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XVII Congreso ACEDE:

Flexibilidad y Cambio ante un Nuevo Escenario Competitivo.


16, 17 y 18 de Septiembre de 2007. Sevilla, Spain

PRACTICAL RECOMMENDATIONS
TO ENABLE ORGANIZATIONAL RECONFIGURABILITY
FROM A COMPLEX SYSTEMS PERSPECTIVE

Eduardo Castellano Fernández


IKERLAN, Technological Research Centre
Dpto. Innovación Estratégica
Pº J. M. Arizmendiarrieta, 2
20500 Arrasate-Mondragón (Gipuzkoa) – Spain
Phone 943-712400
Fax 943-796944
ECastellano@ikerlan.es

Summary

Business organizations are finding it more and more difficult to maneuver in a rapidly changing
environment driven by market globalization, the increase in product variety and personalization, the
rapid introduction of new technologies, and the emergence of new markets and global competitors.
Within this context, businesses should be able to develop mechanisms that enable them to absorb
uncertainty of their environment and reconfigure themselves in an agile and innovative way. In the last
decade, the Complexity and Organizations research field has produced numerous studies that show a
variety of approaches to organizational dynamic reconfigurability. This article provides a
comprehensive presentation of the most significant proposals, as well as a series of practical
recommendations to enable organizational reconfigurability, under changing environments, at three
main levels; business strategy, organizational structure, and management style.

Key words:

Organizational reconfigurability; turbulent environments; complexity.


PRACTICAL RECOMMENDATIONS
TO ENABLE ORGANIZATIONAL RECONFIGURABILITY
FROM A COMPLEX SYSTEMS PERSPECTIVE

1. INTRODUCTION

Closed equilibrium systems are the main metaphor on which are based both Alfred Marshall’s
traditional economy and current management thinking. Its primary hypotheses are that the industrial
structure is known, the application of decreasing returns, and that firms are perfectly rational.
Marshall’s equilibrium model was a good metaphor for the agricultural and industrial economies of his
time, and even for certain economies in today's world. However, it seems to encounter numerous
difficulties in attempting to explain current dynamic economies based on technological, knowledge,
and services industries (Beinhocker, 1997).

Nowadays, business organizations are faced with a multitude of challenges; the transition from the
industrial to the information era, globalized markets and competitors, new emerging countries, ever
shorter technology cycles, worker diversity deriving from migratory movements, fast-paced changes
in product and service demand along with a high degree of client personalization, etc. Thus,
organizational environments become more competitive, and even hyper-competitive (Ilinitch,
D'Aveni y Lewin, 1996), characterized by numerous interactions between their multiple components;
organizations, technologies, institutions, workers, clients, etc. As a result, dynamic and nonlinear
networks of relationships are generated between actions and their consequences, where a behavioral
change in one of the components (agents) spreads and reverberates through the system, generating
several chains of reactions and changes at various levels. All this leads to environments with a higher
degree of dynamism and uncertainty and continuous appearance of new, and unexpected,
opportunities and challenges (Morel and Ramanujam, 1999).

These changing environments call for organizations to be more adaptive, learn more quickly from
their experience, and reconfigure themselves more efficiently to face the new challenges and
opportunities. Organizational strategy has thus focused on aspects such as creativity, innovation,
dynamism, change and uncertainty, evolving interrelationships, and so on, instead of focusing
exclusively on the efficacy and procedure paradigm characteristic of mass production systems (Cohen,
1999; Rose-Anderssena et al., 2005).

There is a long tradition in organizational sciences of viewing organizations as systems (Katz and
Kahn 1966, Ashby 1968). The Complexity Sciences provide a series of valid metaphors and tools to
visualize a new organizational model where creativity, innovation, change and uncertainty are the
result of endogenous processes of the system and the central axes from which to observe the evolution
of the numerous parts of industries and economies, instead of seeing them as a result of random
disturbances that are exogenous to the system. These systems have certain basic characteristics, such
as: (1) They are open dynamic systems, with dynamic equilibriums, and evolving behavioral patterns;
(2) They are composed of heterogeneous agents, with evolutionary schemas of reality, that interact
dynamically between each other, and the environment, affecting and transforming each other’s
actions; (3) They exhibit properties such as self-organization and the emergence of new structures
(Beinhocker, 1997; Rose-Anderssena et al., 2005).

More and more authors, i.e. Stacey (1996), Brown and Eisenhardt (1998), Cohen (1999), Morel and
Ramanujam (1999), Lissack (2002), etc., have started to visualize current organizations as
nonlinear dynamic systems with adaptive, evolutive, and creative capabilities, able of generating

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new structures and comprising multiple components that co-interact at various levels and with the
environment in co-evolutionary way.

The following work presents a thorough collection of the main contributions, from the perspective of
complex systems, to enable dynamic reconfigurability of organizations faced with high levels of
change and uncertainty environments. These contributions, extracted from the literature, have been
coherently structured in order to provide a series of general practical recommendations or guidelines
that can help companies under turbulent environments to design their business strategies, their most
adequate organizational structures and business management style. The paper is structured in three
sections. The first section is a review of the main research lines of the Complexity Sciences, with a
special emphasis on the main characteristics of Complex Adaptive Systems, as well as on approaches
developed from this perspective in the study of business organizations. The second section describes
in detail the generic principles of Complexity, while presenting for each of these principles a series of
practical considerations proposed in the literature to make them operational and exploit them from an
organizational viewpoint. Finally, the third and last section structures these practical considerations
according to organizational dimensions –business strategy, organizational structure, and management
style- , and synthetically presents practical recommendations or guidelines to enable organizational
dynamic reconfigurability under changing environments.

2. COMPLEX SYSTEMS AND BUSINESS ORGANIZATIONS

2.1 Complexity theories

The first thing that must be stated is that there is no such thing as a Unified Theory of Complexity, but
rather several theories that have their origin in a variety of branches of natural and social sciences;
physics, chemistry, biology, evolution, mathematics and computers (Miltelton-Keely, 2003a):
• dissipative structures (Prigogine and Stengers, 1985; Nicolis and Prigogine, 1989; Prigogine,
1990);
• the chaos theory (Gleick, 1998);
• autopoiesis (Maturana and Varela, 1980, 1992; Luhman, 1990; Mingers, 1995);
• complex adaptive systems, both in the USA and Europe (Axelrod, 1990, 1997; Waldrop,
1992; Kauffman, 1993, 1995, 2000; Gell-Mann, 1994; Goodwin, 1995; Holland, 1995, 1998;
Dooley, 1996, 1997; Allen, 1997; Casti, 1997; Anderson, 1999; Bonabeau et al, 1999;
Axelrod and Cohen, 2000; Epstein, 2003; Mitleton-Kelly, 2003a; Chang and Harrington,
2004; Schreiber, Singh and Carley, 2004; Tesfatsion, 2006);
• self-organized criticality (Bak, 1997);
• increasing returns (Arthur, 1990, 1995; Hodgson, 1993, 2001);
• and complex networks (Watts, 1999, 2003; Dorogovtsev and Mendes, 2001; Barabasi, 2002;
Buchanan, 2002; Newman, 2003).

Complexity sciences deal with the dynamic properties of nonlinear systems structured through
complex feedback network structures (Waldrop, 1992; Kauffman, 1993, 1995, 2000; Gell-Mann,
1994; Gleick, 1998). The study of this type of systems reveal that the systems must operate outside
their equilibrium zones in order to produce a continuously changing creative and innovative behavior.
Both positive and negative feedback forces appear in these regions outside the equilibrium, leading the
systems to a mixed region where stability and order are present simultaneously. The transformation
processes in these conditions generate a series of unstable behaviors (self-organization and emergence)
with a high potential to produce new structures and new order (Stacey, 1995).

Among the generic principles of complex systems and complex behavior are (Miltelton-Keely,
2003a): connectivity and interdependence, feedback processes and increasing returns,
coevolution, exploration of the space of possibilities, far from equilibrium systems and dissipative
structures, self-organization, and emergence.
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2.2 Complex Adaptive Systems

Complex Adaptive Systems (CAS) are the way to operationalise complexity sciences. A complex
adaptive system consists of a group of individual agents with mental schemes of themselves and their
environment, generally represented by rules, that determine their actions based on information
perceived from their environment. These agents are interconnected between themselves by
relationships that vary in intensity and frequency, by nonlinear feedback processes, in such a way that
the actions of one agent change the context of the other agents and viceversa (Dooley, 1997, 2001).
Each aspects of a CAS - agents, schemes, diversity and intensity of interrelationships - can change and
evolve in time. New ones can appear, existing ones can disappear, or they may simply undergo
transformation (Simon, 1996).

The components of a CAS may be persons, organizations, institutions, territories, nations and so on.
The general approach from the CAS perspective is to attempt to elicit complex behavior, or interesting
emergent properties, through using more or less simple rules and diverse patterns of interaction
between these components (Morel and Ramanujam, 1999). In other words, to deal with the emergence
of patterns of behavior, at the macro level, derived from interactions between heterogeneous
autonomous agents guided by certain rules of interpretation and behavior, at the micro level, that
evolve over time.

According to Dooley (Dooley, 1996, 1997, 2001), CAS models focus in the interaction between the
system, its environment, and the coevolution between both. Figure 1 shows the relationship between
the various generic principles of complexity theories within this outline.

Fig. 1 – Axes of complex adaptive systems and complexity principles. Source: Dooley (2001)

2.3 Approaches to the Study of Organizations as Complex Systems

Researchers who have applied complexity concepts to organizational and management studies have
done so basically by applying two different methodological approaches (Levy, 2000). On one hand,
there is an entire school whose research is based on the traditional scientific paradigm and the use of
mathematical investigation tools (Bak, 1997; Watts, 1999, 2003; 2001; Barabasi, 2002; Newman,
2003, etc.), and computer simulations, to analyze the structure, behavior, and properties, of a variety of
network topologies of agents interrelated through a number of evolution rules based on interpretation
(i.e. Axelrod, 1990, 1997; Waldrop, 1992; Kauffman, 1993, 1995, 2000; Holland, 1995, 1998; Allen,
1997; Casti, 1997; Anderson 1999; Epstein, 2003; Chang and Harrington, 2004; Schreiber, Singh and
Carley, 2004; Tesfatsion, 2006; etc.). On the other hand, there are those that affirm that the
understanding of organizations as complex systems requires the application of methods such as
ethnographic studies, longitudinal studies, the use of metaphors as analogies and who primarily
make use of inductive approaches to identify patterns and common meanings, conditions that enable
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the development of self-organization processes between individuals, frameworks that enable the
development of cultures of creativity, organizational innovation and change, etc. (i.e. Stacey, 1995,
1996, 2000, 2001; Mitleton-Kelly, 1998, 2003a; Brown and Eisenhardt, 1998; Anderson, 1999;
Maguire and McKelvey, 1999; Marion, 1999; Mitleton-Kelly and Papaefthimiou, 2000; Eisenhardt
and Sull, 2001; etc.).

