Abstract
Business complexity is increasing every day. Although initiating a business is easier than a decade ago, sustaining and growing a business is more difficult than ever. When you consider the last decades leading organizations, some of them have already vanished or lost market share despite their large size. Some of today's leading organizations may not exist in the next decade due to challenges in managing complexity.
This paper introduces increasing business complexity and provides some examples of companies that are unable to cope with complexity. It will define strategy as one of the critical process for the future of the business direction. The paper states that another source of complexity is to maintain or discontinue existing capabilities, building new multiple capabilities to achieve strategic targets.
Being competitive also means being capable of managing complexity. Selecting right strategies, Organizational Project Management Maturity and Excellence in Operation will make the difference in coping with the challenges of complexity. Skills and competencies of project managers in the organization will drive output of strategic results by successful planning and execution.
Introduction
Business Complexity Is Increasing
Business complexity is increasing every day. Although initiating a business is easier than a decade ago, sustaining a business is more difficult than ever. According to the IBM CEO Study (2010) “Today's complexity is only expected to rise, and more than half of CEOs doubt their ability to manage it”.
When you consider some of the leading organizations of last decade, some of them have already vanished or lost market share, although they have lead the market for some duration. The business is like sand castles, which are fragile to waves, weather conditions, etc. The waves also exist for the business areas in the form of market shifts, macro-economic conditions, and technological advancements. Transforming the product and services and the organizational capabilities are critical success factors of the companies to cope with competition, achieve growth, and sustain the business in changing business conditions.
Being competitive also means being capable of managing complexity. Selecting right strategies, Organizational Project Management Maturity and Excellence in Operation will make the difference in coping with the challenges of complexity. Skills and competencies of project managers in the organization will drive output of strategic results by successful planning and execution.
Old Business Giants
Challenges of Kodak (January 2012)
Eastman Kodak Co, a 130-year-old photographic film pioneer filed for bankruptcy protection in 2012. Kodak, which invented the hand-held camera, also helped bring the world the first pictures from the moon (Thomson Reuters, 2012).
Adapting to technological change can be especially challenging for established companies like Kodak. The history shows that innovation alone is not enough; companies must also have a clear business strategy that can adapt to changing times.
Nortel
Nortel was the first telecom vendor to announce and deliver a complete portfolio of digital communications products. The digital multiplex system (DMS) line of central office telephone equipment, which was launched in 1976, created expressive growth for the company. The company made big investments in high-speed fiber optic systems in 1993 and lead the industry forward. In the late 1990s, Nortel grew about 100 percent annually. The company dominated the emerging market for public and private networks. This had to be done by transforming a century old telephone company in a modern Internet protocol (IP) technology-based firm. Those capabilities were beyond what Nortel was accustomed to doing, so the company invested to acquire those capabilities. When the Internet revolution created massive growth in fiber optics, Nortel grew rapidly and entered into new markets. However, the company paid a huge price for the acquisitions, the integration of them, and transforming business to IP routing were not successful.
As a large and old firm, Nortel never really embraced the IP shift in the marketplace. Nortel's competitors kept pushing the technology further and the company was essentially left behind. In 2004, an investigation was launched into Nortel's financial statements. Then, Nortel was accused of manipulating its books in 2000, 2001, and 2003. The decline continued even during the years of high economic growth (2004-2007). Nortel filed for bankruptcy in early 2009. The four factors were identified for the failure of Nortel:
- Permanent revolution of digital technology that killed Nortel;
- Expensive acquisitions;
- Existing dominant logic in the old established company failed to integrate; and
- Nortel failed to transform its business.
Looking for the Winning Strategy
Organizations are putting efforts to achieve their goals in parallel to vision and mission statements. Sustaining the business or taking leadership in competition is the main driver of strategy planning process. The process includes mainly identification of status, definition of the targets, and planning the way to reach the targets.
At one site, it looks like a straightforward process. However, it includes uncertainties as usual and it has to be continuously repeated. Therefore, it is one of the sources of business complexity. The identification of status, which may include market size, market share of the players, market segmentation, brand perception, customer satisfaction, trends, existing risks, and opportunities, etc., is not an easy task. Organizations use their own knowledge base or use external sources such as market analysis reports, customer satisfaction surveys, market reports, and external advisory parties to locate the current position of the organization in the market.
