Complexity and Emergence : Chaos and Complexity - Knowledge Management ?

lissack

Michael is Research Associate at Henley Management College, U.K, and a Senior Advisor, Tripod Inc. He is also Director, Organization Science Related Programs, at the New England Complex Systems Institute.

Michael can be contacted at lissack@lissack.com, and he has his own website at lissack.com.


Abstract

As interest in the study of complex systems has grown, a new vocabulary is emerging to describe discoveries about wide-ranging and fundamental phenomena. Complexity theory research has allowed for new insights into many phenomena and for the development of a new language.

This paper argues that a shared language based on the vocabulary of complexity can have an important role in a management context. The use of complexity theory metaphors can change the way managers think about the problems they face. Instead of competing in a game or a war, they are trying to find their way on an ever changing, ever turbulent landscape. Such a conception of their organizations' basic task can, in turn, change the day-to-day decisions made by management.

If part of the problem of knowledge management is the need to identify value added knowledge, language and metaphor play a key role - for they are the very tools of the identification [what is knowledge] and ascription [what makes it value-added] process.

Complexity theory metaphors, it is argued, are not panaceas. There are limits to the types of organizations where the notion of a "fitness landscape" and "degree of coupling" can make a positive contribution to managements understanding of the world. The author argues that one potential distinction - between worlds where complexity metaphors can contribute and those where they cannot - can be drawn by measuring the degree to which an organization perceives that value-added investments are to be made in a ) the development of new knowledge or b ) infrastructure.

In this context, infrastructure is defined as those items to which an economist might ( once such investment is made ) ascribe the label "sunk costs", but which management would not willingly walk away from. For this purpose then, emotional investments, legacy systems, existing bureaucracy, and material goods could all constitute "infrastructure". Infrastructure investments it is argued are part of what Brian Arthur of the Sante Fe Institute defines as the world of diminishing returns.

Investments in knowledge are different. While the ability of an organization to effectively deal with new knowledge is limited by a variety of constraints, the leverage which can be obtained from such knowledge gives rise to the potential for increasing returns. As organizations learn to remove some of the constraints on their ability to absorb and lever new information, they force themselves down to the increasing returns part of the "S" curve.

Several case studies are presented to illustrate the potency of complexity metaphors in driving managerial perceptions of knowledge management businesses.

"We are all doing it; very few of us understand what we are doing."- Goethe

"Where is the wisdom we have lost in knowledge ? Where is the knowledge we have lost in information ?"- T.S. Eliot ( 1963 )

"... our brains have a certain capacity for detecting regularity. To the extent that the world matches these characteristics of ours, we can see structure and pattern. To the extent that behavior in the world exceeds our capacities, the excess amount of sophistication in the stimulus is lost on us and turns into randomness, into apparent structure less-ness that we can't represent."- James Crutchfield ( Crutchfield and Kahn 1996 )

As the 20th century draws to a close we find ourselves drowning in a sea of data, all purporting to be information, and about which others may ascribe the label "knowledge." While computers have aided our ability to deal with this data, it seems not to be an exaggeration to state that for many of us the sea is complex, our confidence in our ability to recognize and make use of value-added knowledge is under attack, and our way finding skills seem lacking.

For purposes of this paper then, the knowledge management problem is :

How do managers cope with increasing quantities of data points and the need to identify value-added knowledge therefrom ?

Since this paper is being delivered as part of the ontology section, it is important that I make clear my distinctions amongst knowledge, data, and information. In this regard, I follow Fransman, to wit: "Information is defined as data relating to states of the world and the state-contingent consequences that follow from events in the world [i.e. useful data]. Knowledge is defined as belief. While belief is influenced by information processed by the believer, belief is not wholly determined by processed information... there is room for insight, creativity and misconception."( Fransman 1994,755 ) Lave ( 1993 ) amplifies this with the observation that "Knowledge always undergoes construction and transformation in use."

Devlin ( 1991 ) suggests that the act of classifying a piece of perceived data turns it into information, finding a means of using that information in one's belief system renders the item knowledge.

If we accept beliefs as the definition for knowledge, then the search for value added knowledge is the ongoing acquisition of beliefs which help the organization ( or person ) accomplish whatever it is that is set out as the goal. This notion of knowledge is goal-relative, information-based, contextual, descriptive, weak, and externalist. Goal-directedness is a shaper of the informational space around and inside an organism ( Bogdan 1994 )

Nonaka ( 1994 ) maintains that knowledge creation is closely tied to language use and communication and requires both the creative use of metaphors, analogies and models and a resolution to the conflict in beliefs which such creative uses may provoke. Beach's Image Theory suggests "a frame is that portion of his or her store of knowledge that the decision maker brings to bear on a particular context in order to endow that context with meaning." ( Beach 1992 ) Weick's concept of Sensemaking can be summarized as an organization's need to interpret and make sense of the environment around it if it is to survive.( Weick and Roberts 1993, Weick 1995 )

The ability to make such sense is in great measure a by-product of the language of interpretation available to the organization and its members. In this light, Nonaka and Beach, when taken together, are saying that choice of frames ( which endow meaning ) and metaphors ( which can provoke new images ) within an organization can be determinative of what value added knowledge an organization can both extract and absorb from the environment around it.

