Modeling at the level of socio-economic systems, financial and capital markets, including neoclassical simplifications or using complexity theory, occurs at the most general level. And how does it look at the level of organizations, institutions and enterprises? To present this level of confrontation between the classical approach and the one referring to the levels described by the theory of complexity I will refer to the work of Yishai Ashlag, senior partner at Goldratt Consulting (as well as a son-in-law of Goldratt who died in 2010), published as TOC Thinking.

The classic approach to management of enterprises (but also organizations, institutions, all organized forms of group activities) is the attitude to basic challenges faced by managers: business improvement, business modeling (through planning, forecasting and budgeting), ways of dealing with conflicts, dealing with progressing complexity and coping with the optimization of activities. I will discuss them one by one.

The invisible hand of the market, competition, forces enterprises to constantly improve. In the classical world of industrial production it is assumed that the sum of all improvements made inside the company translates into an improvement in its functioning, into profit. So, we should focus on what we can do in all those spots of the organization that can bring about local improvement. Local upgrades are among the major tasks of managers. The theory of constraints suggests, however, that a significant improvement of the process cannot be achieved without identifying its constraint(26). Only work on what limits the entire process will result in significant improvement as the constraint is the point of enhancing the results, the leverage point. Everything else is information noise and the company’s results in a competitive market will be subject to the known phenomenon of regression to the average: once a little bigger, sometimes a little smaller – depending on a combination of quite random circumstances. While focusing on local improvements and by distracting their attention managers become themselves a constraint, because, as Ashlag writes, the attention of the managerial staff is the ultimate constraint of every organization(27).

Only work on what limits the entire process will result in significant improvement as the constraint is the point of enhancing the results, the leverage point. Everything else is information noise

Planning, forecasting and budgeting are the daily bread of managers. It is expected of them that their organizations shall deliver reliable and predictable results. That they will create an illusion of certainty and accuracy in uncertain, in principle, situations, and so they are prone to mask, even for themselves, uncertainty instead of revealing it(28). Such action is nothing but an attempt to impose certainty on uncertainty. Uncertainty, however, cannot be eliminated, and fluctuations in results are inevitable. Ashlag writes: (…) when the forecast is completed to the second decimal place, it is very likely that someone manipulated the numbers. Whereas by accepting inevitable fluctuations in results we can achieve a lot by making sure that our efforts to improve have more impact than the noise(29). By forcing certainty on uncertain situations, the manager deforms the company’s operations, trying to implement the plan, the budget and forecasts. As a result, actions taken disguise uncertainty instead of revealing it. The combination of uncertainty and not properly identified interdependencies that determine the efficiency of the entire business process makes, in turn, random occurrences act against the organization(30). To use the concept that I will later introduce after Nassim Nicholas Taleb – the organization becomes fragile.

Every company, organization is prone to conflicts. Ashlag sets out three types of conflicts: internal, when it seems necessary to take conflicting actions (e.g. conflict of stocks – small stocks of raw materials threaten production continuity, large threaten liquidity of the company and are a financial burden), inter-departamental conflicts within the organization and external conflicts with suppliers or clients(31). A typical way of dealing with conflicting requirements, with the desire to satisfy two seemingly contradictory expectations at the same time is optimization, the best known compromise between conflicting requirements. However, clearly defined conflicts, contradictions are the company’s asset in the new management method. After all, reaching to the ontological assumptions of TOC, people are good and every conflict can be solved. A well-defined conflict is the beginning of the process of finding a solution. This new way of acting meets seemingly conflicting needs without compromise. This new heuristic of action, a new, better paradigm, is the rejection of outdated or false assumptions that pull the company down.

Enterprises and organizations are becoming more and more complex. They are satisfying more and more individual needs of their clients and stakeholders. The complexity of needs generates the complexity of the satisfying processes. Striving for simplicity understood in a classical manner, one large system is divided into smaller subsystems, easier to grasp by the minds of managers. Easier. Is it really? We assume that smaller units are easier to manage because it is easier to focus and rely on intuition in making decisions. But this attempt to simplify reality usually comes with a price. Dividing an organization into smaller units requires more effort on the synchronization side and thus increases complexity(32) – instead of reducing it. It increases the number of dependencies and the associated uncertainty. It leads to dealing with symptoms, not the main problem. It promotes local optimization, favors solving local problems in isolation from a holistic view of the functioning of the system and makes it difficult to find a constraint, a leverage point to strengthen the results, to identify the key conflict, to find a new paradigm, a new solution.

The breakthrough in action depends not on complicated algorithms but on the ability to effectively challenge fundamental yet erroneous, incomplete, obsolete assumptions of actions taken at a given moment

Expecting excessive accuracy (greater than the level of noise), optimization and specialization from the managers results in actions leading, as Ashlag put it, to „sophisticated solutions”(33). In such case enterprises reach for IT solutions, for advanced statistics. But human fascination with sophistication, complicated algorithms solving complex problems serves, according to Ashlag, to mask the fundamental misunderstanding of reality(34). The breakthrough in action depends not on complicated algorithms but on the ability to effectively challenge fundamental yet erroneous, incomplete, obsolete assumptions of actions taken at a given moment.

The aforementioned classic challenges facing managers are directly related to our human behavioral lenses. All the previously referred to modeling of reality, happening in anthropogenic complex systems such as companies, organizations, institutions, countries, etc., have their sources in cognitive errors generated by the way in which we perceive the reality that surrounds us. The human mind, although able to elevate, is at the same time best prepared to grasp localities, small scales and limited complexity. The galloping for centuries growth of the complexity and scale of anthropogenic systems is still advancing – despite the numerous falls of societies and civilizations throughout the history. And our ability to perceive and analyze reality both at the individual and the collective level does not keep up with new threats and challenges that are associated with the increase. In order to better understand the pitfalls of our thinking, the possible and so easy to make cognitive mistakes, let me at this point reach for the achievements of the aforementioned probability theory, namely how we try to assess uncertainty, unpredictability and risk.