Charles O’Reilly is a management professor at Stanford’s Graduate School of Business.
This article, which has been edited for length, is reprinted courtesy of Rotman Magazine, a publication of the Rotman School of Management, University of Toronto.
The Stanford professor and proponent of 'organizational ambidexterity' describes what it takes to compete today.
What is 'organizational ambidexterity'?
It's the ability of an organization to compete simultaneously in mature markets and technologies–where key success factors involve efficiency, incremental improvement and short timeframes; and simultaneously, to compete in emerging markets and technologies–where key success factors require flexibility, initiative, risk-taking and experimentation. Research indicates that the ability to do both of these at once is associated with long-term success. If an organization can't be ambidextrous as markets and technologies change over time, it is doomed to follow whatever the industry lifecycle is.
Why do most companies find it so difficult to balance day-to-day business with the pursuit of innovation?
We talk about something called the 'success syndrome': once a successful organization has been around for any length of time, it develops systems, processes, skill-sets and cultures that support its success in a mature business. In the jargon this is called exploitation: businesses get better and better at delivering their product or service more efficiently. But that very alignment – the people, organization and culture that drive success in the mature business – actually creates inertia. The irony is that the very things that make you successful also increase rigidity, and make it more difficult to change.
There's a famous historian of technology named Elting Morison who called this 'dynamic conservatism'. It means that successful organizations are not passive: they actively try to maintain the alignment that makes them successful.
In addition to the inertia that comes from having a successful alignment, there is also the mindset that comes from senior managers not seeing or believing in a new industry shift. If you look at Kodak, it's 132 years old and bankrupt. Kodak saw the digital age coming, and it actually invested quite successfully in some of the digital imaging software, but it had senior managers who could not wrap their heads around how they would ever make money at something other than film. So even though they had the technology within the company, they were not able to capitalize on it. Before Kodak went bankrupt, it sold off a lot of its digital imaging software, and that software actually became the basis of several other successful companies.
Should ambidexterity be a goal for everyone?
That's a tricky question. If you think about it in extreme terms, the answer is No. Ambidexterity is fundamentally inefficient in the sense that it requires duplication of functions. If you're in a business that is stable, where there are no disruptive technologies coming, and the pace of change is very slow, should you be putting resources towards exploration?
Natural resource companies are a good example. Exxon, for instance, is in the business of finding, extracting and refining petroleum. It's expensive, there is often big risk involved, but they are basically doing something that they know how to do. They can increase exploration accuracy, get better at drilling and extracting oil, but fundamentally this is all incremental change. If you go to Wikipedia and search 'world's oldest companies', you'll see a long list, and many of the very oldest are in industries that have not changed a whole lot: brewing beer or running restaurants or hotels. There has been change, of course, but not fundamental disruptive change.
So should Exxon be ambidextrous? Sure, they should probably be investing some money in alternative fuel sources–and they are. They've invested in algae-based fuels, for instance; but is it going to be a big deal? Probably not. When it comes to ambidexterity, leaders need to ask two questions: "How likely is it that there is going to be a fundamental change?" and "Is that change going to disrupt our business model? Will new customers and markets emerge?" If the answer to these questions is Yes, I think you need to worry about being ambidextrous. But it's not for everyone.
You have pointed out that Toyota's original product was a loom. How do managers know how to grow or innovate in the right direction?
You cannot know what is going to work. But with some diligence and some knowledge of technology and markets, you can place some bets. If you look at it in terms of evolution, innovation from an evolutionary perspective entails variation, selection and retention. Traits that do not help us reproduce are selected against, and then retained, so biological evolution is this blind variation. Ambidexterity is not blind variation, but placing a set of bets on where you think things might go.
Here's an example. The Ball Corporation was founded in 1880 by five brothers making wooden buckets lined with tin, to carry kerosene for electricity. Then in 1886, glass emerged as a rival container material, and they very quickly realized the era of wooden buckets was over, and moved into glass jars. From 1886 through to 1946, Ball grew by getting better and better at making glass jars, and by buying small glass companies around the U.S. Then in 1946, the U.S. government said "No more acquisitions!" The senior managers at the Ball Corporation said, "Gee if we want to grow, what is it that we have within the company in terms of our capabilities that we could apply in other markets?"
It turns out they were very good at the interface of metal and glass – they made Mason jars among other things – and that allowed them to move into aerospace. Much of the Hubble telescope is actually a Ball product. When it became clear that cans would replace glass bottles, they moved in to metal cans, then into plastic, and they sold off their glass business. If you look at a company like Ball, it is close to 130 years old, but only because it had management that was able to shift into different technologies and different markets as the world changed.
I think the trick is for managers to be able to place some bets on where they think the world is going, recognizing, as venture capitalists do, that most of the bets are not going to work out. But if you don't place any bets, you will have a problem.
Can you offer an example of an organization that got stuck in its status quo and suffered for it?
Think about Sears, an iconic brand that for 50 years was North America's largest retailer; and now they have lost it. Walmart, in contrast, started out in big box stores, but in the last 10 years, has gone from just selling merchandise to selling groceries, and in doing that, basically put a bunch of grocery store chains out of business. Growth in their hypermarkets is now flattening out, so they are looking at smaller stores, setting up Walmart Express, which has a 15,000-square-foot format. Walmart has great capabilities in transportation and logistics and real estate, and it knows how to set up and supply stores, so now it is expanding into smaller formats.
Could Sears have done that? Probably, but they were content with the status quo for a long time, and they didn't bother running a bunch of experiments. About 15 years ago, a senior manager at Sears was asked about Walmart, and he said, and I quote, "They are not our competitor." As Walmart was growing, Sears' attitude was, "Sure, they're setting up these huge stores, but they're out in the hinterlands, and they're selling lower-margin merchandise. We're in all these great suburban malls." That reflected Sears' heyday; and they lost out because they didn't continue to innovate.
There has been a lot of interest in organizational ambidexterity in recent years. What are the most interesting takeaways from the research on the subject?
One thing that's become pretty clear is that ambidexterity is more than just an academic topic. There's good evidence that it is associated with organizational performance in terms of growth, sales growth and longevity. There are still lots of questions: when should an organization focus on this? And what's the right balance of exploitation and exploration? The answers depend largely on the business and technology.
Fundamentally for me, this is a leadership issue. I'm working on a book right now, and I've been looking at lots of companies. Some have succeeded and some have failed at this, and what strikes me is that the companies that fail almost always have the technology. It's not like, "Oh my god, we didn't see it coming." Look at Blockbuster; it should have been able to rent out DVDs by mail; there's no reason why Netflix had to emerge to kill it.
What makes the difference is whether or not an organization's leaders are able to compete in both mature and emerging markets. The Ball Corporation had senior leaders that said, "We've got to stay in the container market, but if we want to grow, we've got to figure out how to get into other markets." So in the end, this is a leadership story, not a technology story.
Charles O'Reilly is the Frank Buck Professor of Management at Stanford's Graduate School of Business and director of its Leading Change and Organizational Renewal Executive Program.
For the full text of the interview with Prof. O'Reilly, see the fall 2014 issue of Rotman Management magazine.