This paper argues that metaphors drawn from complexity theory can aid some organizations and/or some aspects of organizations in their quest for value added knowledge. It is critical to note that the paper does not argue for the use of complexity theory metaphors as a sufficient explanatory device or theory with regard to important managerial questions. Instead, it argues that complexity theory metaphors add value by allowing managers new ways of thinking and the use of a different language.

Complexity theory deals with systems that show complex structures in time or space, often hiding simple deterministic rules. This theory contends that once these rules are found, it will be possible to make effective predictions and even to effectuate control of the apparent complexity. If we define an organization as "systems of coordinated actions among individuals and groups whose preferences, information, interests and knowledge differ" ( March and Simon 1993, 2 ), then the central task of an organizational manager is "the delicate conversion of conflict into cooperation." Such a conversion can be greatly assisted when the participants speak a common language and share access to somewhat similar views of the world they inhabit. The better the cooperation the better the results.

"Care must be taken when reading popular accounts of chaos [and complexity] in the management literature. As is often the case with the introduction of a new management metaphor, "chaos" tends to be suddenly seen in almost all managerial systems." ( Levy 1994 )

Yet what is it that these management experts now see ? A lack of ability to control. "It would seem that increased turbulence in the business world and the widely-reported accelerating rate of change is sufficient to label the system as chaotic. Despite the limited evidence, bold claims are being made about chaos theory being the 'next major breakthrough in management'." ( Phelan ) Leading authors agree that " . . . if one accepts the premise that the dynamic of success is chaotic . . . all forms of long-term planning are completely ineffective" ( Stacey 1996, 188 ).

The descriptive metaphor that everything is changing and thus the organization must be poised to adapt to change says nothing about what to do next or about how to convert conflict into cooperation. Indeed the material may be useful as a sales pitch for organizational change, but the product - what to change, how, when and why - is not connected to the management experts' observation regarding loss of control. Something more is needed.

Complexity research is not at the point of describing an underlying theory of everything. But its descriptive powers are at a point where they can help to shape the world around us.. The aim of this paper is to illuminate some of that descriptive power and its application as an analytical and creativity inspiring tool.

Several case studies are presented along with summary insights gained from a series of focus groups held under the auspices of the Santa Fe Center for Management Strategy. The central idea gleaned from these investigations is that the complexity metaphor can be a powerful tool for organizing a corporate response to the competitive environment.

Theoretical Approach

The underlying theory for these investigations was drawn primarily from a little known book by Young Back Choi, Paradigms and Conventions: Uncertainty, Decisionmaking, and Entrepreneurship. In this book Choi outlines a theory of human decision making which I summarize as follows:

In order to make decisions, individuals must have un understanding about any given situation, and hold this idea with sufficient confidence to follow the course of action it suggests. Under uncertainty, individuals seek ideas that enable them to deal with a given situation , terminating this search only when such understandings have been obtained. Choi quotes Frank Knight: "With uncertainty present, doing things, the actual execution of activity, becomes in a real sense a secondary part of life; the primary problem or function is deciding what to do and how to do it."( Knight 1921 )

To Choi, every human action presupposes an associated paradigm - a model, an example of something that is believed to work. In my words - the acceptance of some metaphor as knowledge. Choi states that identification of the accepted paradigm is the crux of decision making under uncertainty. Individuals will continue searching for a paradigm until they find one, if they lack examples of viable practice, they will try to find them themselves, through experimentation or the more likely technique of trial and error. The tendency for ...paradigms to be stable [once something is accepted as a belief , it tends to stay that way] implies that they are also likely to become sub-optimal over time, even if they started out as "optimal' solutions.

People decide and act in a given situation based on a paradigm identified as appropriate for that situation. Without a paradigm there will be no decision and no action. A situation is uncertain if one cannot identify an appropriate paradigm to associate with it. To make a decision is to resolve uncertainty by identifying an appropriate paradigm.

When faced with uncertainty, an individual will use a trial-and-error approach to find a paradigm deemed suitable for the given situation, testing the most promising paradigm first and expecting certain outcomes. If this initial test brings the anticipated results, the individual will stop the search. If it fails, he or she will try another promising paradigm, continuing this search until attaining success.

In his book The Sciences of the Artificial ( 1981 ), Herbert Simon said that "solving a problem simply means representing it so as to make the solution transparent." Notice that Simon uses the words "representing it". Choi uses "finding the appropriate paradigm".

