Business analysis

C onsider this tale of two companies, both more than 100 years old. One is the U.S. retailer Sears. In 1973, Sears Roebuck & Company built a 108-story

skyscraper, what was then the tallest building in the world, in Chicago. It was a towering testa- ment to Sears’ standing as the largest retailer in the world. However, less than two decades later, an upstart retailer from Arkansas – Wal-Mart – succeeded in knocking Sears off its perch as the top retailer. By 1994 Sears had sold its eponymous tower; a year later it vacated the premises. In 2009 the building was renamed the Willis Tower

– another symbolic act, only this time signaling Sears’ demise from its glory days of yore.

Another company, founded just like Sears in the late 1800s, followed a different fate. Ball Corporation similarly started from humble roots: a partnership between enterprising in- dividuals who seized upon a market need. The Ball brothers began making wooden-jacketed tin cans, and then the emblematic glass home- canning jars that made them famous.

But a look at Ball’s product portfolio to- day reveals something rather interesting: It doesn’t just make jam jars anymore; it makes

By MIChAeL tuShMAN

Leadership Tips for Today to Stay in the Game Tomorrow

THE AMBIDEXTROUS LEADER

DOSSIER insight

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Leadership Tips for Today to Stay in the Game Tomorrow

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metal beverage and food containers as well as aluminum aerosol containers. In fact, it is the largest producer of recyclable beverage cans in the world. Moreover, it has branched out into aerospace technologies, manufacturing com- ponents, instruments and avionics systems for use on aircraft, satellites and spacecraft, with national defense, civil and commercial space applications. Ball represents a corpora- tion that, throughout its long history, has never stopped anticipating the future by constantly scanning distant horizons – even in the literal sense of outer space.

This tale of two companies – the fallen gi- ant and the perseverant adapter – has fascinat- ed me for 25 years. In my research, I have been asking myself why so many large, successful organizations that are the undisputed leader at one point in time, when faced with some kind of discontinuity from the outside world, fail. Oth- ers, like Ball, make it through the storm; they are reborn, adapt and survive.

This article reveals what I have discovered, which I recently shared with executives and alumni during a Continuous Education ses- sion at IESE Business School in Barcelona.

In the face of disruptive change, the key to sur- vival involves embracing paradox. Continuing to exploit current success is a must, but so is taking a plunge into the future through explo- ration. Carrying out both of these activities simultaneously calls for ambidexterity, a talent that is as rare in organizations as it is in humans.

Here I discuss the major pitfalls that can lead even the most powerful companies to go astray. I explain what is required of CEOs to build organizations that exploit and explore simultaneously, along with the competencies that the senior management team needs to pos- sess in order to pull off this twin feat.

Watch Out for the Big Shift Throughout history, disruptions have come in many shapes and sizes. During the 18th and 19th centuries, it was the Industrial Revolution. During the 19th and 20th centuries, it was the light bulb, the automobile and electronics.

Since the emergence of the Web at the end of the 20th century, the power of technology to disrupt business and society has accelerated and become more intense. This big shift can be competency destroying or, if anticipated and managed skillfully, competency enhancing. Ei- ther way, the opportunities in the 21st century are plentiful, whether it’s crowdsourcing, the sharing economy, robotics or genomics.

CEOs need to decide not only how to react, but how to act in the face of such game-changing potential. Consider another cautionary tale in this regard. The world’s first quartz watch prototypes were invented by the Swiss in the ’60s but they failed to realize the commercial potential until Japanese watchmakers stole their lead in the ’70s. The first reaction of Swiss watchmakers was to guard their centuries-old traditions. The prospect of a “cheap” watch did not appeal to them. For them, quartz technol- ogy was competence destroying, and such a mind-set drove many of them to the brink of bankruptcy. Then along came Nicolas Hayek.

this article summarizes research by the author into why some organizations fail in the face of “punctuated change,” while others are reborn, adapt and survive. The key, he finds, involves embracing paradox. Continuing to exploit current business success is a must, but so is taking a plunge into the future through exploration. Carrying out both of these activities simultaneously

calls for ambidexterity. The article highlights the defining features and characteristics of ambidexterity, and the keys that underpin putting it into action. While these skills need to reside in the leader at the top, senior management teams and heads of business units have to be just as adept at grasping the cognitive complexity and making the tradeoffs required for future success.

eXeCutiVe suMMARY

In the face of disruptive change, the key to survival involves embracing paradox. Continuing to exploit current success is a must, but so is taking a plunge into the future through exploration.

