Fostering innovation in a large organization. Using the ambidexterity approach

Table of contents

1 Introduction

2 Organizational ambidexterity
2.1 Definition and conceptual background
2.2 Prerequisites
2.3 Implementation strategies

3 Methodology

4 Case Study
4.1 Company presentation – Dr. Ing. h.c. F. Porsche AG
4.2 Findings

5 Conclusion
5.1 Discussion of the findings
5.2 Conclusion

List of references

1 Introduction

Successful organizations often have developed several core competencies in order to out- stand competitors. In a stable environment it is high likely that organizations only focus on further improving and developing the core competencies that help them to get into this com- fortable situation. With this approach one could remain the market leader in such a relatively stable environment. This might have been the case in the past, but it is not the way we see the environment in the last centuries. The competitive business environment has fundamen- tally changed. With the globalization of markets, rapid technological change, shortening of product life cycles, and increasing aggressiveness of competitors, organizations have to face these changes (Volberda, 1996). It is not sufficient to only improve competencies one is already good at. Organizations must also explore in emerging business fields, test new prod- ucts and experiment new procedures. Organizing a company in a way so that some employ- ees are working on exploitation and others on exploration at the same is therefore a chal- lenging balancing act. The approach of managing this balancing act of exploration and ex- ploitation is called organizational ambidexterity (O’Reilly & Tushman, 2004). This seminar paper will deal with this concept and answers the following question: How organizations use ambidextrous design to ensure innovation?

First, the concept organizational ambidexterity will be defined, and its five different litera- ture streams presented. In addition to that, characteristics for organizations succeeding at this approach and possible implementation strategies will be discussed. Afterwards the method- ological approach for the case study will be explained. The case study itself with a short company presentation of the Dr. Ing. h.c. F. Porsche AG and its findings cover chapter four. The conclusion in the last part will discuss the findings and give an overall summary with answering the research question.

2 Organizational ambidexterity

The term “ambidexterity” is rooted in Latin, composing the words “ambi” meaning “both” and “dexter” meaning “right”. For humans it denotes the ability to equally use one's arms and legs without preferential use of one hand. For organizations ambidexterity can be meta- phorically adapted to describe the ability of exploiting existing potential and exploring new opportunities at the same time to foster innovation. Authors assume that this strategic ap- proach enables organizations to further improve profitability in the existing core business, as well as to come up with new competencies (O’Reilly & Tushman, 2004).

This chapter covers the definition of the concept organizational ambidexterity approach with the five literature streams in which this concept is used (2.1). Afterwards characteristics of organizations succeeding at being ambidextrous (2.2) and different implementation strate- gies (2.3) will be discussed.

2.1 Definition and conceptual background

There are different understandings of the term ambidexterity, its related aspects, dimensions and implications for organizations (O’Reilly & Tushman, 2013). Although scholars come up with such different definitions and differentiations from different areas of research, there is a basic common understanding along all differences. Organizational ambidexterity can be described with the paradox of combining exploitation of the current and exploration of new opportunities in order to be creative and adaptive while also running the current business in a proven method (O’Reilly & Tushman, 2004). Exploitation contains the refinement and extension of existing competences. It’s returns are positive, proximate and predictable (March, 1991). So it is therefore connected to a rather low risk. The perspective for exploi- tation is short-term and keywords for that are efficiency and improvement. Exploration on the other hand refers to experimentation and searching for new alternatives. The returns are often negative, uncertain and unpredictable (ibd.). So it is therefore connected with high risks. Exploration initiatives are conducted in a long-term perspective and keywords are in- novation and creativity.

The understanding of organizational ambidexterity has broadened, and the exploitation ex- ploration trade-off is applied to different areas. Raisch und Birkinshaw (2008) have therefore named five categories to show the complexity of ambidexterity, namely organizational learn- ing, technological innovation, organizational adaptation, strategic management and organi- zational design in order to distinct the research streams. Each category will be marked out briefly in order to get a better understanding of this complexity.

For organizational learning, exploitation and exploration is associated with learning activi- ties. In his groundbreaking article, March (1991) differentiated between exploitation and exploration by the type or degree of learning and postulated that organizations need both exploration and exploitation to make their organizational learning efficient and effective. Other scholars rather extended this view examining the existence or missing of learning (Benner & Tushman, 2003).

In technological innovation one on the most important themes is the distinction between incremental and disruptive innovation. Whereas incremental innovations describe minor adaptions to existing products or business models, disruptive innovations are all about major changes or complete replacements of products, services or business models. Tushman and Smith (2002) describe the incremental innovations with the purpose to meet existing cus- tomer’s needs as exploitative and radical innovations with the purpose to meet the needs of emergent customers as explorative. Duncan who first coined the term ‘ambidextrous organ- ization’, suggested that organization can solve the paradox by getting ‘ambidextrous’ switch- ing between the two structures depending on the progress of the innovation process of a company (as cited by Jansen, 2005). Ambidexterity for technological innovation can there- fore be described as “the ability to simultaneously pursue both incremental and discontinu- ous innovation and change results from hosting multiple contradictory structures, processes, and cultures within the same firm” (Tushman & O’Reilly, 1996, p. 24).

For organizational adaption the exploration and exploitation paradox is transferred to the field of continuity and change. Organizations that are successful do not only prioritize on exploitation during periods of evolutionary change but also pursue radical transformation and exploration in periods of revolutionary change (Tushman & O’Reilly, 1996). Such rev- olutionary change can cause chaos, because the organizational change might be too radical, and continuity is not taken into account. On the other hand, organizations that focus too much on continuity neglect organizational changes will end up in inertia. Consequently, scholars suggest that long-term success requires a balance between the continuity and change (Probst & Raisch, 2005; Volberda, 1996).

