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  • Writer's pictureHugo Hellard

Corporate entropy, or the art of managing disorder

Updated: Sep 30, 2022

Entropy, in thermodynamics, is a measure of disorder, or of the degree of disorganization. The higher the entropy, the greater the disorder. The second law of thermodynamics tells us that the entropy of an isolated system naturally increases. Imagine a cupboard in which you take and put back documents and objects: the disorder in the cupboard grows, the entropy increases. Deciding to tidy up the cupboard allows to decrease the entropy, at the cost of an energy expenditure.

Applying this notion to companies allows us to understand the consequences of their natural evolution. We propose an overview of the main sources of entropy, while indicating the levers to limit them in order to maintain competitiveness.

Did you say entropy?

Following the analogy, the entropy of a company can be defined as the energy present but unavailable for the creation of the value proposition. In other words, the amount of resources lost to the creation of the value proposition.

The consequences of increasing entropy are multiple and harmful to the company, including a loss of efficiency and a decrease in the profitability level, a decrease in team commitment and an increase in turnover, a decrease in the quality of the value proposition leading to an increase in competitive risk.

The objective is therefore to control its entropy to avoid the 'thermal death' of the company, where all the available energy, and therefore resources, are no longer available for the creation of the value proposition.

Although the sources of entropy are multiple, interdependent, and present at different levels within the company, we identify three main sources

  • The organizational structure

  • The processes

  • The level of diversification

Organizational entropy

The study of the entropic impact of hierarchical organizations generally opposes two visions. The first, traditional view postulates that low organizational entropy is maintained through a highly ordered and hierarchical structure, with strict lines of authority. Yet, a hierarchical structure unsuited to the company's situation, however orderly, will increase entropy. Indeed, the apparent order masks in fact a disorder in light of the need the organization addresses. This is the case, for example, of the so-called "Mexican armies" where, for convenience, too many people are promoted to leadership positions, decreasing the capacity of execution, thereby increasing dramatically the loss of information and decision time.

The second, more agile view postulates that low organizational entropy is maintained when the hierarchical structure allows everyone to answer the following question in a clear and simple way: what should I do and by what means? In other words, the volume of available resources for the creation of the value proposition is maximized. This vision allows for less vertical or even non-hierarchical structures to exist, while limiting the increase of entropy.

The alignment of the organizational structure with the creation of the value proposition is therefore key to minimizing its entropy. This alignment must be dynamic and can be adjusted through support on several levers, for instance:

  • Realignment of the organization with the company’s strategic issues

  • Clarification and harmonization of roles and responsibilities

  • Delayering, or elimination of unnecessary management levels in favor of a horizontal organization and the promotion of expertise

Operational entropy

Operational performance is the vital complement to organizational performance to ensure effective creation of the value proposition. Low operational entropy is maintained by processes tailored to the working methods and to the organization, illustrating the interdependence of entropy sources.

An appropriate process is simple and clear to understand the steps required to create the value proposition, especially for newcomers. It is both agile and robust to allow for continuous improvement of working methods. This requires a clear definition of activities and managers, a refined jargon, and a precise characterization of the means available for the operations. It is also an integral part of the continuous improvement process that limits the natural misalignment of operating practices with respect to business stakes.

Much like the organizational structure, a process is only suitable at a given moment and must be dynamic. A support on several levers can improve the performance of the company:

  • Streamlining and review of processes

  • Definition and implementation of new digital tools to simplify processes

  • Framing and implementation of an operational excellence that ensures the long-term continuous improvement of processes and tools

Market entropy

Entropy, as a measure of disorder, is also applied as a measure of a firm's degree of diversification [1]. Several authors have shown how market entropy varies according to the number of markets targeted and the distribution of the firm's sales in each of these markets. It appears that entropy increases when each of the targeted markets has a comparable sales volume.

This can be intuitively understood by referring to the previous two sources of entropy, illustrating once again their correlation. A company with two distinct activities with equal sales volumes will likely need to adapt its organization and processes to both activities. The processes may be distinct, and the organization best suited to each activity different. On the other hand, a company with two activities, one of which accounting for 80% of sales volumes, can more easily tailor its organization and processes to the main activity and adapt its second, more minority activity to it.

In this case, a support on all strategic issues allows to ensure the coherence of the offer with the company's promise to its market, thereby limiting the market entropy:

  • Carve-out of non-strategic activities

  • Review of the outsourcing strategy

  • Restructuring of the offer around a core activity focused on selected market priorities

Controlling your sources of entropy

A company's entropy - the amount of resources lost to the creation of the value proposition - increases over time. Like the closet that requires an hour of tidying to efficiently find back documents and objects, a tracking and an ad-hoc expenditure of energy helps to realign the company with its challenges.

This usually involves support on several levers, specific to each source of entropy and therefore to each organization.

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