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Instead of liquidating two venerable Swiss in- stitutions, ASUAG and SSIH, he merged them and turned them around, introducing the Swatch concept in the ’80s – colorful, plastic, affordable watches that revitalized the entire industry.

The lesson here is not to stand by and wit- ness the steady erosion or destruction of your company’s value, waiting until you are about to go under before you finally wake up and ex- claim, “Let’s be innovative!” Leaders need to be proactive as well as reactive. As such, watch out for the following warning signs, which, if left unchecked, could accelerate your decline and take you to the point of no return.

shORt-teRM thinKing. Lou Gerstner, when he was CEO of IBM, was reportedly alarmed to discover that one of his business units, which had been working on a promising new initiative, had been forced to abandon its work due to lack of funding. A report by an IBM strategy group documented how the company had failed to capture value from and commercialize 29 sepa- rate technologies and businesses. An internal analysis highlighted that the overriding reason for this was management systems that rewarded execution, favoring short-term results. This situ- ation will no doubt be familiar to many readers. In IBM’s defense, at least attempts were being made to explore new technologies. However, if too much pressure is put on executing flawlessly on immediate opportunities, then this reduces the chances of ever pioneering new fields.

inVesting MORe in eXpLOitAtiOn thAn eXpLO- RAtiOn. Sometimes organizational processes or risk aversion can lead to lopsided investment that prioritizes exploitation. Other times, fi- nancial crises are to blame. Logically, desperate times call for desperate measures. Yet knee-jerk belt-tightening focused solely on opportunistic exploitation will eventually backfire.

When the global economic crisis began to

bite in 2008, Mike Lawrie, CEO of Misys, asked his senior management team to present him with options. Given the potentially rocky finan- cial road ahead, the priority was to generate as much cash flow as possible from cost savings to keep the financial services side of the business going. At the same time, they could not neglect their recent acquisition of Allscripts, which was considered a strategic move by Misys to expand its presence in health-care information tech- nology. The recommendation came back to cut the company’s annual $3 million investment in an open-source venture exploring potentially disruptive health-care software. What would you do?

When caught between a rock and a hard place, most CEOs would probably go with their senior management team’s advice and cut ex- ploration. This is natural. But as we will see when we return to this example later, CEOs need to find a third way – one that protects to- day without completely cutting-off exploration and the inroads for firm survival tomorrow.

FROM ALignMent tO ineRtiA. Aligning people, processes and structures is an important ingredi- ent for success. A strong corporate culture gives balance, fit, flow and consistency to manage- ment decision-making. When alignment is do- ing its job, the system gets tighter and tighter, and execution runs smoothly.

However, when there is tremendous align- ment within a company, people risk becoming inward-looking, generating inertia. And in to- day’s fast-moving business environment, iner- tia is suicide. While you are busy ensuring that your corporate machinery is perfectly oiled and all the systems, procedures and controls are working in sync, the world shifts and you disappear.

Alignment, and the inertia it engenders, re- sults from basking in the glory of current and past successes. This phenomenon is highly common and hard to resist. Nokia is a good

Leaders need to be proactive as well as reactive. As such, watch out for the warning signs, which, if left unchecked, could accelerate your decline and take you to the point of no return.