The first of these approaches is known as mathematical complexity and the second as social
complexity (Snowden and Stanbridge, 2004). Both approaches, the first more engineering oriented
and the second humanism oriented, coexist with some tensions, the result of which is a certain degree
of creativity (Goldstein, Allen and Snowden, 2004). A brief description of each of these tendencies
follows.

2.3.1 Mathematical Complexity – Analytical Tools, Models and Simulation

We can distinguish three different periods within the study of mathematical complexity. The first
corresponds to the so-called “deterministic complexity” (Manson, 2001), better known as chaos
theory (Gleick, 1998), that studies systems consisting of a few nonlinear iterative differential
equations (May, 1976). These studies provided the first concepts regarding sensitive dependence of
initial conditions (Lorenz, 1963), fractals (Maldebrot, 1977), bifurcations (Feigenbaum, 1980), and
strange attractors.

The second refers to “aggregate complexity” (Manson, 2001), that uses computer simulation tools
to study aggregate emergent macro behaviors, as well as growth and change processes in general,
derived from the interaction between agents guided by evolutionary micro rules of behavior (Radzicki,
1990). This research field was primarily performed through cellular automata (CA) simulations
(Wolfram, 1984,1994, 2002), and more recently though agent-based modelling (ABM).
In general, these simulation models attempt to achieve greater understanding of certain socioeconomic
phenomena. Simulation can be very useful in the design and testing of hypotheses regarding internal
dynamics of organizational behavior (Axelrod, 1990, 1997). Simulation has also been used
traditionally for prediction. As long as we can develop a model that accurately reproduces the
dynamics of a specific behavior, we can simulate its evolution over time and therefore use the model
to see what would happen in the future (Gilbert, Troitzsch, 1999; Sterman, 2000). And also has been
used as training platforms for tasks such as computational decision making labs in business (Warren,
2002).
However, the main purpose of ABMs for social scientists is their potential to aid in the discovery and
formalization of theories. Social scientists can build very simple computational models that focus on a
specific aspect of the social and organizational world, and discover the consequences of their theories
in the "artificial societies-organizations" that they have built (Langton, Taylor, 1991; Gilbert and
Conte, 1995; Axelrod, 1997; Casti, 1997). In this sense, computer simulation in social sciences
occupies a position similar to that of mathematics in physical sciences; programming in computer
languages is more expressive and less abstract than mathematical language, the programs have greater
parallel processing capacities and work with processes that do not contain a well-defined order of
activities. These programs can create simulation systems with heterogeneous agents – individuals with
different roles and world views, different capacities, and so on (Gilbert, Troitzsch, 1999). In general,
simplicity is key to agent-based models (ABM), and the primary aim, as stated by Axelrod (1997), is
to improve our understanding of fundamental processes.
In the intra and inter-organizational aspect, ABMs have been used to represent evolution, social
learning and innovation processes by various heterogeneous actors with different capabilities - degrees
of intelligence, knowledge bases, objectives and cognitive perception – and patterns of interaction (i.e.
Radner, 1993; Carley et al, 1998; DeCanio and Watkins 1998; Miller, 2001; Epstein, 2003; Chang and
Harrington, 2004; etc.). ABM organizational applications see organizations as a collection of
heterogeneous agents (basic information processing and decision making units based on certain rules
of behavior and limited rationality) that interact dynamically among themselves and with the
environment (this can be abstract; multidimensional, with various degrees of dynamism, or specific;
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visible competitors with which to coevolve, or a set of identified clients) that results in certain
behaviors and performaces (benefit or other utility functions). The interaction networks can be
determined formally (organigram) and also informally (social network, emergent communities, etc…);
information communication networks, authority and decision making networks, social networks
(culture, norms, etc), interest and conflict networks, etc… The primary questions for which these types
of applications seek an answer are (Chang, Harrington, 2004): Which are the core determinant factors
of organizational behavior and fitness?; How does organizational structure, resulting from agent
actions, affect behavior and performance?; What is the ideal balance between exploitation and
exploration, centralization and decentralization?; How are organizational behaviors and performances
affected by the influence of other competitors or specific environmental conditions? This kind of
questions, between others, have been approached through a variety of ABM platforms or generic
ABM modelling environments (Tobias and Hofmann, 2004) that allow the modelling and simulation
of a large variety of dynamic behaviors of diverse relationship networks, the dynamic hypothesis
testing, and the dynamic simulation of emergent and co-evolutionary processes of different
organizational networks (structural-cultural-technical) at different levels of detail (micro-actors,
macro-processes, organization). These functionalities make ABMs especially valid for modelling
social complex organizations and exploring alternative what-if scenarios.

The third period refers to “complex networks” and originates from homogeneous and random
networks such as the Erdös-Renyi, or the NK model by Kauffman (Bollobas, 1985). Recent studies
have shown that patterns of interaction among components in numerous real complex systems are
highly heterogeneous, i.e. the Internet, networks of collaboration between actors, networks of
collaboration between scientists, social networks, ecosystems, etc (Watts and Strogatz, 1998; Watts,
1999, 2003; Dorogovtsev and Mendes, 2001; Strogatz, 2001; Barabasi, 2002; Buchanan, 2002;
Newman, 2003; Solé, 2006). These type of heterogeneous networks present a variety of connectivity
distributions between nodes; ranging from exponential distributions to scale free distributions, that
obey a potential law (Amaral, 2000). Each of these distributions are a result of different basic types of
organization, and exhibit characteristics behaviors and properties. It has also been observed that the
interaction network topology of biological, social, economic and technological systems influence
aspects such as the transmission speed of information-energy-materials, network robustness and
fragility under failures and attacks (Barabási, Albert and Jeong, 2000). These real world heterogeneous
networks present another significant characteristic, known as the Small-World effect (Watts and
Strogatz, 1998): Small World networks are highly clustered-modulated (each node is densely
connected within its group – typical of regular networks) and, in addition, mean distance between two
given nodes of the network is small (characteristic of homogeneous random networks). These simple
models of heterogeneous networks have opened an important bridge between complexity sciences and
network theories, especially in the field of social and organizational network analysis (Scott, 1998;
Wasserman and Faust, 2000), covering matters such as organizational network evolution and change
over time (Nohria and Eccles 1992; Dorian and Stokman 1997; Morel and Ramanujam, 1999). These
network models have been applied recently to ABM environments with the dual purpose of studying
the properties of their evolution processes, and for understanding the impact that certain topologies, or
structural configurations of relationships, have on behavior and performance in a variety of
organizational system environments (Contractor, 2002; Schreiber, Singh and Carley, 2004; Tesfatsion,
2006).

The methods and tools that are characteristic of mathematical complexity are:
• Statistical techniques for the chaos theory (Sole and Manrubia, 1996; Kantz and Schreiber,
1997);
• Methods and tools for modelling and simulation using CAs and ABMs (i.e. Swarm, Repast,
Anylogic…);
• Methods and tools pertaining specifically to the network theory, SNA/ONA (i.e. UCINET,
PAJEK, SIENA…).

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One of the major criticisms to the ABM & Networks approach of the mathematical complexity, from
the social complexity standpoint is the potential temptation to use these models as predictive
applications in the human context. Some of the reasons put forth are that people do not possess a
single identity, but rather an individual and collective identity that is transformed continuously
depending on contexts, and also that people do not act according to simple predetermined rules (Kurtz
and Snowden, 2003). Therefore, despite accepting their validity for certain issues, i.e. discovery and
formalization of socioeconomic theories for the understanding of certain phenomena, organizational
training environments, etc., they should not be viewed as tools that allow us to predict the exact
behavior in time of certain individuals under specific circumstances.

2.3.2 Social Complexity – Metaphorical Framework

The social complexity approach incorporates a new viewpoint regarding the underlying structures and
processes that generate change and evolution in organizations. From this perspective, an organization
is understood as a nonlinear feedback system consisting of multiple elements, dimensions, and
interrelationships, that co-evolve with each other over time. The concepts of complexity are
understood as a metaphorical framework that helps describe these changing and evolving processes,
understand them better, and therefore enable more effective actions (Stacey, 1996; Rosenhead, 1998;
Ortegón-Monroy, 2003).

According to Lakoff and Johnson (1995), metaphors partially structure our daily experience and this
structuring is reflected in the language we use. Therefore, and in step with Wittgenstein’s Proposition
5.6; "The limits of my language mean the limits of my world", the new complexity metaphors have the
power of allowing us to see the world from a different point of view and to create new realities. In this
sense, the managers that adopt them see their companies differently than the rest and so, compete
differently. Complexity metaphors can be a useful means to approach multiple ways of seeing the
organization, its coevolution with its environment, its internal contradictions, and how to organize it to
respond appropriately within dynamic environments fraught with fast pace of change and uncertainty
(Clegg, 1994).

In the context of a socio-economic ecosystem, complex adaptive systems provide a new explicative
framework of interrelations regarding how individuals and social and economic organizations
interact, interrelate and develop. Complexity also explains why intervention can have unexpected
consequences. The complex correlations of components within these systems give rise to multiple
chains of interdependence at all scales. In general, we become aware of the change only when a
different pattern becomes perceptible, but various changes at numerous micro-levels are taking place
simultaneously even before the macro-level is apparent (Mitleton-Kelly, 2003a). The variety of
interrelationships between actions at a micro level produce emergent patterns of behavior and macro
level structures, that in turn influence individual entities and their interrelationships too. This generates
co-evolutionary processes between micro and macro levels that create continuous dynamics of
regeneration, transformation and change (Stacey, 1995, 1996, 2000, 2001; Mitleton-Kelly, 1998,
2003a, 2003b; Brown and Eisenhardt, 1998; Maguire and McKelvey, 1999; Marion, 1999; Mitleton-
Kelly and Papaefthimiou, 2000; Eisenhardt and Sull, 2001).

This new view leads to new forms of action, interrelationship and teamwork. Basically, the emphasis
is no longer on the pre-design of the organizational system, but on the creation of conditions and
infrastructures - social, cultural, technological, political, etc… - that encourage, enable or at least
do not inhibit the development of beneficial behavior patterns for the organization1. For example,

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An example in another context by Kurtz and Snowden (2003): “A group of West Point graduates were asked to manage
the playtime of a kindergarten as a final year assignment. The cruel thing is that they were given time to prepare. They
planned; they rationally identified objectives; they determined backup and response plans. They then tried to “order”
children’s play based on rational design principles, and, in consequence, achieved chaos. They then observed what teachers
do. Experienced teachers allow a degree of freedom at the start of the session, then intervene to stabilize desirable patterns
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self-organization and the evolution of relationship patterns between workers according to specific
needs, exploration of the space of possibilities to create new ideas and innovate, the emergence of new
forms of work and distribution of responsibilities, new forms of organization and of doing business, to
respond as quickly and efficiently as possible to organizational environment continuous new
opportunities and threats (Mitleton-Kelly, 2003b).

