Organizational ambidexterity balancing short and long term priorities

Antonio Nieto-Rodriguez
I
12
min read
Organizational ambidexterity balancing short and long term priorities

Nokia, Blackberry, TWA, Kodak, Olivetti, Enron, Blockbuster, Delta Airlines, Swiss Air, Arthur Andersen, General Motors, Chrysler, Lehman Brothers, Worldcom…and many other world known companies went busted …one of the main reasons for their failure is because they failed to become ambidextrous

The most accepted definition of organisational ambidexterity is a balance between explorations and exploitation; organisations capable of exploiting their existing competencies while simultaneously exploring new opportunities.

James March refers to this as the exploration of new possibilities and the exploitation of old certainties. Exploitation includes such things as refinement, choice, production, efficiency, selection, implementation and execution. While exploration encompasses knowledge creation and analysis of emerging and future opportunities.

Research shows that ambidexterity is critical for successful strategy execution and that leads to higher performance but at the same time it emphasises that the tension between two distinct capabilities is a key strategic challenge.

Understanding the concept of the ambidextrous organization is one thing, making it a reality another.

Imagine that I told you that to do your work you need to use both hands, mostly the right, occasionally the left, and sometimes both at the same time. You need to use your right hand for writing letters, while the left one to draw paintings. Imagine that you are expected to use both hands with the same level of excellence and that no one tells you when to use one or the other. In fact, no one has told you that for the 20 years you have been working. Your natural tendency is to use your right hand, it is easier, you learned when you were little and you spent thousands of hours practicing and being corrected. For the same reasons, most of your colleagues at work also use their right hand.

Your organisation is a right-handed one, all the processes, the systems, the governance, the structure, the values, the culture, the career path, and even the rewards have been developed in order to excel at the right-hand work. Which is the case for most organisations in your same industry. Let’s admit, in the end, writing is much easier to control and to predict than painting. You can estimate how much time it will take you to write an article, calculate the cost and establish a reasonable price to sell it. Painting requires creativity, you don’t know how much it will cost you, nor when you will finish it, and even worse, in the end, you don’t know if you are going to sell it or not.

However, you just found out that to survive and to be successful a company needs to excel at both, the right-hand and the left-hand work, and to that extend, you also need to be proficient at both. Yet, by nature, and if you or someone else doesn’t force you, you will work with your right-hand. Imagine that as of today, after reading this article, you need to start using your left hand, and not just you, your entire organization needs to shift from being right-handed, focused on being outstanding at writing, to a one that needs to mix-up the writing with the painting. Becoming solely a left-handed organization is not an option either. This change will require that all the processes, the systems, the governance, the structure, the values, the culture, the career path, and even the rewards will have to be adjusted. Just picture the daily tension and chaos, not just for yourself, but for your entire organization.

Being able to use both hands adroitly is known as ambidexterity. It is a phenomenon increasingly applied to companies where the tension between two different business models is described as “organisational ambidexterity”. The concept was first applied to managerial contradictions by Robert Duncan in 1976 and has since entered various streams of research — in strategic management as alignment versus adaptability; in operations management as flexibility versus efficiency; or in innovation management as radical versus incremental.

Research shows that ambidexterity leads to higher performance but at the same time it emphasises that the tension between two distinct capabilities is a key strategic challenge.

Exploration and exploitation

The most accepted definition of ambidexterity is a balance between explorations and exploitation; organisations capable of exploiting their existing competencies while simultaneously exploring new opportunities. James March refers to this as the exploration of new possibilities and the exploitation of old certainties. Exploitation includes such things as refinement, choice, production, efficiency, selection, implementation and execution. While exploration encompasses knowledge creation and analysis of emerging and future opportunities.

Organisations that engage in exploration to the exclusion of exploitation are likely to find that they suffer the costs of experimentation without gaining many of its benefits. They exhibit too many undeveloped new ideas and too little distinctive competence. A well-known example of too much emphasis on exploration is Ericsson, the telecom giant that led the development of the global system for mobile communications. At its peak, its R&D organisation employed 30,000 people in 100 technology centres with considerable duplication of work. Despite its strong focus on exploration, the company’s results went into steep decline. Ericsson laid off around 60,000 employees and closed most of its technology centres to focus back on exploitation in order to return its businesses to profitability.