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example: It came up with the first smartphone; yet its reluctance to look beyond its success in hardware engineering and to open up space for the emerging importance of software rendered the company obsolete.

the Age OF seniOR teAMs. In my research, I have found another important source of inertia: senior teams who have worked together for too long. Studies show that the longer senior teams are together, the poorer their performance. The pat- tern is the same across industries and countries, with the average peak of performance hovering around 2.5 years. When teams are together any longer, the performance of their organization often drops. It’s not that familiarity breeds con- tempt; that would actually be a good thing if con- tempt provoked some disagreement and debate. Instead, group members – whether on a board, senior management team or project team – lose their edge and their ability to deal with conflict, and they begin to think alike.

The consequences of group age getting too high are catastrophic when there’s any kind of disruption to the status quo. If managers can’t handle debate or challenge within the team, then they will hardly be able to deal with dis- ruptions coming from outside it. The simplest, most common way to break this dynamic is through deliberate succession or rotating peo- ple to take on new challenges.

Don’t Trip Over Your Own Success What all these issues have in common is the tension they heighten between the past and the future. It should not necessarily come as any surprise that a company’s future success

Michael tushman is the Paul R. Lawrence MBA Class of 1942 Professor of Business Administration and Chair of the Program for Leadership Development at Harvard Business School. He holds degrees from Northeastern University, Cornell University and the MIT Sloan School of Management. He is a director of Change Logic LLC,

a Boston-based management consulting firm specializing in strategic renewal. In 2013 he was awarded the Academy of Management’s Career Achievement Award for Distinguished Scholarly Contributions to Management and was the winner of the 2013 Lifetime Achievement Award from the American Society for Training and Development.

ABOut the AuthOR

may look quite different from that of the past or present. But what’s harder for many companies to grasp is the transformation they will have to undergo to adapt or reinvent themselves as they journey from what was to what is to what will be. This demands that leaders learn how to play two games simultaneously, and play both of them equally well.

This is what we call ambidexterity. Grant- ed, practicing ambidexterity is a tall order for any CEO and organization. (Ambidexterity in the usual sense – the ability to use both hands equally well – occurs in less than 1 percent of the population.) But it will take a rare talent to meet today’s business challenges.

I define organizational ambidexterity as the ability of an organization to explore and ex- ploit; to compete with mature technologies and in mature markets where efficiency, con- trol and incremental improvements are prized and to compete with new technologies and in new markets where flexibility, autonomy and experimentation are preferred.

Manage the Tension, Don’t Avoid It Creating and sustaining ambidextrous struc- tures falls on the shoulders of CEOs and senior management teams. Heeding the warnings mentioned earlier is a good place to start, but to move forward the ambidextrous leader will need to learn to manage many contradictory demands and challenges.

Remember Mike Lawrie’s tricky budget de- cision? He knew that if he axed exploration to deal with one crisis, his company could be fac- ing a much worse one down the road.

In the end, he not only opted to protect Mi- sys’ open-source investment, but he strength- ened it by separating it from Allscripts’ core. This meant that the open-source unit was ef- fectively competing with Allscripts, with both business unit leaders sitting around the same table. Imagine the tensions this caused with respect to firm identity, threats to power and confused employees.

But rather than avoid the inherent tension, Lawrie managed through it, continuing to ex- ploit the core business while at the same time converting exploration into a profitable new av- enue. As Allscripts’ revenues began to grow and Misys Open Source Solutions earned important contracts, the senior management team and fellow business unit leaders were won over.

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This illustrates the kind of vision that every CEO should be bringing to his or her company and the competencies they must develop to pull off ambidexterity. Let’s look at more ex- amples to draw out more defining features of ambidexterity.

Treat Game Changers as Friend, Not Foe The traditional way that Havas Media Group would work would be to enlist its creative de- partment in developing high-quality commer- cials with multimillion-dollar budgets. Victors & Spoils, on the other hand, is the world’s first advertising agency built on crowdsourcing principles. It lets the crowd do the work. The results are also high quality but at drastically reduced costs. If you were Havas, would you

regard Victors & Spoils as competency destroy- ing or competency enhancing?

