Ambidexterity as a Dynamic Capability: Resolving theO Reilly Tushman 02 19 07 3 Ambidexterity as a Dynamic Capability Resolving the Innovator s Dilemma It is not the strongest of the species that survive nor the most intelligent but the one
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Copyright © 2007 by Charles A. O’Reil ly III and Michael L. Tushman. Working papers are in draft form. This working pa per is distributed for pu rposes of comment and discussion only. It may not be reproduced without pe rmission of the copyright holder. Copies of working papers are available from the author. O’Reilly & Tushman 02/19/07 1 Ambidexterity as a Dynamic Capability: Resolving the Innovator’s Dilemma. Charles A. O’Reilly III Stanford University Michael L. Tushman Soldiers Field Road [email protected] March 24, 2007 O’Reilly & Tushman 02/19/07 2 How do organizations survive in the face of change? Underlying this question is a rich O’Reilly & Tushman 02/19/07 3 Ambidexterity as a Dynamic Capability: Resolving the Innovator’s Dilemma. of change? This fundamental question disparate as management, history, strategy, 1997; Hannan & Freeman, 1984; Nelson & Wint & Dutton, 1981; Tushman & Romanelli, 1985). It O’Reilly & Tushman 02/19/07 4 both arguments. For example, in a study of the largest U.S. manufacturing firms in the 20 report that only 28 of the initial 266 compan ies remained on the lis 1997. In their sampling across three major time the firms appear only once, and then disappe ar, suggesting that most firms do not adapt life expectancy of firms in the S&P 500 was 90 years. By 1975, that number had dropped to 30 years, and in 2005 it was estima 2001). Being large and successful at one poi nt in time is no guarantee of continued survival. Another McKinsey study (Deva n, Millan & Shirke, 2005) examined 266 firms during the period 1984-2004 and found only a sma ll number were financially successful Similarly, Wiggins and Ruefli (2002) st udied 6,772 firms across 40 industries over 25 years and found only a small minority ex hibited superior economic performance. reports the failure of former ly prominent firms such as Polaroid, DEC, PanAm, RCA, Sears, and organizations alive and thriving through strategic insight and strategic execution (Harreld, O’Reilly & Tushman, 2007)—not to assist in their death. This position underlies most research in strategy and management. O’Reilly & Tushman 02/19/07 5 O’Reilly & Tushman 02/19/07 6 become increasingly inert as they age (e.g., So rensen & Stuart, 2000) even as some adapt O’Reilly & Tushman 02/19/07 7 sses. More specificall y, these routines are O’Reilly & Tushman 02/19/07 8 ability to develop dynamic transformation. Similarly, Verona and Ravasi (2003) ex amined innovation at Oticon, a Danish hearing-aid company, and found th at the ability of the firm ize and implement these advances through the development of new capabilities relies on the orchestration and process to simultaneously sustain existi O’Reilly & Tushman 02/19/07 9 While much of the literature discusses ambidexterity as a structural characteristic (eg Tushman and O’Reilly & Tushman 02/19/07 10 Tushman & O’Reilly, 1997). Exploitation is autonomy, innovation and embracing variation. Ambidexterity is about doing both. In March’s terms, this is the fundamental tensi survival. “The basic problem confronting an exploitation to ensure its current viability and, at the same time, devote enough energy to The trade-offs necessary to balance this tension are difficult and most often tilted dback in the form of customer demand and & Tushman, 2002; Gupta, Smith & Shalley, that because of this short-term bias “established organizations will always specialize in exploitation, in becoming more efficient in using what they already know. Such organizations will become dominant in th e short-run, but will gradually become O’Reilly & Tushman 02/19/07 11 iplines that enable th firm to identify threats and opportunities a O’Reilly & Tushman 02/19/07 12 from their resources (planes, routes, or em ployees) but from the combination of factors gh productivity from their employees, and low O’Reilly & Tushman 02/19/07 13 The organizational alignments associated resources, this capability also requires a ba lance in centralization O’Reilly & Tushman 02/19/07 14 O’Reilly & Tushman 02/19/07 15 Seizing opportunities is about making th O’Reilly & Tushman 02/19/07 16 development, Daneels (2002) suggested that O’Reilly & Tushman 02/19/07 17 integration across organizational units to capture the advantages of co O’Reilly & Tushman 02/19/07 18 fit, alignment, or complementarities is a diffi cult challenge, especially with organizations of any size or complexity (Milgrom and R do succeed at achieving this fit, the very sour te inertia