Definition of complementarity

The term complementarity – derived from the Latin word complere, “to fill up” is used in many disciplines, with different meanings. It found its way into the language of economists in the 19th century. Since the early 1990s, it has gained increased attention in microeconomics, thanks largely to the work of Stanford economists Paul Milgrom, John Roberts and their co-authors. They define complementarity as a relationship between two or more elements such that one element enhances the value of the other one (see John Roberts’ book “The Modern Firm”). The notion of complementarity gives greater specificity to the closely related ones of ‘synergy’ and ‘fit’.

In the context of organisations, complementarities exist when two or more factors – be they strategic choices, organisational arrangements, capabilities or other such elements – increase each other’s effects on performance. For example, Casey Ichniowski, Kathryn Shaw and Giovanna Prennushi showed that particular work practices such as training and flexible job assignments had a greater effect on the productivity of steel finishing lines when they were part of a coherent HR system, than when they were used in isolation. A review of the empirical literature on complementarities by Edgar Ennen and myself has demonstrated that complementarities can be very powerful performance drivers, in particular when they involve many, diverse elements.

Complementarity thinking thus goes an important step beyond conventional “best practice” approaches. When many strategic or organisational choices are closely related to one another, seeking to optimise one of them without adapting the others may not yield the hoped-for performance gains, or may even backfire. Complementarities also make imitation by competitors more difficult, thus offering an additional competitive advantage to firms.

 

Challenges of implementing complementarity strategies

The complementarity approach is challenging in that complementarities are often hard to recognise and understand. Mapping a firm’s activity system can be a helpful tool in this context. In their article “Can You Say What Your Strategy Is?”, David Collis and Michael Rukstad present such an activity system for brokerage firm Edward Jones. Their analysis illustrates how seemingly distinct decisions – such as the choice of investment products, hiring and training policies, and the firm’s ownership structure (Edward Jones is a partnership) – directly or indirectly relate to one another.

Identifying, developing and nurturing complementarities requires managers to deeply reflect on the nature of their organisations. Following standard recipes is not enough. [1]

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