural areas and new kinds of disputes need solutions. Existing regulations, like European Law, Interna- tional Law, and Trade Law must include regulations for internet trade and computer science.

d) Organizational Impacts ΔO1

The organizational structures and processes change by the new requirements. It is an individual adjustment to the change of situation. Also the behaviour of employees and other internal influences can have an impact that makes the situation more complex to analyse.

e) Other Influences ΔO2

Some other influences can appear form the special behaviour of consumers or suppliers, e.g. by pollution of the environment, when new plants are built without filters of air or water. Not all impacts are uncovered up to now.

The impacts are easier to recognize by their first letters that can be written as the word “IGLOO”. So the approach can be called “IGLOO-Concept”. The new term IGLOO-Concept describes the economic complexity in the digital economy by the different complexity-impacts. So a first goal to describe the economic complexity is reached, because up to now there is no widely accepted definition or description.

The change in complexity is visualized in the figure below. That IGLOO-Concept helps to describe the term “economic complexity”. Considering all that influences on economy, the complexity of the environment and the internal complexity of the companies has grown by an amount ΔC.

The initial impact comes from the information technology. The other part-impacts are following effects. So ΔI has been set in a central role in the IGLOO-picture. It has a double ring to show its double role. On the one hand it influences to globali-

zation, laws, organization and other fields, but on the other hand it is influenced itself by the feedback of those, so that it can be adjusted and developed in busi- ness practice.

illustration not visible in this excerpt

Figure 2: IGLOO-Concept, Components of the growing complexity

That ΔC can be written alternatively as a formula:

illustration not visible in this excerpt

Before the market for personal computers was launched in the 1980ies, computer technology was very expensive and only available for big enterprises. Only those had the network and the money to act on the global markets. As a result only big corporations were affected by the very strict regulations of global trading and computer law.⁶⁵ But since the late 1990ies, especially after the introduction of the Internet a big number of private persons and small or medium sized companies (SME) use the IT and go global. When a critical mass of users was reached the e- business management became important.⁶⁶

Many small companies in Europe have gone out of business in the last years, be- cause they had problems to deal with the challenges of IT and the barriers against IT. One of the reasons was that many employees rejected the new tech- nologies. They were too old to learn something new or had fears that their jobs would be replaced. Also the globalization was missed by some companies. Many of the companies‟ managers did not adjust their companies to the requirements of the international markets, e.g. break down of many IT start-ups in 2000.⁶⁷ Finally a lot of companies failed because of the new laws. A typical case was the launch of the Basel-II-laws.⁶⁸ For example German banks did not extend credits of SME, so necessary investments and innovations did not happen and thousands of middle- class companies had to go out of business in the early 2000ths. That is a sustain- able problem, because the middle class companies are high productive firms. They employ most of the employees and keep most of the apprentices. When they go out of business the productivity of an economy deceases. As a result the living-standard of many European countries is depressed.⁶⁹

One possible solution to support the middle-class economy is the introduction of a systematic e-business management⁷⁰ in the SME. E-business is a new man- agement concept to deal with the complexity of a company‟s conditions. It offers SME new strategies to survive the changes to achieve the strategic targets of the company. The company learns to use new technologies, to take part in the global- ization and to handle new laws. It searches for new structures for the organization processes and changes the order of events in the value chains to deal with the new technology. As a result the company advantages in time and cost.

[...]

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⁶ Drucker, P. (1999): Management Challenges for the 21st Century, 61.

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⁵⁸ The six reasons were reduced and revised to five main points.

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• Universidad: Comenius University in Bratislava (Department of Management)
• Curso: Corporate Management
• Calificación: A
• Autor: Dr. Susanna Mandorf (Autor)
• Año de publicación: 2009
• Páginas: 197
• No. de catálogo: V181100
• ISBN (Ebook): 9783656040996
• ISBN (Libro): 9783656041276
• Idioma: Inglés
• Etiqueta: Strategic Management, Digital Economy, Internetökonomie, BSC, Balanced Scorecard Analysis, Balanced Scorecard, success factor, management, business, business engineering, IT-Management, IT-Balanced Scorecard, E-Business, electronic business, E-Commerce, electronic commerce, SME, KMU, medium-sized enterprises, complexity, complexity management, alignment