Simple Smarts - Roland Berger

navigating complexity

May

2018

Five design principles for building resilient and agile organizations

Simple Smarts

T H E B I G

32 Think:Act

Simple Smarts

>2/3Share of large companies in

Europe in transformation Page 3

5Number of design principles for resilient and

agile organizations (Simple Smarts) Page 8

0Number of reorganizations needed to put Simple Smarts into practice

Page 14

A THREE-STEP CYCLE TO PUT SIMPLE SMARTS INTO PRACTICE P. 17

Think:ActSimple Smarts

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Never have companies been under such severe pres-sure to change as they are today. In many organiza-tions, one change project follows another like a nev-er-ending relay race. A survey of chief strategists conducted by Roland Berger and the University of St. Gallen found that, as early as 2014, about 70% of all large European companies were already running trans-formation programs. The survey concludes that the "adaptation of business models and organizational change are no longer exceptions, but rather the 'new normal'." There are many reasons why this is so:

Conditions in the corporate environment are becoming more complex. Companies today are faced with more volatile markets, growing geopolitical instability, more and tighter regu-lation and a far more interlocking, interdependent global economy. Their platform is a highly sensitive global infrastructure, and they have to reckon with the appearance of "black swans" – unexpected events and disruptions with far-reaching consequences – at a mo-ment's notice.

The pace and dynamism of competition is unprecedented. New market players are overcoming geographical hur-dles and tearing down the barriers between different industries. Product lifecycles are shrinking all the time. Changing customer requirements and techno-logical advances can quickly turn today's poster boys into tomorrow's restructuring candidates.

Digitalization is calling existing business models into question. Big data is paving the way to radical customer-centric-ity. Connected systems are revolutionizing production processes. Disruptors are reconfiguring entire value chains. Nimble start-ups are leaving incumbents standing. Equipped with only minimal resources, digi-tal platforms are assimilating large swathes of value chains. The threat of being "ubered" is all-pervasive.

None of this is new, and plenty has already been written about it. There is just one problem: Answers to the questions of what conclusions strategic manage-ment should draw and how organizations should (re)

The change trap: Companies know they need to become more agile and resilient. They just don't know how.

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come more resilient in a turbulent world. Better still, the instructions should be simple and – following the wisdom of US physicist and Nobel prizewinner Richard P. Feynman, who said "What I cannot create, I do not understand" – should lend themselves to immediate and unconditional implementation in practice at any and every company.

The set of guidelines we have come up with we call "Simple Smarts", which is explained further down. But what inspired us to formulate these guidelines? It was the way ants behave and organize themselves: Their colonies are perfect examples of adaptive and resilient organizations. Ants have existed as a species for a good 100 million years and can be found almost anywhere on Earth. The section below discusses the lessons our companies can learn from them.

design themselves have hitherto remained astonish-ingly vague.

Companies are commonly called on to become "more agile" and "more adaptive" to ward off the threat of "strategic drift": a debilitating divergence between the demands of a company's environment and its orga-nizational design. Agile organizations, we are told, make better decisions. One reason is that agile organi-zations process information better and faster. Another is that employees are given more freedom, or "lati-tude", to make decisions and can therefore respond more accurately to all kinds of changes in a turbulent environment. Another familiar piece of advice is to consciously experiment, to "fail fast" and learn quickly from mistakes. Others preach transformation into da-ta-driven companies that harness predictive analytics to mold their strategy. Proponents of dynamic capabil-ities expect organizations to reinvent themselves again and again by adapting their resource base. And then there are the advocates of ambidexterity, urging com-panies to strike a balance between the conflicting goals of stability and flexibility, efficiency and resilience, ex-ploitation and exploration in order to step up their evo-lutionary fitness – running a "dual operating system" in extreme cases.

"Change or die" is the rallying cry uttered by the permanent change faction – and their view is apparent-ly substantiated by a recent Santa Fe Institute study. The study puts the half-life of today's US companies – irrespective of industry or legal form – at no more than ten years. In other words, at least every second firm will no longer be in the market ten years from now.

