More Details On The 8 Productive Tensions Of Innovation - 5. Develop Without Becoming Bureaucratic

Q - How do you mature a business without making it sluggish and bureaucratic?

As organisations evolve, complexity inevitably grows and they become more structured and adopt rules, regulations, systems, processes, policies, procedures, etc while hoping to impose order and increase efficiency. However, over time, this results in increased complexity and makes organisations less flexible and more bureaucratic and encourages inertia. This poses a problem in fast moving, uncertain environments that require agility and adaptation.

The below diagram shows how the more structured an organisation becomes, the less effective its performance.

(source: Davis et as quoted by Christopher Bingham et al, 2022)

One way to handle this is rational heuristics, ie
"... a counterintuitive insight: when environments become more complex, the best strategy is often to take the form of simple rules of thumb, or heuristics..."
Christopher Bingham et al, 2022

Simple rules used to simplify complexity

Complexity exists whenever
"...a system has multiple interdependent parts..."
Christopher Bingham et al, 2022

Heuristics are used in preference to comprehensive information and analysis to streamline decision-making. Intuition and experience are important parts of heuristics. Some examples:

- Berkshire Hathaway (has a few rules of thumb when selecting businesses to acquire
"... 1. large purchases (at least $50 million before-tax earnings
      2. no turnarounds
      3. little or no debt..."
Christopher Bingham et al, 2022a)

- Covid-19 (Dr Anthony Fauci's 3 rules of thumb for physical distance:
"...1. stay 6 feet apart
     2. limit gatherings to 10 or fewer people
     3. wear a mask when in the presence of people other than members of their own household..."
Christopher Bingham et al, 2022a)

- Samsung (aims to release new phones twice a year - in early spring and fall)

Critics of heuristics claim it is a knee-jerk substitute for analysis that helps explain irrational behaviour and strategic failure, ie
"...heuristics emphasise cognitive errors......recency bias: a focus on nonrepresentative data, misuse of probability and the like..."
Christopher Bingham et al, 202

However, heuristics need to be carefully nurtured as this tool can be linked to high performance, especially in complex environments.

It is most useful in

- complex strategic situations where experience and intuition are important

- reducing the tension between efficiency and flexibility by restricting scope of possible solutions

- accelerating decision-making and simplifying problem-solving

- by not specifying the details of solutions, it leaves room for flexible action

- easy to remember, ie research has shown that knowledge retention is best when lessons are simple, as your short-term memory has limited capacity, ie restricts the amount of information that can be encoded to long-term memory.

Some examples

- Amazon's ('2-pizza Teams' rule, ie if 2 pizzas are needed to feed a team, the team is too big!
"...This simple rule is both efficient and flexible. It's efficient because it's easy to remember and apply; it also reduces demands on employees' time as it makes decision-making less bureaucratic. The rule is flexible, too; it doesn't dictate who should be on the team, what team members talk about, or for how long......simple-rule heuristics are strict but not restrictive..."
Christopher Bingham et al, 2022a)

- Y Combinator (uses a few simple rules to run its program for start-up organisations
"...i) duration of three months
     ii) a single location
     iii) $20,000 for each start-up that joins the program in exchange for 6-8 percent in equity, and
     iv) a requirement that the founders be physically present..."
Christopher Bingham et al, 2022a)

NB In addition to being simple, heuristics are usually more accurate than the analytically complex, information-intensive approaches; because the latter tries to accommodate every situation; decision-makers have to balance diverse information and undervalue people's experience and intuition.

"...when environments become more complex, the best strategies are often the simplest......In dynamic environments develop a few simple rule heuristics that provide some structure - such that they can efficiently build on the past - but not too much structure so that they can be flexibly adapted in the present..."
Christopher Bingham et al, 2022a

Types of  heuristics

i) universal (used to find answers to binary-choice problems

- representativeness (reliance on common stereotypes to make choices, eg all librarians are introverts)

- availability (refers to information, ie incomplete, and time, ie limited)

Need to be aware of systematic errors (biases) because these are cognitively too easy to use, eg use of stereotypes

However, with non-binary-choice and in an unpredictable environment, heuristics perform better.

There are 2 subsets, ie granular (specific, micro, etc ) and abstract (general, macro, etc)

-  a granular one can be to sell to 'governments, insurance companies and banks'

-  an abstract can be to sell to 'organisations with extensive proprietary data and ability to pay'

ii) selection heuristics (used to distinguish between opportunities, activities, etc to pursue and those to ignore; involves setting boundaries to narrow the range of possible actions, eg target specific customer types or geographical locations, etc; reduces the time wasted chasing unpromising opportunities or becoming overwhelmed by so many options; reduces flexibility while increasing the structure)

iii) procedure heuristics (guides the execution of selected activities to pursue a given goal; usually based on intuition and experience)

iv) priority heuristics (helps ranks activities, opportunities, etc for allocating resources to)

v) timing heuristics (guides the sequencing and pacing of activities; is important in unpredictable environments when capturing fleeting opportunities that can mean the difference between success and failure)

Some examples

- Google's 70/20/10 rule, ie
"...70% of employees' aggregate time to be dedicated to Google's core business, 20% to projects adjacent to core business, and 10% to projects unrelated to core business..."
Christopher Bingham et al, 2022a

The aim of this was to generate more original ideas.

- Elon Musk developed several 'time heuristics'
"...i) keep meeting shorts, typically 30 minutes or less
     ii) make the base frequency of meetings match the urgency of the matter at hand, and
     iii) leave a meeting if you think you are not adding value..."
Christopher Bingham et al, 2022a

- Apple used to release new products in the Northern Hemisphere Fall, usually in September, to benefit from the back-to-school rush.

Some commonalities in heuristics, ie
"...the typology of organisations' heuristics to be remarkably consistent from one organisation to another, their specific content is often idiosyncratic..."
Christopher Bingham et al, 2022a

- entering new markets using 'procedure heuristics', while the precise details vary, ie direct sales, indirect sales, etc

- common structure, ie using 'selection, procedure, priority, timing', etc to capture unique opportunities from a large range of possibilities

- simplification, ie minimise the number of rules, etc (usually less than 8) to reduce confusion and inconsistencies; 2 questions to help:

"...i) do we have procedures, processes or policies that can be eliminated?
    ii) do we require routine steps or actions that can be omitted to move more quickly and efficiently?..."
Christopher Bingham et al, 2022a

Over time, use of heuristics tends to increase with managerial experience, ie ending up with a portfolio of heuristics which are continually updated, fine-tuned and upgraded. Ideally, heuristics should be set up to reduce mistakes, increase efficiency while also leaving room for flexibility.

Diagram - efficiency versus flexibility (How can we build on the past and still adjust for the present?)

(source: Christopher Bingham et al, 2022)

"...organisations tend to accumulate policies, routines, and playbooks over time. These fruits of experience improve efficiency that can suppress the flexibility that leaders need in dynamic environments. a good way to balance efficiency and flexibility is with heuristics - simple rules of the thumb. We have shown that with smart procedures, heuristics can lead to better decisions and rational strategy..."
Christopher Bingham et al, 2022a

 Summary

"...heuristics are simple rules that leaders used to simplify complexity and to support rational strategy in dynamic settings..."
Christopher Bingham et al, 2022

A guide to using simple heuristics