Choi's emphasis on paradigms in his theory is a powerful explication of the potential role of metaphor. Metaphors enable one to open up unexpected possibilities and to explore multiple meanings and interpretations. Metaphors can serve as catalysts for creative insight by calling attention to unexpected associations. Metaphors can allow one to reconceptualize an entire problem. ( Ortony, 1979 )

Finke points out that "Modern theories of creativity have begun to incorporate many of the characteristics of chaotic thinking, such as considering multiple realities, exploring playful combinations, seeking out interesting contrasts and contradictions, developing useful metaphors, and discovering emergent properties."( Finke and Bettle 1996 )

Andy Clark phrases it as "Imagine someone trying to solve a problem. To solve it... is to activate an appropriate explanatory prototype. Sometimes, however, our attempts to access a satisfying ( explanatory ) prototype fail. One diagnosis may be that we do not command any appropriate prototype, in which case there is no alternative to slow, experience-based learning. But an alternative possibility is that we do command just such a prototype but have so far not called it up. This is where a good piece of context fixing can help. The idea is that a bare input that previously led to the activation of no fully explanatory prototype may suddenly, in the context of additional information, give rise to the activation of a developed and satisfying prototype by being led to exploit resources originally developed for a different problem." ( May, Friedman et al. 1996,117 )

If part of the problem of knowledge management is the need to identify value added knowledge, language and metaphor play a key role - for they are the very tools of the identification and ascription process.

Morgan ( 1986 ) has argued that 'Organizations are many things at once!'. Clegg ( 1994 ) goes on to state: "Multiple ways of looking at organizations are required to achieve better understandings of their complexities and contradictions. Any single metaphor is partial." Metaphors drawn from complexity theory are one more tool in the managers' quiver.

Lane and Maxfield ( 1995 ) suggest,"agents seek to construct a representation of the structure of their world that can serve them as a kind of road map on which to locate the effects of their actions." Constructing a representation of the world - I believe these are words for developing a language, vocabulary, and set of metaphors with which to communicate with each other and with others. Exhibit I illustrates some of the complexity theory metaphors and their practical applications.

The language of complexity and the metaphors it creates can change the definition of management

Lakoff and Johnson ( 1980,14 ) argue that "many of our activities ( arguing, solving problems, budgeting time, etc. ) are metaphorical in nature. The metaphorical concepts that characterize those activities structure our present reality. New metaphors have the power to create a new reality." Corporate managers tend to view their companies as being in a race - be it for success, market share, revenues, or survival. That metaphor influences the way they see the world and the way they manage their companies.

In the race metaphor, the landscape is fixed even if the course is not. One has an identified goal and a set of competitors. In the fitness landscape metaphor, the landscape itself is always changing. One's goals, course, and competitors are but factors which can and do affect the shape of the landscape itself. The objective is to climb to a non-local peak and your peaks may be very different from your competitors.

In the race metaphor, information and data can be confused. Too much data lead to a loss of vision, a potential diversion from the goal, and the risk of overload. In the complexity metaphor, data is merely unused potential information. Information changes the landscape and data becomes information when it is ascribed value ( whether correctly or not ). Noise is a risk and a diversion in the race metaphor and a source of new understanding and potential information in the complexity metaphor.

To quote Lakoff and Johnson ( 1980,179 ), "We understand a statement as being true in a given situation when our understanding of the statement fits our understanding of the situation closely enough for our purposes....metaphors partially structure our everyday experience and this structure is reflected in our literal language." Managers who can make use of the metaphors of complexity see their companies in a different light than those who don't, and in a sense, are competing in a different world. ( Lakoff and Johnson 1980,179 and 46 )

Mental models matter. "Managers attend to what they believe is important to their firm's performance. Their belief may be based on their own or other people' s attributions.... these mental models will influence attention, and determine what environmental data is noticed and interpreted, all of which together constitute a major factor in guiding and directing organizational activities." ( Grohnaug and Lines 1995 )

In a complex world, strategy is a set of processes for monitoring the behaviors of both the world and of the agents of the organization, observing where potential attractors are and attempting to supply resources and incentives for future moves. It may be that command and control are impossible ( at least in the absolute and in the aggregate ), but the manager retains the ability to influence the shape of what complexity theory [and biology] refers to as "the fitness landscape."

Identification of value added knowledge as a task can be represented by the metaphor of search for optimal fitness on a landscape. The landscape is rugged, in that there are hills and valleys, and it is turbulent in that it co-evolves with both the outside environment and with the very participants ( employees, customers, suppliers, regulators, competitors, etc ) who make up the essence of that landscape.