Conversely, organisations that engage in exploitation to the exclusion of exploration are likely to find themselves trapped in stable equilibrium; going nowhere fast but efficiently.

Maintaining an appropriate balance between exploration and exploitation is a primary factor in the survival and prosperity of any system.

Problem solving

Most of the academic work and research has focused on trying to explain the problem of organisation ambidexterity. Julian Birkinshaw and Cristina Gibson in their article “Building Ambidexterity into an Organisation”, (MIT Sloan Management Review 2004), are among the very the few scholars trying to provide a framework for businesses to become ambidextrous. They describe organisational ambidexterity as the capacity to simultaneously achieve alignment (exploitation – excellence in daily operations) and adaptability (exploration – referring to the organisation’s ability to innovate and change in response to changing demands in the environment). To ensure long-term success, an organisation needs to master both adaptability and alignment. Focusing too much on alignment makes an organisation lose long-term vision, while emphasising adaptability over alignment means building tomorrow’s business at the cost of today’s.

Birkinshaw and Gibson explain that there are two forms of organisational ambidexterity, structural and contextual:

  • Structural ambidexterity is about creating separate organisations or structures for different types of activities, organisations that are either solely aligned or solely adaptive, where employees have clear mandates and are rewarded accordingly.
  • Contextual ambidexterity is when individuals in an organisation have to make choices between exploitation-oriented and exploration-oriented activities in their daily work. To allow this, the organisation context has to be more flexible, allowing employees to use their own judgement as to how they divide their time between adaptation-oriented and alignment-oriented activities.

Unfortunately in today’s world business climate, very few organisations can afford to have an independent structure to solely focus on exploration. This was the case for many companies which invested heavily in R&D as we saw in the Ericsson’s example. They usually had a fairly independent organisation, with its own management and own budgets, isolated from the core day-to-day business. But after the crisis and the extreme focus on efficiency and cost control, most of these independent structures have been drastically reduced or dismantled.

A New view

The structural separation focused on by much academic research is unrealistic. Mostly focused on theory rather than practice and riddled with academic language — exploitation, exploration, adaptability, alignment, ambidexterity, context, organic systems – it is perhaps little wonder that organisational ambidexterity often fails to resonate with executives as an important concept, and yet, it has been proven that it leads to greater returns

As a practitioner I have had to develop an effective means of communicating and executing these concepts. To do so, I describe in my book organisational ambidexterity as the tension between two different business models: running-the-business versus changing-the-business:

  • Running-the-business is the alma mater of the organisation. It includes the core processes, such as operations, sales, customer services, finance and IT. Most of the revenues generated by any firm will come from running the business activities. Running-the-business keeps the company alive, if you stop running it, the company will quickly die. The focus of running-the-business is short-term; objectives are mainly commercial, financial and performance-driven; it is about efficiency, productivity, speed; in academic terms it is about exploitation. It is akin to writing with the right-hand.
  • Changing-the-business is the future of the organisation. It includes all the initiatives, projects and programmes, strategic and tactical. Organisations have often hundreds and thousands of initiatives running in parallel. Changing-the-business creates future value for the organisation; the objectives are often more strategic and closer to the vision, but the benefits are only achieved in the medium and long-term, and, as such, are less tangible and quantifiable than operational objectives. These targets aim at transforming the business to significantly increase growth and profitability. In addition, it is highly risky and there is no certainty that benefits will be achieved at all. In academic terms this is exploration. It is akin to painted left handed.

The main trouble senior executives have in practice is that it is very difficult to focus on both dimensions at the same time. If you focus too much on short term objectives, the competition will soon catch-up as market conditions evolve. On the other hand, if you put too much attention on changing-the-business, you will sacrifice today’s business in the hope of having a better business in the future.

And, to make it even more complicated, being successful in a single dimension is also extremely difficult. Revealing research by Manuel Hensmans and colleagues investigated 215 of the largest publicly listed UK firms over a period of 20 years, from 1984 till 2003. First they looked at how well companies could run their business over a long period. Out of the 215, only 28 of the companies were able to consistently perform at the frontier of their sector performance over the two decades. Of this 28, only three were able to made major strategic changes while performing consistently over the 20 years.

