LSE-2003-Complexity ORG Case Study

Applying Complexity Principles and the Exploration vs.
Exploitation Cycle Framework to the Analysis of FSTO

Organizational Dilemmas
Eduardo Castellano
LSE Complexity Research Programme Workshop
18th June, 2003
London School of Economics (UK)
EC | 18.06.03 1
ApplyingComplexity
Applying ComplexityPrinciples
Principlesand
andthe
theExploration
Explorationvs.
vs.
ExploitationCycle
Exploitation CycleFramework
Frameworkto tothe
theAnalysis
Analysisof
ofFSTO
FSTO
index
1) Background
2) FSTO 3 teams and Generalists vs. Specialists
…Complexity view (adaptive tension, connectivity)
…EvE view
3) The EvE Dilemma
EvE Cycle and Complexity (adaptive tension and
networks connectivity)
4) Some notes about Centralisation vs. Local autonomy
EC | 18.06.03 2
ApplyingComplexity
Principlesand
andthe
theExploration
Explorationvs.
vs.
ExploitationCycle
Frameworkto tothe
theAnalysis
Analysisof
ofFSTO
FSTO
index
1) Background
…EvE view
3) The EvE Dilemma
EC | 18.06.03 3
BACKGROUND (1/6)
K-Company employs 100.000 people and 2000 Finance professionals

around the globe.
K-Finance Services (KFS) work with 5 businesses and a Corporate

Centre. KFS is divided on few departments and one of them is FSTO
(Finance Services Treasury Operation).
Previously they have it decentralised – a Local Treasury function in

each of their companies around the globe (135 countries). Each one
working and reporting to their operating units. Doing all almost the
same thing on a daily basis.
EC | 18.06.03 4
BACKGROUND (2/6)
…with the globalisation of the businesses and the IT facilities there

were opportunities to centralise most of the treasury activities
EC | 18.06.03 5
BACKGROUND (3/6)
The Reorganisations Process:
First centralisation activities (‘97) – A Treasure Centre (FSTO) was

established for all the decentralised treasuries: optimise the flow of
cash funds, foreign exchange activities as borrowing, funding, lending
activities, and to avoid pockets of local borrowing.
FSTO is an internal Bank of K-Company, is a service provider. Its
customers are the 5 business of K-Comp, and the Corporate Centre.
At the same time moving from being cash rich to being in need of some
external funds due to acquisitions and market circumstances (from
having a large pool of cash and investing it, to start with debt and
borrowing and raising funds; set up new borrowing programmes)
Need to develop new skills – Specialists (contract them in the capital markets)
EC | 18.06.03 6
BACKGROUND (4/6)
EC | 18.06.03 7
BACKGROUND (5/6)
…The Reorganisations Process:
Because of increasing activities in the last 3 years they have to change again
the front office
Front office splits in 3 teams:
Internal customers team; to have focal points for internal customers -
provide internal customers with whatever Treasury service they like.
Making sure that the centralisation process happens fast, and as
standardised as possible, manage all the cash pockets that are lying
around in the group still into a central point. (s/t-view operational unit)
Market team; concentrate on market services and increase market
knowledge to manage risk (m/t-view market unit)
Development team; it’s like a R&D unit that think about the better type
of organisation to have in order to respond to possible pressures that
may come. (It thinks about the future, l/t-view unit )
EC | 18.06.03 8
BACKGROUND (6/6)
EC | 18.06.03 9
ApplyingComplexity
Principlesand
andthe
theExploration
Explorationvs.
vs.
ExploitationCycle
Frameworkto tothe
theAnalysis
Analysisof
ofFSTO
FSTO
index
1) Background
…EvE view
3) The EvE Dilemma
EC | 18.06.03 10
FSTO 3 TEAMS AND GENERALISTS VS. SPECIALISTS (1/12)
What means generalist and specialists?