Kauffman carried out a number of studies of search on rugged landscapes which demonstrate that, when fitness is average, search is best carried out far away across the space of possibilities. But, as fitness increases, the fittest variants are found ever closer to the current location in the space of possibilities.( Kauffman 1993 )

On complex surfaces ( i.e., rugged fitness landscapes with many hills and valleys ) systems can become trapped on poor local optima ( the wrong hill ). Kauffman's research has developed a variety of approaches to "simulated annealing" to assist in getting organizations away from these local optima and moving toward a more global optimum. "Simulated annealing is an optimization procedure based on using an analogue of temperature, which is gradually lowered so that the system nearly equilibrates at each temperature and is gradually trapped into deep energy wells. The general concept lying behind simulated annealing is that at a finite temperature the system sometimes "ignores" some of the constraints and takes a step "the wrong" way, hence increases energy temporarily. Ignoring constraints in a judicious way can help avoid being trapped on poor local optima. " ( Kauffman 1993 )

Within this language clearly is a "how." Kauffman says break up the organization into patches, yet emphasizes that these patches must interact. This advice is different from the old management standby of the independent self-sufficient business unit. It is in the nature and quantity of the interactions that Kauffman finds that the organization as a whole can be moved toward a global optimum even though each patch is acting selfishly. Interactions require language or some other mechanism of fairly continual communication. He stresses that the patches must be coupled. In management lingo, the pieces must communicate, and not just at quarterly review sessions.

"The basic idea of patch procedure is simple: take a hard, conflict-laden task in which many parts interact, and divide it into a quilt of non-overlapping patches. Try to optimize within each patch. As this occurs, the couplings between parts in two patches across patch boundaries will mean that finding a "'good" solution in one patch will change the problem to be solved by the parts in adjacent patches. Since changes in each patch will alter the problems confronted by neighboring patches, and the adaptive moves by those patches in turn will alter the problem faced by yet other patches, the system is just like our model coevolving ecosystems."( Kauffman 1993 )
Kauffman's other two procedural suggestions are to ignore some of the inputs coming into the organization ( the theory seems to be that accommodating all inputs leads to freezing and that the necessary degrees of freedom to better find optima can only be accomplished by deliberately ignoring some of the inputs ), and to recognize that too much data cease to be information ( that which informs the agent or actor ) but instead acts like a brake on the system. This latter concept he calls "tau" for his measure of how many simultaneous changes an interacting system can tolerate before freezing up.

"While simulated annealing is an important mathematical optimization procedure, it involves agents making errors "on purpose" at a controlled diminishing frequency. People and organizations do not appear to behave this way. On the other hand, human agents in organizations almost certainly respond to the stresses of conflicting demands by ignoring some of the constraints some of the time. Such apparent irresponsibility can, as we have seen, work to the overall benefit of the organization."( Kauffman 1993 ) Ignoring some of the information being generated allows for a new set of priorities to emerge, and at least some of the time, a significant improvement can result.

Kauffman describes the role of error and of ignoring some constraints. The annealing process can also be looked at as one of deliberately introducing noise into a system to see what happens. Guastello ( 1995, ch. 4 ) refers to this as " . . . the chaotic controller. ... Chaotic control works counter intuitively by first adding a small amount of low-dimensional noise into the system. The reasoning is that the amount of sensitivity to initial conditions is not uniform throughout the attractor's space; sensitivity is less in the basin of the attractor and least in its center . . . Adding noise to the system allows the attractor to expand to its fullest range."

This is a very different concept of noise than the traditional. Where traditional managers may have wished to delete the extraneous, the complexity research educated manager may be attempting to cause the deliberate addition of noise at various places along the way. Of course, noise can still be noise, and search strategies must be able to separate wheat from chaff if the enterprise is to be at all successful.

With this as background we now turn to our case studies.

BioTech and Internet - Complexity Theory In Action

Two companies I examined in depth for this paper are both in evolving high tech industries. One, which I will call BioTech, is a division of a many thousand employee industrial company. The other, which I will call Internet, is a young start-up Internet content provider with fewer than forty full-time employees.

Coming from very different stages in their corporate lives, these two companies share a few things in common. First their executives think about complexity on a day-to-day basis and their vocabulary and descriptions of their competitive environments reflect such thinking. Second, I was struck how a senior executive of each company told me a variant on an old J.P. Getty story, which states that success can be achieved if you: are in business for yourself, market products or services that are in demand, guarantee those products and services, give better services than your competitors, reward those who do the work, and build your success on the success of others.

BioTech's products provide cutting edge systems to the life science community with the most comprehensive line of integrated and automated systems for DNA research and analysis, protein and peptide characterization and analysis, carbohydrate analysis, separation and detection, as well as data research, management, and analysis. Application of excellence in microbial biotechnology ( bacteria, yeasts, fungi ), process design, scale-up and operation ( batch, fed-batch, and continuous ), and recombinant organisms is combined with a genuinely entrepreneurial culture and a receptivity towards external collaboration for business development. BioTech believes that it has brought together a scientific team capable of quickly and efficiently advancing its product development programs and identifying new proprietary products, technologies, and market opportunities.

In the biotech industry overall, diversification of revenue line has become the name of the game - - building businesses around such areas as research, manufacturing, contracting, shared development costs, co-marketing and co-promotion, desktop tools for scientists, bio-information systems, and, in some cases, actual product sales. "The challenge of my generation," said the president of one of BioTech's competitors, "is not just to have good technology and products in the pipeline. We also have to keep abreast of the ever-evolving changes in regulatory affairs, intellectual property, company alliances, and market niches from the start. Five or ten years ago, the biotechnology industry was a fraction of the size it is now. Today, the complexity of the environment and intense competition push us from day one."