After identification of the current position, the short-term and long-term targets of the organization can be focused. At this stage, there is no limit of dare to dream. The ultimate goal, anyway, is to sustain or grow the business. The targets may vary for the organization such as increasing market share, increasing customer satisfaction, targeting new market segments increase brand perception or corporate image, reaching a certain profitability level, establishing and growing revenues, orders, customer numbers, market share, etc.
Upon defining targets, organizations consider the enablers to get to the targets. This plan will foresee to leverage existing assets and capabilities and build new ones. Building new capabilities will be the critical opportunity or risk of the organization. Therefore, the success of strategies is hardly depending on new organizational capabilities, which come up as new programs or projects of the organization. The organizational capabilities may be called as competitive advantages, too.
Capabilities Required
For business continuity and growth, capability development for longer term is required. To cope with global competition and to take the leadership, organizations are developing these organizational capabilities:
- innovation,
- acquiring skilled resources or outsourcing,
- global operations,
- new market entry,
- new product introduction,
- marketing, fast time to market, catch the market shift,
- cost reduction, increase profitability,
- higher customer satisfaction, CRM, etc.,
- automation in operations,
- agility,
- efficiency in supply chain and manufacturing,
- fulfillment of commitments,
- etc.
In addition to this list, these are other challenges that raise complexity: complying with code of ethics, developing/applying respectful code of conduct, complying/applying with environmental, health, and safety (EHS) regulations, complying with market regulations, and being legitimate.
The list can include more items based on the industry, the scale of the business, and the competitive environment, but it contains the major sources of business complexity. The sources of complexity can be simply stated as maintaining or discontinuing existing capabilities and building new multiple capabilities to achieve strategic targets.
Coping with Complexity
Business strategies play key roles to define future market position and business growth of the organization. As described previously, the success of strategies depends on availability of organizational capabilities, in other words, competitive advantages. The missing capabilities need to be developed as output of programs and projects. In general, the organizations have to build multiple capabilities in parallel, where the outputs of each project, simply the project portfolio, contribute to the capability development.
When the scale grows and the number of capabilities required increases, the governance, execution, and monitoring of initiatives taken to build new capabilities is getting harder or more complex. Another challenge is that the power and authority is required in decision-making process at every initiative. Hierarchical organizations cannot deal with this complexity. The organizations require agile and well-defined processes, which makes the organization a team performing efficiently. It also requires talents to score with delegated authority.
Portfolio, program, and project management (PPP) is a powerful tool set supporting organizations through success in execution and transformation toward development of the capabilities successfully.
This paper proposes three key enablers of managing complexity:
- Alignment of project portfolio with strategies;
- Organizational Project Management Maturity and Excellence in Operation; and
- Talented project managers.
Strategic Alignment of Project Portfolio (Portfolio Management)
Portfolio management is a process that enables executive management to meet organization goals and objectives through efficient decision making concerning projects and other work, either directly or under programs. Portfolio management needs to be considered as an organization-wide process.
The organization's overall strategies drive the portfolio management process to ensure that the projects are aligned to achieve the organization's goal. Based on the strategic goals, the portfolio management process will select, prioritize, and approve proposed portfolio components.
Strategy Setting and Updates
Strategy planning is a continuous process that involves setting short-term and mid-long term strategies. The goal of the process is to verify validity of existing strategies and refine the strategies based on the new conditions. The process also defines organizational key performance indicators (KPIs) aligned with the strategy defined. KPIs are a set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their strategic and operational goals. KPIs vary between companies and industries, depending on their priorities or performance criteria.
The portfolio management process also requires integration with the strategic planning process regarding current and future state analysis. This drives strategic changes to ensure that the planned components continue to support the strategic goals. For example, if strategic planning determines that a goal is no longer valid for the organization, the portfolio management team should review the portfolio and recommend the reassessment of any components that are in place to achieve a new obsolete goal.
Lead and Opportunity Identification
Identify Projects
Organizations continuously identify new leads and opportunities that may support strategic goals. The process generates a list of projects that are relevant to a specific portfolio. The list of identified components is the main source of an organization's opportunity pipeline. Managing your opportunity pipeline in an effective way can help you focus on the right opportunities for supporting the organization's strategic goals. It also defines the areas where organizations can put investments (financial, resource, knowledge). As the Pareto principles states, 80 percent of value is gained from 20 percent of the activities.
Exhibit 1 – A sample opportunity pipeline
Categorize
Categorizing components involves assigning components to relevant categories to which a common set of decision filters and criteria can be applied for evaluation, selection, prioritization, and balance. The categories are defined on the basis of the strategic plan. The categorization also allows the organization to balance its investments and its risks between the strategic categories and goals.
