From a strategic point of view, companies have been facing an apparent contradiction: They need to keep the business profitable, while at the same time preparing it for the future. On the one hand, intense competition induces austerity measures, cost-cutting, and increased efficiency. On the other hand, the increasing pace of change demands innovation.
How do we reconcile cost-cutting and efficiency with innovation?
The answer is “strategic ambidexterity.”
The term ambidexterity as applied to management appears in July 2004 with the publication of the article “Building Ambidexterity into an Organization” by Birkinshaw and Gibson in the MIT Sloan Management Review.
Organizational ambidexterity can be understood as a company’s ability to seek new paths, while comprehensively exploring current ones. Companies need to be ambidextrous to operate in different environments that simultaneously require different management models, or in dynamic environments that require a transition between styles over time. It implies developing separate structures for different types of activities: those that attend to the present and those that project the future. Companies need to be ambidextrous when operating in emerging and developed markets, when developing new products and technologies to market while exploiting existing ones, when integrating startups into their current businesses, and in other circumstances.
“Strategic ambidexterity” would be the ability to rethink strategy and apply multiple approaches to strategy simultaneously and successively, as many companies operate in more than one environment at the same time. Strategic ambidexterity is an approach that calls for using different strategy approaches aligned with one other.
The four approaches to ambidexterity, illustrated in Figure 1, are: separation, exchange, self-organization, and ecosystem. These in turn are a function of the degree of diversity and dynamism of the environment.
Most large companies operate in various environments that change rapidly over time – spanning many markets and increasingly diverse product categories – and are supported by a wide range of functions. This diversity requires companies to be strategically ambidextrous, because no single approach to strategy can be fully applied by a large company at all times.
The appropriate approach to organizational and strategic ambidexterity depends on how many different environments the company faces (diversity) and how often these environments experience transformation (dynamism).
A separation approach means that different strategy approaches are managed top-to-bottom and executed independently of one other in different units or markets. Companies that apply a separation approach manage a common pool of resources that shift between the different strategy approaches.
The exchange approach requires that resources and information flow across business boundaries. This can be challenging, because when senior management makes the decision to change style, companies may respond slowly, resource conflicts may arise between the units, and teams—fearing the consequences of switching to a new project that may not succeed—may resist change. Startups are particularly adept at making changes; however, that doesn’t mean that a similar culture can’t exist in a large corporation.
Self-organization means that each unit chooses the best approach to strategy. A self-organizing approach presents some disadvantages, as the company may incur significant duplication costs, diseconomies of scale in individual units, and the additional costs of complying with local rules. Therefore, this approach is only appropriate in highly diverse and dynamic environments.
Finally, in an ecosystem approach companies seek different approaches to strategy externally through partners specializing in the necessary or desired approach.
The need to develop ambidexterity is widely recognized by managers, as evidenced by a survey conducted by the Boston Consulting Group with 130 senior executives from large public and private companies. The survey pointed out that 90% of respondents agreed that being able to manage various styles of strategy and the transition between these styles are important competencies to be developed.
Another BCG survey of the financial performance of approximately 2,000 U.S. companies found that only about 2% consistently exceeded their industry’s performance during turbulent and stable periods.
In conclusion, we can be see that the growing economic importance of emerging markets is expanding the range of environments in which companies need to operate. At the same time, technological transformation is changing existing products and business models at an ever-increasing pace. As the diversity and dynamism of business environments grow, strategic ambidexterity has become an increasingly critical asset.