Quoting: “In K-Company there are not treasury specialists, only some but not many
– need more specialists in order to operate more efficiently.”
Specialists are new people came from the City (financial and capital markets
experts) – very specific view, not as in K-Company where they try to be more
generalist (K-Company career people - big picture: know little about a lot of things).
Advantages and Problems with generalists

Turn over… quoting: “changing jobs every 3-4 years put people outside of their comfort
zone (far from equilibrium), as part of their development, what that means, you’re working
with inspired amateurs a lot of the time (cross fertilization but loss of expertise).”
Invention and innovation… quoting: “A lot of bottom up good ideas and knowledge
sharing happened because the system keep juggling the people around (source of
diversity, cross fertilization). They bring a certain amount of baggage applying ideas that
worked elsewhere in a different place (exaptation). But also people tend not to be
specialists and sometimes don’t necessarily think through all the implications of what it is
that they’re doing.”
EC | 18.06.03 11
Generalists – Specialists, and the Social Network
Quoting: “The social network in K-Company is very important in career development

terms, also the decisions are most of the time taken after general broad consensus
with their peers (convincing your colleagues - political dimension) and not in a
hierarchical way.”
Specialists new entries don’t have a social network in K-Company (because they
came later).
New entrants don’t feel they need to create this social network maybe because they
don’t intent to make a K-Company career.
Quoting: “Treasury specialist have limited career progression opportunities in K-
Company – they will have to exchange with outside K-Company.”
EC | 18.06.03 12
Generalists – Specialists, in FSTO 3 Teams

Quoting: “(FSTO must have a ) Balance of specialist-efficiency vs. generalist with
knowledge of the K-Company business – effectiveness
Generalists understand internal customers needs but not financial
instruments vs. specialists (market team) who understand financial
instruments but not internal customers needs.”
¾ Internal Team (Generalists): Internal customers knowledge link. They exchange and
turnover inside K-Company business. Quoting: “It’s extremely useful that
they’ve had that K-Company business experience as well”. [explore and
exploit IC knowledge]
¾ Market Team (Specialists): Financial and capital markets knowledge link. They
exchange with outside financial and capital markets. [explore and exploit CM
knowledge]
¾ Development Team (Generalists): R&D unit that think about the better type of
organisation to have in order to respond to possible pressures that may
come. [explore future new org. and process forms]
EC | 18.06.03 13
Generalists – Specialists, in FSTO 3 Teams
MT: Explore CM – knowledge creation
MT: Exploit CM – knowledge exploitation
IT: Exploit IC – knowledge exploitation
DT: Explore new org and process forms
IT: Explore IC (turnover) – knowledge

creation
EC | 18.06.03 14
ApplyingComplexity
Principlesand
andthe
theExploration
Explorationvs.
vs.
ExploitationCycle
Frameworkto tothe
theAnalysis
Analysisof
ofFSTO
FSTO
index
1) Background
…EvE view
3) The EvE Dilemma
EC | 18.06.03 15
FSTO 3 Teams …Complexity view
Complexity and adaptive tension
Synthesising McKelvey’s work about adaptive tension (1999, 2001, 2002a, 20002b): Complexity
theory explains how energy imported into a system, coupled with adaptive tension dynamics
(tension or energy-differentials), creates emergent behaviour in the form of “far from equilibrium”
dissipative structures (Nicolis and Prigogine, 1989) and “at the edge of chaos” (Kauffman, 1993).
This region—in which emergent self-organisation occurs—exists between the 1st and 2nd critical
values of adaptive tension. Below the 1st value there is little change; above the 2nd value the
system becomes chaotic and dysfunctional. The level of adaptive tension can be used to explain
how the various states of complexity come to exist (Cramer, 1993) and the conditions where
enabling emergent structure apply.
One Jack Welch’s, CEO of GE, favourite phrases to his division presidents is: “Be #1 or 2 in your
industry in market share or you will be fixed, sold, or closed” (Tichy and Sherman, 1994; Kerr,
2000). This is a classic adaptive tension statement.
EC | 18.06.03 16
FSTO and adaptive tension
Some of the identified FSTO tensions:

Career development tension – social network
IT technology – centralisation process
New products, new skills required – Splitting front office in the 3 teams
…
But:
No external pressure… quoting: “K-Treasury is not exposed to sharp competition. In the end
there’s no real external pressure in this environment. I guess that’s because we’re part of the same
organisation. K-Company is a very rich company, it breeds complacency.” (INHIBITOR)
Risk aversion…quoting: “K-Company culture is conservative and the expression of that is
that they do not want to take any risk in finances”. (INHIBITOR)
EC | 18.06.03 17