Internet, by contrast, is a start-up, a young business of mostly young people trying to make a "great thing" happen in a new medium. Internet provides its members with "tools for life," promoting an ethic of investment by offering six services: finance, career, travel, health, living, and community. Internet is pursuing a marketing strategy that builds upon its niche in the on-line market as a life skills development service aimed at the college market.

Internet began as a school project for two of its founders and has developed into a small web community and a larger media company. Internet offers advertisers several venues for reaching people who need to know about their products or services: a web site, a 1,000,000 closed circulation print magazine, and some innovative-sponsored media opportunities. As a content provider ( not access ), Internet is attempting to compete in a value-added sector of a new medium. Content is, by definition, a knowledge management business.

As its founder puts it, "Internet will be demand-driven. Internet will be highly responsive to the expressed needs of young people. Ultimately, Internet's success depends on the demand from the students it intends to serve." As a demand driven company it may be greatly changed from the original vision - "a computer network designed specifically for the interests of college students. This network could be accessed from your personal computer in your dorm room, or at home, or from computers generally available at school. The network would help you acquire important life skills, not currently included in college curricula, in such areas as personal finance, career planning and job search, and preventive health care. Additionally, there would be other services of interest to students, such as travel and research. To acquire these skills, students would participate in interactive simulations and play games. A low annual membership fee would provide unlimited access to all the network's programs and services."

Steve Case, the CEO of America OnLine defined the challenge, "the market is driven now by four components: 1 ) breadth and depth of content-we've got to have things that people see value in, such as major brands; 2 ) packaging and presentation of that content-having an engaging visual appeal, useful in terms of how services are integrated together, giving people the ability to personalize the information and so forth; 3 ) pricing-the pricing has to be simple and affordable and simple is actually as important as affordable; 4 ) providing a sense of community-a subtle component, but an important one."

I will return to the theme of community below, but for now suffice it to note that the essence of a virtual community lies in the self-identification of its members. Such identification can only occur where there is an ongoing belief that there is such a community and that one is a member thereof. Not only then is the content being provided one form of knowledge, but belief about community is a second, and perhaps for the long-run survival of the business, the more important form.

Both Internet and BioTech have recognized a need to divide their company into two worlds. The old style manufacturing world where cost is king and a new style knowledge-based world where survival itself may be dependent upon new innovation and adaptation.

BioTech actively employs a technique which its executives ( and our discussion group at Santa Fe ) refer to as "flocking." Flocking is the ability of the organization to recognize good opportunities and to flock resources around those opportunities - much as birds in an unselfconscious and reflexive way will rotate the leadership of their flying wing as one bird gets tired and another represents the "next hope." Having the ability to flock is having the ability to take advantage of opportunity. This is much easier said than done.

Ed Hutchins describes the essential nature of flocking to the knowledge management task in his new book, Cognition in the Wild ( 1996 ). Hutchins begins with a description of navigation on a large naval vessel when things go wrong. The navigation crew clearly is flocking from task to task, shifting assignments, and cognitive burdens as seems necessary when judged from the perspective of "we must do this." When things go wrong on the navy boat, there are not enough crew, not enough resources, not enough cognitive capacity. But they make do. Indeed, if they did not, catastrophe would ensue.

At BioTech there is a common pattern - too many opportunities chasing too few resources. So how do the choices get made ? How is the search conducted over the opportunity frontier ( if I may use that set of words instead of fitness landscape ) ? BioTech has institutionalized two distinct processes to help this along - first, researchers ( and this is a select group at BioTech ) are free to seek out their own resources among the company components, and second, BioTech has an institutionalized group ( which they label "operations" ) whose function is to satisfy the bureaucratic demands of the organization and keep the bureaucrats away from these select researchers. The freedom to fail has thus been institutionalized.

In some respects this is like an ad agency, where the account manager types shelter the "creatives" from the pressures of such things as budget overruns, and have the responsibility for acting as a liaison between the "numbers" part of the business and the "creatives." I note that the two parts of BioTech do not both speak of complexity - this is a language used by the searchers ( those who get to decide flocking ) and managers, but not by manufacturing or operations. The ad agency liaison analogy seems apt.

At one of BioTech's competitors, Chiron "managed chaos has meant that the borders of projects are nebulous. People working on one project may drift over and help with another project if they find it more urgent, letting their own languish temporarily. This is fine with management, in fact, it is the way the company trims projects with less promise. 'If people feel they are working on a problem that is ceasing to be important, and wish to exchange it for an important problem, they can make that judgment," chairman Butter said. "The appetite for continued funding of a project that is going nowhere is always decreasing; the researchers' enthusiasm wanes.'"

