Complexity theory and organizations, also called complexity strategy or complex adaptive organizations, is the use of the study of complexity systems in the field of strategic management and organizational studies.
Complexity theory is an interdisciplinary theory that grew out of systems theory in the 1960s.:350 It draws from research in the natural sciences that examines uncertainty and non-linearity. Complexity theory emphasizes interactions and the accompanying feedback loops that constantly change systems. While it proposes that systems are unpredictable, they are also constrained by order-generating rules.:74
Complexity theory has been used in the fields of strategic management and organizational studies. Application areas include understanding how organizations or firms adapt to their environments and how they cope with conditions of uncertainty. The theory treats organizations and firms as collections of strategies and structures. The structure is complex; in that they are dynamic networks of interactions, and their relationships are not aggregations of the individual static entities. They are adaptive; in that the individual and collective behavior mutate and self-organize corresponding to a change-initiating micro-event or collection of events.
In the early 20th century, organizational thinking primarily saw organizations as a machine, which meant large amounts of bureaucracy, hierarchy, and standardization. An organization was a determinist, closed system.:356 This approach was rejected In the mid-1900s, as organizations became to be seen as dynamic systems in constant states of change.:357-8
From the 1950s to the 1980s, the dominant approach to organizational change was the planned approach. This focus tried to improve organizations by looking at operational practices and effectiveness through wide, participative change moments.:74 Change was a process that organizations would deal with incrementally by focusing on one problem or goal at a time.:76
From the 1980s onward, the emergent approach to organizational change has dominated. The emergent approach argues that change is continuous and unpredictable. Rather than happening through big events, change is happening all of the time through many small steps, and organizations do not have the luxury of dealing with one change at a time. This approach also takes into account the importance of power to organizational culture.
Many followers of this approach argue that organizations must be able to change themselves continuously, especially in fast moving sectors of the economy.:75-6
The Punctuated Equilibrium model originated in the 1980s and is a complement to complexity theory. It argues that organizations evolve over time, with long periods of stability that are disrupted by short periods of large change. These disruptions set the stage for a new period in the life of the organization.:76
Beginning in the early 1990s, theorists began linking complexity theory to organizational change. Complexity Theory rejects the idea of organizations as a machine, as well as a planned approach to organizational change. Rather, it agrees with the emergent approach that power and constant change are crucial elements of organizational life.:77 It can also be used to explain the often paradoxical nature of organizations.:359
Organizations can be treated as complex adaptive systems (CAS) as they exhibit fundamental CAS principles like self-organization, complexity, emergence, interdependence, space of possibilities, co-evolution, chaos, and self-similarity.
CAS are contrasted with ordered and chaotic systems by the relationship that exists between the system and the agents which act within it. In an ordered system the level of constraint means that all agent behaviour is limited to the rules of the system. In a chaotic system the agents are unconstrained and susceptible to statistical and other analysis. In a CAS, the system and the agents co-evolve; the system lightly constrains agent behaviour, but the agents modify the system by their interaction with it. This self-organizing nature is an important characteristic of CAS; and its ability to learn to adapt, differentiate it from other self organizing systems.
Organizational environments can be viewed as a system with coevolution. According to CAS theories, each agent inside the environment tries to get a better payoff, while most of the time, the results are greatly influenced by what other agents do. That creates a dynamic equilibrium of coevolution with small, medium, or large changes in outcomes, according to power law. Small changes can sometimes lead to extraordinary improvements, and that is the reason why systems that are at the edge of chaos can defeat those not. The best-run companies survive because they operate at the edge of chaos by relentlessly pursuing a path of continuous innovation, and, indeed, because they inject so much novelty and change into their normal operations, they constantly risk falling over the edge.:81 An organization should maintain a balance between flexibility and stability to avoid failing.
CAS approaches to strategy seek to understand the nature of system constraints and agent interaction and generally takes an evolutionary or naturalistic approach to strategy. More recently work by organizational scholars and their colleagues have added greatly to our understanding of how concepts from the complexity sciences can be used to understand strategy and organizations. Much of this later research integrates computer simulation and organizational studies.
Complexity theory also relates to knowledge management (KM) and organizational learning (OL). "Complex systems are, by any other definition, learning organizations. Complexity theory is, therefore, on the verge of making a huge contribution to both KM and OL." Complexity Theory, KM, and OL are all complimentary and co-dependent. "KM and OL each lack a theory of how cognition happens in human social systems - complexity theory offers this missing piece".
In 1997, a think tank called Knowledge Management Consortium International (KCMI) was formed in Washington, DC. The formation of the group acknowledged, "the profound connection between complexity theory and knowledge management". Complexity theory offers new approaches to some of the questions that Peter Senge has posed in the field of KM. "In what has only recently become apparent, the issues Senge speaks of are precisely those that scholars and researchers of complexity theory have been dealing with for the past 15 years."
Complexity theory is also being used to better understand new ways of doing project management, as traditional models have been found lacking to current challenges.:23 This approaches advocates forming a "culture of trust" that "welcomes outsiders, embraces new ideas, and promotes cooperation.":35
Complexity Theory would advocate for approaches that focus on flatter, more flexible organizations, rather than top-down, command-and-control styles of management.:84
Complexity theory also reveals that individual behaviors and choices are more important than executive plans in an organization. Instead, individuals are highly impacted by their interrelations with other individuals within the organization. Therefore, CAS suggests that managers should focus on self-organization instead of management control. Paying attention to small changes and interventions, and encouraging conflict and change are also necessary. This may seem to push the organization to an unstable situation, the organization actually can gain improvements from the healthy edge of chaos. In contrast to the traditional perspective where managers fix problems, complexity theory would instead say that they should hold off and wait to see what happens on its own.:373 Managers should instead seek to find the balance between chaos and stability to cultivate the greatest creativity and innovation. A workplace that is always stable will become predictable and stagnant, while too much chaos will also be unworkable. The trick is to find the place on the edge of chaos.:374
Moreover, managers should increase the flow of information into the organization and encourage tension, rather than fight it. They should encourage questions and allow employees to forge their own path. Managers should see their own role as a participant, rather than an outside observer.:376
Managers also need to understand the importance of relationships of individuals within the organization. Creating an environment of encouraging "care and connection" can help improve the organization's creativity, efficiency, and adaptability.
For a non-technical introduction to complexity theory and its application to organizations see Douma & Schreuder (2017).
A typical example for an organization behaving as CAS, is Wikipedia - collaborated and managed by a loosely organized management structure, composed of a complex mix of human-computer interactions. By managing behavior, and not only mere content, Wikipedia uses simple rules to produce a complex, evolving knowledge base which has largely replaced older sources in popular use.
Other examples include the complex global macroeconomic network within a country or group of countries; stock market and complex web of cross border holding companies; manufacturing businesses; and any human social group-based endeavour in a particular ideology and social system such as political parties, communities, geopolitical organisations, and terrorist networks of both hierarchical and leaderless nature. This new macro level state may create difficulty for an observer in explaining and describing the collective behaviour in terms of its constituent parts; as a result of the complex dynamic networks of interactions, outlined earlier.