“To deliver growth among the best in our industry, we’re strengthening our core business, renewing our focus on discontinuous innovation, and implementing a $10 billion productivity program.”
—Procter & Gamble, 2012 Annual Report
Managers today face an apparent contradiction. On one hand, austerity in the developed world and intense competition push them to cut costs and drive efficiencies. On the other, the increasing pace of change means they need to emphasize innovation.
Resolving this contradiction requires ambidexterity—the ability to both explore new avenues and exploit existing ones. Companies need ambidexterity when operating in diverse environments that require different styles of strategy simultaneously, or in dynamic environments that require them to transition between styles over time. Companies need to be ambidextrous when operating in both emerging and developed markets, when bringing new products and technologies to market while exploiting existing ones, when integrating startups into their existing business, and in a range of other circumstances.
The need to develop ambidexterity is widely acknowledged: in a recent BCG survey of 130 senior executives of major public and private companies, fully 90 percent agreed that being able to manage multiple strategy styles and transition between them was an important capability to develop. But this aspiration is hard to realize. Exploration and exploitation require different ways of organizing and managing. Exploration is facilitated by long-term targets, a flexible and decentralized structure, and a culture of autonomy and risk taking, while exploitation typically requires short-term targets, centralization, standardization, and discipline in execution. And switching between them is difficult because managers tend to emphasize what delivered success yesterday. In the words of BCG’s founder, Bruce Henderson, “Success in the past always becomes enshrined in the present by the over-valuation of the policies and attitudes which accompanied that success.”
3M, a company renowned for its culture of innovation, experienced the exploration-exploitation tradeoff in the early 2000s, when it introduced Six Sigma practices in an effort to boost productivity. While the company’s productivity did indeed increase, the same practices reduced 3M’s ability to innovate, as evidenced by a fall in the proportion of revenues from new products.
Ambidexterity is therefore rare: a recent BCG study of the financial performance of approximately 2,000 publicly listed U.S. companies found that only about 2 percent consistently outperformed their industry in both turbulent and stable periods. But ambidexterity is becoming an increasingly critical asset as the diversity and dynamism of business environments rise. The growing economic importance of emerging markets, for example, is expanding the range of environments that companies need to operate in. At the same time, technological change is overturning existing products and business models at an increasing rate. It took the PC approximately 15 years to go from 10 percent market penetration to 40 percent; it took the Internet 5 years and smartphones fewer than 3.