Looking at all these observations and recommen-dations, it is true that companies have to become fast-er, more flexible and more innovative if they want to keep up with the more demanding pace of the digital age and pre-empt potential disruption from agile as-sailants. But how exactly do you achieve the goal of "be-coming more agile and adaptive"? How do you identify the root causes of a lack of resilience, rather than mere-ly put plasters on symptoms such as organizational inertia? By way of answer, the approaches listed above offer little of substance. They merely describe the attri-butes of notional model organizations – without saying anything about how to realize such models.

What companies need, then, is an instruction booklet telling them how to become more agile and adaptive, how to arrive at better decisions, how to be-


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13,000 different types and supercolonies that can ex-tend over hundreds of kilometers establish the ant as one of the planet's most successful species in evolu-tionary terms. "Go to the ant, you sluggard; consider its ways and be wise!" is a piece of advice from as far back as the Bible (Proverbs 6:6 NIV). But why should such a small creature with comparatively modest (in-dividual) intelligence be regarded as wise? The answer is simple: Ants are the prototype of a principle-based network organization – a structural model that has shown itself to be superior to all others in complex en-vironments.

Ants are regarded as a model of emergence: They have the ability to generate new systemic properties through interactions between many individual ele-ments. By building on pronounced social behavior and drawing on collective intelligence, they can attain to remarkable collaborative achievements:

PIONEERING BEHAVIOR Ants swarm out in search of food. On these expedi-tions they develop collective problem-solving strate-gies (e.g. overcoming obstacles by building living bridges). If one path is blocked, alternative paths are identified and used. Shorter routes are automatically used more frequently and thus become more clearly marked out.

PROVISION AND PRECAUTION Ants cultivate fungi in climate-controlled subterranean chambers and use an antibiotic coating to protect them from pests. Long before humanity evolved, they thus developed a form of agriculture, complete with pesticides similar to modern medicines to guard their harvest.

COLONY FORMATION Ants' nests are like megacities, with countless levels, specialized chambers (e.g. to handle supplies or care for the young), connecting tunnels, a sophisticated air-conditioning system and defined transportation paths. The mounds in which these nests are built are designed to optimize rainwater run-off, and the sensi-tive surface is continually restacked to guard against fungal infestation.

RESCUE SQUADSAnts protect each other collectively and selflessly against threats. In the event of flooding, for example, individual ants use their heads to plug any holes, while others absorb water that has already entered the nest and thus communally drain the edifice. Some types of ants even build floating bivouac nests.

Ants' collaborative achievements are so impressive that they have been taken on board by computer mod-

Quick-change artists: What sets the most adaptive organizations apart.


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els designed to deal with exceptionally complex prob-lems. The ant colony optimization (ACO) algorithm is a metaheuristic – based on ants' exemplary behavior when foraging for food – that scientists and companies alike use to solve deductive optimization problems (such as route planning).

Unwittingly, but all the more successfully for that, digital platforms such as Google, Amazon and Face-book likewise emulate the principles of ant logic in their actions. Instead of prescribing a centralized, hier-archic organization to control a linear production pro-cess, they essentially restrict themselves to coordinat-ing the networks attached to their ecosystem. That is the perfect model for an organizational form whose design maximizes its agility, flexibility and ability to innovate. This model is so successful and so vastly su-perior in terms of resource allocation that it is already operated by six of the world's ten most highly capital-ized companies.

Obviously, insights gained from the world of ants cannot be mapped as-is onto human organizations, and certainly not onto individuals. Unlike ants, hu-mans act out of self-interest, have a stronger urge for freedom and strive toward self-fulfillment. Conversely, in social organizations, people feel responsible for each and every member and – unlike ants – would not sacrifice the individual in order to benefit the collective.

Yet despite differences in the way ants and humans behave, ants' supremely successful collaboration can teach us valuable lessons for organizations and how to transform them:

LESS IS MOREAnts teach us that you don't necessarily need a complex organization to deal with complex requirements. Hier-archically, ant colonies have only a small number of castes: queens, workers or soldiers, and winged male ants (or drones) whose only task is to mate with the queen. Depending on what the colony needs most ur-gently to survive, the workers and soldiers shoulder a flexible array of tasks, forming groups to forage for food, defend the colony, and so on. The lesson is sim-ple: A handful of modular components that can be flex-ibly recombined to adapt to the given environment is more fit for purpose than highly specialized units that are armed only with a hammer and see every problem as a nail.

