What is complex? What is simple?

To understand what is complex, it is helpful to first define the term complicated. A motor or a mathematical equation can be complicated. We do not immediately recognize how the motor works or – if it is defective – why it does not work. Similarly, we cannot easily solve the result of a mathematical equation. It is complicated (not complex!). However, the way the engine works and the result of the equation are clear. If you press the accelerator pedal, the engine accelerates. The mathematical equation always leads to the same result under all circumstances.

Complex systems do not behave like this. Their behavior can be surprising. Small interventions can have devastating consequences. Complex systems are systems with many elements, usually of different types, which interact. To make matters worse, not all factors that influence the function of a complex system are known. Complex systems are, for example, nature with its animals and plants. Human intervention can be well-intentioned, but can lead to unforeseeable consequences and the extinction of a species. Our market economy is also a complex system in which countless market participants are constantly making decisions and creating dynamics. Some companies succeed, others die. Here too, interventions (by governments) are often delicate and have unexpected outcomes. Hence the advice: Only admire a functioning complex system, don’t touch it!

A simple system, on the other hand, is a system that consists of just a few elements and relationships. It is transparent and its mode of operation is easily recognizable. Interventions are more likely to lead to the desired effects.

However, a simple system must not be too simple, as this would also limit its functionality. An extremely simple system does not need management. A system must be sufficiently complex to provide necessary and vital functions. It must be able to evolve and cope with environmental influences, possibly using them to its advantage. It needs a certain degree of variance and must still be controllable at the same time.

Management and complexity

What is management? Management is the transformation of resources into results.

This definition expresses that it is about effectiveness. It is not about working a lot and “hard”. In organizations of all kinds, we transform human labor, capital and – today in particular – knowledge into results. These results consist primarily of providing a certain service for the customer, developing a new product or simply being productive or profitable.

Dealing with complexity is the biggest challenge for managers in today’s rapidly changing world and extremely volatile markets. Management today is more than ever about dealing with uncertainty, about making decisions under extreme lack of information.

Everything that our organizations produce, whether intentionally or unintentionally, is the result of our actions and decisions. And the complexity that we have to deal with in most cases ensures that things often turn out differently than planned. We can compare the manager to a rider who has to control his horse (his company, his department), which is much bigger and stronger than himself. And this horse not only has to go in the direction he has set, but also overcome obstacles and other adversities.

Discounters: The success story also in foreign markets and a guarantee for growth

Artikel vom 08.01.2019

The French magazine Linéaire describes how the French full assortment retailers withdraw from foreign markets. French retailers have left 30 countries. Tesco pulled  back from South Korea and Taiwan and suffered in the USA. Walmart has not only not succeeded in Germany but also stopped its expansion into South Korea.

While especially hypermarkets struggle abroad, the discounters are also strong outside of their home countries. Not only ALDI and Lidl are celebrating great succcess in 17 and 26 foreign markets respectively. In addition, there are extremely  successful Hard Discounters like BIM in Turkey, KOBA Tiendas D1 in Colombia and Biedronka in Poland. As consultants we had the pleasure to develop all of them to market leaders.

In Germany discounters stand for 50 % of the national grocery market, in Poland discounters occupy more than 30 % and even in Colombia discounters have grown to more than 10 % of the market – in only 10 years!

According to the German Food newspaper Lebensmittel-Zeitung (Retailytics) discounters are the fastest growing category in grocery retail in 2019. While ALDI and Lidl will grow by 6 – 8 %, Carrefour will grow only by very modest 0,7 %, Tesco by 3,6 % and the Metro Group will continue its poor performance with – 0,3 %.

The full assortment retailers will continue to play an important role in the retail market but especially hypermarkets are not the format of the future The disruptive format is discount. If not done so yet, it is about time to consider this.

Will Jack´s strike back? Does Tesco know Discount?

Artikel vom 07.08.2018

In 2012, we have published on the internet page of our Institute for Simplicity an article about Lufthansa´s plans to launch a discount airline. Our doubts were justified. Eurowings is not a discounter. Discounters are disruptive. Eurowings is just another airline, only low cost with low quality and more complexity than before.

Now, Tesco is planning to launch a Discount concept called „Jack´s“ to fight ALDI and Lidl. Already this fall 60 stores are going to be opened with sales areas of 1000 to 2700 sqm. We agree with Marcel Corstjen who calls Tesco „desperate“.

What we think:

  1. ALDI started operating in the UK in 1990. Today, ALDI´s and Lidl´s combined market share is somewhere at 9 %. What took Tesco´s management and Board of Directors so long to consider what the response of the market leader could be? Especially Tesco´s Board of Directors was obviously deeply asleep for decades although the business model as well as the success of discount was easy to observe in several countries.
  2. Will the same retail experts who have caused Tesco´s troubles of the recent past be now the ones to establish a retail format which is so different from any traditional supermarket business? Dieter Brandes used to say, ALDI is more similar to Toyota than to retailers like Walmart or Tesco.
  3. The experience shows that multi-format retailers are not able to run discounters. Carrefour failed, Metro failed. Jeronimo Martins and Biedronka is the example which proofs the rule. Luckily Poland is far away from Portugal. Daily intervention is not easy. In the early years of Biedronka Dieter Brandes helped to implement fundamental principles and processes of a Discounter.
  4. A discounter says „No“ to many standards of the industry. A very restrictive  limited assortment is one of these „No´s“. One can have doubts whether Tesco is able to decide to run the discount stores with only – let´s say – 800 items in stores of 500 sqm.
  5. A discounter has a very special corporate culture. It is about extreme cost-consciousness, strong principles and procedures how for example to make decisions in regards to assortment and prices. It´s about delegation and believing in small entities instead of economies of scale.
  6. Finally, it is probably not surprising to hear that famous strategy consultants are hired to develop the new discount concept. Will this ensure success? What is Tesco´s management doing when core responsibilities are delegated to consultants? Just an example: BIM, today the largest grocery chain in Turkey with today almost 6500 stores and net sales of 6B USD, has never used any consultants

BMW understands Simplicity: The new Model 3 will have 80 % less Options

Artikel vom 05.07.2018

The second step of our „3-Step-to-Simplicity“ Method is about reduction of complexity by reducing the number of options. A typical car manufacturer has lots of such options. When ordering a car many features need to be defined: pages filled with interior details have to be selected as well as several exterior options like colors, tires and so on. All of these need to be developed, tested, negotiated, ordered, planned, certified, stored. Many are kept available for years after the model has already been withdrawn from the market.

The offered variety does not only mean attractive options for customers. It also means higher cost for the manufacturer, many of these costs are hidden general administration expenses.

BMW CFO Nicolas Peter mentioned in an interview with the German magazine Automobilwoche the need for reduction in order to achieve the company´s profitability target of 8 – 10 %.

This results in the fact that the new BMW model 3 („G20“) will come with less variety in regards to types of motors as well as less color options and combinations. Peter refers to Tesla´s simplicity: “On their website they offer two types of a model. You can tick two boxes.“ That´s it! Also German Carmaker Smart will reduce the number of motors. That´s again step 2 of our „3-Step-to-Simplicity“ Method (reduce complexity). In addition, they also take the first step of our method (avoid complexity): they will offer only electric motors, gasoline motors are completely omitted.