Categories group components possessing common strategic goals and measurement criteria. The categories need to be defined and widely understood throughout the organization; they may change or evolve if the strategic plan changes or evolves. The categories are also in line with the capabilities that need to be developed. These are some example categories:
- Revenue generation,
- Risk reduction,
- Cost improvement,
- Legal/regulatory obligation,
- Process improvement, and
- New product or services introduction.
Project Selection
Evaluate Components
Components are evaluated to provide comparisons to facilitate the selection process. Qualitative and quantitative information are gathered from variety of sources across the organization. The organization may apply series of evaluation criteria associated with various business aspects such as these:
- General business criteria,
- Financial criteria,
- Risk-related criteria,
- legal/regulatory compliance criteria,
- HR-related criteria,
- Marketing criteria, and
- Technical criteria.
Later organization, evaluates the opportunities with a scoring model comprising weighted key criteria produce graphical representations to facilitate decision making in selection the process.
Exhibit 2 – A bubble diagram of the weighted score of portfolio components
Select Components
Compare components to selection criteria, select components based on evaluation results, and Produce a list of components for prioritization:
- HR capacity analysis,
- Financial capacity analysis, and
- Asset capacity analysis.
Prioritize Components
The prioritization process enables an organization to objectively compare each component against all other selected components:
- Confirm the classification of the components
- Assign scoring criteria for ranking components
- Single criteria
- Multi-criteria ranking
- Determine which component should receive highest priority within the portfolio
There are various project selection methods practiced by modern business organizations. These methods have different features and characteristics. Therefore, each selection method is best for different organizations. Although there are many differences between these project selection methods, usually the underlying concepts and principles are the same. Exhibit 3 illustrates these two methods: benefit measurement and constrained optimization.
Exhibit 3 – Benefit measurement and constrained optimization methods
Balance Portfolio
Portfolio balancing provides the best combination of the projects that collectively support the organization's strategic objectives. It also includes the evaluation and management of trade-offs of the objectives, such as managing risk and return, balancing short-term goals, and balancing technologies and project types to align with the strategic objectives (Project Management Institute, 2008a).
Authorize Components
Authorizing components enables the formal allocation of resources required to develop business cases or execute selected components.
- Authorizing selected components, deactivating and terminating components;
- Allocating resources to selected components;
- Reallocating budget and resources from deactivated and terminated components; and
- Communicating expected results.
Risk Appetite
It has often been said that no company can make a profit without taking a risk. The same is true for all organizations: no organization, whether in the private, public, or third sector can achieve its objectives without taking a risk. The only question is how much risk do they need to take?
Yet, taking risks without consciously managing those risks can lead to the downfall of organizations. Risk appetite describes the level of risk an organization should consider to take to achieve strategic objectives.
Exhibit 4 – The relationship between risk appetite tolerance and performance (Institute of Risk Management, 2011)
It therefore becomes the board's responsibility to define this all-important part of the risk management system and to ensure that the exercise of risk management throughout the organization is consistent with that appetite, which needs to remain within the outer boundaries of the risk tolerance. Different boards, in different circumstances, will take different views on the relative importance of appetite and tolerance.
Every portfolio contains certain risks. The challenge is to be aware of the portfolio risks and avoid risks over than the organization can take.
The objectives of portfolio risk management are to increase the probability and impact of a positive event and to decrease the probability and impact of negative events. Portfolio risk management includes these processes (Project Management Institute, 2008a, p. 85):
- Identify portfolio risks,
- Analyze portfolio risks,
- Prioritize components, and
- Develop portfolio risk response.
Organizational Project Management Maturity and Excellence in Operations
OPM and Operational Excellence increase the probability of project success and deliver the results by creating satisfaction of the stakeholders.
Organizational Project Management Maturity Model (OPM3®)
According to the Organizational Project Management Maturity Model (OPM3®) (Project Management Institute, 2008b), organizational project management maturity is the degree to which an organization practices organizational project management, which is defined as the application of knowledge, skills, tools, and techniques to portfolio, project, and programs to achieve the goals of an organization.
As defined, OPM3 covers three domains of project management: portfolio management, program management, and projects. The level of maturity in project management defines the consistency and reliability of the results from projects.
According to Project Management Institute's (2013) Pulse of Profession 2013 report, high-performing organizations are at least four times more likely than low-performing organizations to have achieved maturity in their project management practices (Project Management Institute, 2013).
