COMPLICATED VERSUS COMPLEX
Updated: Sep 8, 2021
I’ve studied Complexity Theory at an academic level for a long time. If you read all these books like Tipping Point and Outliers by Malcolm Gladwell, you’ll notice that these books are really different sub-versions of Complexity Theory. In fact, Nassim Taleb writes about Complexity Theory in economics and business under the guise of Black Swan and probability math, but it's really all subdivisions of Complexity Theory.
Today I wanted to talk about two aspects of Complexity Theory. I think people confuse complexity with complicated a lot of times, so we're going to talk about those two attributes and how we use it in Crown Capital businesses to achieve great things.
So, you have a range of outcomes in the system. You can have a very stable system where nothing much is happening and it's basically a zero event system. We can use the example of a ball sitting in a bowl. If it just sits there and nothing acts on it, it will just stay there forever. Nothing very interesting happens. So you can have zero activity all the way to a whole mangle of things happening which is chaotic. That's also not very interesting because it all just mangles into a mess and there's no order or structure to what’s happening. Complete chaos is actually not that interesting.
Where it gets interesting is in this middle ground and I think that too many people make the mistake of confusing complicated for complex in their analyses. Think about politics and global interactions in political policy and economic interactions. People view things as being mechanical. Mechanical things can be complicated, but mechanical things can never be complex. Complexity is a different thing.
Everything on this scale has four elements that you analyze to determine what your outcomes are:
Diverse elements or actors in the system
The degree of their connectedness: are they all acting independently and never connected?
How much inner dependency between these elements? How much does the action of one influence the action of another? How much does one person want to be like the other, or want to not be like a different one?
Adaptation: can these elements can adapt over time?
Imagine a mechanical system. For example, at our Graniteville factory, we have these big machines that process and coat textiles. There is no complexity in a machine. It is false to use the term complexity when talking about a machine. They are purely mechanical. The difference is that they might have diverse parts, they might be connected, but they don't adapt. None of those parts adapt over any amount of time, so it can be laid out very mathematical terms. When you turn adaptation to zero and interdependency to zero, the connectedness and diversity of parts just leads to a machine.
The problem is, most people approach the world from a mechanical or mechanistic philosophy. When you approach companies this way, you become very process-oriented and dogmatic process is not a good thing. Now, you can address diversity and connectedness as it relates to process. In complex business models, we want process, but we want them to be able to adapt and evolve, and that's what we focus on in Crown Capital’s operating model.
Ecosystems follow sets of rules and they have physics and a process, that's mathematical that applies. The difference occurs when different actors can make different choices within the system. That is what makes a business. If you don't embrace the process of adaptation and interdependency and you focus everything on diversity and connectedness, then you'll end up with a system that caps out.
Typically, what happens is that these founders (mostly baby boomer in the case of Crown Capital operating companies) is that the sheer effort it takes to get a company off the ground requires an intense focus on process and mathematical opportunities to fix outcomes. Then, once you get it to a certain point, growth is limited because there's only one of you and you can't create all adaptable interdependent relationships in your image. All these things that can happen become too much for diversity and connectedness to keep contained. You can't do it. So what we do with our operating companies upon acquisition is move from mechanical to complex to create growth and it happens the way it’s intended to every single time. In every single one of our portfolio companies, we've achieved 35% or greater increase in EBITDA within 18 months. When you engage in this process and reverse the organizational chart from the traditional top-down oppressive control to bottom-up support and information flow to adapt and change systems and you get a really robust employee base, it is fascinating to see that culture change and to witness the level of the productivity that comes out of a much smaller group of people.
It’s interesting because all things relate to this theory. Think about global policy, for example whether to support the Kurds in Syria or not. People tend to address it as if it's a mechanical outcome, but the truth is that it's more dynamic than that. That's why when you change behavior, like our former president did, you'll get some odd failures that people wouldn’t have expected and some interesting successes that they wouldn’t expect either. It's not just his behavior that matters. It's also the behavior of the other players in the system who adapt to his behavior and then their behavior causes other people to adapt. This interdependency and connectedness then influences a different Global situation. I think that people try to make it more simple than it really is.
Another example is when people talked last year about Judge Amy Coney Barrett as the Supreme Court nominee. The left would say that bad things would happen immediately and the right maybe thought that good things might happen immediately, but the truth is probably neither of those extremes happen. There's just too much complexity involved to make such mechanistic determinations about what will happen when you add one person to a system of nine with laws that support that and cases, and statutes, and the Constitution. It's really much more complex than that.
This also relates to this interdependency and an interesting process of in-groups and out-groups. Think about who your in-group is and who you associate with. As you stack identities, do you start to limit your other choices because you don't want to be associated with an out-group? Or do we start to expand to include portions of those outgroups? Think about this: The Irish and Italians during the 1920s and 30s were considered part of the out-group, but eventually the out-group expands and these out-groups adapt to be part of the in-group, so there's an interesting evolution of these things over time. Herbert Spencer, great evolutionary sociologist talked about in-group and out-groups evolutions over time, he just didn't use those terms. This is all a part of Complexity Theory and a bit about how we use it to grow businesses and help them evolve past their mechanistic limitations.