Following are several methods and tools used in the social complexity approach:
• The use of narratives and collaborative active research to identify conditions and
infrastructures that enable organizational change and a culture of anticipation (Mitleton-Kelly,
2003b);
• Cynefin sense-making framework, by Kurtz and Snowden (2003), to identify by a team the
various frameworks/views from which to interpret the internal and environmental behavior
patterns of the organization, and share the search for answers/solutions;
• Real options, scenarios planning, and robustness analyses to identify a mix of robust
strategies for turbulent environments (Rosenhead, 1989; van der Heijden, 1996);
• GDSS - Group Decision Support Systems (Huxham 1996) for strategic team brainstorming,
and;
• PSM - Problem Structuring Methods (Rosenhead, 1996), such as Soft Systems
Methodology (Checkland, 1992), to structure perceptions and identify problem’s roots, and
for negotiating alternatives and reach agreements by teamwork.

3. GENERIC PRINCIPLES OF COMPLEXITY AND CONTRIBUTIONS TO THE


ORGANIZATIONAL DOMAIN

Following several generic principles of complex systems are presented. Each includes a brief
description of the concept, with an interpretation of the concept from an organizational or
socioeconomic perspective, and a series of practical considerations extracted from the literature.

3.1. Connectivity-Interdependence and Diversity

Complex systems are defined in terms of a variety of patterns of interaction between diverse
components (Kauffman, 1993). This view differs from that of simple systems, that may have multiple
components, although both they and their interrelations are simple and uniform. Complex behavior
arises from interrelations, interactions and interconnectivity between various components of a system
and between the system and its environment (Gell-Mann, 1995, 1996; Watts, 1999, 2003; Barabasi,
2002; Buchanan, 2002).

In human systems, such as business organizations, connectivity and interdependence imply that the
decisions or actions taken by one agent (individual, group, organization, institution, etc.) affect the rest
of the agents and systems with which it is interrelated. The impact of these actions on the rest will not
be uniform, but will depend on the state of each of these agents (their history, mental schema,
organization and structure) and on how these are interrelated. Human complex systems are
multidimensional and all these dimensions (social, cultural, technical, economical, political…)
interact among each other and influence each other mutually (Anderson, 1999; Mitleton-Kelly,
2003a).

A distinguishing characteristic of socioeconomic complex systems is that they are capable of adapting
and evolving intentionally. In this sense, both connectivity between individuals or groups, and their
own schemes of interpretation and action are not uniform over time but vary and evolve. Specifically,

and destabilize undesirable ones; and, when they are very clever, they seed the space so that the patterns they want are more
likely to emerge.”
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interrelations can vary over time in diversity, density and intensity or frequency (Mitleton-Kelly, 1998,
2000, 2003a, 2003b).

Agency

The agents (individuals, groups, group coalitions, etc) populate a complex system and interact in an
intentional and nonlinear manner. They possess schemes, cognitive structures, that determine the
actions to perform based on perceptions of the environment, as well as on fitness criteria at different
scales and levels. These schemes, or cognitive structures, are frequently represented by rules of
interpretation and behavior (Holland and Miller, 1991; Gell-Mann, 1994; Senge, 1994; Carley, 1995;
Eoyang, 1997), that are typically nonlinear and evolutive.

Link diversity

In terms of connectivity, the diversity of a network of agents (McKelvey, 1999b, 2001, 2002a, 2002b)
is expressed by the intensity of its links or couplings; strong links and weak links. Weak links
(Granovetter, 1973), also known as structural holes and bridges (Burt, 1992), create conditions for
the generation of novelty, and satisfy Ashby’s (1956) variety requirement to produce creative
emergence.
The absorptive capacity (Cohen and Levinthal, 1990) of new knowledge by the agents usually acts as
a “threshold gate”. Generally speaking, weak links tend to disappear when this capacity is low.
Nooteboom (2000) associates an agent’s absorption capacity with the cognitive distance in the
context of effective communication and the diffusion of new knowledge between weak links. The
cognitive distance must be short enough for mutual understanding and long enough for the exchanged
knowledge to be new and non-redundant.
Along the same lines, Uzzi (1999) notes that the most effective intra and inter-group networks are
those that possess an adequate combination of weak links (those that favor novelty) and strong links
(those that favor efficiency).

Degree of Connectivity and Connectivity Patterns

As mentioned above, connectivity and interdependence spread the effects of actions throughout the
ecosystem. This spread, or influence, however, is not uniform but rather depends on the degree of
connectivity. The higher the degree of connectivity between the components of the system (network
density), the higher the coupling and the higher the disturbance effect of a change in one part over the
whole system. Therefore, when an entity attempts to improve its position or fitness, this may lead to
the worsening of the conditions for other entities of the system.

Social and biological ecosystems do not possess relationship structures in which all their components
are completely interconnected. In order for the system to have a certain level of coherence and for its
behavior not to be chaotic, CAS tend naturally towards the formation of interrelated structures where
some agents are firmly coupled – conforming clusters/modules (strong links) - and a small group of
agents of these groups share weak couplings between each other - structural holes/bridges (weak
links). This topology was been named as Small World network model (Watts, 1999, 2003). This
combination of links offers real systems a robust nature that derives from the combination of a
clustered structure and a high degree of connectivity, and also very low mean distances between two
given nodes of the network due to bridges (the average distance between any two webpages is only 19
steps; 6 steps between any two people in the world; any two CEOs of the 6,742 Fortune 1000
companies are only 4.6 steps away from each other, etc.). The consequences of the structural and
dynamic properties of the Small World model, local clustering and global accessibility have been
thoroughly studied in the field of contagious diseases, rumor spreading, distribution of information
and knowledge, dissemination of innovation, etc. We can therefore say that there are real world
relationship networks with various characteristic degrees and patterns of connections, and that their
topology is a determining factor on properties such as the transmission speed of information-energy-
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materials and others such as the robustness and fragility of these networks (Powell, 1990; Burt, R.S.
1992, 2000; Kauffman, 1993, 1995, 2000; Krackhardt and Hanson, 1993; Doreian and Stokman, 1997;
Scott, 1998; Watts, 1999, 2003; Barabási, Albert and Jeong, 2000; Wasserman and Faust, 2000;
Barabasi, 2002; Buchanan, 2002; Nohria and Eccles, 2002; Oliver and Ebers, 2002; Snijders, 2005).

3.1.1 Several practical considerations

Following are a series a practical considerations, collected from the literature, regarding Connectivity
patterns and associated with the Small World model, and Diversity aspects, to improve organizational
performance in changing environments.

Granovetter (1973) and Burt (1992, 1996, 2000) highlight the capacity of weak links in their role as
bridges between isolated communities as key elements for the development of social capital, each
with a differentiating or diversity component. The theory proposed by Burt is known as “Structural
Holes”: The persons who act as a bridges between isolated groups, joining local clusters and creating
shorter paths between groups with non-redundant heterogeneous interests, are individuals who
create new business opportunities (competitive advantage), being innovative agents, transmitters of
new ideas, sources of new competitive advantages for the organization. Their identification and
development, both at the formal organizational level and the informal level is key as an element for
innovation and development of new dynamic capabilities, novelty, diversity and the creation of new
business opportunities for the organization.

On the other hand, Noteeboom (2000) and Uzzi (1999) highlight the fact that the local groups or
clusters are highly cohesioned and redundant, and the relations between them are of the strong type.
Therefore, the cognitive distance between their members is short because the strong relations lend
their members cultural similarities such as a common language and world views – shared mental
models. This favors “exploitation” of current group abilities, their specialization, group knowledge
codification and standardization and the search for productivity. On the other hand, the weak links
typical of “bridge” agents create shorter paths between heterogeneous groups with non-redundant
views (diversity). The cognitive distance between these heterogeneous groups is generally high. Weak
links facilitate inter-group communication and enable later generation of new approaches (ideas,
products, services, business opportunities). They impulse “exploration” and the development of new
abilities, innovation, flexibility and change. To ensure the generation of new ideas they suggest it is
important to renew the links between people with different views; to mix people from different
departments, incorporate new people, etc. Finally, they also suggest that at a global organization level,
a balance between strong and weak links within the organization is key to achieve both the
advantages of exploitation and exploration.

Cohen and Levinthal (1990), suggest that organizations with the highest absorption capacity tend to
be more proactive in taking advantage of the opportunities presented by the environment. Those with
the less absorption capacity are more reactive. The absorption capacity of an organization does not
coincide with the sum of its workers, but rather largely depends on the individuals present in the
“interface” regions between the company and the environment and between the various company
units. If these individuals’ absorption capacity is high, they will be capable of monitoring the
environment and transfer this information in a comprehensible way to those that can make the best use
of it. In a stable environment, only a few of these individuals are needed to perform this function. But
in highly changing environments it is preferable that there be several individuals with this profile to
absorb and transfer the wide range of information generated.

As regards the concept of Social Capital: (1) Coleman (1990) describes Social Capital as “...the sum
of the resources possessed by an individual, or a group, as a result of having a lasting network of
mutual recognition relationships...”, which can be translated as having a network with high density of
relationships. For Coleman, the higher the density of the network, the greater the social capital and
potential access to information; (2) On the other hand, following his structural holes theory, Burt
(1992, 1996, 2000) suggests that to make the most of these alliances, the company in question must
position itself as a bridge between highly dense networks, which will enable access to non-redundant

10
information and knowledge. Once both views are considered, neither of them alone appear very
recommendable. The most recommendable solution seems to be to setup a network configuration that
allows both high levels of clustering through dense local networks (social capital in terms of
Coleman), and also high accessibility to non-redundant information and communication from other
networks via bridges, strategic collaborators, that cover structural holes (Burt’s approach). The answer
is the Small World model network topology.

The Small World network model, therefore, seems to be the structure towards which real world
systems naturally evolve. These systems, however, are continuously regenerating their components
and undergoing restructuring. Therefore it can be considered as a dynamic equilibrium structure –
between exploitation and exploration, robustness and global communication. The same can be said of
business organizations as regards their regeneration processes and their coevolution with the
environment.

The tools provided by social network analysis (SNA) are used to capture, characterize and analyze
the structures, patterns and evolution of intra and inter-organizational networks, both formal and
informal; connectivity between actors, rank, prominence, proximity, degree of isolation, popularity,
centrality, agent reciprocation, relationships (a)symmetry, transitivity, network density, network
heterogeneity, network degree of (de)centralization and so on. The use of SNA thus enables (Cross,
Parker, and Borgatti, 2000): (1) The identification of the potential of a network to lever off its
collective knowledge in response to new opportunities or problems; (2) Evaluation of the most
efficient ways to design intra and inter-organizational networks of collaboration to promote and
improve the efficiency of strategic collaboration between business units, in teams to develop new
products, high performance management, etc.; (3) To map integration dynamics after a reorganization
(organizational restructuring, fusion, acquisition, etc.); (4) The identification of how intra and inter-
organizational networks contribute to innovative activity in business processes, how they promote
communication, integration, flexibility and novelty, and the intangible assets of the organization that
competitors find difficult to reproduce (Jones, Steward and Conway, 2000).
Therefore, the organizational application of SNA tools in both the formal and informal networks of the
organization allows us to identify the agents that are critical to the creation and distribution of
knowledge and innovation in the organization (Krackhardt and Hanson, 1993; Doloff, 1999),
practicing communities and emergent interest communities (Wenger, 1998), the advice network - that
reveals who the individual has to consult to perform a task, the trust network - about who shares
delicate information and with whom, the communications network - that explains who is in charge of
work-related communications, as well as how to design a more effective social network structure to
respond to organizational conflicts and crisis and assists in processes of organizational change, which
individuals are better connected than others (centrality) and therefore have more influence over the
network, how are individuals connected to others through the network - connectivity structure and
distribution), which individuals are most critical as regards network connectivity in case they might be
eliminated, etc. IBM Global Services has been using SNA/ONA since the 1990s to map internal
collaboration between its various communities; innovation communities, knowledge communities,
practice communities (INSNA, 2006).

