Building an Ambidextrous Organisation

AIM Research Working Paper Series Building an Ambidextrous Organisation Julian Birkinshaw Cristina Gibson 003-June-2004 ISSN: 1744-0009

Julian Birkinshaw Associate Professor, London Business School Fellow, Advanced Institute of Management Research London NW1 4SA +44 207 262 5050 jbirkinshaw@london.edu Cristina Gibson Graduate School of Management University of California, Irvine Irvine, CA 92697-3125 Phone: (949) 824-8472 Fax: (949) 725-2846 cgibson@uci.edu 4 June 2004 This is a summary of a paper that is forthcoming in Sloan Management Review * We acknowledge the contributions of James O'Toole, Tom Williams, and others at Booz Allen Hamilton, the World Economic Forum, and the Center for Effective Organizations. 2

Building an Ambidextrous Organisation HOW TO CREATE AN ORGANIZATION THAT IS ALIGNED AND ADAPTIVE AT THE SAME TIME For a firm to succeed over the long term it needs to master two diametrically opposed qualities, adaptability and alignment an attribute that is sometimes referred to as ambidexterity.t i The trouble is, it s very difficult to strike a good balance between the two. Focus too much on alignment and the short-term results will look good, but changes in the industry will blindside you sooner or later. Equally, too much attention to the adaptability side of the equation means building tomorrow s business at the expense of today s. The concept of organisational ambidexterity which represents the optimal balance between adaptability and alignment- has been around for many years, but the evidence suggests that most companies have failed to apply it, and remain as one-handed as ever. In this paper, we report on a major study that sought to shed new light on the phenomenon. We developed a new way of conceptualising ambidexterity, and we polled more than 4000 people in ten multinational companies (see box, About the Research), with a view to understanding how a business can become truly ambidextrous. TWO FORMS OF AMBIDEXTERITY The standard model, which we call structural ambidexterity, is to create separate structures for the two different sets of activities. ii Structural separation is necessary, the argument goes, because the two sets of activities 3

are so different that they cannot effectively coexist. But separation can also lead to isolation, and many R&D and business development groups have failed to get their ideas accepted because of their lack of linkages to the core businesses. So many companies have experimented with a variant of the structural ambidexterity model by separating out the two sets activities within a single business unit. Such approaches allow the competing demands for adaptability and alignment to be met within a single business unit, which eliminates the problem of having an isolated unit. But they still rely on business unit managers to judge how best to divide up the time of their employees between one set of activities and the other. We approached the challenge of ambidexterity from a different direction from the perspective of the individual employee. In their day-to-day work, individuals often face choices as to how they should spend their time should they continue to focus on an existing customer account to meet quota, or should they nurture a new customer with a slightly different need? In business units that are aligned or adaptive, these people have clear instructions, and they are incentivized accordingly. But if a business unit strives to be ambidextrous, the systems and structures have to be more flexible, to allow people to use their own judgement as to how they divide up their time between adaptation-oriented and alignment-oriented activities. And for this to transpire, a much greater level of attention has to be paid to the human side of the organisation its behavioural context or culture. 4

We use the term contextual ambidexterity to refer to this alternative model. iii The end goal is the same to simultaneously achieve alignment and adaptability but we believe that this is best achieved not by creating separate units or projects to partition the work, but by building an organization context that encourages individuals to make their own judgements as to how best to split their time between the conflicting demands for alignment and adaptability. DIAGNOSING BEHAVIOURAL CONTEXT By framing the challenge of ambidexterity in this way, our emphasis shifted toward making sense of behavioural context in the companies we were studying. The logic suggested that a carefully designed behavioural context would be correlated with ambidexterity, which in turn would be correlated with performance. Our analysis provided strong support for this logic (see Research Findings). To shed light on behavioural context, we applied some of the ideas developed by Sumantra Ghoshal and Chris Bartlett, iv who model context as the ofteninvisible set of stimuli and pressures that motivate people to act in a certain way. Ghoshal and Bartlett argue that four sets of attributes stretch, discipline, support and trust interact to define an organisation s behavioural context. We adapted this to focus our analysis on two distinct dimensions of context. The first is performance management (a combination of stretch and discipline), which is concerned with stimulating people to deliver high-quality 5