MORE IS DIFFERENTA colony of ants is the most graphic illustration of the adage that the whole is more than the sum of its parts. Left to itself, a single ant has little chance of survival in the wild. Hardships such as food shortages, predators and floods are ever-present threats. Working together as a collective, however, these creatures are ingenious survival artists with phenomenal capabilities: Think of the ant rafts with which they cross whole rivers, to name just one example. To generalize the principle: (Re)combination of the parts creates units with com-pletely new properties. Nor is this principle confined to ants alone: Individual atoms, fitted together in the right way, form DNA and, ultimately, living organisms. Stones become infrastructure, and infrastructure and humans together become cities. Recombining known technologies and elements of business leads to inven-tion. And so we could continue. Great things can be achieved with small, basic elements. Applied to organi-zational change, this means that "change" does not have to be a magic trick or a big bang: It simply means systematically acting in accordance with fundamental rules.

PURPOSE MATTERSPermanent change endangers the stability and identity of an organization. It is therefore all the more impor-tant to answer the "why" question. In ants, the answer is genetically programmed. Their very raison d'être is the survival of the colony, and their actions prove how rigorously they pursue this goal. Especially in today's turbulent times, human organizations too need a clear purpose that is worth working toward, that its mem-bers pursue. Only then can the coherence of the orga-nization be preserved through all the transformation processes. Put another way, the common purpose en-sures that, even when change is happening, the mem-bers of the organization all pull together. Finding a valid answer to the "why" question is not merely an or-ganizational issue, however. It also satisfies a basic hu-man need that has both a rational and an emotional component. People want to know the higher purpose of what they are doing. They find satisfaction in the perception of congruence between what they do and why they are doing it.


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THE LOGIC OF THE ANTS IS BASED ON SIMPLE RULES, DEMONSTRATING THAT SOLVING COMPLEX PROBLEMS DOES NOT REQUIRE COMPLEX RULES AND STRUCTURES

Source: Roland Berger

SINGLE ANTBearer of yes/no statuses

E.g. if it starts to rain, the ant switches its status to "it is raining"

The resulting dynamics within the ant colony are complex and based on the interactions that take place

An ant colony possesses all the properties needed by a Turing machine (= a computer)

ANT COLONY Complex dynamics based on interactions

COMPUTER

AMPLIFIER

OSCILLATOR

LOGIC GATE

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Multi-faceted behavior emerges from replicating those simple rules throughout the colony. Essentially, this simple logic allows you to solve any kind of problem that a regular computer can solve.

A


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Simple Smarts: How five simple rules can make an organization more agile, and how managers can advance this transformation.

The behavior of ants teaches us three guiding principles for the organization of tomorrow: "less is more", "more is different" and "it's the purpose that matters". What follows are a set of five concrete measures – our understanding of "Simple Smarts" – that show how any organization can immediately put these ideas into practice. Simple as they are, the measures are very effective. By way of illustration, we also describe how pioneering companies are already successfully applying this approach and, in the process, benefiting from greater agility, better decisions, more flexibility, growing entrepreneurial freedoms and a deeper level of employee engagement.


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to be earth's most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online."

Southwest Airlines US low-cost airline Southwest Airlines puts its customers at the center of how it sees the future. "Connect people to what’s important in their lives through friendly, reliable, and low-cost air travel" is its mission, its stated purpose. This purpose fits hand in glove with the vi-sion that Southwest addresses not only to customers, but above all also to its investors: "To become the world's most loved, most flown and most profitable airline." Is Southwest realizing these goals? Yes, the company delivers on its promise. It is not only the first but also the biggest low-cost airline in the world, operating more than 4,000 flights a day. It has been in the black for 45 years and is thus the US airline with the longest profit history. Customer surveys regularly give the company top rankings.