From the perspective of agent-based simulation (ABM), Díaz-Guilera et al (2003) propose the
following conclusions regarding network topology and information management: (1) For low
densities of information packages circulating through the network, typical of stable environments, the
structural configuration that allows the least number of information packages to accumulate in the
network is a highly centralized star type structure. This minimizes the average distance between any
two points and since the density of information packages is low, traffic and delays in the central node
are avoided; (2) For higher densities of information packages circulating through the network, typical
of turbulent environments, the best network configuration is a structure of clusters with a few
randomly established long distance links – Small World network structure. This achieves low average
distances between any two network nodes, high global accessibility and, given its decentralization, it
allows all the nodes to support similar information processing loads and avoids information traffic
congestion due to bottlenecks.

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In addition, the work by DeCanio and Watkins (1998), based on ABM simulations dealing with the
effect of agent cognitive capacity, and relationships structures, regarding the efficiency in
distribution and adoption of new knowledge and innovation by agents of the organization, starts
with the following question: Which is the best organizational structure (centralized, decentralized,
hierarchical, non-hierarchical, etc.) for agents with different cognitive capacities to distribute and
adopt new knowledge and innovation as quickly as possible? The answers obtained are as follow: (1)
Efficacy in the distribution of innovation varies depending on the organizational structure; (2) For
high absorption capacity values of the agents of an organization, the structures with the best results
are non-hierarchical, flat structures; (3) The introduction of hierarchy (divide into teams) and
limiting channels of communication reduce the effect of intoxication on the organization.

Finally, Roose (2003) makes the following observations as regards the association of the connectivity-
interdependence and diversity concepts with organizational performance, based on a case study of a
long process of organizational transformation of a firm to achieve a robust and flexible model
under high level of change environments: (1) The information and knowledge exchange processes
were limited, and instead of being continuous in time, they were performed ad-hoc depending on
specific needs. Also, internal connectivity between units decreased (reduction of global accessibility of
information, and reduction in the volume of circulating information and informational stress of matters
that were not specifically required) in favor of external connectivity with local markets/customers and
within the context of each unit; (2) An organizational network consisting of semi-autonomous
units was developed, which prevented a specific change in a unit to be spread throughout the
network. Each semi-autonomous unit was oriented towards its market and context. Each unit was
encouraged to develop its own micro strategy, using information of client needs as well as their own
views, working modes, products and services; (3) A professional mobility plan was implemented to
stimulate job rotation and extend the action radius and repertoire of problem-solving techniques. As a
result, each unit recovered its diversity (increase in cognitive distance) and due to certain weak links –
bridges (ad-hoc possibility of new information exchange), as well as sporadic inter-unit rotation of
personnel, specific exchange of non-redundant knowledge to solve client problems in the form of new
products, services or the identification of new business opportunities was enabled; (4) The semi-
autonomous units were connected via an alignment group formalized as a management team. The
decision making capacity was transferred to whoever was closer to the relevant information (client,
market) and had the capacity to turn it into knowledge and action. These persons could consult with
others, if necessary. Also, if the decision implied mobilization of large organizational resources, it
should be discussed with the alignment group / management team. Roose, in fact CEO of this firm,
and his team designed a Small World network type organizational model with a significant degree of
decentralization (micro strategies, local decision-making, etc.), combined with a centralizing
component (a management team to manage common resources).

3.2. Feedback Processes and Dimensionality

Feedback processes are of two kinds; positive or reinforcing feedback processes (i.e., amplifying) -
that creates change, and negative feedback processes - that creates stability (balancing). While the
first is considered as a driver of change, the second works whenever there is a “goal searching”
behavior (Kahen and Lehman, 2000).

The term feedback process is used to avoid machine metaphors and to distinguish the human being
and the organization from other mechanical systems. The term “goal searcher” is used to imply that
the system is attempting to achieve a desired behavior. However, evolutive biological processes are
not “goal searchers” in the sense that they are not directed. The evolution of socioeconomic
organizations is not directly analogous to biological evolution, since cognition and learning provide a
strong component of direction. However, both biological and socioeconomic evolution depend on
emergence, self-organization, exploration of the space of possibilities and other processes whose result
is not the desired or directed goal, in the sense that there is a specific desired result, that they can be
planned and whose behavior can be accurately predicted (Mitleton-Kelly, 1998, 2000, 2003a, 2003b;
Anderson, 1999).

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In the case of complex systems, multiple types of feedback processes operate simultaneously - some
are positive (they produce instabilities), and others are negative (they produce stability). This leads the
systems to regions with mixed order-change behavior, referred to by some authors as the “edge of
chaos” (Packard, 1988; Langton, 1990; Li, Packard and Langton, 1990); with order, necessary to store
information and maintain structure stability, and change or disorder, which provides flexibility in the
transmission of information (Packard, 1988; Langton, 1990; Li, Packard and Langton, 1990).

Sensitive Dependence to Initial Conditions, and Attractors

Complex systems are iterative nonlinear dynamic systems, what makes them unpredictable in the long
term. This is because in nonlinear iterative feedback systems outputs become system inputs, so any
variation in the initial conditions can grow in a linear, potential or exponential mode until it deforms
any expected result in the long term (Lorenz, 1963; Kauffman, 1993). A second characteristic of
nonlinear dynamic systems is the presence of critical values for the system variables and parameters.
When system variables and parameters are near those critical values, any small variation with respect
to these initial values can lead the system to qualitatively different behaviors in time. This second
characteristic is directly linked to the concept of sensitive dependence to initial conditions, and is the
basis of the study on bifurcations (Lorenz, 1963; Sole and Manrubia, 1996; Kantz and Schreiber,
1997).

Even though the incapability of predicting long term evolution of a complex adaptive system, this kind
of system do not show a random behavior. In fact, they commonly present recognizable behavioral
patterns, characterized as attractors (strange) of behavior, i.e., archetypes (Senge, 1994), potential
laws (Bak, 1997), etc. There are numerous statistical techniques to identify system patterns (attractors)
using system time series (Solé and Manrubia, 1996; Kantz and Schreiber, 1997).

Dimensionality

The dimensionality of a complex adaptive system is defined by the number of degrees of freedom
that the system’s agents have to develop their behavior (Dooley and Van de Ven, 1999). Control,
whether in the form of negative feedback, or by means of regulations and constraints, reduces system
dimensionality and makes system behavior more predictable. On the other hand, autonomy and
decentralization, as a means of positive feedback, increase the dimensionality of a system.

Increasing Returns vs. Decreasing Returns

Traditional economic theory is mainly based on the hypothesis that economies are based on negative
feedback processes, decreasing returns, and that system’s states of equilibrium are more or less
predictable (Arthur, 1990). Brian Arthur (1990) argues that, apart from these stabilizing mechanisms,
there also exist other positive feedback processes that can lead to non-equilibrium situations. The
classical example he uses to demonstrate the presence of increasing returns in the economy is the case
of VHS vs. Beta, where VHS takes over the video market thanks to positive feedback (Arthur, 1990):
“The VCR market started out with two competing formats selling at about the same price: VHS and
Beta. Each format could realize increasing returns as its market share increased: large numbers of
VHS recorders would encourage video outlets to stock more pre-recorded tapes in VHS format,
thereby enhancing the value of owning a VHS recorder and leading more people to buy one. (The
same would, of course, be true for Beta-format players.) In this way, a small gain in market share
would improve the competitive position of one system and help it further increase its lead. ...
Increasing returns on early gains eventually tilted the competition toward VHS: it accumulated
enough of an advantage to take virtually the entire VCR market”. As can seen, the appearance of
increasing returns for one technology has a lot to do with the number of products and services
associated to that product. This phenomenon is also known as “network externalities” (Kelly, 1994;
Mainzer, 1996).

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3.2.1 Several practical considerations

According to Stacey (1995), organizations, understood as nonlinear feedback systems are


simultaneously subjected to both processes that lead them toward stable behavior (negative feedback),
and toward unstable behavior (positive feedback). An example of this is the distinction between the
formal and informal organization of a company. The formal system exists to provide efficacy in the
development of daily activities, for which there are hierarchical structures, procedures, norms, etc.,
that attempt to maintain a status quo, order and stability. Forces of integration, maintaining control and
the need to adapt to the environment guide the formal behavior of the system (ordinary
management) towards a stable state of equilibrium through negative feedback processes – data
analysis processes, setting goals, evaluation of options versus objectives, rational selection of options,
implementation through hierarchy, and monitoring results. At the same time, organizations are
subjected to forces from the opposite direction, towards division, decentralization and new ways of
doing things. The informal system is one of the drivers for change in an organization. It can be very
useful when the organization needs to develop a more flexible model under a continuously changing
environment. In these cases, extraordinary management should promote activation of tacit
knowledge and creativity in the organization through more informal structures. Depending on the
primary goal of an organization to achieve success, at any given moment; efficiency vs. creativity and
innovation, one of the two behaviors must be promoted; either stability through mechanicist
organizational structures based on formal relationships (ordinary management) or renewal, creativity
and change through organicist and fluid structures that empower more informal ad-hoc relationships
(extraordinary management).

Along these lines, Dooley’s work (1997) concludes that successful implementations of methods
oriented to the reduction of dimensionality, negative feedback processes such as control (TQM,
EFQM, etc.) achieve high efficacy and productivity in stable environments, but also reduce the
possibility of innovative activities. The degree of innovation is proportional to that of autonomy of
value creating units.

Stacey (2002), once again, proposes that when an organization faces a changing environment, it also
faces the paradox of requiring consistency and stability to conduct its day-to-day business efficiently
(exploitation through technical rationality and negative feedback supported by formal network
structures), and the need to "decompose" this consistency and stability to generate new creative
movements (exploration through second order learning dynamics, self-organization, supported by
more informal network structures). Innovative organizations are nonlinear feedback systems that
operate between stability and change, with a combination of exploitation and exploration dynamics
developed via structures based on both formal and informal networks. Generally speaking, and due to
Stacey (2002), the following occurs when this combination is considered: (1) Resistance to consider
informal organization as a mean for management appears; (2) When the informal organization is
recognized and considered, the first response is to attempt to formalize it, make it predictable and to
place it under the control of management; (3) Organizational defensive routines make a strong
appearance. It is therefore a fundamental task of management to attempt to find a balance between
both dynamics; centralization and control to promote efficiency and productivity and decentralization
and autonomy to maximize flexibility, creativity and innovation. Some of Stacey's proposals (2002)
include: The incorporation of new personnel or rotation of the existing personnel to ensure that there is
not only one homogeneous organizational culture; To promote a democratic management style
avoiding unique views; To promote the conditions necessary for the emergence of an evolution agenda
regarding strategic matters; Encourage management to intervene selectively when necessary, at critical
moments; Management must try to understand the behavior patterns that are being generated and the
consequences of its intervention, and; Management must combine a permissive style with the
generation of tension so that the workers do not settle down to their daily routines.