How to build organizational ambidexterity

Building organisational ambidexterity requires a radical change in every single element that composes a company (the organisational context). I have developed and road-tested a framework that addresses these six critical pillars:

1. Leadership and culture

Leadership is where everything starts and ends in a company. Although the company’s culture and values are defined over time and can remain unchanged for decades, the CEO and top management can alter these elements at any point with their messages and actions. In an ambidextrous organisation, the CEO is the main driver of change; thus, he or she needs to be the first one to adopt the culture and values and to gain top management’s support in transmitting these principles to the rest of the organisation. Top management needs to be aware of how run-the-business and change-the-business activities operate independently and how they interact.

2. People and skills

The biggest challenge to the People and Skills pillar of an ambidextrous organisation is to seamlessly align two different sets of HR models. The organisation must first define the change-the-business aspect and then integrate it fully with the run-the-business model. Highly motivated employees will gain experience in both dimensions alternately, for example, spending two years in a marketing position and then moving on to manage a CRM implementation project. Employees cannot become managers if they have not previously managed a large project. It is important that HR management is aware of these different models and takes them into account when defining the organisation’s HR policies.

3. Structure and governance

Having the right organisational and governing structure is probably the biggest challenge of becoming ambidextrous. Making changes within an organisation is extremely complicated for two fundamental reasons: those that pertain to history and those relating to human behaviour. First, organisations are built over many years; and over time, they become rusty, expensive to run, and out of touch with reality. Second, the hundreds and sometimes thousands of individuals that make up an organisation have their old habits, which they are often reluctant to change. Some of these individuals are also influenced by decision-making power, which is often reflected by who has the largest department, the highest budgets, and the biggest salary.

This pillar is one of the most difficult business elements for which to find the right balance, because both the organisation and the external environment constantly change. Implementing the right connections between the change-the-business and the run-the-business activities is fundamental for the execution of the strategy. If this optimal balance is achieved, the organisation will become extremely responsive to the changing environment and able to quickly react to the competition. Eventually, the organisation can become a trendsetter in its industry.

4. Processes and methods

Processes, methods, and standards are necessary to ensure that work is performed consistently throughout the organisation. Each process has a specific objective, which requires the performance of certain activities to produce the desired output. Not only do processes help to gauge performance and increase efficiency, they also facilitate continuous improvements and give management better control over the company. Nevertheless, most organisations have mature run-the-business processes. This is not the case for the change-the-business dimension, whose processes are not fully developed and are less embedded in the organisation, or for the link between the two dimensions.

To become an ambidextrous organisation, the run-the-business and the change-the-business processes and methods must interconnect at certain critical points. If these connection points are missing, the company will remain very strongly unbalanced in the direction of its run-the-business side, as this is generally its dominant dimension.

5. Systems and tools

None of the above improvements can be achieved without a set of critical systems and tools that support the execution and the management of both the run-the-business and the change-the-business components. Organisations today are composed of an amalgam of applications. Each dimension has specific applications that are needed to efficiently perform its role in the business. If we consider that strategy execution is the combination and integration of the run and the change, then we can conclude that companies today don’t have any software to plan and to execute their strategies.

This is one of the reasons why strategy execution is so difficult; and although many IT vendors claim to have produced a strategy execution tool, this is not the case. In fact, there is no single tool that can cover both sides of the business and consolidate the information to allow management to follow up the execution of their strategies. The all-embracing strategy execution tool has not yet been invented. On the other hand, being regularly confronted with the lack of such a tool has led me to find a temporary solution that I believe should form the basis for its future development.

6. Enterprise performance management

Enterprise performance management refers to a framework (e.g., processes, tools, key performance indicators) that manages performance and measures it against the company’s predefined operational, commercial, and strategic goals. Some well-known performance management methodologies include total quality management (TQM), Economic Value Added (EVA), Six Sigma (6Σ), and Activity Based Costing (ABC); but the one that is most widely used is the Balanced Scorecard, developed in 1992 by Robert Kaplan and David Norton. The main drawback of the Balanced Scorecard, and the other enterprise performance management methodologies, is that they address only the run-the-business dimension, thus failing to account for a large and key element of strategy execution. Enterprise performance management should be a top-down framework that focuses on managing the execution of the firm’s strategic goals. It should cover both run-the business and change-the-business dimensions and monitors the execution of the commercial and operational goals together with the company’s strategic roadmap.

This article was published by the Strategic Business Review, from the London Business School –  Ambidexterity Inc. 

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