Complexity and connectivity
Connections among the agents is a cornerstone of complexity, order creation, and novelty production via
self-organization (Kauffman 1993). But, if all the agents are the same, there is no advantage to having
them connected. Efficacious emergence is also a function of agent diversity (McKelvey, 1999, 2001,
2002a, 2002b).
Presuming that the adaptive tension (energy-differentials) become imposed on the agent system, the pool
of weak ties (Granovetter, 1973) among agents and weak-tie “bridges” across structural holes (Burt,
1992), create the conditions of novelty production, and satisfies Ashby’s (1956) “requisite variety”
required for efficacious emergence to occur.
Uzzi (1999) shows that that best advantage, the more effective networks within or across groups, comes
from an optimal mixing of weak (novelty) and strong ties (efficiency).
Agents in general may be defined as behaving in a threshold-gate manner - Cohen and Levinthal’s
(1990) absorptive capacity acts as a threshold gate. High threshold gates turn weak-tie fields into no
longer working connections.
Nooteboom (2000) relates the concept of absorptive capacity to the “cognitive distance” in the context of
effective communication and knowledge diffusion between weak ties: Outside sources of complementary
cognition require a “cognitive distance” which is sufficiently small to allow for understanding but
sufficiently large to yield non-redundant, novel knowledge.
EC | 18.06.03 18
FSTO connectivity and knowledge sharing (1/2)
Inhibitors
Social network… quoting: “Specialists new entries don’t have a social network in K-
Company. The social network in K-Company is very important because the decisions are
most of the times taken after general broad consensus”
Risk of separating teams (market and internal customer teams)… quoting: “people will
concentrate on ‘their’ end of things and not take any notice of the rest”
Enablers
Co-location…quoting:; “The three units are physically co-located what facilitates
communication, a critical mass of people who talk to each other and exchange ideas.”
Manager meetings… quoting: “there are management team meetings and one by one
meetings with the 3 managers every week. Also the 3 managers talk frequently to each other
about the interaction between the 3 teams”.
EC | 18.06.03 19
FSTO connectivity and knowledge sharing (2/2)
In general terms, FSTO has a good balance of agent diversity (IT, generalists – MT, specialists).
It also has a good balance between weak ties (specialist – generalists) and strong ties
(generalists – generalists, social network)
The knowledge threshold, absorption capacity and correct degree of cognitive distance, is solved
by Co-location of he IT and MT and by the continuous Managers meetings. What facilitates the
knowledge sharing and the trade off between knowledge novelty and understanding between both
teams.
[Nooteboom, 2000]
EC | 18.06.03 20
Complexity, adaptive tension and connectivity

The two underlying generative processes, mixed pool of ties (weak and strong) and adaptive
tension (energy-differential) are both required to co-produce efficacious emergence (McKelvey,
1999, 2001, 2002a, 2002b):
(1) Without the adaptive tension process in operation, there is no reason to expect
emergent structures; and
(2) Without a mixed pool of ties in organizations (requisite of variety), there is little
prospect for expecting adaptively efficacious emergent structures to appear.
How managers might best create the conditions for efficaciously emergent macrostructures in
organizations:
(1) Making sure that mixed pools of ties are constantly being renewed by bringing in
employees with diverse backgrounds, mixing people from different departments
(turnover)…
(2) Creating the correct level of adaptive tension. For instance, GE simple-rules, or
parallels to them…
EC | 18.06.03 21
FSTO adaptive tension and connectivity

In FSTO although they have a good connectivity pool (weak and strong ties), there is a LACK OF
GENERAL ADAPTIVE TENSION (no external pressure, risk aversion):
Consequence: External pressure is needed to translate inventions into exploitative

innovations - Invention and innovation… “A lot of bottom up good ideas and knowledge
sharing happened because the system keep juggling the people around (source of diversity,
cross fertilization, exaptation). But also people don’t necessarily think through all the
implications of what it is that they’re doing.”
Also, the mixed pool of ties (weak and strong) should match in requisite variety of the various tensions or
energy-differentials imposed upon a firm. Maybe the rate of turnover is too high (is more a result of the
career development tension than the environment pressure in FSTO):
Turn over… “changing jobs every 3-4 years put people outside of their comfort zone (far from
equilibrium), as part of their development, what that means, you’re working with inspired
amateurs a lot of the time (cross fertilization but loss of expertise).”
And the culture of consensus derived from the social network acts too as an inhibitor of self-
organisation.
EC | 18.06.03 22
ApplyingComplexity
Principlesand
andthe
theExploration
Explorationvs.
vs.
ExploitationCycle
Frameworkto tothe
theAnalysis
Analysisof
ofFSTO
FSTO
index
1) Background
…EvE view
3) The EvE Dilemma
EC | 18.06.03 23
FSTO 3 Teams …EvE view
Exploitation vs. Exploration FSTO dilemmas in…
Balance of specialist (efficiency, market team) vs. generalist with knowledge of