results and making them accountable. The second is social support (a combination of support and trust), which is concerned with providing people with the security, support, and latitude they need to perform consistently to their highest potential. If these two dimensions are represented as orthogonal axes on a matrix, it is possible to identify four generic positions that an organisation can take (see Figure 1). The top-right corner is labelled a highperformance context it stimulates people to deliver high-quality results through its performance management systems, while at the same time it provides the social support and security they need to do their jobs consistently well over the long-term. The bottom-left corner, in contrast, is labelled a lowperformance context as it offers neither the performance ethic nor the social support that individuals require to do their jobs effectively. We label the bottom-right corner a burn-out context, because it has a demanding results-driven orientation but it lacks social support. Many people will perform well for a limited time in such a context, but its depersonalised, individualistic, and authority-driven nature typically results in a high level of personnel turnover, making ambidexterity difficult to achieve. Finally, we refer to the top-left corner as a country-club context, to suggest that while the social support is very strong, and employees typically benefit from and enjoy the collegial environment, the performance-orientation is weak. 6

Figure 1 Four Types of Behavioural Context High Country-Club Context High- Performance Context Social Context Low- Performance Context Burn-Out Context Low High Performance Management Context High-performance Context What does a high-performance context look like in detail, and how do you create such a context in order to subsequently develop ambidexterity? To answer these questions, we consider in the full-text version of this paper two companies, Renault and Oracle. These emerged as the companies with the highest overall ratings of ambidexterity, and with behavioural contexts firmly in the top-right corner of Figure 1. But the way these two companies are managed, and the routes they took to build their high-performance contexts, are very different. Three critical points are raised. 7

First, there is no single pathway to ambidexterity: Renault achieved it by building a performance context around its existing social support; Oracle built a performance context first, and then looked for ways of building support and trust across the organisation. Second, the role of the leader is very different in the two companies. Larry Ellison is the charismatic, all-knowing, and allpowerful CEO. Louis Schweitzer is no less powerful, but works in a more collegial manner, and builds support for his initiatives before putting them in place. Third, despite all their differences, Renault and Oracle have one important factor in common: a clear and simple set of priorities. In our survey analysis, Oracle employees emphasised the role of goal setting, individual performance appraisal and risk management, while Renault employees highlighted capital allocation, recruiting and vision as key priorities. Obviously, selecting focal elements is important because they have to fit the needs of the organisation, but our evidence suggests that the consistency with which they are applied, and the number of employees impacted, is even more important. Burn-out Context Contrast the success at Renault and Oracle with the impact of a very different type of behavioural context the burn out context. A burn-out context puts so much emphasis on performance management that the social support systems are either neglected or never put in place, and ambidexterity is jeopardized. 8

Consider the example of Scotch Inc. (disguised name), one of the largest consumer products companies in the world. Scotch had grown quickly during the late1990s through a strategy of focusing on a small number of core brands and rolling them out quickly on a global basis. By 2000, however, growth was slowing, and the foreign subsidiary managers were starting to voice some concerns they had limited influence over the positioning of the global brands in their local markets, they were short of resources, and they felt the strategic planning process was too top-down. And at the same time, the growth goals were demanding, and there was little or no tolerance of failure. On careful analysis, it was clear that Scotch Inc. had created a burn-out context. Its emphasis on performance management had led to solid growth, but executives were worried about where the next phase of growth would come from, and feared the impact of the subsidiary managers concerns. So three initiatives were put in place to increase the quality of the social context in Scotch Inc. one group of subsidiary managers was asked to propose changes to the strategic planning process, a second focused on systems for sharing best practices among subsidiary, and a third worked on professional development. While it is too soon to say how these changes have worked out, their purpose is to push Scotch Inc. towards the high-performance context. Country-Club Context A third type of context -- the country-club -- is instantly recognizable. It is a world where no-one works too hard and mediocre performance is tolerated, but at the same there is a strong sense of support and trust. Many 9