"Managed chaos is appropriate for a company such as Chiron, Butter observed, because opportunities in biotechnology don't come in a predictable fashion. When they do come along, the company must immediately reassess its priorities, and have a management structure that allows for frequent disruptions of plans. As one Chiron researcher explained, 'It seems to me that the company is always in a state of flux, it doesn't seem like anything is hard and fast.'"( Perry 1995 )

Perhaps most important, both Chiron and BioTech have taken Kauffman's patches theory to heart. There is explicit recognition in each company of the differences between the manufacturing components ( which are run like traditional - lowest cost margins win - companies ), thinkers, researchers, and the operating divisions that bind them all together. Each part co-evolves with the others, yet is selfishly doing its own thing. And it seems to work.

At Internet, the processes are similar although the number of personnel involved is much smaller. As the company grew, its leaders recognized the need to patch and subdivide into co-evolving units. Tasks such as content and community development, web site architecture and design, advertising/sponsor relations, public relations, budgeting, and hiring and managing creative and technical staff were split out and made the province of a separate part of the firm. A select set of finders and thinkers are charged with the explicit task of seeking out the generative relationships of which Lane and Maxfield write. Internet's executives speak of opportunity frontiers and competition landscapes. They describe their ideal business partners and potential new services using words almost directly lifted from Lane and Maxfield. And indeed they must. In its brief corporate existence, the company has shifted from a "members who pay for access" model, to an advertising model, to a "we sell related services" model - evolving as opportunities have presented themselves and as the net itself has evolved.

Even Internet has traditional production type aspects and these have been farmed off to more traditionally managed pieces of the organization. Tasks such as mail lists, marketing promotions, billing, membership updates, server maintenance are not part of the "creative side of the business." The complexity which Internet's officers see is in carving out an identity, an audience, and a revenue stream - not in becoming the cheapest provider.

The challenge for Internet is managing an ever changing field. Esther Dyson, publisher of Release 1.0 said in a recent issue, "What new kinds of content-based value can be created on the net ? We believe the answers include services ( the transformation of bits rather than bits themselves ), the selection of content, the presence of other people, and assurance of authenticity - reliable information about sources of bits and their future flows. The trick is to control not the copies but a relationship with the customer - a subscription. And that's often what the customer wants, because he sees it as an assurance of a continuing supply of reliable, timely content. Much chargeable value will be in certification of authenticity and reliability, not in the content itself. Brand name identity and other marks of value will be important; so will security of supply. Customers will pay for a stream of information/content, from a trusted source . . . who add value - everything from guarantees of authenticity to software support, selection, filtering, interpretation, and analysis. The redistributor's goal is to be the most convenient source of content and to put its own attitude or personality around the content; the underlying is unlikely to be exclusive, since the content provider wants to maximize distribution."

Brian Arthur refers to this split in tasks as the division between the world of traditional economics - one defined by cost competition and diminishing returns, where business models are driven to commodity production - and the knowledge-based world of "increasing returns." Other researchers make note of the network effects implicit in new technologies and suggest that to the consumer sunk costs are not sunk but represent emotional investments which must be accounted for in evaluating next steps. This seems to be what both Case and Dyson refer to when stressing the importance of "community." Internet's executives feel the need for community is a driving force if their firm is to prosper.

Bill Gates seems to feel the same way. In a December, 1995 keynote address to an industry group, he said "Content is the biggest of all.... And, you know, it's sort of like saying in the TV industry, "Where was the money made ?" Of course it was made on the content, not in making TV's or recording studio equipment. ...But overwhelmingly, content is where in the long run the really differentiated, branded scale-type assets will exist. Now, this idea of an Internet online service, today may be the first day you hear that term. It's a very important concept to us because it means an online service where all the content of the Internet is fundamental to the offering, and so it's not necessary for an information provider to go through anyone in order to be out there and make it available. And yet there's a recognition here that, for the person getting onto the Internet, having a great mailbox, having community chat, having easy sign-up, being able to call up and ask a question about their bill at any time, having things aggregated together onto that bill, ways that contents are organized together and highlighted for new things, as well as a significant budget to buy in unique content being part of the offering, that there will be a business here....There isn't a perfect analogy to that programming budget in today's world. The closest might be somebody like an HBO, although it's pretty rare to go for a total exclusive in a format like that, and it won't be that uncommon in this format. This idea of working with a community like MSN is particularly attractive in the era of the Internet where the people who are able to get subscriptions or to get advertising revenue, that will be quite modest." ( Gates 1995 )

Creation of a community and an emphasis on knowledge are what Internet shares with a portion of BioTech and Microsoft. Both BioTech and Microsoft, of course, have other operations that resemble traditional manufacturing businesses. Chiron Corp, another biotechnology and chemical company notes that in its research efforts it cultivates a spirit of "managed chaos" or "managed disorder". Chiron asks its researchers and their managers to reassess progress "almost daily." But, Chiron sees an important distinction between knowledge and infrastructure and has gone to the extent of separating the research arm into a self-standing company.( Perry 1995 )

Says its chairman, as quoted in Research Technology Management, "I've always felt that having abundant resources is a disadvantage, because all abundant resources do is allow you to think creatively about how to spend resources. You have to set up a structure for spending, which diverts you from doing the actual research. You develop new programs, build big laboratories, and pretty soon, instead of solving problems in the present, you are just banking on the future."( Perry 1995 )

Now does this matter ? Perhaps. A few anecdotal cases follow to illustrate this perspective.