In strategic management, one core organizational task is to allocate available resources in the best possible way. With scarce resources managers has to face the challenge of allocating these resources in the existing business, but also in research for new products or services. Burgelman (2002) distinguishes induced processes for variation-introducing and autono- mous strategic processes that increase variation. The induced processes are based on the current strategic scope and existing knowledge, whereas autonomous strategic processes re- quire the creation of new competencies outside the company’s strategic scope (Raisch & Birkinshaw, 2008). A balance between the different processes seems the most promising. The former can be related to exploitation and the latter with exploration.

Research on ambidexterity regarding the organizational design adapt the exploration and exploitation paradox to the challenge of being both efficient and flexible. Burns and Stalker (as cited by Raisch & Birkinshaw, 2008) argue that organizational structures that are mech- anistic like standardized processes, centralization and hierarchies, support efficiency, whereas organic structures represented in a high degree of decentralization and autonomy support flexibility. To face that paradox of efficiency and flexibility for the organizational design, an auspicious recommendation again is a balanced use of both structures. Duncan suggests that organizations require organic structures to create innovations but also mecha- nistic structures to implement and apply them (as cited by Raisch & Birkinshaw, 2008). From this perspective, organizational ambidexterity can be defined as a firm’s ability to op- erate complex organizational design that provide for short-term efficiency and long-term innovation (Tushman & O’Reilly, 1996).

2.2 Prerequisites

With the concept organizational ambidexterity organizations have to face dichotomous re- quirements. This sub-chapter cover prerequisites for this approach and describes character- istics of those company who succeed at using the ambidextrous design.

Besides improving the current core business, the strategy a company pursues has to enable employees to think innovative and creative in order to come up with new ideas and incubate them. For allowing exploitation activities organizations need to prepare for refinement, effi- ciency and execution (March, 1991). For allowing exploration activities prepare for “things captured by terms such as search, variation, risk taking, experimentation, play, flexibility, discovery, innovation” (ibd., p.71). Consequently, one can summarize that the distinction between exploration and exploitation captures a number of fundamental differences in firm behavior that have significant consequences on a firm’s performance (ibd.).

Organizations face that dilemma of allocating scarce resources to both parts. Managers are often reluctant to allocate funding and staff to projects and initiatives they perceive as risky and do not help in a short-term success. Exploration is sometimes seen like a distraction, because the revenues will not be provided that exploiting the existing business could deliver (ibd.). With exploration the returns are way more unpredictable and in short-term often neg- ative. The returns of exploiting in comparison are more proximate, predictable and positive (ibd.). Therefore, ambidextrous design has a huge impact on organizations.

Scholars found out that organizations that succeed at ambidexterity share important charac- teristics (O’Reilly & Tushman, 2004). First, the senior management needs to be linked to the ambidextrous strategy. The commitment is very important because it has signaling ef- fects for the whole staff. The leadership and mindsets of managers influences staff and the organization itself, making sure everyone is working the right way. Second, employees need to share the same values. The “overarching vision and values” (Raisch & Birkinshaw, 2008, p. 399) and goals deliver guidance for the staff and ensure alignment across all employees regardless of the hierarchy position and work field. Third, a company needs to be clear about how assets and capabilities will be shifted from exploitative units to explorative units. The alignment of the organizations units is an important step for executing the ambidextrous strategy (O’Reilly & Tushman, 2016). Strategies for implementing the ambidexterity ap- proach are context specific, so there is no universal solution. Subsequently, the next chapter will present different implementation strategies in order to execute ambidexterity in an or- ganization.

2.3 Implementation strategies

There are different strategies to execute the ambidexterity approach. All share the same goal of handling the contradictory and reciprocal dependencies of exploitation and exploration by providing organizational management focusing on solutions for this paradox (Lewis, 2000). Scholars share different positions about to what extent exploration and exploitation should be integrated within the same organizational structure or kept separated (Gibson & Birkinshaw, 2004). Consequently, the following presented strategies can be categorized in separative and integrative approaches. Separative approaches are categorized as trying to minimize the contradiction of exploitation and exploration by spatial, cross-company or tem- poral separation. Hence, the separative approaches are subsumed into structural, interorgan- izational and sequential separation (Fojcik, 2015).

The structural separation plans to set up parallel units of exploitative and explorative de- partments with distinct characteristic within the organization (Duncan 1976, as cited by Fojcik, 2015). These distinct units are planned to stimulate and benefit from each other. However, one has to consider additional coordination and integration efforts with this dual structure. In order to prevent negative crowding-out effects especially from explorative ac- tivities to exploitative activities scholars suggest to buffer and decouple the activities with this strategy (Raisch & Birkinshaw, 2008).

Interorganizational separation plans to solve the paradox by separating the explorative and exploitative activities across at least two organizations (Tushman & O’Reilly, 1996). One organization only pursues exploitative activities and the other only pursues explorative ac- tivities. By exchanging the knowledge and other outputs, the two organizations complement each other and benefit from specialization advantages. However, with this approach there is unclarity about the coordination of all outputs and integration of the both organizations (Fojcik, 2015).

The third separative approach, namely sequential separation plans to decouple exploitation and exploration temporary. This approach is based on the assumption that a simultaneous implementation of both activities is an insurmountable contradiction (ibd.). Consequently, a company would focus on exploiting the present business and sequentially interrupt it with explorative elements. The ground idea behind the separating implementation strategies is that each strategic approach and activities can be specified to the specific situation in the best possible way without mixing up the contradictory approaches (Raisch & Birkinshaw, 2008).

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