One view of complexity holds that it’s largely a bad thing—that simplification generally creates value by removing unnecessary costs. Excessive complexity, according to this argument, should be addressed by reducing the number of countries where a company operates, streamlining its product range, or creating an organizational structure that focuses primarily on one dimension, such as geographies or functions.¹

But our recent work supports a more nuanced view. When companies treat complexity as something they must overcome, they miss an opportunity. If complexity, in all its aspects, is seen as a challenge to be managed and potentially exploited, not as a problem to be eliminated, businesses can generate additional sources of profit and competitive advantage.² Managed well, complexity can also increase the resilience of a company by enhancing its ability to adapt to a changing world.

To understand how to manage complexity, executives need to view it on two levels:

• First comes institutional complexity, a consequence of the number of nodes and interactions within an organization (as well as outside it, in the case of networked businesses). This kind of complexity stems from strategic choices and the external context (such as the regulatory climate) and from major choices about...