government departments, universities, and state-owned companies exhibit this context, and so indeed do a fair number of commercial organisations. An example is Cowes Ltd., a European dairy products company. Formerly state-owned, Cowes sold farm produce to consumer goods companies, typically within a strict set of regulations and quotas. Faced with the impending deregulation of its industry, however, Cowes reviewed its strategy and organisation with a view to becoming more competitive. Analysis showed that Cowes had indeed developed a country-club culture, so the top executives made two significant changes: they broke the company down into distinct profit and loss units, and instituted a pay-for-performance scheme for the unit managers; and they instigated a process for innovation to seek out new sources of top-line growth for the company. As with Scotch Inc., it is too soon to establish how successful these changes have been, but the purpose is clearly to build a high-performance context, out of which superior results will flow. Low-performance Context The final box on the matrix, the low-performance context, is a cross between the worst parts of the burn-out and country-club contexts there is little concern for performance, but neither is their any sense of trust or support among the employees. Ambidexterity is impossible in these contexts. If a company were to find itself here, the best way out would be essentially identical to the approach taken by Cowes Ltd., that is by working to improve 10

the performance management context. This completes the discussion of the four types of behavioural context. As the discussion has suggested, the framework serves two purposes: it acts as a diagnostic device to establish the relative focus on performance management and social context, and it also suggests some of the changes the company might want to put in place to change its context in order to ultimately become more ambidextrous. For example, both Scotch Inc. and Cowes Ltd. instituted new initiatives on the basis of their analysis. PATHWAYS TO AMBIDEXTERITY Ambidexterity is an alluring concept, and our research has suggested that it is not as difficult to achieve as once thought. Three key lessons emerge from our work. 1. Think behavioural context, not structure. Our research shows clearly that a supportive context fosters ambidexterity. In contrast, the structural approach of separating out alignment-oriented and adaptation-oriented activities often creates as many problems as it solves. For example, many large firms including BAT, Royal Sun Alliance and British Airways, established corporate venture units during the dotcom boom to nurture new business ideas, but lacking the connective tissue with the core business, most became isolated and irrelevant to their firm s strategy. Structural separation clearly has its merits, but in our view it is best seen as a temporary arrangement - as a 11

means of giving a new activity the space and resources to get started with a view to reintegrating it with the mainstream organisation as quickly as possible. 2. Focus on a few levers, and use them consistently. As our research has shown, there are many ways of building a supportive behavioural context. We found no evidence that specific organisational levers, such as incentive compensation or risk management, were consistently linked to success. Rather, we discovered that the higher performing companies were those that focused consistently on a small number of levers. For example, in making its move toward ambidexterity, Scotch Inc. is focusing on professional development, knowledge transfer and a more participative strategic planning process. These levers are all directed towards building the social support context, and in addition the consistency with which they are being applied will likely make it easier for employees across the organisation to make sense of the changes that are underway. 3. Don t think of the changes as leadership driven; view them as driving leadership. The final point to emphasize is the different approach to leadership suggested by the research. v Our research showed that ambidexterity arises not through formal structure, nor through the vision statements of a charismatic leader. Rather, it emerges through the creation of a supportive context in which individuals make their own choices about how and where to focus their energies. Leadership, in other words, becomes a 12

quality of people throughout the organisation, rather than just a tiny few at the top of the hierarchy. Of course, some companies have become ambidextrous in large part through the styles and structures put in place by their charismatic leaders - Oracle for example. But most have done it through a more understated approach to leadership that allows the leader(s) to emerge from the organisation at all levels, rather than the other way round. Ambidexterity has been seen as a desirable organisational trait for many decades, but surprisingly it is usually discussed only in abstract or metaphorical terms. This research has served, we believe, to demystify the concept. We have developed a practical way of measuring the relevant attributes of ambidexterity. And we have shown that the achievement of adaptability and alignment at the same time is perhaps not as difficult as was traditionally thought. Ambidexterity is still an alluring and important organizational capability, and now we have some tangible evidence of how it can best be achieved. 13