from the strategies, structures, people, and cultures that have created the success—what Tushman the “success syndrome” and Audia, Locke and O’Reilly & Tushman 02/19/07 19 Exploration, Exploitation, and Or ganizational Ambidexterity: Dynamic Capabilities in Practice Based largely on March’s seminal paper there has been a growing interest in research change. For example, Christensen (1997) O’Reilly & Tushman 02/19/07 20 While provocative, this sentiment sits unc omfortably with the mandate for leaders of organizations to ensure that their firms are profitable in the short-term and able to adapt to changes and remain successful in th e long-term. Shareholders firm but to develop strategies that ensu fundamental question of the field of strate gic management is how firms achieve and O’Reilly & Tushman 02/19/07 21 ce that some firms can do this. In a study of 100 large organizational failures, Probst and Raisch (2005 failure was home-grown and not inevitable. organizational ambidexterity is specifically review revealed more than 40 studies in this domain, most conducted within the last few years. These studies are me simulations, formal modeling, lab studies and field studies. Several explicitly O’Reilly & Tushman 02/19/07 22 ational ambidexterity,” Duncan (1976), long-term success firms needed to consider dual structures; different structures to initiate ambidexterity occurs sequentially as as innovations evolve. Firms ad just their structures by the ctures are employed to explore followed by mechanistic structures to exploit. This view temporal sequencing is evident in some of the curre O’Reilly & Tushman 02/19/07 23 and team processes capable of managing these inconsistent alignments in a consistent fashion (e.g., O’Reilly & Tushma n, 2004; Smith & Tushman, 2005). When ambidexterity is adopted sequ management are quite different that when O’Reilly & Tushman 02/19/07 24 e senior team about the strategy and the importance of ambidexterity? Can the senior team manage the c onflicts and interface issues that such a design entails? Without th is consensus, disagreemen team undermine the coordination needed to O’Reilly & Tushman 02/19/07 25 more long-term orientation. Managing an ambidextrous form brings with it a further Given this difficulty, why should managers even attempt this feat? Two figures help illustrate contexts where ambidexterity ma y be strategically crucial. The first is the notion of innovation streams (Figure 2) a t is incremental innovation O’Reilly & Tushman 02/19/07 26 ientific paradigms. A second way innovation occurs is through major or discontinuous changes in which major improvements are made, O’Reilly & Tushman 02/19/07 27 O’Reilly & Tushman 02/19/07 28 rather than optometrists), had different technologies (chemistry rather than app lied materials) and required a different manufacturing process, the company spun the where it became a successful pharmaceutical compound. If a product has low strategic importance ither internalized or contracted out. For example, the repair of most personal co mputers, a low margin item, is handled by contractors rather than the manufacturer. Wh cannot benefit from leveraging existing firm assets, the advice is to operate the new This is often th e case with product substitutions, when one technology or process is replaced by another. For instance, in the O’Reilly & Tushman 02/19/07 29 circumstances, to spin the exploratory unit out is to sacrifice the future or, at minimum, lable resources. Burgelman (1991) builds a persuasive case that, when managed effectiv internalizing the variation-selection-retention O’Reilly & Tushman 02/19/07 30 challenge, when executed in the appropriate strategic contexts, these complex designs are O’Reilly & Tushman 02/19/07 31 needed is the identification of specific processes/routines that allow firms to ma strategies. Ambidexterity as a dynamic capabil O’Reilly & Tushman 02/19/07 32 Ambidexterity is both a difficult managerial O’Reilly & Tushman 02/19/07 33 O’Reilly & Tushman 02/19/07 34 O’Reilly & Tushman 02/19/07 35 make the already delicate balancing act be tween exploration and exploitation more There are several ingredients for this reci pe. First, diversity in experience within the team has been shown to promote ambi dexterity (Beckman, 2006) while a lack of O’Reilly & Tushman 02/19/07 36 Gerstner, who replaced almost his entire senior team upon his arrival at IBM, is on record noting the potential importance of “public vision are essential for the success of ambidexterity. O’Reilly & Tushman 02/19/07 37 While simple conceptually, it is freque ntly the case that in the pursuit of exploration, senior managers fa new business with systems and thinking from th units without sufficient resources or at the