In 2012, Havas acquired a majority stake in Victors & Spoils. This move demonstrates that Havas was at least prepared to embrace new technology and a very different business model from its own. Perhaps for Havas the move was nothing more than a preemptive strike against a competitive threat that it regarded as compe- tency destroying. After all, if the crowd can pro- duce equally slick commercials for a fraction of typical costs, then competency destroying it certainly is.

But maybe Havas realized something else, too: that open, distributed, peer-to-peer, com- munity innovation is here to stay. As such, bringing game-changers like Victors & Spoils into the fold guarantees Havas’ own future –

h ow does innovation happen? Does it depend on the visible hand of management to define problems and set boundaries to protect the firm from external dependencies? Or does it require enlisting the help of self-organizing communities outside the organizational bounds to co-create solutions? The answer is both, and increasingly the latter. As such, CEOs need to move beyond simplistic closed vs. open debates and instead embrace complexity, building organizations that can attend to inconsistent innovation logics.

In recent research, we suggest two contingencies that determine where a firm positions itself on the closed-to-open continuum: the extent to which critical tasks can be decomposed; and how distributed the problem-solving

Managing at the intersection of Change Ambidextrous executives increasingly find themselves spanning multiple boundaries.

SOURCE: Adapted from “Open Innovation and Organizational Boundaries” by K.R. Lakhani, H. Lifshitz-Assaf and M. Tushman (2013).

knowledge is that’s needed to complete the tasks.

The graphic depicts this. The lower left quadrant is how organizations traditionally worked, where they held all the cards. Sometimes they formed alliances (upper left) when the specialist ability required to accomplish some task resided outside the firm.

HIGH

LOW NARROW BROAD

Distribution of

Problem-solving KnowleDge

ta s

K D

e c

o m

P o

s it

io n

Partnership Community

Internal Collaboration

Other times, firms kept control of the tasks but absorbed knowledge from several actors (lower right). Finally, firms can decompose the tasks and throw the doors wide to allow a range of actors to develop solutions (upper right).

Two key trends – digitization and the sharing economy – are repositioning the locus of innovation from the lower left to the upper right. This means executives will increasingly find themselves not so much in one particular quadrant at a time, but rather at the intersection of all. They must constantly make choices regarding how and when to partition or repartition the problem space, maximizing their options to access knowledge and dynamically compose or decompose critical tasks, based on fluid rather than fixed organizational frameworks.

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it is competency enhancing – as the company manages the tension between the “old world” of innovation (one that depends on all creativ- ity coming from inside the organization) and “the new.”

Solution-seeking organizations need to be on the lookout for this, learning how to adapt and benefit from these disruptions. NASA, for example, established the Center of Excellence for Collaborative Innovation, soliciting the public to generate ideas and solve important problems – from sunspot prediction and crater detection to tracking asteroids and devising an algorithm to recognize vehicles from aerial images – with cash prizes awarded to winning ideas. While the quality of the ideas varies, you never know when that retired mechanical en- gineer just might deliver the breakthrough so- lution your company has been looking for, as happened with NASA.

Dynamic Capabilities: The Name of the Game Welcoming innovation into your organization requires dynamic capabilities. My research colleagues and I define these as a firm’s abil- ity to integrate, build and reconfigure internal and external competencies to address rapidly changing environments. Dynamic capabilities are the manifestation of a firm’s ambidexterity; they are the decisions that help an organization reallocate and reconfigure organizational skills and assets, enabling the firm to exploit existing competencies and at the same time develop new ones.

Going back to IBM, when it realized that it was missing out on opportunities because of an obsessive focus on short-term results, it sought to remedy this by setting up the Emerging Busi- ness Organization. This initiative divided the company’s portfolio of businesses into three horizons, each with its own challenges and each requiring a different organizational archi- tecture: current core, growth and future growth

business. The idea was to produce an explicit, replicable process, with clear senior executive ownership for generating new businesses and processes, which would allow the company to explore new growth opportunities in a system- atic way. The Emerging Business Organization involved a complex management and funding process with disciplined mechanisms for cross- company alignment. In the end, IBM estimated that it added $15.2 billion (19 percent) to its top line between 2000 and 2005.