Mitleton-Kelly (2003b) emphasizes passing from the pre-defined design of the organizational system,
to the creation of conditions and infrastructures - social, cultural, technological, political, etc. - that
14
encourage, enable, or at least do not inhibit, the development of beneficial behavior patterns for the
organization. For example, self-organization and the evolution of relationship patterns between
workers according to needs, exploration of the space of possibilities to create new ideas and innovate,
the emergence of new forms of work and distribution of responsibilities, new forms of organization
and of doing business, to respond, reinvent oneself as quickly and efficiently as possible in the face of
continuous change present in the organizational environment.

3.3. Coevolution

Coevolution refers to the idea that evolution in one domain is partially dependent on the evolution in
another domain (Ehrlich and Raven, 1964; Kauffman, 1993, 1995, 2000; Pianka, 1994; McKelvey,
1999b), or that one domain changes in the context of another. The notion of coevolution emphasizes
reciprocal evolution of interaction at different scales (Futuyma, 1979; Mitleton-Kelly, 2003a).

In human systems, such as socioeconomic ecosystems, coevolution is understood as reciprocal


evolution of the intricate network of multiple interlinked relationships between the agents that
comprise them (their connections, schemes, objectives). Each individual belongs to many groups and
to a variety of contexts and their contribution in each context depends in part on the other individuals
in the same group and their interrelationships (Mitleton-Kelly, 1998, 2000, 2003a, 2003b; Anderson,
1999).

Another way of thinking of coevolution within an ecosystem is in terms of adaptive landscapes or


fitness landscapes (Kauffman, 1993). These landscapes are a way of visualizing the fitness
(performance) of the components of a system and are usually represented as mountainous terrain
where the heights of hills and depths of valleys represent fitness function values or the fitness system
function. The fitness contribution of the components will depend on their contribution, as well as on
the contribution of the components with which they are related.
The components, or adaptive agents (N), of the system are subjected to conditioned constraints by
their connectivity (K), which affect their degree of fitness optimization. The coevolution process
between adaptive agents can be understood as a process of deformation of the fitness landscape, where
the adaptive movements of each agent towards higher regions of fitness alter the landscapes of their
neighbors, who are related entities. In Kaufmann’s words (2002): “… coevolution is a dance of
coupled landscapes that become deformed”. As the connectivity between agents in the system
increase, the fitness landscape becomes more and more rugged, due to the multiple constraints that
come into conflict, appearing therefore multiple low level local optimums. The term agent or entity is
used here as a generic term and can be applied on different scales; to individuals, teams, organizations,
industries, institutions, economies and so on.

In general terms, the relationship between the concept “adaptation” and the concept “coevolution”
depends on the symmetry/asymmetry of power distribution among the agents that interact.

3.3.1 Several practical considerations

As regards the subject of coevolution, Beinhocker (1997) emphasizes the fact that markets are
dynamic systems and not static systems. Changes in one agent of the market are spread and
propagated by the network of relationships to the rest and vice versa. This produces co-evolutionary
phenomena that endogenously produce cascades of changes whose effects can spread throughout the
economy (the invention of the automobile, the development of the oil industry, etc...). Shumpeter’s
creative destruction waves are a consequence of this.

Likewise, Levinthal (1997) proposes that the competitive fight (co-evolutionary fight) in business
organizational systems are established in the fields of strategy, technology, processes, products and
services, to ensure organizational survival in the markets. Any movement or repositioning of an agent

15
in the sector to improve its fitness will cause movements in the rest of the agents of that sector, i.e.
benchmarking as a co-evolutionary prey-predator race.

McKelvey (1999b) states that co-evolutionary systems present two main regimes of behavior, one
ordered and the other chaotic. Ordered behavior occurs when companies coevolve until they reach
mutually compatible peaks, which leaves the system in a stable and ordered regimen. In these cases,
we say that the system has reached a Nash equilibrium. Chaotic behavior occurs when companies
pursue efficacy peaks in their respective landscapes and, due to adaptive movements of the others, and
the coevolution of their coupled landscapes, these peaks change faster than each take to reach them.
This effect is known as the “Red Queen Effect”; in their competition to find an efficient position in
the economic network, they find themselves in a continuous “arms race” where nobody wins and
where they all hurry furiously to not be the last, typical of turbulent environments.

In their works, Kauffman (1993, 1995, 2000), and Dooley (1997), state that the global optimum of a
system is easily found when the criteria of the agents that comprise it are independent. However, as
interdependence increases between the agents of a system, agent fitness depends on both its own
characteristics and the characteristics of the other agents with which they interact. Therefore, the
number of conflicting constraints between them increases and the possible optimums that can be
reached by each individually are reduced by their interaction, while multiple smaller local optimums
appear (Kauffman, 1993,1995, 2000). According to Dooley (1997), one way to avoid this effect is
through task modularization – this reduces global interdependence between value network companies
and offers higher efficiency when optimizing the whole system.

In Kaufmann (2002), the author uses the NK model to suggest that decentralized organizations are
more flexible structures because they possess a lower number of internal interrelationships (K) and
therefore fewer conflicting constraints. Decentralization means partitioning, decoupling the
organizational system into semi-autonomous units (patches), each of which can search for their
optimum individually. These patches, in turn, have a certain degree of interaction. So, as each of them
try to reach their own individual optimums, it transforms the conditions of its neighboring patches and
creates a co-evolutionary dance. Following Adam Smith’s “invisible hand” principle, it is supposed
that individual optimizing actions, via the co-evolutionary dance, lead the system to a global optimum.

Lastly, Levinthal (1997), uses ABM simulations of the NK model to study the relationship between
organizational change processes and selective forces, or conditions of the environment. The author
establishes that organizations with less interrelated attributes (low K), known as loosely coupled, have
a higher survival rate in changing environments than strongly coupled organizations (high K) known
as tightly coupled organizations. Therefore, an organization with low attribute interdependence (low
K or loosely coupled) can change one of its attributes to achieve better fitness in a new scenario
without this having a negative impact on the contribution of the rest of its attributes.

3.4. Exploration of the Space of Possibilities

The exploration of alternatives is another characteristic of complex evolving systems. Kauffman’s


work (the NKCS model) on fitness landscapes shows that there is no optimal universal solution.
There are only local optimum degrees in a fitness landscape under continuous change (Kauffman,
1993, 1995, 2000). Thus, it is necessary that the systems constantly explore their space-of-
possibilities.

If a socioeconomic ecosystem is observed as a landscape consisting of hills and valleys that are
continuously changing, then an entity (the most adequate) or a solution (optimum degree) at the top of
the hill at one instant can be in a valley if the landscape changes (either the environment or the
socioeconomic ecosystem itself). If that is the only available solution, then that entity will be
inadequate and unable of rising to a new hill. However, if the entity had been exploring its space of
possibilities and generating a variety of strategies in its repertoire of responses (Ashby 1969) and has

16
developed other local optimum solutions, it would have better chances of survival (Mitleton-Kelly,
1998, 2000, 2003a, 2003b; Anderson, 1999).

The Adjacent Possible

When exploring the space of possibilities, whether to design a new product, process, or to do things
differently, it is impossible to explore all the possibilities. What is possible, however, is to consider a
small step with respect to the original position in multiple directions. This type of exploration is
known as “the adjacent possible” (Kauffman, 2000). The adjacent possible can be expanded a little
further so that the possibilities of creating new market niches is higher. This process is continuously
used by biological systems and allows them to continuously adapt to the environment at a sustainable
rate (Kauffman, 2000).

3.4.1 Several practical considerations

In their renowned work “Strategy as Simple Rules”, Eisenhardt and Sull (2001) state that, in
unpredictable turbulent markets, the strategy to identify a desirable position and develop the necessary
capacities to achieve competitive advantages over time is a too static and therefore ineffective
approach. Environments with a high level of uncertainty and confusion demand simple, concrete, and
clear strategies as a source of direction in the fog, and as a source of competitive advantage. Simple
strategies give companies the necessary framework to be sufficiently flexible and to quickly and
efficiently size up and take advantage of opportunities that occur continuously in turbulent markets.
The difference between position, resource, and competition strategies when compared to the simple
rules strategy is as follows:
(1) Position – build a fort on a hill and defend it;
(2) Resources and skills - search for leverage and resources and skills that distinguish you from
your competitors;
(3) Simple rules – have the flexibility to quickly take advantage of the opportunities that come up.
Eisenhardt and Sull (2001) propose a series of guides to elaborate strategies based on simple, concrete
rules. The first step is the definition of key processes and rules. To do so, there must be a selection of
the strategic processes where the flow of opportunities is greatest, i.e., product innovation,
collaboration network, brand, etc. This is followed by establishing guidelines for these processes
consisting of a few clear, concrete rules. For example, Autodesk, a software manufacturer was faced
with a mature market with a low growth rate where it dominated all the products. After identifying that
its technology offered possibilities of fast growth in new markets (wireless, Internet, images...) it
focused its strategy towards product innovation using 2 simple rules; (1) To apply its technology to
new products for new markets, reducing the time for product development from 2 years to 3 months,
and; (2) New promising products that could not be placed on the market for lack of capital would be
marketed by co-financed spin-offs using capital risk companies.
Secondly, there are two different kinds of simple rules:
(i) How-To Rules – that define how the key processes are to be executed. For example Akamai, a
company dedicated to the development of Internet technologies defined 3 simple clear rules
for its customer service process; (a) employees in the customer service process had to be
experts in the technical area, (b) consultations had to be answered after the first contact (phone
or email), and (c) R+D employees would rotate with customer service employees;
(ii) Environmental Rules – help to quickly decide what opportunities we will focus on. For
example Cisco, that selected acquisitions as its key process, set up its principle environmental
rule as follows; to acquire only companies with no more than 75 employees, 75% of whom
were engineers;
(iii) Prioritization Rules – help to quickly prioritize various opportunities. Example of Intel stated
that productive capacity should be distributed depending on gross profit of the products. This
rule permitted Intel to evolve towards the microprocessor market;
(iv) Time Rules – these permit synchronizing the company with the flow of emergent
opportunities (market, legislative, etc…), as well as with other parts of the company.
17
Examples from Nortel: 1) To know when a product should be distributed on the market in
order to obtain key clients, 2) To complete the development of a product in less than 18
months;
(v) Exit Rules – help to decide when to quit an opportunity. Example of Oticon: To close a
development project when a key member of the project is transferred to another company
project. Example of GE: To be the first or second in your market or close down.
The number of rules in play is also important. Too many rules paralyze, while too few cause
confusion. A minimum of 2 and a maximum of 7 are recommended by Eisenhardt and Sull (2001).
More rules can be played with in stable markets, while fewer rules are preferable in turbulent markets
to favor flexibility. According to these authors, the rules originate in the knowledge and common
sense given by experience. The rules can also be changed, should be changed, when market conditions
suffer a major change or if it is decided to bet on other company processes as key processes.