2. TEST AND DEBATE HYPOTHESESCrowdsourcing, not expert opinions: The best compa-ny decisions are rooted in broad-based discussion and consideration of as many alternatives as possible. In corporate reality, however, things often look very dif-ferent. In many companies, the leaders occupy the sta-tus of experts, and it is they who prescribe what is best for customers, what products they need, how to com-municate with them, and so on. The problem is, this approach no longer works in a world of turbulent mar-kets, because there are too many dynamic, constantly changing aspects to be considered. No single expert can even keep tabs on them all, let alone give them the exhaustive assessment they merit. A different ap-proach is needed; and once again, we can draw inspira-tion from the behavior of ants. Once a source of food has been identified, ants collectively establish a route

1. ANCHOR PURPOSENietzsche wrote that "He who has a why to live can bear almost any how". Today, answering the question why is probably the single most important manageri-al challenge. People yearn for a sense of purpose. Ev-ery organization must therefore serve a purpose that is transparent and understandable to both internal members and external stakeholders. If it doesn't, it is doomed to fail sooner or later. The purpose must be as clear and simple as possible, and must be commu-nicated with equal clarity and coherence. If your company pursues too many goals, that will only di-lute your aspirations. Ideally, the purpose should be formulated in a story: Molding issues into a tradi-tional narrative structure gives meaning to the con-tent, forges identity and brings the desired behavior to life as a tangible experience. It also addresses not only the mind, but also the senses [and emotions] of the "listeners". It is especially important to commu-nicate this narrative to employees and investors. For customers, the key issue is that the organization is seen to be living out its purpose authentically: They must understand exactly what the company's pur-pose is, even if they don't know the exact words the organization itself uses to tell its story.

REAL-WORLD EXAMPLES

The most successful companies in the world have implant-ed a simple, clear purpose in the minds of customers and employees. Two examples illustrate the point:

Amazon Practically every customer worldwide probably as-sociates Amazon – the undisputed global market leader in online retail – with the ability to buy (almost) anything on-line. Yet few of them know exactly how Jeff Bezos, the Am-azon CEO, phrases his vision for the company: "Our vision is


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Applicable to advance any organization, regardless of structure and level of resilience

B

FIVE SIMPLE SMARTS AS DESIGN PRINCIPLES FOR RESILIENT AND AGILE ORGANIZATIONS


1. Anchor purpose

2. Test and debate

hypotheses

3. Solve problems in

flexibly staffed and diverse teams

4. Minimize managers'

influence on day-to-day

business

5. Declutter

How to do it

What to doH

ow to

supp

ort

SIMPLE SMARTS


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tion for the countries they wish to visit. To do so, the original version of the website is juxtaposed with a version contain-ing the new information. User streams that are as homoge-neous as possible are then guided to both variants over a defined period of time, and this allows staff to see which version is best accepted by users. The change proposals themselves can come from any and every part of the com-pany. Over the last eight years, Booking.com has continually refined and optimized this process. At any given time, the Dutch company is currently conducting around 1,000 em-pirical tests in parallel. Its success makes a powerful case for this approach: Over the past decade, Booking.com has seen its stock price increase by a factor of 50.

3. SOLVE PROBLEMS IN FLEXIBLY STAFFED AND DIVERSE TEAMSIn today's dynamic environment, routine is a rare luxu-ry as companies face ever-new challenges and assign-ments. No organization can model this kind of volatili-ty by keeping dedicated units available for every conceivable eventuality – quite apart from the fact that such a proposition would be economically non-viable. Any such structure would have any number of depart-ments that regularly had too little to do. Instead, em-ployees must group and regroup as flexibly and auton-omously as possible in response to new tasks. Once again, the behavior of ants sets us a good example. De-pending on what is needed, worker ants can chop and change between completely different requirements. An ant that has successfully located a source of food can, at a moment's notice, become a bridge-builder. A scout ant can switch to defending the nest or supplying food to the young. All this happens without hierarchies and with not a hint of central command. Even the queen has no authority to issue instructions: She merely dis-charges her breeding function. Applying the same

to get there. There is no decision or commission from above.

Instead, the group organizes itself decentrally, col-lectively, like a network. When companies follow their example, the first crucial point is to allow alternative decision proposals to be submitted from all parts of the organization. Anyone can contribute them, irre-spective of status, past successes or any other condi-tions. (Feynmann describes this kind of scientific method as "brutal" in a positive sense, because the facts alone decide.) The important thing is to think through the decision alternatives from the customer's perspective. The next step is to try to decide between the hypotheses on the basis of hard data. If this exer-cise does not succeed, a discussion of the quality of the hypotheses ensues and a decision is made on this ba-sis. At the end of the day, the final decision needs the backing of everyone – even of those whose opinion dif-fers. As Amazon CEO Jeff Bezos puts it: "Disagree and commit."