Exhibit 5 – High performers have higher maturity levels
The Pulse data show clearly that more mature project, program, and portfolio management practices lead to better project performance (Exhibit 6). Organizations with developed project management practices, benefits realization processes, portfolio management practices, and program management practices and those with high organizational agility all have significantly better project outcomes than their counterparts who are less advanced in their project management practices.
Exhibit 6 – Maturing practices drives projects meeting goals and business intent
Operational Excellence
Organizations may have to conduct day-to-day activities such as production, finance, marketing, legal, information services, procurement, human resources, and administrative services, etc. Every project may need one or several of those functions to perform inside the project, since every project involves operations and expertise from those functional areas are required. On the other hand, the output of the project portfolio is often used by operations management.
Operational Excellence can be defined as delivery of the value in a reliable and efficient way. The performance of operational activities creates value for the customer and the stakeholders. Therefore, it needs to be continuously adapted and improved in the direction of creating efficiency, increasing quality, and considering global sustainability.
According to Andy Ginder, vice president, ABB Reliability Consulting, these are the five foundational elements of operational excellence: reliable people, reliable processes, reliable systems, reliable technology, and reliable equipment.
Talented Project Managers Refined the Decision-Making Process
Complexity in business creates complex organizations where decision making and understanding of business insight is a big challenge.
Ray Hatoyama from Sanrio Company, Limited said “Why can't we run the decision process differently to support [local staff] so that they can innovate themselves, decide on the business, the speed, how to communicate? You need people to do it on their own. My responsibility was really to style that kind of management organization” (PwC, 2012).
Project managers who have delegated authority and are equipped with leadership and management skills can build business results that support organizational strategy and develop capabilities. The organization strategic goals cannot be achieved only by strategy planning and identification of the capabilities required. Execution makes the difference.
The project manager needs to be well equipped with skills and competencies to manage multiple dimensions and has to deal with complexity to manage projects successfully. Bourne and Walker (2003) depicted three dimensions of project manager activities.
Exhibit 7 Three-dimension of project manager activities
Dimension 1 defines the “hard” skills. It refers to processes, techniques, and methods defined by the standards and recommendations such as developing plans, schedules, reports, and forecasts. Dimension 2 refers to stakeholder management, relationship management in general terms. The project manager manages the relationships inwards (managing himself/herself) and outwards like performing art. Managing relations at an outward direction requires a mix of management and leadership so that the needs of clients, suppliers, and users are fulfilled. Dimension 2 also includes looking downwards. In other words, it refers to managing the project team with appropriate leadership. Dimension 3 considers the management of peers and senior management requirements. This can be addressed as understanding management strategy and performing to create results planned by the organization.
Closing
The main challenge of companies is to grow and sustain its business by developing competitive advantages, simply capabilities. The capabilities required varies based on the strategic goals of the organization, such as new product development to establishing global supply chain, entering into new markets to transforming business processes, etc. Indeed, the scale of the capabilities required to achieve strategic goals also determines the level of complexity an organization has to manage. On the other hand, the outcome of capability development will define position of the company (organization) in the market today and in the future.
The first challenge is to be able to define the right strategies. This requires understanding the status of the market and the position of the organization in the market at the moment. The next is to be aware of the market trends and defining the short-/mid-/long- term strategies to grow and sustain the business in changing business environment.
Strategic planning is a key activity that determines the future direction of the organization. However, it is not enough alone to sustain the business in the future. Once the strategic plans are in place, the execution of capability development will make the difference in achieving strategic goals of the organization.
These challenges in ensuring success of capability development:
- Selecting of the capabilities required, in other words investing to right capabilities;
- Aligning strategic objectives with the capability selection;
- Managing increased number of stakeholders;
- Allocating required resources of the organization for development of selected capabilities;
- Identifying the risk taken by the organization while developing new capabilities and managing those risks;
- Founding business processes to manage multiple capability development initiatives and align their interactions; and
- Distributing the authority throughout the organization so that the decisions can be made across the organization, which enables agility in reaching expected outcomes.
To overcome the challenges mentioned and to deal with the complexity arising out of those challenges, this paper proposes an integrated approach which includes there main component.
- Project portfolio management to align strategic objectives to make sure right projects are invested and organization resources are well utilized.
- Improved Maturity in Organizational Project Management and Excellence in Operation to increase the probability of project success and deliver the results by creating satisfaction of the stakeholders.
- Employing skilled and competitive project managers to delegate the power and authority of the execution.