As regards the fitness function of a company, Brown and Eisenhardt (1998) state that determining the
real fitness function objective of an organization can be very complicated, given the multiple
expectations and views that coexist within an organization, especially when it is competing in a
turbulent environment. In general, fitness can be understood as a combination of returns derived from
exploitation, reputation, the market position, resources and technology (March and Simon, 1958;
Lewin et al, 1999). In this sense, Brown and Eisenhardt (1998) suggest that the most efficient
organizations, with the best current and future performances, are those that have evolutionary
strategies that keep a balance between change and stability.

Brown and Eisenhardt (1998), again, developed the Patching concept from Kauffman’s (2000)
patches mentioned above, and propose a series of practical activities to facilitate dynamic restructuring
of business networks in order to explore opportunities. From the operational viewpoint, Patching is a
continuous strategic process in which corporate directors redesign their businesses in order to adapt
to/create new market opportunities. This may take the shape of dividing, transferring, eliminating,
adding (acquisitions) or combining business components, to create a business portfolio (multi-business
companies) with a high profit creating potential, and with each focused on temporary opportunities of
their target markets. The patching process creates capacities over the strategic process of dynamic
repositioning; identification of market tendencies, recognition of emerging patterns of change, market
segmentation, technological product roadmaps, etc…, instead of adopting only one position and
creating capacities for it alone.
The patching process is usually carried out through small, but continuous changes, is an evolution,
not a revolution. Transformations are constant, so that the company creates a culture of anticipation
and change, while developing change routines. For example Cisco develops routines (rules) to carry
out acquisitions, to mobilize human and technological teams, stock options as compensations, etc.
Size is an essential aspect in the patching processes. The size of business components, patches, should
be small enough to be agile and large enough to be efficient. For example in Microsoft, their
applications companies do not employ more than 200 workers, so management is very close to both
clients and employees, to motivate them appropriately, but with size enough to develop the requires
software applications. The higher the market uncertainty, the smaller the size of the business
component to search for agility rather than efficiency, and vice versa.
In addition, infrastructures must also be taken into consideration: (1) Modular business components
(semi-autonomous teams, i.e., Sun Microsystems), that give rise to corporate structures in the form of
heterogeneous Small World type networks; (2) Well-defined metrics at all levels so that businesses
can be compared between each other in order to evaluate the tendencies of each business and marking
the times for new patching (i.e., Honda), and; (3) Compensations that are coherent with the changes
throughout the company. It is important to choose the correct people for new companies, which can
generate that bright managers or technicians are placed at a new positions. These changes should be
compensated. Also, managers whose business is divided, combined, etc., should receive some kind of
compensation.
Patching processes should be performed quickly, in 2 or 3 months, to reduce anxiety. In general,
multiple options, between 3 and 4, are developed at the start. The option with more potential a priori is
18
quickly chosen. Sometimes, before making a definitive change, a test is carried out, by creating an
informal temporary organization within the existing company infrastructures. During the test time,
note is taken of the aspects to be corrected once the patch is implemented. The fine details are solved
once patching is carried out. Organizations accustomed to this exercise frequently create a specific
plan with clear objectives (i.e., GE – launching routine) for the first 30-60 days of the new company.
This helps personnel to familiarize themselves with the new situation and reduces anxiety. Examples
of organizations that develop practices of this kind are Hewlett-Packard, 3M, Johnson & Johnson,
Dell, Cisco, British Petroleum, Lucent Technologies.

In order to identify the impact of corporate strategy on competitive advantages in highly dynamic
environments, Caldart and Ricart (2003) chose three main blocks – the “corporate strategy triangle”:
(1) The first block refers to the cognitive aspects associated with identifying the landscape working
on; (2) The second block refers to the strategic initiatives needed to move within the landscape in
order to reach the best competitive position; (3) And the third block refers to the most adequate
organizational/corporate architecture to develop within the changing landscapes. These authors
propose: (i) The development of activities with a flexible structure but provided with a structure at
critical points, a culture of frequent change within the context of general rules, and the presence of
communication channels between the various divisions of the company; (ii) Encouragement of
modular design of business subsystems with different exploitation-exploration aims, i.e.
development of standard processes for exploitation oriented divisions and the adoption of metrics
consistent with corporate priorities, as well as the promotion of recombination of resources and
business opportunities throughout the divisions and the development of communication channels
between divisions for exploration purposes; (iii) These authors propose the superiority of self-
organization processes with regard to control as a way of creating new business opportunities in highly
dynamic environments. These self-organizational processes are understood as interactive processes
(policies, learning teams and training communities, creation and exchange of knowledge, etc.) that
generate innovation and new strategic directions for the organization. The role of designing simple
rules is left to the corporate level (general objectives or policies). These are the framework within
which the self-organizational, cooperative, and collaborative processes can develop in order to identify
new opportunities in the various business units and implement those that are considered most valuable.

Beinhocker (1997) states that the key to success for changing and uncertain environments seems to be
in the simultaneous combination of the positive aspects of being a Competitor (exploitation) and an
Evolver (exploration) by simultaneous combination of: (i) Strategies focused on day-to-day processes,
with a robust mix of strategies for possible futures; (ii) Creating competitive advantages by continuous
adaptation; (iii) Exploitation, standardization and proceduring of certain businesses along with
exploration, diversity, and innovation in new ones; (iv) The size of the business and its flexibility.
Following are differences between the Competitor and Evolver approaches in different organizational
environments.
Mix of robust strategies vs. Unique strategy: Instead of focusing exclusively on one well-defined
line of attack as to where, how and when to compete, complement this approach, which is valid to
dominate a short term survival market niche, with a mix of strategies that allow to compete adequately
in a variety of possible, although currently uncertain, future environment scenarios. An example of a
mix of robust strategies (similar to a real options portfolio): Microsoft –at the end of the 1980s, when
DOS system was in its maturity-decline phase, Gates chose to move the industry towards Windows.
To reduce the risk of this change, Microsoft also invested in possible Windows competitors; Unix,
OS/2 and the Macintosh Apple system. The company also acquired programming expertise in object
oriented programming and graphic interface design, expertise that would be necessary to compete
regardless of the system that finally won out. The difference between this approach and the traditional
analysis of scenarios is that the mix of robust strategies does not attempt to identify which of the
possible future scenarios is the most-least probable to happen. The mix of robust strategies is more
similar to a group of strategies that cover a wide range of possible futures that evolve over time as the
future unfolds in one direction or another. Some of these strategies will survive and others will not.
Continuous adaptation vs. Competitive advantages: Fitness studies on more than 400 companies in
a 30 year period showed that it is very difficult for companies to maintain superior performances than
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those of their competitors for over 5 years. According to these studies, due to continuous co-
evolutionary changes of the competitive landscape where these companies operate, long term
sustained superior fitness is not achieved by sustainable competitive advantages, but by continuous
development and adaptation of new sources of temporary advantages.
Exploitation vs. Exploration: In environments with a high level of change, businesses that resist
change and do not evolve (pure exploitation approach) will obtain poor results. The same occurs with
businesses that are hypersensitive to change and are continuously creating radical innovative responses
(pure exploration approach). It is necessary to combine stability (exploitation) and diversity-
adaptation-change (exploration) to survive in the short term without mortgaging the mid and long
term. For example, Walt Disney Company manage thematic parks and other businesses in an ordinary
manner (efficiency, task proceduring to cover growth and expansion, cost reduction…), while at the
same time its mission to provide family fun has lead it to embark on a variety of projects such as
animated films, cable television, etc., that are more innovative and provide the basis for facing new
future scenarios.
Flexibility vs. Scale Economies: In traditional economies, it is good to be big; this achieves
advantages in scale acquisitions, operations, marketing, etc. However, it is also true that as a company
grows, there is an increase in both the number of its components and the interrelationships between
these components. For systems that are large enough, the conflictive constraints that derive from the
interrelationships between multiple components cause small changes in one part of the system to
spread throughout the entire system, producing negative effects in other parts of the system. To avoid
this, systems tend to become more rigid as they grow, incorporating multiple control systems to
minimize the damaging collateral effects of local changes. As a result, the flexibility of system
responses and system adaptability become more and more complicated. The ability of the system to
face changes in the environment and to respond quickly to new smaller competitors is reduced. For
example: IBM vs. Dell in the sale of PCs by mail order - although IBM saw the cost savings advantage
in the approach, it was tied down because this change would seriously damage their traditional
distribution channels. The response to recover flexibility is by creating partitions in the organizational
structure as it grows, which reduces the conflictive impact of decisions in one part of the system on the
performance of the rest.

Finally, Boisot and Child (1999), also focusing on the problem faced by organizations when they have
to adapt to complex environments, propose two approaches for this adaptation; reducing complexity
or absorption. Reducing complexity: In order to adapt, an organization reduces environmental
complexity when it elicits a unique and representative view of their competitive environment from the
multitude of existing possibilities, and then acts on the basis of its understanding of what is happening.
This type of strategy leads to specialization. Absorption: An organization absorbs the complexity of
the environment when it maintains various representations of it, some of them contradictory between
each other, and prepares a repertoire of possible responses that cover the various future potential
scenarios. In this case, the responses will be less effective than in the previous case, but can cover a
wider range of contingencies presented by the environment. This authors use their I-Space model
(based on the NK model) to conclude that the Western world prefers to reduce complexity and have
evolved, in the globalization context, from integrated and bureaucratic models towards market
structures – Market Capitalism. On the other hand, they argue that Asian markets, and more
specifically cultures such as the Chinese, have a long historical tradition of political instability, low
levels of institutionalization due to large differences between local identities, a lack of clear rights,
strong jurisprudence and legislation, etc. These aspects create a tendency towards intense relationships
based on unwritten rules, associated with loyalty and reciprocal obligations, common trust and values,
that compensate the risks associated with uncertainty and ambiguity. As a result, the organizational
forms associated with the absorption of complexity are dominant in China and have evolved towards
Clan type structures in their current phase of modernization. Although Chinese require more time in
terms of social relationships, these structures also offer higher potential to adaptation and renewal
when faced with changing environments – Network Capitalism. The authors, Boisot and Child (1999),
recommend that Western countries entering China should take into account these aspects if they do not
want to be frustrated in their collaborations, and highlight the need to establish environments of trust
and mutual understanding, as well as to foresee possible operational difficulties when adapting and
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starting up their businesses, standard procedures, and practices, within the business systems of China
and related Asian countries.