REAL-WORLD EXAMPLES

Expedia The online travel agency Expedia is a prime exam-ple of the scientific method in practice. "We believe in the scientific method: Everyone’s ideas are equal in the face of hard data. We use data to guide but not define our actions." This (guiding) principle is ingrained as one of the US compa-ny's cultural norms. It highlights the importance of collective, data-based decision making in the company's everyday op-erations. Rather than blindly trusting expert opinions from above, employees formulate hypotheses about a variety of issues on a daily basis. The significance of these hypotheses is then put to the test. True to what is known as the "test and learn" philosophy, Expedia staff are actively encouraged to get it wrong. In this context, mistakes are seen as successful learning experiences. This approach to decision making in-volves employees on every level of the hierarchy in major de-cisions. One useful side-effect is that this analytical environ-ment automatically fosters a less political culture.

Booking.com Dutch hotel website Booking.com adopts a similarly radical non-hierarchic decision making process. Even the most minor alterations to the website are first re-viewed by what is known as an A/B test. Using this testing method, it is, for example, possible to determine whether users are interested in seeing specific immigration informa-


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logic to companies, we see that employees must be giv-en the chance to organize themselves into flexibly staffed teams. That also means giving them both the freedom to make decisions and the resources to get their jobs done. A culture that gives precedence to find-ing the optimal way to complete tasks must prevail throughout the company – task-based entrepreneur-ship, rather than a formal hierarchy split by depart-mental divides. An interdisciplinary mindset is vital. People must think in terms of networks, and everyone needs to know what skills everyone else possesses in order to assemble the best teams. In this kind of orga-nization, departments and hierarchies are merely a sub-plot: They give employees a sense of belonging and create a framework of responsibility for formal matters such as requesting vacation. And that, basical-ly, is it.

REAL-WORLD EXAMPLES

Apple Californian technology giant Apple has long been used to setting up flexible teams to solve problems. To take just one example: The company has always consciously avoided establishing one department that is responsible for developing the iPhone. It fears that any such department would be too dominant, would become the victim of its own success and could ultimately slip into inertia. Instead, Ap-ple's employees repeatedly organize themselves – flexibly and autonomously – into new project teams. That simplifies direct dialogue and open communication between people. Ultimately, it also facilitates and encourages unconvention-al innovations. The perennial success of the iPhone proves the wisdom of this management approach. On average, the American firm sells more than seven smartphones a sec-ond. It thus remains one of the world's leading smartphone vendors and is, with a market value approaching USD 800 billion, the most valuable company in the world.Spotify Alongside Apple, the popular music streaming ser-vice Spotify has also successfully established a new type of organization with around 1,200 employees. A structure made up of what the Swedish company calls tribes and squads does away with the conventional top-down ap-proach, freeing up staff to take the initiative and tackle as-signments as they arise. An assortment of different employ-ees (a "tribe") defines objectives and fleshes out the most important targeted outcomes. A tribe consists of multiple interdisciplinary teams, each of which is a "squad". Compris-

ing no more than ten people, squads are the smallest units in this organizational structure. The individual squad members have completely different skills, and it is relatively straight-forward for them to switch to a different squad as and when the need arises. The sole purpose of a squad is to pursue the goals defined for it. This is Spotify's take on the principle of "anchoring the purpose" that we looked at earlier. Squad members are completely free to decide how best to achieve the goals set for them. They work in an environment that is designed to encourage collaboration and simplify communi-cation. The individual squad members thus share a work space and have access to shared common room areas. This tribe and squad structure is critical to Spotify's organization-al agility. Besides generally giving greater autonomy to em-ployees, it leaves open the option of quickly forming a new squad if that becomes necessary. Once a squad has com-pleted its assignments, it can simply be dissolved. No one has to worry about changing the reporting structures.