The exact process at IBM may not suit ev- eryone. But the idea of separating past and future, exploitation and exploration, and de- veloping the corresponding architectures that support each of these two distinct endeavors, is a common characteristic of ambidextrous organizations.

Implementation: The Keys to Success Having looked at some of the defining features and characteristics of ambidexterity, the fol- lowing keys underpin the process of putting ambidexterity into action.

Keep it sepARAte. Procter & Gamble is often held up as an example of an ambidextrous organiza- tion, strongly investing in exploratory innova- tion projects but wisely keeping them separate from the core business. Take one of its flagship products, Tide, which represents a significant share of the detergent division’s business. A smaller share is dedicated to experiments. Sev- eral years ago, one of those experiments was for a Tide sheet that was supposed to do everything – whiten, soften fabric, de-static – all in one. The only problem was, as the story goes, the sheet turned out to be combustible. Consider the disas- ter it would have been had Procter & Gamble not kept its experiments separate from its core, or if it had structured its innovation portfolio differ- ently – gambling the business on a revolutionary product that turned out to be a fire hazard.

Welcoming innovation into your organization requires dynamic capabilities, which are the firm’s ability to reconfigure internal and external competencies to address rapidly changing environments.

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So, apart from resisting the temptation to only ever exploit at the expense of exploration, ambidextrous leaders need to make sure their exploration efforts actually support their core business, not jeopardize it.

In experimenting, leaders will have to be prepared for the fact that they may well en- counter more failures than successes. But in the end, companies should be “failing forward.” In other words, they should fail fast, abandon- ing the fruitless experiments that aren’t going anywhere and quickly pursuing new lines of investigation.

Likewise, when a breakthrough finally does occur, they should be ready to place bets and scale the innovation just as quickly. Only at this stage should leaders start to bridge one side of the business with the other, leveraging corpo- rate assets to integrate the new development in a carefully targeted fashion.

This is why leaders need to remain vigilant to these parallel business activities, knowing when to separate and when to integrate. But separate does not mean “out of sight, out of mind.” Ambidextrous leaders need to keep an eye on both.

deVeLOp A MuLtiFACeted identitY. In a seminal 1960 Harvard Business Review article, “Marketing Myopia,” Ted Levitt suggested that once-suc- cessful industries stop growing mainly because of a failure of imagination. Managers and busi- nesses often define themselves too narrowly by the assets they have built up, rather than by what they did with those assets. Levitt used the exam- ple of railroad companies, which he argued went off the rails, so to speak, when they conceived of themselves solely in terms of trains, not as trans- port, and transportation needs have only ever gone up.

The “myopia” that Levitt talked about 50 years ago remains just as, if not more, relevant today. It helps explain the disappearance of kodak. Although it developed the first digital

camera, it ushered in its own demise by stub- bornly sticking to being a seller of film.

If John Fisher, a senior leader at Ball Corpo- ration from the ’60s to ’80s, or any of his pre- decessors had thought of the company in nar- row terms, Ball would have joined the annals of companies that are no more – those who lost their raison d’être for lack of a broader unifying identity. Ball aspired to be the world’s greatest container corporation, which took it beyond not just the types of containers it manufac- tured, whether wood, glass, metal or plastic, but also what was contained inside them, from the original kerosene to food, beverages, paints, aerosols and more.

Ambidexterity manifests itself in these multiple, expansive identities and self-concep- tions. Tide aspires to keep clothes clean, which is more than just making detergent. Misys thinks of itself as a company that solves indus- try-wide problems, not as a vendor of software applications.