3.5. Far From Equilibrium Systems and Dissipative Structures

Dissipative structures are ways in which open systems interchange energy-material-information with
their environment, and when they are displaced far from their zone of equilibrium, are capable of
creating new structures and a new order, i.e., de Bénard cells (Prigogine and Stengers, 1985; Nicolis
and Prigogine, 1989). In “far from equilibrium” conditions, nonlinear relationships are predominant
and the system becomes “disorderly sensitive to external influences. Small inputs yield enormous,
surprising, effects”(Prigogine and Stengers, 1985) and the entire system may become reorganized in a
new way. Prigogine has reinterpreted the Second Law of Thermodynamics: “…under conditions of
disequilibrium entropy can produce, rather than deteriorate, order (and) organization...stable systems
disappear while other systems develop and grow simultaneously in a coherent form”(Prigogine and
Stengers, 1985).

In human systems, far from equilibrium conditions take place when a system is disturbed far from its
established norms, far from its normal forms of work and relationships, far from its comfort zone,
creating creative tension (Senge, 1994) or adaptive tension (Cramer, 1993; McKelvey, 1999b, 2001,
2002a, 20002b). An example of this is the classical sentence of Jack Welch, ex-CEO of GE: “Be #1
or #2 in your industry in market share or you will be fixed, sold, or closed” (Tichy and Sherman,
1994; Kerr, 2000). When the organizational system is thus disturbed or stressed, a bifurcation point
can be reached that can, well deteriorate in internal disorder, loss of morale, loss of productivity, or
well, create new order and organization. In other words, new forms of work and relationships are
developed. The degree of perturbation, or adaptive-creative tension, applied the system is a key factor
for one or the other of these behaviors to finally appear.

3.5.1 Several practical considerations


McKelvey (1999b, 2001, 2002a, 2002b) states that, in the absence of adaptive-creative tension, it is
very difficult that emerging structures and new forms of work can appear. It is therefore important for
managers to develop an adequate level of tension within their companies, i.e., GE or similar.

Goldstein (1990, 1994) suggests some ways of creating adaptive-creative tension within the
organization and displacing it from its equilibrium or comfort zone: (1) Discussing, reviewing,
changing the frontiers or limits of the organization; (2) Connecting the system to its environment
(clients, suppliers, competitors); (3) Creating groups with diverging conversational dynamics; (4)
Discussing purpose, mission, vision of the organization; (5) Reconsidering the tacit hypothesis
concerning the company goal and its environment threats in a creative way; (6) Rotating personnel; (7)
Develop policies awarding innovative and disruptive proposals; Etc…

Anderson (1999), on the other hand, proposes that organizations are dissipative systems and can only
sustain and renew themselves by contributing energy. Those with influence and authority must raise-
low the tension level of the organization by incorporating new sources of energy (i.e., workers,
suppliers, collaborators, clients), motivating stakeholders, stirring up the organization, providing new
challenges that can not be solved with the existing procedures. In general, the more turbulent the
environment of a company, the higher level of energy that should be generated to maintain the system
in an ideal state for self-organization, creativity and innovation.

3.6. Self-Organization

A complex adaptive system is capable of adapting and evolving over time, creating new order and
coherence, without the need for a central controller (Mitleton-Kelly, 2003a). A system consisting of
actors that interact by means of a variety of rules (schemes or agendas) applied in a recursive way,
tends to naturally produce patterns of behavior at an aggregate and self-organizational level without
21
the need for a central controller (Drazin and Sandelands, 1992). In fact, all social entities self-
organize when their members interact more or less continuously over time, i.e. the existence of
informal structures in organizations, which are usually very robust in the face of changes to the formal
organizational structure (Anderson 1999).

From a social-ecosystem perspective, the desire to create change is frequently implemented through
interventions, for example, by formal restructuring processes. As entropy scares us so much, we
impose control mechanisms that inhibit individual self-organization and the appearance of new order.
In other words, emergent order is inhibited by imposing designed order that controls every aspect,
relationship, and work method, in an organization, due to a profound fear to uncertainty (Mitleton-
Kelly, 2000).

Self-Organized Criticality

Many iterative and interactive dynamic systems evolve naturally towards a critical state. This process
has been named as self-organized criticality (SOC). The systems that have reached this critical state
demonstrate a very interesting property: If the system is disturbed, a range of responses that can be
described using a power law distribution -1/f (few large responses, small responses are common) are
obtained. For example: Avalanches of goods that enter and exit an economy as a result of an
innovation; The size distribution of companies in an economy; The wealth distribution in a society;
The size distribution of large cities; Biological evolution; Etc… In addition, at critical points,
transition laws are universal. Therefore, if the real systems are near the critical points, very simple
models can give rise to realistic behaviors (Bak, 1997).

3.6.1 Several practical considerations

Mitleton-Kelly (2000) states that when an organization wants to create new order and provides a
detailed design, the support needed to make it happens is very large. The reason is that those
individuals in charge of developing the new order need continuous support from the designers. The
designers will have to provide the new framework in which to develop the new predesigned
relationships and connections. Thus, although the intention of interventions in organizational changes
is to create new working behaviors, too heavily structured working methods can seriously
constrain/inhibit the emergence of new behavioral patterns (i.e., exploration, variety, creativity,
learning, coevolution, etc…). However, these processes would be more efficient if organizations
would focus on using a basic framework of rules and objectives for the change and provide a
framework of conditions and infrastructures (social, cultural, technical…) to encourage the
emergence of new ways of organization and work. Those emergent new forms that were aligned
with the objectives of the change could be maintained and those that not could be redirected. Thus,
new ways of work could be achieved, unique for each organization and circumstance, and therefore
very difficult for the competition to imitate.

Brown (1997), and Slokum and Frondorf (1997), propose that encouragement of self-organizational
processes is frequently a powerful source of innovation. Companies like Xerox (Brown, 1997) and
Sencorp (Slokum and Frondorf, 1997) have benefitted by recognizing and allowing self-organization.
In large complex organizations, each aspect of the work and relationships can not be designed and
controlled. Self-organization allows experimentation and exploration of new alternatives
(exploration of the space of possibilities). Some experiments will fail but others will prosper. The
latter will do so because they are “appropriate” to the new socioeconomic context and because they
can successfully co-develop with their related systems (other groups, departments, organizations,
institutions, etc…).

Mitleton-Kelly (2003a, 2003b) also points out that self-organization, in a socioeconomic context,
involves the spontaneous union of a group of individuals to perform a particular task without being
directed by anyone outside the group. This is not the same as “self-management”, since nobody
22
outside the group dictates those individuals that should pertain to the group, neither what they should
do or how they should do it. The individuals themselves decide to get together, what to do, and how to
do it. One of the characteristics of these groups is that they are frequently informal and temporal.

Other considerations relevant to this section and mentioned previously are: (1) Stacey (1995) –
Extraordinary management and the informal system (organicist, fluid structures that empower ad-hoc
relationships) as a driver for innovation and change when the organization needs to develop a more
flexible model under highly dynamic environments; (2) Dooley (1997) - The degree of innovation is
proportional to the autonomy of value creating units, and; (3) Caldart and Ricart (2003) – Superiority
of self-organizational processes of interaction (i.e. learning teams and training communities for
knowledge creation and exchange, etc), versus control, as a way to create new business opportunities
in highly dynamic environments. Due to these authors, the role of designing simple rules should be left
to the corporate level (general objectives or policies), within which the self-organizational,
cooperative, and collaborative, processes can emerge and those considered most valuable be further
implemented.

3.7. Emergence

Emerging behavior is highly unpredictable, and a reductionist analysis of the individual parts (micro
individual behaviors isolated) can not predict the resultant emergent behavior at a macro-level.
Emerging behavior is nonlinear, and the non-determined connections between the parts are the main
drivers for creating new unexpected characteristics (Checkland, 1981; Holland, 1995, 1998).

Unexpected structures and patterns are the result of the co-evolutionary dynamics between the micro
to the macro scales. The nature and process of emergence, resulting from the co-evolutionary
relationships between the micro and macro levels are not yet entirely understood. Authors such as
Prigogine and Stengers (1985) suggest that it is a form of: “communication based on multilevel
feedback processes. In molecular biology, for example, the basic mechanism (that) explains the
transmission and exploitation of genetic information is itself a feedback loop, a nonlinear
mechanism”. Iterative feedback processes between micro and macro levels are mutually processed
and influenced, which changes both. Quoting Prigogine and Stengers (1985) again: “One of the most
important problems of the evolution theory is the eventual feedback between macroscopic structures
and microscopic events: microscopic structures that emerge from microscopic events will, in turn,
lead to a modification of microscopic mechanisms”. This dynamic process of change is important –
neither the microscopic events nor the emerging macroscopic structures or patterns remain static. They
mutually co-evolve, and influence each other through multiple multilevel feedback processes
(Mitleton-Kelly, 2003a, 2003b).

Varela and Maturana (Varela and Maturana, 1992; Varela, 1995), have interpreted emergence as a
transition between rules or principles of interaction between individuals/agents towards global
principles or macroscopic states that derive from them. They understand this transition of local rules of
interaction towards global behaviors as a resonance phenomenon (Varela 1995), and add that to truly
understand the concept of emergence, first, the processes that facilitate the transition must be
understood.

In response to such question, Reason and Goodwin (1999), have identified that the density of
interrelations between the agents that are interacting on the basis of rules at a local level, can be a
significant factor to produce a transition from uncoupled local behaviours towards a coupled and
coherent emergent behavior. Their conclusion are supported by behavioral studies of social insects,
specifically ant colonies. When the density of a colony is low, each ant behaves randomly. At the
most, small islands of coupled behavior within a few ants are generated. However, when the density of
interrelations exceeds a critical level, a coherent behavioral pattern appears that spreads throughout the
entire colony and manifests a super organism coherent behavior.

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3.7.1 Several practical considerations
Complex adaptive systems usually present recognizable structures or behavior patterns at an
aggregate level characterized by (strange) behavioral attractors, i.e. Archetypes (Senge, 1994), and
Power laws 1/f distributions (Bak, 1997) as avalanches of goods that enter and exit an economy, the
size distribution of companies in an economy, the wealth distribution in a society, the size distribution
of large cities, etc. There are numerous statistical techniques to characterize system patterns
(attractor) from system time series (Sole and Manrubia, 1996; Kantz and Schreiber, 1997).

Likewise, as regards the concept of emergence, Mitleton-Kelly (1998, 2000, 2003a, 2003b) states that
a generation of knowledge and innovative ideas in a team can be described as an emerging property
in the sense that it arises from the interaction of individuals. It is not simply the sum of previously
existing ideas from each one, but rather something completely new and unexpected. Similarly,
organizational learning can be viewed this way, as a process based in the interaction of individual
agents that create new patterns of meaning and behavior at a (organizational) macro level. This type of
learning is essential for organizational adaptation and evolution.

4. SOME PRACTICAL RECOMMENDATIONS AT THE LEVEL OF BUSINESS


STRATEGY, ORGANIZATIONAL STRUCTURE, AND MANAGEMENT STYLE,
FROM A COMPLEX SYSTEMS PERSPECTIVE

On the basis of the practical considerations for each complexity principle, described in the previous
section, a series of practical recommendations have been developed in order to facilitate dynamic
reconfigurability of organizations that face highly changing and uncertain environments. These
recommendations are structured over three key dimensions of the organization; business strategy,
organizational structure, and management style.

