Critical Thought

Critical Thought

Corporate Sustainability – Managing organizational complexity

Date Released: Thu, 26 January 2012 11:12 +0200

By Dr Thomas W. Hoekstra, Sustainability International LLC

 

The concept of life cycles whether they be biological, social and corporate have been part of these sciences since the 1950s.

Recent developments in biological and social sciences have resulted in better analysis of costs and benefits of organizational complexity that can be incorporated into the life cycle concept and hence help improve our understanding of corporate sustainability.

Corporate sustainability is defined as the growth and long term survival of corporations, which is possible by expanding our understanding of how to manage organizational complexity and thereby increase resources for organizational growth.

We recognize that biological and social organizations commonly demonstrate a classic life cycle pattern following their establishment; where they experience growth, resource accumulation, degeneration, and eventually death phases.  Individual biological organisms all follow that entire pattern, while more complex social and biological organizations (e.g. nations and ecosystems) have internal adaptive and resilient dynamic processes that can perpetuate them for extended periods of time, sometimes even millenniums.

Corporations, which are a recent human phenomenon, have rarely survived more than a century. In fact, fifty percent of small businesses die within the first four years of existence. There are many reasons why corporations fail. However, those corporations that are sustainable over decades and in a small number of cases have survived over a century, can be shown to have effectively managed organizational complexity.

Biological and social sciences offer a model for increased understanding and explanation of organizational complexity and how it changes in different life cycle phases. The objective is to manage complexity in the growth and resource accumulation phases to reduce the diminishing return effects that lead to degeneration and death.

The reason corporations, like their social and biological counterparts become more complex is that increasing complexity solves organizational problems. Complexity resulting from problem solving can demonstrate itself in a number of ways suggested below. In our book on Supply-Side Sustainability, Allen, Tainter and Hoekstra, indicate that a more complex organization can typically have:

• more institutions, i.e. required customs, policies, practices, and procedures
• more organizational subgroups and other parts
• greater specialization within the organization
• more networks between the parts
• more vertical and horizontal controls
• greater independence of parts and
• more social roles.

In addition, an organization achieves such a differentiated structure through greatly enhanced processes such as the flow of information, which must be protected, directed, centralized, filtered and synthesized.    Complexity can be both beneficial and costly in terms of valuable resource use. Therefore, managing organizational complexity is a key to achieving corporate sustainability.

Professors Gunderson and Holling, editors of Panarcy – understanding transformations in human and natural systems, established a system based explanation for how resiliency and adaptability of an organization changes its sustainability.

Applying their explanation to life cycle phases of adaptable and resilient organizations, the degeneration and death life cycle phases are delayed. New life cycle phases of decomposition and reorganization are incorporated in the organizational life cycle as growth and resource accumulation phases are maturing and when diminishing returns can be reversed, facilitating renewed growth and resource accumulation phases.

Adaptable and resilient corporations can continue to evolve and grow into the future with this changed sequence of life cycle phases, as shown in Figure 1 below.

 Three attributes of an organization that influence its ability to be adaptable, resilient and solve problems include:

• The inherent potential of the organization that is available for change, since potential drives the range of possible future options
• The internal controllability of an organization; that is, the degree of connectedness between internal controlling variable and processes, which reflects the flexibility or rigidity of the controlling variables and processes
• The adaptive capacity or the resilience of an organization to unexpected or unpredictable shocks

These attributes of an organization influence its ability to realize a sustainable state.  Gunderson and Holling suggest that complexity of living systems such as corporations, emanate from a small number of controlling processes, not a large number of randomly associated interacting factors.

They posit that if sustainability means anything, it has to do with that small set of self organized variables and transformations that occur in them during the evolutionary processes of corporate development.  The evolutionary process of corporate development occurs in the decomposition and reorganization phases of the corporate life cycle.

An example of tradeoffs in diminishing returns is demonstrated by corporations that do not add human resources complexity by hiring new employees until they have the sales revenues to support that increase. Another example is hiring new employees domestically rather than by adding complexity of going off shore to solve the problem even though these labor costs are lower. It is that small set of self organized variables and transformations that are the key to identification of information and the successful assessment of corporate sustainability business requirements.