4. MINIMIZE MANAGERS' INFLUENCE ON DAY-TO-DAY BUSINESSEstablishing Simple Smarts has major implications for managers, too. On the one hand, they focus more on genuine managerial tasks. They ensure that the company's purpose is anchored in the organization. They moderate the hypothesis-based discussion and decision process. And they create an environment in which teams can organize themselves and successful-ly solve problems. These are authentic management tasks that cannot and should not be delegated.

On the other hand, Simple Smarts requires manag-ers to renounce their position as omnipotent decision makers. Indeed, they should be involved in daily oper-ations as little as possible. If they shoulder the man-


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agement duties described above in a responsible man-ner, they won't have the time anyway. Another issue is that flexible teams are much better at handling day-to-day business, linking up in network structures and making robust, collective decisions.

REAL-WORLD EXAMPLES

Spotify In this context, Spotify's tribe and squad structure also has repercussions for the key tasks of managerial staff. Daniel Ek, CEO of the Swedish music streaming service, puts it in a nutshell: "If you want to know who makes the decisions, Spotify is the wrong company for you." True, each tribe is headed by a leader. His or her main job, however, is to create the best possible working environment for the rele-vant squads. In other words, rather than directly influencing the work of their employees by interfering with their operat-ing business, leaders rather concern themselves with ensur-ing that the conditions for open communication and direct information sharing are met.

Expedia At Expedia, data-based decision making has elimi-nated managers' traditional tasks. Executives no longer op-erate as the all-knowing source of decisions. Instead, their job is to ensure that the hypothesis-based discussion and decision process runs smoothly. As described above, all em-ployees are equal in the context of data and discus-sion-based decision making. Even if the decisions arrived at contradict the ideas of the manager, the latter must accept them and work to ensure that they are implemented.

5. DECLUTTEROrganizations tend to spend a lot of time busying themselves with things that have nothing to do with their actual purpose. Scientists would be quick to flag

a fundamental law at work here: the tendency toward maximum disorder – the second law of thermodynam-ics (entropy). In social systems, we mostly find discern-ible psychological phenomena. People can be distract-ed from goals and prefer tasks that serve their own personal needs but not necessarily the purpose of the organization. Structures, rules and processes emerge that are coherent in themselves (though not even that is always true), but that no longer have much to do with the goals of the organization. Once established, procedures such as regular meetings prove to be im-mensely durable, even if those who attend see them as futile exercises. The same goes for a company's prod-uct portfolio, or the existence of individual corporate units. Even long-standing loss makers are often subsi-dized by other parts of the company for years on end. Departments are kept alive even when their sole pur-pose is to preserve the manager's power base.

All this junk puts the brake on organizations. Re-sources are squandered, staff motivation is under-mined, market opportunities are missed. It is therefore hugely important for organizations again and again to question their structures, rules and procedures, their culture, management principles and business models – and to throw out the junk. That does not mean forc-ing an organization to be lean at all costs. The aim is to strike up a debate about what things the organization needs because they serve its purpose, and what things are surplus to requirements. The latter should then be jettisoned. The important task of launching and steer-ing this debate is the preserve of management. By spelling out the purpose, managers make it clear what results are expected once all the junk has been discard-ed. Think of a sculpture emerging from a block of gran-ite: In effect, the end product was there all the time. It was just hidden by all the ballast. Here again – as in every area of Simple Smarts – you can start immediate-ly, at any point in the company or, of course, at many points simultaneously.

REAL-WORLD EXAMPLES

Boeing, Seagate, Apple, Intel, Lenovo In the words of US economist Michael E. Porter, the principle of systematically throwing out all the junk can be summarized as follows: "The essence of strategy is choosing what not to do." Whereas far too many organizations still find themselves


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sidelined by a lack of focus, some already regularly – and rigorously – review their established structures and proce-dures. US aircraft manufacturer Boeing is one of them, and another is Irish hard drive vendor Seagate. At both compa-nies, managers regularly receive feedback about the "load" they place on their employees in terms of the meetings that have to be attended or the e-mails that have to be worked through. Ongoing comparison with the average load gener-ated by other managers encourages Seagate's executives to question whether established processes genuinely yield benefits.