Fig. 2 – Organizational dimensions and related complexity principles

24
Following, some practical recommendations regarding the three areas mentioned are presented.

4.1 Business Strategy Practical Recommendations

BS-PR1: Evolutionary strategies that balance stability (exploitation) and diversity-change


(exploration) achieve better performances in dynamic environments

• In the context of dynamic environments, organizations with the best present and future
performances are those that have evolutionary strategies that maintain a balance between
stability (exploitation for short term survival) and diversity-adaptation-change (exploration to
ensure the future).

BS-PR2: Simple rules strategy framework take advantage of opportunities that continuously occur in
turbulent markets

• In order to have the sort of flexibility that allows the company to take advantage of arising
opportunities, a simple rules strategy is proposed, because in unpredictable turbulent markets
the strategy to identify a desirable position and develop elaborated capacities to achieve
competitive advantages over time is a too static approach and therefore ineffective.

• Simple rules strategy give companies the necessary framework to be sufficiently flexible and
to quickly and efficiently size up and take advantage of opportunities that continuously occur
in turbulent markets. Monitoring new tendencies in the environment is essential. These simple
rules should be applied mainly in those strategic processes where the flow of opportunities is
the greatest – key processes. Types of simple rules: (1) How-To Rules define how to execute
key processes; (2) Environment Rules help to quickly decide what opportunities to focus on;
(3) Priorization Rules help to quickly prioritize the various opportunities; (4) Time Rules
synchronize the company with the flow of emerging opportunities; (5) Exit Rules decide when
to abandon an opportunity. The number of rules in play is important: Too many rules paralyze,
while too few cause confusion. A minimum of 2 and a maximum of 7 are recommended. More
rules can be established within stable markets, while fewer rules are preferable in turbulent
markets to favor flexibility.

BS-PR3: Portfolios of robust strategies, through various strategic experiments, are the best way to
absorb potential future competitive environment scenarios

• In order to adapt, an organization reduces environmental complexity when it elicits a unique


and representative view of the environment, from the multitude of existing possibilities, and
then acts on the basis of its understanding of what is happening. This type of strategy leads to
specialization. On the contrary, an organization absorbs the complexity of the environment
when it maintains various representations of the environment, some self-contradictory, and
prepares a repertoire of possible responses that cover the various possibilities. In this case, the
responses will be less effective than in the previous case, but can cover a wider range of
potential future competitive environment scenarios.

• A mix of robust strategies allows to operationalise the strategies of absorbing the complexity
of the environment. Instead of focusing exclusively on one well-defined line of attack as to
where, how and when to compete, this approach is complemented with a group of strategies -
strategic experiments- that cover a wide range of possible futures and evolve over time as the
future unfolds in one direction or another. Some of these strategic experiments will survive,
others will not. Innovation and experimentation should be rewarded. It is recommended to
perform multiple low cost experiments and, depending on success, increase their budgets,
rather than performing few very high-budget strategic experiments. Main techniques to create
robust strategies are; Real options, Planning using scenarios, and Robustness analyses.

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4.2 Organizational Structure Practical Recommendations

OS-PR1: Small Word type organizational structures balance exploitation and exploration dynamics
and facilitates organizational renewal in changing environments

• The ideal topology of organizational networks greatly depends on the context. In the case of
stable environments, the structural configuration that allows better management of
information (global accessibility of information vs. workload and management delays) is a
highly centralized, star-type structure. But in the case of unstable environments, the best
configuration to manage large volumes of information is a network structure of clusters with a
few inter-cluster links.

• Living systems (both biological and socioeconomic) that are continuously regenerating their
components and reshaping themselves, evolve naturally towards network relationship
structures of the Small World model type: Clusters of dense local networks (that foster local
robustness) along with bridges between the clusters (that foster global accessibility). Local
clusters of dense relationship networks encourage access to homogeneous, low cognitive
distance, information and working methods (they are exploitation drivers), while bridges
between those clusters provide access to non-redundant, high cognitive distance, information
and knowledge (exploration drivers).

OS-PR2: To better take advantage of changing environment opportunities, individuals with highest
absorption capacities should be placed in the interface regions between the firm and the environment,
and as bridges between internal units of the firm

• Organizations with high absorption capacities tend to be more proactive in taking advantage
of the environment opportunities. Those organizations with the less absorption capacity are
more reactive. The absorption capacity of an organization does not coincide with the sum of
its workers, but largely depends on the individuals placed at the “interface” regions between
the company and the environment, and between the various company units. In stable
environments, only a few of these “bridge” individuals are needed to perform this function.
But in highly changing environments it is preferable that there be several individuals with this
profile to absorb and transfer the wide range of information generated.

• In an organization where people in general have high absorption capacities, the structures that
achieve better results in the dissemination of new information are those that are flat and non-
hierarchical, while the introduction of hierarchy (division into teams), and limitation of
communication channels, reduce the effect of infoxication.

OS-PR3: Create dynamic businesses portfolios for the exploration and exploitation of environment
opportunities through modular business architectures composed of semi-autonomous business units

• When organizational systems are very large, the conflictive constraints, that derive from the
relationships between multiple components, cause that small changes in one part of the system
are spread throughout the entire system, producing negative effects in other parts of the
system. To avoid this, organizational systems tend to become more rigid as they grow as they
incorporate multiple control procedures to minimize the damaging collateral effects of local
changes. As a result, system flexibility and system adaptability to face environmental changes
is greatly reduced. The creation of partitions in the organizational structure as it grows, in the
form of semi-autonomous units, reduces the conflictive cross-impact of decisions in one part
of the system over the performance of the rest, and is recommended in large organizations to
foster response flexibility and adaptability.

• Promote dynamic restructuring of businesses for the exploration of opportunities through


patching. These are small but continuous organizational changes that dynamically reposition
the business portfolio by for example; dividing, transferring, eliminating, incorporating, or
26
combining business components, in order to create a business portfolio with a high potential
for creating profits by focusing each on the temporary opportunities of their markets. Special
attention to the size of the resulting business has to be taken. They should be small enough to
be agile, and large enough to be efficient. The higher the uncertainty of the environment, the
smaller they should be to foster agility rather than efficiency, and vice versa. This modular
business architecture, composed of semi-autonomous units, needs establishing well-defined
metrics at all levels so that profits tendencies can be compared, and therefore alert of the better
timing for promoting new patching. Also, compensations mechanisms, coherent with the
organizational changes developed, should be placed to minimize possible negative impacts
over people immersed in the patching processes.

OS-PR4: SNA tools permits the analysis of intra and inter organizational networks for the
identification of main leverage points to promote collaborative behaviors and facilitate reorganization
processes

• SNA tools allow the characterization and analysis of organizational network patterns and the
evolution of intra and inter-organizational formal and informal network structures, by
measuring aspects such as agents connectivity, degree of isolation, popularity, centrality,
reciprocity levels, etc, in time. This facilitates, for example, to: (1) Identify the potential of a
network to use its collective knowledge in response to new opportunities or problems; (2)
Analyze how they contribute to innovative activity in company processes, how they promote
communication, integration, flexibility and novelty; (3) Advise about the most efficient ways
of designing intra and inter-organizational collaboration networks to promote and improve the
efficacy of strategic collaborations; (3) Facilitate in practical terms the processes of
organizational change, such as the integration after reorganization; organizational
restructuring, fusion, acquisitions, etc.

4.3 Management Style Practical Recommendations

MS-PR1: The mix of ordinary-extraordinary management style is a function of environment/processes


change level

• Depending on the primary goal of an organization to achieve success, at any given moment;
efficiency vs. creativity-innovation, one of two behaviors must be promoted; either stability
through mechanistic organizational structures based on formal relationships (ordinary
management) for stable environments/processes, or renewal, creativity and change through
organicist and fluid structures that empower more informal ad-hoc relationships (extraordinary
management) for high level of change environments/processes.

MS-PR2: Formal and informal temporary links between heterogeneous people foster creativity and
innovation

• The renewal of links between people with different views, people from different departments,
value network partners, the mix of personnel from different areas, new incorporations with
different experience, etc., encourages the creation of new ideas and new skills.

• Implementation of professional mobility plans that stimulate rotation, turnover, facilitate


exchange of non-redundant knowledge, spreading the radius of action and the repertoire of
techniques and skills for solutions to client problems, whether in the form of new
products/services or the identification of new business opportunities.

• Learning teams, communities of practices, etc, supported by informal network structures,


facilitate the development of exploration of ideas and new skills necessary to originate
creative movements.

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MS-PR3: Provide a framework of conditions and infrastructures (social, cultural, technical…) to
encourage the emergence of new ways of organization and work, and then intervene to stabilize
desirable patterns and destabilize undesirable ones

• When an organization wants to create new order to better compete in environments with a
high level of change, and provides a too detailed design to do so, the support needed from the
management to make the new order happens is generally too large and can greatly
constrain/inhibit the emergence of new efficacious patterns of behavior.

• The definition of frameworks of conditions and infrastructures (social, cultural, technical, etc)
in the form of basic rules and objectives, not elaborated procedures, that facilitate, or at least
do not inhibit, the emergence of desired behavior patterns and skills for the organization needs
(i.e. new organizational and working forms to foster creativity and innovation), allow faster
and more efficient responses under changing environments.

• For making operative the concept of framework of conditions and infrastructures that facilitate
organizational change processes, several aspects should contemplated: (1) A feeling of
leadership and purpose, a change anticipation culture, empowerment, trust; (2) Organizing
activities with flexibility but providing them with structures at critical points within a context
of general rules; (3) Put the simple rules framework of conditions and infrastructures design at
the corporate level (objectives and policies guidelines) that will serve as the internal context
within which self organization processes can be developed.

MS-PR4: Place non-critical decision making capacity in the hands of those that are nearer to the
relevant information, customers/markets, and have the skill to turn it into knowledge and actions.

• To facilitate organizational restructuring under changing environments, it is important to


reduce internal connectivity between units in favor of promoting external connectivity with
clients, local markets, networks of collaborators etc., that belong to the context of each unit.
Connecting the semi-autonomous units by an alignment group formalized as a management
team. The decision making capacity is put in the hands of those that are nearer to the relevant
information and have the skill to turn it into knowledge and actions. Also, if the decision
involves mobilization of large organizational assets, it will be discussed with the management
team. This network type of organizational model combines a high degree of decentralization
(micro-strategies, local decision making, etc.) with a centralizing component (management
team for the management of common assets).

MS-PR5: Adaptive-creative tension is necessary to produce new ways of working and efficacious
emerging structures

• The management team should be capable of combining a permissive style with the generation
of tension so that workers do not relax in their daily routines. In the absence of adaptive-
creative tension, it is very difficult to produce emerging structures or new organizational
forms. Examples of tension creation; (1) Discussing, reviewing, changing the frontiers or
limits of the organization; (2) Connecting the system to its environment (clients, suppliers,
competitors); (3) Creating groups with diverging conversations dynamics; (4) Reconsidering
the tacit hypothesis concerning the company and its environment in a creative way; (5)
Rotating personnel; (6) Policies awarding innovative proposals; Etc.

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