Of Haircuts and Backrubs

There's not a lot you can buy for 10 bucks these days - a movie ticket with soda, perhaps, or a Supercuts haircut. The budget hair cutting chain offers haircuts, shampoos, and blow-dries at a rate of 100 per day at an average store. Floor sweepers are kept busy at the company's Corpus Christi, Texas, store, where in just one day in 1994, 786 heads were shorn.

Supercuts' founders, two San Francisco Bay Area hair care professionals, spearheaded an "awakening" in the hair care industry by introducing an unbundled, a la carte service menu with a basic haircut for only $6.00. They also were the first in the industry to offer the unique combination of affordability, convenience and style for everyone by offering longer hours, seven days a week, no appointments and no chemical treatment services ( translation, no unpleasant smells ). Their unique hair cutting technique also provided more consistent, mistake-proof results. All of this was especially appealing for men.

Supercuts tried to be unique in terms of knowledge content. All Supercuts stylists are licensed cosmetologists, which means they have completed the required hours of cosmetology school and have passed a test regulated by the state in which they live. All Supercuts stylists attend an extensive hands-on training class in a company owned and operated training center. The stylists learn eight basic hair cutting procedures, from a one length design line to a flattop. These procedures can then be combined to create any style that the customer would like. Supercuts stylists are recertified every 210 days to ensure quality haircuts and service for every customer. Managers also attend a technical coaching class to learn skills to develop and assist their stylists on a day to day basis and to be able to conduct in-store training.

Supercuts prescribes for its franchisees a complete plan, or format, for managing and operating his or her establishment. The plan provides step-by-step procedures for every aspect of the business and, attempts to anticipate most management problems, by providing a complete matrix for management decisions confronted by the franchisees. Whether it's accounting and financing, advertising and public relations, personnel management, purchasing or inventory control, management was to be there to provide "hands on," one-to-one assistance.

By 1987 Supercuts had 504 stores and $18 million in revenues from royalties. Business was so good that a busy Supercuts franchisee could expect a 100 percent return on an initial investment in less than two years. To get the most out of his investment, its new owner ( a man named Lipson ) quickly began expanding Supercuts to what is now a chain of more than 1,100 stores, with sales topping $60 million. In 1987, nearly all of its stores were franchised.
But franchisees weren't expanding fast enough, so Lipson shifted to a strategy of aggressively opening company-owned stores and buying back franchises. After all, why settle on only a 10 percent royalty from franchisees if you can get all of the profits by owning the stores outright ? There are now 400 stores that are company owned and managed versus almost none three years ago. Lipson was fond of saying that "at the end of 1995, half of Supercuts income will come from sources that didn't exist in 1992."

The investment in infrastructure as compared to knowledge was a failure. The company fundamentally changed the nature of its relationship to franchisees and to employees. What was one a business managed for the sake of promoting a concept [a belief among consumers about what was a Supercuts haircut - a value added form of knowledge if there ever was one] became a business managed by the numbers for the sake of an amorphous return on investment.

By 1994 there were accusations of theft and fraud. To meet publicly stated goals of opening a certain number of stores in a specific period of time - so the company could book franchise fees Supercuts routinely counted stores as open that weren't officially open for business. These were known as "soft" openings. "You'd go in there and cut the hair of a construction worker," one ex-employee told the San Francisco Chronicle, describing what was commonly referred to at Supercuts as "construction cuts." The former employee added: "The store could have been in any stage - from almost finished to just drywall." By charging for a haircut, the store could be counted as open, allowing Supercuts to book as revenues $22,000 per store in franchise and development fees.

As this is being written, Supercuts is in the midst of a restructuring to recover its roots [no pun intended], company owned stores are being sold to franchisees and the parent company is looking to restore itself as the provider of knowledge.

Then there is the Great American Backrub, a store which hopes to do for your back what Starbucks does for your central nervous system.. The lure ? For $9.95 you can get a 10 minute massage. You don't take off your clothes and you can walk in without an appointment. It's not much different than a barbershop, except instead of barber chairs there are massage chairs that you lean over. The fledgling company also offers patrons a selection of stress-relief goodies, such as electric massage tools, bath oils and contoured pillows. Customers are pounded, pushed, pulled and pinched-and many find themselves coming back for more.