Whatever holds your business together, it needs to be an emotionally compelling iden- tity that encompasses existing products and services, yet at the same time is broad and as- pirational enough to make way for the future.

send MiXed MessAges. Together with my re- search colleagues Wendy k. Smith and Andy Binns, we examined 12 top management teams at major companies and concluded they should be doing much more than simply “running a tight ship.” CEOs need to hold the tension be- tween the demands of innovation units and the core business at the top. They also need to engage the senior management team around a forward- looking, strategic aspiration. At the same time, they must balance conflicting strategic agendas.

If this sounds like sending mixed messag- es, it is. The message to the “exploit” crowd should be: “Please continue getting better and better on the same trajectory.” The mes- sage to the “explore” crowd should be: “Lots of

Whatever holds your business together, it needs to be an emotionally compelling identity that encompasses existing products, yet at the same time is broad and aspirational enough to make way for the future.

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n Altman, E.J., F. Nagle and M. Tushman. “Innovating Without Information Constraints: Organizations, Communities and Innovation When Information Costs Approach Zero.” Forthcoming in The Oxford Handbook of Creativity, Innovation and Entrepreneurship: Multilevel Linkages, edited by C. Shalley, M. Hitt and J. Zhou. Oxford, UK: Oxford University Press, 2015.

n O’Reilly, C. and M. Tushman. “Organizational Ambidexterity: Past, Present and Future.” Academy of Management Perspectives 27, no. 4 (2013): 324-38.

n Lakhani, K.R., H. Lifshitz-Assaf and M. Tushman. “Open Innovation and Organizational Boundaries: Task Decomposition, Knowledge Distribution and the Locus of Innovation.” In Handbook of Economic Organization: Integrating Economic and Organization Theory, edited by A. Grandori. Northampton, MA: Edward Elgar Publishing, 2013.

tO KnOW MORe

experiments, please, most of which are go- ing to fail, but some of which may yield break- throughs.”

Ambidextrous CEOs ought to be asking their leadership teams to be consistently incon- sistent – to say one thing to this crowd (“Don’t make a mistake on the core but improve on it continuously”) and a totally different thing to the other crowd (“Feel free to make lots of mistakes in the discovery process toward some- thing new”). This is actually a good thing.

integRAte AMBideXteRitY in seniOR teAMs. While all of the above need to reside in the leader at the top, senior management teams and heads of business units have to be just as ambidextrous. They, too, must be able to grasp the cognitive complexity of what they are called to do, make tradeoffs and manage highly differentiated, tar- geted integration. To pull off organizational am- bidexterity, this is a must.

Challenges Ahead For all the business giants we see toppling as the world shifts, there are growing numbers of am- bidextrous organizations that are achieving the great feat of finding the exploit-explore sweet spot, figuring out how to reposition themselves for reinvention. CEOs need to make sure their companies are among the ambidextrous ones.

As they do so, they should not fear “punc- tuated change,” when strategies, structures, people, processes and cultures flip at the same time in the face of a shocking change – today, this change would be technology. I am a believ- er in “punctuated change” being the only way to get to the future. As a business leader, you need to embrace the current context as the right time and the right place for your business, and focus on delivering fantastic execution in the midst of this environment.

While I have been able to detect through my research some of the key factors that make ambidexterity possible, invariably questions remain, especially in relation to open or crowd- sourced innovation.

How do you externalize innovation neces- sary for your survival without undermining your own core competency? Even if it makes economic sense to externalize innovation, how can you manage something outside of your firm that you don’t own or control, and keep it aligned with your firm-specific strategy? While

you can’t deny the reality of open innovation, you still need to exercise some control. But how much is too much? When should you look to open innovation and when is it better to consid- er strategic partners, multi-firm collaborations or intra-firm problem solving? (See the sidebar Managing at the intersection of Change.)

Like it or not, you will always be walking these tightropes. You can choose to deliber- ately engage in self-destructive behavior, para- doxical as it might be, but with the hope that ul- timately it will lead to a lifeline to the future. As Gordon Brunner once said about exploration as a former senior executive at Procter & Gamble, “If we don’t destroy ourselves internally, Uni- lever will.” And this is all part of what it means to be ambidextrous.

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