Significant differences exist between corporate sustainability as just described compared to sustainability measured for the triple bottom line:

Corporate sustainability as used in this paper is:

• shareholder oriented
• information simple
• supported by systematic strategic business  requirements
• accounts for corporate complexity
• is planning and decision making oriented
• and enhances corporate resilience and adaptability.

Triple bottom line sustainability is typically:

• stakeholder oriented
• information heavy
• of limited support to corporate sustainability business requirements.

In our book Supply-Side Sustainability, we focused on sustainability and the roles of hierarchy and complexity theory.  We proposed five principles for managing organizations such as corporations to be more sustainable. These sustainability management principles are integral with an organizations potential, its internal controllability, and adaptive capacity or resilience. The five principles for managing organizational sustainability include:

• Understand the problem of diminishing returns to problem solving
• Manage for productive systems, not their outputs
• Manage systems by managing their context
• Identify what dysfunctional systems lack and provide only that
• Deploy system processes to subsidize management efforts, rather than conversely.

Supply-side principles identified above work in concert with each other and the attributes of an adaptive organization life cycle. No one principle will generally be sufficient by itself.  Greater management effectiveness and efficiency is possible when using as many of these principles as appropriate.

An initial supply side sustainability principle is to recognize early on when a corporate subsystem begins to demonstrate diminishing returns.  Using a small number of controlling process variables and transformations, adaptive corporations can decompose and reorganize the components of existing complexity that require change to maintain a sustainable corporation.

A second supply-side sustainability principle is to understand productive systems as completely as possible, reviewing the structures and processes that are creating diminishing returns. The sustainable solution is then to manage complexity of the problem system through decomposition and reorganization, whether that system is accounting, information technology, or production of products or services.

Management actions should focus on these systems to improve quality control, efficiency, and productivity rather than focus on the outputs such as accounting errors, poor productivity, defects in products or poor services. The sustainable solution can be found in the existing system structures and processes that generated the problem, rather than adding additional systems to correct an output problem.

A third supply-side sustainability principle is to understand the role of hierarchy and complexity of corporate systems. Corporate systems are controlled one level up, by their context. A common strategy of corporate executives is to tighten or loosen controls one organizational level below them such as performance requirements of managers on strategic goals of the corporate organization.

Such action may be needed to reduce diminishing returns if and when necessary to go further and decompose and reorganize that next lower system to reduce complexity and better exploit available resources.

It is possible that more of a corporate system can changed than is necessary. This is the fourth principle. The result is to modify systems in ways that are not necessary and likely create new and additional problems and complexity. The old axiom of “if it isn’t broke, don’t fix it” is worth keeping in mind. Corporate systems can be complex and system changes can easily have unintended consequences.

Sustainable corporations that have adaptive capacity or resilience have potential for change of connected processes and structures. To the extent that corporate systems are adaptive and resilient, the fifth principle recognizes they can be used to subsidize management efforts. Benefits of corporations which receive high marks for being a good place to work by employees for example, can generate valuable payoffs in terms of employee retention, reduced training, and workers injury costs.

This is an example of how connected corporate human resource structures and processes can be effectively deployed when the organization has potential and an adaptive capacity. Effective deployment of human resource systems can subsidize existing complexity management efforts in a sustainable corporation and not require additional complexity from adding more rigid human resource structures and processes to solve unnecessary new human resource complexity.

Conclusion

A sustainable corporation demonstrates its adaptability and resilience through incorporating decomposition and reorganization into the life cycle of each corporate component. Diminishing returns, i.e. returns on investment, from complexity in organizational structures and processes are key indicators of need for change. It is recommended that corporate strategists focus their effort in implementing the five principles by answering the following four simple questions for each application:

• Sustain what?
• For whom?
• For how long?
• At what cost?

Adding or reducing complexity should be done with a scalpel, not a butcher knife to address a specific problem.

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