MF-IC (effectiveness, internal team and development team) [specialists and
generalists]
The need to develop and retain core skills vs. the need to move people around
(turnover, cross fertilization) [knowledge expertise and career in MF]
Time spent efficiently doing current job vs. Time spent managing career [social
network]
Culture of consensus and risk aversion vs. self-organisation
EC | 18.06.03 24
ApplyingComplexity
Principlesand
andthe
theExploration
Explorationvs.
vs.
ExploitationCycle
Frameworkto tothe
theAnalysis
Analysisof
ofFSTO
FSTO
index
1) Background
…EvE view
3) The EvE Dilemma
EC | 18.06.03 25
THE EvE DILEMMA AND EvE CYCLE (1/8)
What is the Exploration vs. Exploitation Dilemma
Exploitation
• The efficient use of available resources, competencies, capabilities

• The short-term improvement, refinement, routinization, and elaboration of
existing ideas, paradigms, technologies, strategies, and knowledge
(efficiency and standarisation)
• Emphasizes improving existing capability
• Tightening organizational couplings (centralised integrated structures)
• Returns from exploitation: short term
• Too much => trapped in sub-optimal stable equilibrium - INERTIA
[Holland, 1975; March, 1991; March & Levinthal, 1993; Nooteboom, 2000]
EC | 18.06.03 26
Exploration
• The development of novel resources/competencies/capabilities

• Experimentation with new ideas , paradigms, technologies, and knowledge
• Thrives on risk taking, novelty, free association
• Search, variation, risk-taking, discovery, innovation
• Returns from exploration: less certain, more remote in time
• Too much => too many underdeveloped new ideas - CHAOS
EC | 18.06.03 27
What is the Exploration vs. Exploitation Dilemma …some examples
EXPLOITATION EXPLORATION
Processes Current competencies, Develop new capabilities,

productivity, efficiency, flexibility, ability to change and
standardization, optimization, innovate, generalists…
best practices, TQM, economies
of scale, specialists…
Learning and First order learning, single-loop Second order learning, double-
Knowledge learning (negative feedback – loop learning (change schema –
reduce variation) create diversity)
Explicit (codified) knowledge Tacit knowledge
Innovation Incremental innovation Radical innovation
Org couplings Tight couplings (strong ties) Loose couplings (weak ties)
within network that facilitate within network that facilitate
diffusion and exploitation of diversity, turnover…
knowledge
EC | 18.06.03 28
Exploitation vs. Exploration
• Exploitation alone leads to an org. becoming better and better at an

increasingly obsolescent technology. It is required to survive in the short term
• Exploration alone leads to an org. that never realizes the advantages of its
discoveries. It is required to survive in the long term
Exploitation requires the maintenance of existing identity, knowledge and

practices, with a certain amount of control and coordination, and exploration
requires their change, with a loosening of control and coordination. How can
one resolve this paradox of stability and change?
EC | 18.06.03 29
ApplyingComplexity
Principlesand
andthe
theExploration
Explorationvs.
vs.
ExploitationCycle
Frameworkto tothe
theAnalysis
Analysisof
ofFSTO
FSTO
index
1) Background
…EvE view
3) The EvE Dilemma
EC | 18.06.03 30
The EvE Cycle and Environment Adaptive Tension