Other companies too pride themselves on focusing rig-orously on processes that are genuinely meaningful. Apple only runs with a new idea if an old one is dropped to make room for it. US semiconductor manufacturer Intel has a rule that no meeting is ever to be held without a clear purpose. Chinese tech firm Lenovo allows employees to leave meet-ings prematurely if they get the impression that topics are being discussed excessively.

General Electric The management style cultivated by Jack Welch stands out as a radical example of the principle of throwing out junk. During his 20-year tenure, the former CEO of US group General Electric adhered to the principle of "fixing, closing or selling" loss-making businesses. In keep-ing with this principle, company units that failed to meet their growth and earnings targets were to be either sold or closed if they didn't return to profitability within two years. Generally speaking, Jack Welch was given to regular bouts of "spring cleaning" in his company. "An old house needs pe-riodical cleaning" was one of the principles that guided his actions as CEO. By ruthlessly separating the wheat from the chaff, Welch turned around a company that had been strug-gling when he took over as CEO in 1981, helping it to experi-ence undreamt-of growth. On his watch, the conglomer-ate's sales revenue rose from USD 27 billion to USD 130 billion. Its market capitalization spiraled from USD 13 billion to more than USD 400 billion.


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before they can address the "real" issues. Simple Smarts eradicates this excuse at a stroke. It lets you tackle those issues immediately.

Simple Smarts can and should be introduced wher-ever flexibility is key to mastering the tasks at hand. Knowing this, it is important to split the company's tasks into two categories: those that primarily demand consistency, and those where the focus must be on flex-ibility. Take the example of an airline: Every process that has anything to do with carrying passengers must exclude risks to the greatest possible extent and there-fore requires absolute consistency. Aircraft must be perfectly maintained, they must take off and land on time, it must be clear who is in charge of them, and so on. At the same time, airlines operate in a fiercely con-tested market and therefore need a flexible business policy that lets them respond swiftly to changes. The product portfolio may need to be adjusted when new players enter the market, for example. If certain desti-

Simple Smarts doesn't need a change of organizational structure. We have seen that ants – one of the most adaptable species in the world – can teach companies lessons about setting up agile and resilient organizations. And we have seen the rules of Simple Smarts that are need-ed for them to do so. One last, crucial step is still miss-ing: introducing Simple Smarts in your company in practice. On that score, we have good news for you: Your existing organizational structure is of no conse-quence, so there is no need to change it! Companies can follow the lead given by David Sacks, founder and CEO of the Yammer social network for businesses, who has this to say: "Of course companies should have structures and org charts. But that doesn't mean they have to act according to them." All too often, compa-nies stick rigidly to the confines of their organization charts and thus stand in their own way. And all too of-ten, they argue the need to first adjust the organization

Becoming resilient and agile without delay: How companies can start to introduce Simple Smarts in their organization today.


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Flexibility

Uncertain environments call for more flexibility in the form of greater adaptability, but certain functions will need to retain a degree of consistency (e.g. for security reasons)


Consistency

INTERMEDIARY SERVICE PROVIDER MANUFACTURER

Procurement

Production HR

M&S

Procurement

Production HR

M&S

Procurement

Production HR

M&S

C

FLEXIBILITY VERSUS CONSISTENCY: IT DEPENDS ON BUSINESS MODEL, ON FUNC TION AND ON EVOLUTION OVER TIME


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nations are no longer accessible – due to political up-heavals, for instance – alternatives must be tapped. And prices may need to be adjusted if changes are reg-istered in customers' willingness to pay.

Organizational agility is not black or white. Tasks in both categories, flexibility and consistency, ex-ist side by side in every company. They complement each other, and both are indispensable to the success of the business. Traditional management approaches can be applied to handle tasks for which consistency is more important than flexibility. These approaches pre-suppose stable environmental conditions. However, since companies operate in an increasingly uncertain and turbulent environment, tasks that demand flexibil-

ity are likewise growing in importance and cannot be handled using conventional management approaches. This, precisely, is where Simple Smarts kicks in. Accord-ingly, it is crucial to identify which tasks fall into which category – and then to use the right tools for each job.