Great American's principal officers are former executives of San Francisco-based Supercuts. Great American's stores are patterned after Supercuts. Not only are they open seven days a week from early morning to late at night, but they use the same internal control system perfected by Supercuts. Lines are out the door during lunch hour at the midtown Manhattan store, where large windows lure passers by with bright-red padded chairs, licensed massage therapists kneading and pounding behind them, and stress-relief toys to play with ( or purchase ).

"What made me feel comfortable was the fact that I got to keep all my clothes on," one customer told the Los Angeles Times. "'It's a 20-minute break from total stress relief, and you wind up feeling as though you've had an eight-hour sleep.'Barbara McKeon, a Manhattan legal secretary, said she tries to get rubbed down at least once a week as a relief from her stressful job. McKeon, sitting in one of the large vibrating massage chairs in the store's waiting area, said she got her first back rub after walking by and seeing others being treated."

Great American Backrub plans to open 40 stores over the next year in Los Angeles, San Francisco and New York, with 10 owned by the company and the rest franchised. By the year 2000, its chairman sees more than 1,000 stores, possibly expanding to Boston, Miami, Washington, Chicago and St. Louis, the vast majority of which - 95%, are expected to be franchised.

Howard Sherman, a former officer of Supercuts ( and the leader of the Santa Fe Center forums ), has suggested that what Supercuts was good at was the concept of a knowledge based franchise system. Having a means of forming an identifiable product and service, yet allowing each franchisee to build their own version of community seemed to be key. When Supercuts diverted from this - to a more infrastructure intensive program of company owned stores - it went astray. Great American is but a continuation of the knowledge based system Supercuts started.

Knowledge versus infrastructure investment can be looked at as the analogue of increasing returns versus diminishing returns. Knowledge involves learning. Infrastructure involves the reinforcement or creation of institutions. Learning is a process and institutions are static.

"A firm can be seen as a collection of capabilities which embody its knowledge. While the firm's capabilities are the effect of learning, technological opportunities and the selection process, at any point in time these capabilities are not only inherited from the past, they are also constrained by the past. Capabilities are 'sticky' in the sense that they cannot easily, quickly and at low cost be acquired or passed on." ( Fransman, 1994 )

The key word here is embody. Once knowledge ( or belief ) is acquired, absorbed by the organization, reflected in an organizational capability and embodied into infrastructure a critical line has been crossed. The investment in new knowledge is not identical to a search for improved capabilities. Embodied knowledge, the structure which makes the capabilities sticky, can be refined not only with new information and beliefs but also by changes to the embodiment. Such changes would be changes to the infrastructure. Investments in such changes are not investments in value added knowledge.

"It may appear that the subjects of learning... and of increasing returns have little in common with each other. But in fact there is a strong connection between the two... learning can be viewed as competition among beliefs or actions, with inherent reinforcement of those that pay off well. But as such, learning process may then lock-in to actions that are not necessarily optimal nor predictable, by the influence of small events". ( Arthur 1994 )

"Under diminishing returns, static analysis is sufficient: the outcome is unique, insensitive to the order in which choices are made, and insensitive to small events that occur. ..under increasing returns, multiple outcomes are possible.." ( Arthur 1994 )

What we find when we search is a function of how we look. If the goal is to seek knowledge, complexity might be able to help. At a minimum, complexity metaphors can help managers by providing them with novel associations, suggesting new ways of seeing things, and by opening up interesting avenues of thought. It is not at all clear that new ideas, creativity, uncorrelated thoughts, etc. can help managers' whose goal is to decrease costs, improve efficiency, become the low-cost producer - i.e. to somehow sharpen the infrastructure.

Timmermans' study found "that the selection, evaluation and integration of information are clearly affected by the complexity of the problem. Results concerning information selection show that, although the total amount of information processed increased with the number of alternatives, the average number of attributes used per alternative decreased. Another finding is that the alternative which is finally chosen is evaluated more extensively on more attributes than the non-chosen alternatives. In addition, more references were made to the selected alternative as compared to the remaining alternatives."

He went on to indicate something many of us have observed - namely that managers make decisions from gut feel after whatever holistic input they feel appropriate. "Further analysis of the decision process revealed that the evaluation of the information was most often absolute ( i.e., no comparisons were made between alternatives ) and usually referred to a specific aspect of an alternative and not to the alternative as a whole. Less than 15% of the judgments compared two or more alternatives on a specific aspect. Increasing the number of alternatives reduced the tendency to compare alternatives on a specific aspect ( comparative dimensional judgments ) and increased the tendency to evaluate alternatives as a whole ( absolute holistic judgments )."

If search strategy on a fitness landscape is important, and if judgments are being made holistically, it becomes all the more important to have searches "out past the correlation length" - which incorporate "noise" - which can better inform the holistic judgment. The more powerful the searching device, the more creative its input, the better the ability to find an uncorrelated peak for further exploration.

Brian Arthur notes: "Adaptation, in the pro-active sense, means watching for the next wave that is coming, figuring out how it will work, and setting the company up to take advantage of it."( Arthur 199

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