How to go from an existing working modus operandi to a new one that in the future will turn out to be better but
which now is unknown? The first requirement for survival is ongoing production during adaptation, the second
requirement is co-evolution with novel opportunities and threats – How to do both? How to reconcile continuity
and change? (Nooteboom, 2000):
EC | 18.06.03 31
The EvE Cycle and Environment Adaptive Tension
Consolidation is a process of narrowing and efficiency exploitation (convergent) by eliminating redundancies.
In Generalization, successful practices from the Consolidation stage are placed in novel but adjacent context,
where it is likely to succeed, satisfying the requirement of ongoing production (ADJACENT POSSIBILITIES). It
is a process of widening and increasing variety.
As the practice runs into its limitations, it should be adapted to the local context to solve them. This is the
principle and stage of Differentiation.
Typically such adaptations are inspired by comparisons with similar “adjacent” practices which, in the given
context, are more successful. This exchange of elements from different parallel practices, in a given context, is
the principle of reciprocation. The Reciprocation is akin to metaphor: transferring an element from one
practice to another; seeing something in the light of something else (EXAPTATION).
As the area of application is expanded, and the practice becomes more and more differentiated among
contexts, efficiency looses appear. Novel inserted elements from outside often do not fit well in the structure of
current practice, and for the full utilization of their potential require a more fundamental restructuring of the
practice. This yields a pressure toward novel integration of elements from different practices in a novel practice
(EMERGENCE AND CREATION OF NEW ORDER). This is the Stage of Novel Combinations.
Much experimentation is needed to find its best form and become standardized as a “dominant design”, where
the stage of Consolidation comes again.
[Nooteboom, 2000; “Ten principles of complexity” - Mitleton-Kelly, 2003]
EC | 18.06.03 32
The EvE Cycle and Environment Networks Connectivity

Associated with the different stages of the discovery process there are different entrepreneurial modes: aimed
at consolidation, generalization, differentiation, reciprocation, novel combinations. How does one combine
them in one organization?
The ambidextrous organization (Tushman, M. L. and O’Reilly, C.A., 1996)
The Flexible Firm (Volberda, H. W., 1998)
The Modular Firm (Sanchez, R. & Mahoney, J., 1996)
Network Forms of Organization (Powell, Walter W., 1990; Nohria, Nitin, and Robert Eccles.,1992).
“The lifecycle theory of innovation

proposes that disintegrated forms
of organization (decentralized
forms) perform best in the
turbulent stage in which novelty
arises, while more integrated
forms (centralized forms) are best
in the stage of consolidation”
(Nooteboom, 2000):
EC | 18.06.03 33
The EvE Cycle and Networks Connectivity
Novel combinations are promoted by a constellation of

separate, small, weakly connected, spatially proximate
units in complementary activities (autonomous units in
large firms). In such constellations, sufficient cognitive
proximity is satisfied (be able to understand each other)
and trust is achieved on the basis of shared norms and
values, and the "shadow of the future" from expected
dealings with each other in the future. These requirements
are needed for the transfer of tacit, procedural knowledge,
which is characteristic of the early stages of innovation.
In the stage of Consolidation, with the search for a

dominant design, it is important that there is flexibility to try
out various combinations and forms.
In the stage of Generalization, after consolidation, integrated structures are better at large volume production. A
dominant design has emerged. Tacit, procedural knowledge has been developed into declarative, documented
knowledge, which allows for transfer across larger distances. Competition has shifted from novelty to price (from
product innovation to process innovation). This favours a larger, more international and more integrated firm.
As generalization turns into Differentiation and Reciprocation, comparative advantage shifts again to a greater
variety of organizational forms, in more autonomous divisions, to give room for the generation of variety… in
preparation of the next round of more fundamental innovation.
(Nooteboom, 2000)
EC | 18.06.03 34
ApplyingComplexity
Principlesand
andthe
theExploration
Explorationvs.
vs.
ExploitationCycle
Frameworkto tothe
theAnalysis
Analysisof
ofFSTO
FSTO
index
1) Background
…EvE view
3) The EvE Dilemma
EC | 18.06.03 35
SOME NOTES ABOUT CENTRALISATION VS. LOCAL AUTONOMY (1/3)
FSTO and the Degree of Centralisation