The introduction of Simple Smarts should start at the biggest bottlenecks. In divisions or units where flexibility is paramount, the introduction of Simple Smarts begins by identifying where the organization's biggest bottlenecks are. Where do structures most urgently need to be loos-ened up to facilitate greater flexibility and agility? That could be the innovation process, for example, where rigid hierarchies and cast-in-stone procedures are in-


DCULTURE CHANGE BEGINS WHEN YOU DERIVE TAILOR-MADE RULES FROM SIMPLE SMARTSIterative process involving three steps: How to put Simple Smarts into practice in your company

1IDENTIFY AND

PRIORITIZE BOTTLENECKS

2 FORMULATE TAILOR-MADE RULES

3CASCADE AND ANCHOR THESE RULES THROUGH THE COMPANY

SIMPLE SMARTS CYCLING


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creasingly causing incumbent firms to lag behind agile start-ups. Or it could be the need to set up digital plat-forms which, as we saw earlier, are assuming ever greater importance in today's network economy. Or in the migration of hardware-based productions to solu-tions in which software handles key functionality. No part of the organization is precluded a priori. Simple Smarts can be applied anywhere in the company.

Simple Smarts has to be translated into tailor-made rules. Once the main bottlenecks have been identified, the rules of Simple Smarts are applied to them. The indi-vidual characteristics of each bottleneck must be taken into account in such a way that all five aspects of Sim-ple Smarts are translated into tailor-made rules for each area. Let us take a company's innovation process as an example: In this context, "anchor purpose" can mean establishing the objective of being the innova-tion driver in a specific field. This can be done with a success story that sticks in the mind and describes the company as first mover for all key innovations, as well as outlining how long it takes for copycat products to get to market. The second rule of Simple Smarts – "test and debate hypotheses" – can be realized by juxtapos-ing alternative innovations. Based on clear criteria such as the duration of the development process and the volume of market potential, a decision must then be reached on which alternatives to pursue. In the con-text of an innovation process, "solve problems in flexi-bly staffed and diverse teams" – the third rule of Simple Smarts – means assembling interdisciplinary teams in line with the solution to be developed. That could mean putting software specialists together with me-chanics and business administrators as well as blend-ing internal teams and external teams from start-ups. Management is responsible for prescribing and an-choring the purpose of the innovation process and should, ideally, moderate the process of selecting inno-vations. Beyond that, though, it should steer clear of the details of the innovation process, thus adhering to the fourth rule of Simple Smarts: "minimize managers' influence on day-to-day business". Actions to "declut-ter" a company's innovation process in accordance with rule five could involve limiting the number of pos-sible innovations to be pursued simultaneously. Any alternatives above and beyond this defined group should be resolutely removed from the process.

Step by step the organization becomes more agile and resilient. Once Simple Smarts has been translated into tai-lor-made rules to remedy the major bottlenecks, these rules should be cascaded down through all levels of the hierarchy in those areas affected by the bottlenecks. They must be anchored in the thinking and practice of all employees. The processes by which the rules are im-plemented, cascaded and anchored in the organization are tremendously important, because they go hand in hand with a comprehensive transformation of the cor-porate culture. For executives, one vital task is to mod-erate and manage these processes well. As soon as the major bottlenecks have been remedied with the aid of Simple Smarts, the company can turn its attention to those bottlenecks that command the next-highest pri-ority. In this way, all bottlenecks throughout the com-pany will gradually be eliminated. Step by step, the or-ganization thus becomes more agile and more resilient in the face of today's turbulent environment.

Simple Smarts has huge advantages compared with conventional transformation programs. Introduction can begin immediately. There is no need for extensive preparatory work, no need to recruit new leaders or staff, no need for the kind of organizational "big bang" that, experience shows, often paralyzes the company. The only thing that is needed before you begin is to identify those tasks for which flexibility is more im-portant than consistency, and then to concentrate on the major bottlenecks in these areas. Experience is gathered in small steps. Rules, structures and process-es are continually improved. Progress is immediately visible. Feedback can be solicited from employees and executives at every stage of the process, and can then be channeled into improvements in the next stage. De-spite the gradual, step-by-step approach, the overrid-ing goal is ambitious indeed: to migrate toward an ag-ile, networked company that largely organizes itself.

So there is no reason for you to delay. Simple Smarts can begin today!

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