Box: About the Research The research for this article was conducted over a three-year period by researchers from the Centre for Effective Organizations (University of Southern California) and Booz Allen Hamilton, with the collaboration of the World Economic Forum. We adopted a careful, multi-phase research design, consisting of: (1) interviews with top executives in ten multinational firms, (2) interviews in 2-7 business units in each firm, (3) a survey of a stratified random sample of 50-500 employees at four hierarchical levels in each business unit, (4) identification and understanding of the key context characteristics through qualitative analysis of interview notes and quantitative analysis of survey data, and (5) feedback sessions in each firm. The total number of survey respondents was 4195 individuals across 41 business units in the ten multinational firms. 14

Box: Research Findings A portion of the research involved a detailed quantitative analysis of behavioural context, ambidexterity and performance. Rather than just assume links between these three variables, the intention was to provide rigorous evidence that such links existed. The complete analysis is reported in C. Gibson and J. Birkinshaw, The antecedents, consequences and mediating role of organisational ambidexterity, Academy of Management Journal, 2004 (forthcoming). The key points can be highlighted using two simple graphs, shown below. In Graph 1 the vertical axis is behavioural context (the product of performance management context and social context; i.e. the two numbers multiplied together), and the horizontal axis is ambidexterity (the product of alignment and adaptability). The graph shows that the correlation between behavioural context and ambidexterity is strong and positive. This confirms the first key proposition that the businesses with the highest ratings on behavioural context are also the most ambidextrous. Graph 2 simply plots ambidexterity against business performance, and the result is another strong correlation. Hence, confirmation of our second key proposition ambidextrous businesses outperform those that score lower on one or both of alignment and adaptability. 15

Graph 1. Plot of Behavioural Context vs. Ambidexterity for 41 Business Units 32 Behavioural Context (Performance x Social) 30 28 26 24 22 20 18 16 14 0 10 20 30 Ambidexterity (Alingment x Adaptability) Graph 2. Plot of Ambidexterity vs. Performance for 41 Business Units 30 Ambidexterity 20 10 0 2.5 3.0 3.5 4.0 4.5 5.0 Business Unit Performance 16

NOTES i A number of business writers have used the term ambidexterity over the years. Please see: R.B. Duncan (1976), The ambidextrous organization: designing dual structures for innovation, In R.H.Kilmann, L.R. Pondy and D. Slevin (eds) The management of organization. 1: 167-188, New York: North- Holland; E. McDonough & R. Leifer (1983) Using simultaneous structures to cope with uncertainty, Academy of Management Journal, 26(4): 727-735; M.L. Tushman & C.A. O'Reilly (1996) Ambidextrous organizations: Managing evolutionary and revolutionary change, California Management Review, 38(4): 8-30. ii Duncan (1976) argued that ambidexterity should be managed through dual structures. The concept of structural separation between different types of activities is also evident in much of the organization literature. See P. Lawrence and J. Lorsch (1967) Organization and Environment: Managing differentiation and integration, Boston MA: Harvard University; P. Drucker (1985) Innovation and entrepreneurship: Practice and principles, New York: Harper & Row; J. Galbraith (1982) Designing the innovating organization. Organizational Dynamics, Winter: 5-25. iii The term contextual ambidexterity is new, but a number of similar ideas can be found in the literature. See: P. Adler, B. Goldoftas & D. Levine (1999) Flexibility versus efficiency? A case study of model changeovers in the Toyota production system, Organization Science, 10(1): 43-68; S. Ghoshal & C.A. Bartlett (1994) Linking organizational context and managerial action: The 17

dimensions of quality of management, Strategic Management Journal, 15: 91-112. iv See Ghoshal and Bartlett (1994). Also S. Ghoshal and C.A. Bartlett (1997) The Individualized Corporation, Harper Business: New York. v For additional insights on this approach to leadership, see J. O'Toole (2001) When leadership is an organizational trait. In W. Bennis, G.M. Spreitzer and T.G. Cummings, The future of leadership: Today s top leadership thinkers speak to tomorrow s leaders. San Francisco: Jossey-Bass; B.A. Pasternack and J. Toole (2002) Yellow-light leadership: How the world s best companies manage uncertainty, Strategy +Business, Second Quarter, 2002; and B.A. Pasternack, P.F. Anderson, and T.D. Williams (2000) Leadership as an Institutional Trait, Strategy +Business, Second Quarter, 2000. 18

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