Quoting: “What is the right degree of (de)centralisation? Is there a "right"/ optimum balance
between centralisation and local autonomy?”
EvE Dilemma:
Efficiency of Centralisation (exploitation) vs. Local autonomy responsiveness,
(diversity and exploration)
The Integration – Disintegration EvE Cycle shows that there are some stages in the heuristic
of learning and development that require integration of activities, with strong ties,
and others require disintegration in loose ties between a variety of autonomous
units. (it depends on the environment situation)
New Organisational Forms (The ambidextrous organization, The flexible firm, The modular
firm, The Networked Organisation) shows that large, integrated firms can create the
discontinuities of novel combinations by means of decentralization of autonomous
divisions with suffiently weak ties. And to benefit from their advantages of integration,
large firms must also maintain a capability for systemic alignment, with strong ties,
in the later stages of consolidation and in the stage of generalization. In this way it is
conceivable that a large firm combines the best of two worlds (3M, Intel, Benetton –
Nooteboom 2000, GE – Kerr 2000; Tichy, N. M. and S. Sherman. 1994).
EC | 18.06.03 36
Type of Processes: The position of the optimal connectivity zone depends on the nature of the
processes we want to approach: Linear processes need a great degree of connectivity
and alignment because that is the way to learn the ‘one best way’ very fast. The position
of the optimal connectivity zone of complex processes is more on the left side of the
continuum, lower connectivity (Roose, 2003):
EC | 18.06.03 37
Internally FSTO has solved the paradox of exploitation and exploration by the
separation of the front office in 3 semi-autonomous teams: market team
(specialists, exploitation), internal customer team (generalists – exploration),
development team (generalists, exploration).
They have solved the problem of alignment and interface governance through
continuous managers meetings and the problem of “cognitive distance” through
co-location, what facilitates knowledge innovation and sharing.
…BUT AS STATED BEFORE, THERE IS IN GENERAL A LACK OF

“CREATIVE TENSION” TO TRANSFORM IDEAS INTO PRACTICAL
INNOVATIONS
EC | 18.06.03 38
REFERENCES (1/2)
Ashby, W. R. (1956). An Introduction to Cybernetics. London: Chapman & Hall.

Burns, T., G. M. Stalker. 1961. The Management of Innovation. Tavistock
Burt, R.S. 1992. Structural Holes: The Social Structure of Competition.Harvard University Press, Cambridge, MA.
Cohen, W. M. and D. A. Levinthal (1990). “Absorptive Capacity: A New Perspective on Learning and Innovation,”
Administrative Science Quarterly, 35, 128–152.
Cramer, F. 1993. Chaos and Order: The Complex Structure of Living Things. D. L. Loewus, trans. VCH, New York.
Granovetter, M. (1973). The Strength of Weak Ties. American Journal of Sociology 78, 1360–1380.
Holland, J. H. (1975) “Adaptation in Natural and Artificial Systems”. The MIT Press, Cambridge, MA
Kerr, S. (2000). The development and diffusion of knowledge at GE. Presentation at the Organization Science Winter
Conference, February, Keystone, CO
Kauffman, S. A. (1993). The Origins of Order: Self-Organization and Selection in Evolution. New York: Oxford University
Press.
March, J. (1991). “Exploration and exploitation in organizational learning”. Organization Science, 2: 71-87.
March, J.G & Levinthal, D. (1993). “The myopia of learning”. Strategic Management Journal, 14: 95-112
McKelvey, B. (2002) “Emergent Order In Firms: Complexity Science Vs. The Entanglement Trap”. To be published in Complex
Systems and Evolutionary Perspectives of Organizations: Applications of Complexity Theory to Organizations, Eve Mitleton-
Kelly (ed.), Elsevier, 2003.
McKelvey, B. (2002) “Managing Coevolutionary Dynamics”. Presented at the 18th EGOS Conference, Barcelona, Spain, July 4–
6, 2002. Submitted to Nonlinear Dynamics, Psychology, and Life Science, January 2003
McKelvey, B. (2001). “Energising Order-Creating Networks Of Distributed Intelligence: Improving The Corporate Brain”.
International Journal of Innovation Management, 5 (2) (June)
EC | 18.06.03 39
REFERENCES (2/2)
McKelvey, B. (1999). “Avoiding Complexity Catastrophe in Coevolutionary Pockets: Strategies for Rugged Landscapes,”
Organization Science 10, 294–321.
Mitleton-Kelly, E. (2003) “Ten Principles of Complexity & Enabling Infrastructures”. In Complex Systems and Evolutionary
Perspectives of Organizations: Applications of Complexity Theory to Organizations, Eve Mitleton-Kelly (ed.), Elsevier, 2003.
Nicolis, G., I. Prigogine. 1989. Exploring Complexity: An Introduction. Freeman, New York.
Nohria, Nitin, and Robert Eccles. (1992). “Networks and Organizations: Structure, Form, and Action”. Harvard: Harvard
Business School Press.
Nooteboom, B., (2000), “Learning and Innovation in Organizations and Economies”, London, Pinter
Powell, W. W. 1990. "Neither Market Nor Hierarchy: Network Forms of Organization." Research in Organizational Behavior,
Vol. 12, pages 295-336.
Roose, H. (2003) “Management of a networkorganisation”. Garant Publishers Ltd
Sanchez, R. & Mahoney, J. (1996). “Modularity flexibility, and knowledge management in product and organization design”.
Strategic Management Journal, 17:63-76.
Tichy, N. M. and S. Sherman. (1994). Control Your Destiny or Someone Else Will. New York: HarperCollins.
Tushman, M. L. and O’Reilly, C.A. (1996). “The ambidextrous organization”. California Management Review, 38 (4): 8-30.
Uzzi, B. (1999). Embeddedness in the Making of Financial Capital: How Social Relations and Networks Benefit Firms Seeking
Financing. American Sociological Review 64, 481–505.
Volberda, H. W. (1998). “Building the Flexible Firm”. Oxford: Oxford University Press
EC | 18.06.03 40