risk of being overwhelmed by the mature business. For instance, units may be asked to comply with the demands of the legacy business (e.g., financial reporting, IT system s, or HR processes) that burden them. Corporate staff typically attempt to minimize tr ansaction costs, a reasonable endeavor for mature businesses. However, this emphasis is To mitigate the effects of the legacy business on EBOs, IBM is explicit in categorizing businesses by thei r time frame (Horizon 1, 2, and 3 businesses). Exploratory level sponsor, hire people with the necessa ry skills, design appropriate metrics and from those required in running mature businesse s. IBM’s senior team recognizes that the management challenges are different across time emerging businesses differently from their O’Reilly & Tushman 02/19/07 38 Ambidextrous organizations create inevitable conflicts between operating units. The short-term, efficiency and control of a matu inefficiency of experimentation. How these tens ions are resolved is a crucial element in the ability of an organization to simultaneous unit is not seen as strategic by senior mana gement, it runs the risk of succumbing to short-term cost pressures or a lack of management attenti businesses are likely to lay claim to n eeded resources. To succeed requires what Burgelman (2002) refers to as “strategic encourage dissent and permit would-be champions to argue their points. O’Reilly & Tushman 02/19/07 39 resource patterns. Routine rigidi to use these resources. The research reviewed here on distinctions. In many of the s, the incumbents had the Christensen, 1997; Nobeoka & Cusumano, 1998; Sobel, 1999; Sull, 1999a; Tripsas & ed to run either an the fundamental issu organizational alignment with the strategy—eith O’Reilly & Tushman 02/19/07 40 experimentation, risk and speed. In the ambidextrous form, managers must be O’Reilly & Tushman 02/19/07 41 e view that ambidexterity promotes ovindarajan & Trimble, 2005; He & Wong, O’Reilly & Tushman 02/19/07 42 development processes that are exploitative; that is, in terms of the innovation streams emental (e.g., Daneels, 2002). Studies that equate ambidexterity with new product developm ent often fail to make this distinction O’Reilly & Tushman 02/19/07 43 need for exploration is reduced while in O’Reilly & Tushman 02/19/07 44 it will be most salient for O’Reilly & Tushman 02/19/07 45 xploitation but does not necessarily signify the presence of a dynamic capability (e.g., He & Wong, 2004). It is only if management is consciously able O’Reilly & Tushman 02/19/07 46 turn, ambidextrous organizations. We induced a O’Reilly & Tushman 02/19/07 47 References Adler, Paul, Goldoftas, Barbara and Levine, David (1999). Flexibility versus efficiency? A case study of model changeovers in the Toyota production system. 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Unders tanding dynamic capabilities. Zollo, Maurizio and Winter, Si dynamic capabilities. Zott, Christof (2003). Dynamic capabilities and the emergence of intra-industry differential firm performance: In sights from a simulation study. O’Reilly & Tushman 02/19/07 58 Long-lived Firms That Have Changed Founded Original Current Product Goodrich 1870 Fire Hose Aerospace Nokia 1865 Lumber Mobile Phones Harris 1895 Printing Press Electronics 3M 1902 Mining Office Supplies Allied Signal 1920 Chemicals Aerospace American Express 1850 Express Delivery Financial Services Armstrong 1860 Cork Floor Coverings Bally 1931 Pinball Machines Casinos / Fitness J&J 1885 Bandages Pharmaceuticals Black & Decker 1910 Bottle Cap Mach. Power Tools Carlson 1938 Gold Bond Stamp Travel W.R. Grace 1854 Bat Guano Chemicals O’Reilly & Tushman 02/19/07 59 Innovation streams Existing Type of Innovation Incremental Architectural Discontinuous Mechanical Watches Disk Drives Bias Ply tires Print Newspapers Hard Contact Lenses Quartz Watches Smaller Disk Drives Radial Tires Daily Disposable Lenses Web-based News Fashion Lenses O’Reilly & Tushman 02/19/07 60 When should ambidexterity be considered? Operational Leverage Strategic Importance High HighLow Independent Business Unit Ambidextrous Organization Spin-Off Internalize and/or Contracting O’Reilly & Tushman 02/19/07 61 Proposition 1 - A clear strategic intent that justifies the importance of the ambidextrous form for future survival and provides intellectual Proposition 2 to provide for emotional engagement and a common identity. Provides the foundation for multiple cultures in Proposition 3 to manage the ambidextrous form and to relentlessly communicate a common reward system based on me Proposition 4 - An organizational architecture different alignments and physical exploit sub-units (different busine contradictions of multiple alignments offs and conflicts that occur.