Complexity Theory and Organization Science

Complex organizations exhibit surprising, nonlinear behavior. Although organization scientists have studied complex organizations for many years, a developing set of conceptual and computational tools makes possible new approaches to modeling nonlinear interactions within and between organizations. Complex adaptive system models represent a genuinely new way of simplifying the complex. They are characterized by four key elements: agents with schemata, self-organizing networks sustained by importing energy, coevolution to the edge of chaos, and system evolution based on recombination. New types of models that incorporate these elements will push organization science forward by merging empirical observation with computational agent-based simulation. Applying complex adaptive systems models to strategic management leads to an emphasis on building systems that can rapidly evolve effective adaptive solutions. Strategic direction of complex organizations consists of establishing and modifying environments within which effective, improvised, self-organized solutions can evolve. Managers influence strategic behavior by altering the fitness landscape for local agents and reconfiguring the organizational architecture within which agents adapt. (Complexity Theory; Organizational Evolution; Strategic Management) Since the open-systems view of organizations began to diffuse in the 1960s, comnplexity has been a central construct in the vocabulary of organization scientists. Open systems are open because they exchange resources with the environment, and they are systems because they consist of interconnected components that work together. In his classic discussion of hierarchy in 1962, Simon defined a complex system as one made up of a large number of parts that have many interactions (Simon 1996). Thompson (1967, p. 6) described a complex organization as a set of interdependent parts, which together make up a whole that is interdependent with some larger environment. Organization theory has treated complexity as a structural variable that characterizes both organizations and their environments. With respect to organizations, Daft (1992, p. 15) equates complexity with the number of activities or subsystems within the organization, noting that it can be measured along three dimensions. Vertical complexity is the number of levels in an organizational hierarchy, horizontal complexity is the number of job titles or departments across the organization, and spatial complexity is the number of geographical locations. With respect to environments, complexity is equated with the number of different items or elements that must be dealt with simultaneously by the organization (Scott 1992, p. 230). Organization design tries to match the complexity of an organization's structure with the complexity of its environment and technology (Galbraith 1982). The very first article ever published in Organization Science suggested that it is inappropriate for organization studies to settle prematurely into a normal science mindset, because organizations are enormously complex (Daft and Lewin 1990). What Daft and Lewin meant is that the behavior of complex systems is surprising and is hard to 1047-7039/99/1003/0216/$05.OO ORGANIZATION SCIENCE/Vol. 10, No. 3, May-June 1999 Copyright ? 1999, Institute for Operations Research pp. 216-232 and the Management Sciences PHILIP ANDERSON Complexity Theory and Organization Science predict, because it is nonlinear (Casti 1994). In nonlinear systems, intervening to change one or two parameters a small amount can drastically change the behavior of the whole system, and the whole can be very different from the sum of the parts. Complex systems change inputs to outputs in a nonlinear way because their components interact with one another via a web of feedback loops. Gell-Mann (1994a) defines complexity as the length of the schema needed to describe and predict the properties of an incoming data stream by identifying its regularities. Nonlinear systems can difficult to compress into a parsimonious description: this is what makes them complex (Casti 1994). According to Simon (1996, p. 1), the central task of a natural science is to show that complexity, correctly viewed, is only a mask for simplicity. Both social scientists and people in organizations reduce a complex description of a system to a simpler one by abstracting out what is unnecessary or minor. To build a model is to encode a natural system into a formal system, compressing a longer description into a shorter one that is easier to grasp. Modeling the nonlinear outcomes of many interacting components has been so difficult that both social and natural scientists have tended to select more analytically tractable problems (Casti 1994). Simple boxes-andarrows causal models are inadequate for modeling systems with complex interconnections and feedback loops, even when nonlinear relations between dependent and independent variables are introduced by means of exponents, logarithms, or interaction terms. How else might we compress complex behavior so we can comprehend it? For Perrow (1967), the more complex an organization is, the less knowable it is and the more deeply ambiguous is its operation. Modem complexity theory suggests that some systems with many interactions among highly differentiated parts can produce surprisingly simple, predictable behavior, while others generate behavior that is impossible to forecast, though they feature simple laws and few actors. As Cohen and Stewart (1994) point out, normal science shows how complex effects can be understood from simple laws; chaos theory demonstrates that simple laws can have complicated, unpredictable consequences; and complexity theory describes how complex causes can produce simple effects. Since the mid-1980s, new approaches to modeling complex systems have been emerging from an interdisciplinary invisible college, anchored on the Santa Fe Institute (see Waldrop 1992 for a historical perspective). The agenda of these scholars includes identifying deep principles underlying a wide variety of complex systems, be they physical, biological, or social (Fontana and Ballati 1999). Despite somewhat frequent declarations that a new paradigm has emerged, it is still premature to declare that a science of complexity, or even a unified theory of complex systems, exists (Horgan 1995). Holland and Miller (1991) have likened the present situation to that of evolutionary theory before Fisher developed a mathematical theory of genetic selection. This essay is not a review of the emerging body of research in complex systems, because that has been ably reviewed many times, in ways accessible to both scholars and managers. Table 1 describes a number of recent, prominent books and articles that inform this literature; Heylighen (1997) provides an excellent introductory bibliography, with a more comprehensive version available on the Internet at http://pespmcl.vub.ac.be/ Evocobib. html. Organization science has passed the point where we can regard as novel a summary of these ideas or an assertion that an empirical phenomenon is consistent with them (see Browning et al. 1995 for a pathbreaking example). Six important insights, explained at length in the works cited in Table 1, should be regarded as well-established scientifically. First, many dynamical systems (whose state at time t determines their state at time t + 1) do not reach either a fixed-point or a cyclical equilibrium (see Dooley and Van de Ven's paper in this issue). Second, processes that appear to be random may be chaotic, revolving around identifiable types of attractors in a deterministic way that seldom if ever return to the same state. An attractor is a limited area in a system's state space that it never departs. Chaotic systems revolve around "strange attractors," fractal objects that constrain the system to a small area of its state space, which it explores in a neverending series that does not repeat in a finite amount of time. Tests exist that can establish whether a given process is random or chaotic (Koput 1997, Ott 1993). Similarly, time series that appear to be random walks may actually be fractals with self-reinforcing trends (Bar-Yam 1997). Third, the behavior of complex processes can be quite sensitive to small differences in initial conditions, so that two entities with very similar initial states can follow radically divergent paths over time. Consequently, historical accidents may "tip" outcomes strongly in a particular direction (Arthur 1989). Fourth, complex systems resist simple reductionist analyses, because interconnections and feedback loops preclude holding some subsystems constant in order to study others in isolation. Because descriptions at multiple scales are necessary to identify how emergent properties are produced (Bar-Yam 1997), reductionism and holism are complementary strategies in analyzing such systems (Fontana and Ballati ORGANIZATION SCIENCE/Vol. 10, No. 3, May-June 1999 217 PHILIP ANDERSON Complexity Theory and Organization Science Table 1 Selected Resources that Provide an Overview of Complexity Theory Allison and Kelly, 1999 Written for managers, this book provides an overview of major themes in complexity theory and discusses practical applications rooted in-experiences at firms such as Citicorp. Bar-Yam, 1997 A very comprehensive introduction for mathematically sophisticated readers, the book discusses the major computational techniques used to analyze complex systems, including spin-glass models, cellular automata, simulation methodologies, and fractal analysis. Models are developed to describe neural networks, protein folding, developmental biology, and the evolution of human civilization. Brown and Eisenhardt, 1998 Although this book is not an introduction to complexity theory, a series of small tables throughout the text introduces and explains most of the important concepts. The purpose of the book is to view stra