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Applying Complexity Principles and the Exploration vs.

Exploitation Cycle Framework to the Analysis of FSTO

K-Company employs 100.000 people and 2000 Finance professionals

K-Finance Services (KFS) work with 5 businesses and a Corporate

Previously they have it decentralised – a Local Treasury function in

…with the globalisation of the businesses and the IT facilities there

The Reorganisations Process:

 First centralisation activities (‘97) – A Treasure Centre (FSTO) was

…The Reorganisations Process:

What means generalist and specialists?

Advantages and Problems with generalists

Generalists – Specialists, and the Social Network

Quoting: “The social network in K-Company is very important in career development

Generalists – Specialists, in FSTO 3 Teams

Generalists – Specialists, in FSTO 3 Teams

MT: Explore CM – knowledge creation

MT: Exploit CM – knowledge exploitation

IT: Exploit IC – knowledge exploitation

DT: Explore new org and process forms

IT: Explore IC (turnover) – knowledge

FSTO 3 Teams …Complexity view

Complexity and adaptive tension

FSTO 3 Teams …Complexity view

FSTO and adaptive tension

Some of the identified FSTO tensions:

FSTO 3 Teams …Complexity view

FSTO 3 Teams …Complexity view

FSTO connectivity and knowledge sharing (1/2)

FSTO 3 Teams …Complexity view

FSTO connectivity and knowledge sharing (2/2)

FSTO 3 Teams …Complexity view

Complexity, adaptive tension and connectivity

FSTO 3 Teams …Complexity view

FSTO adaptive tension and connectivity

Consequence: External pressure is needed to translate inventions into exploitative

FSTO 3 Teams …EvE view

Exploitation vs. Exploration FSTO dilemmas in…

Balance of specialist (efficiency, market team) vs. generalist with knowledge of

Culture of consensus and risk aversion vs. self-organisation

What is the Exploration vs. Exploitation Dilemma

• The efficient use of available resources, competencies, capabilities

What is the Exploration vs. Exploitation Dilemma

• The development of novel resources/competencies/capabilities

What is the Exploration vs. Exploitation Dilemma …some examples

Processes Current competencies, Develop new capabilities,

Innovation Incremental innovation Radical innovation

What is the Exploration vs. Exploitation Dilemma

Exploitation vs. Exploration

• Exploitation alone leads to an org. becoming better and better at an

Exploitation requires the maintenance of existing identity, knowledge and

The EvE Cycle and Environment Adaptive Tension

The EvE Cycle and Environment Networks Connectivity

“The lifecycle theory of innovation

Novel combinations are promoted by a constellation of

In the stage of Consolidation, with the search for a

FSTO and the Degree of Centralisation

FSTO and the Degree of Centralisation

FSTO and the Degree of Centralisation

…BUT AS STATED BEFORE, THERE IS IN GENERAL A LACK OF

Ashby, W. R. (1956). An Introduction to Cybernetics. London: Chapman & Hall.

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First centralisation activities (‘97) – A Treasure Centre (FSTO) was