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The essence of business strategy: How to be ambidextrous

Loizos HeracleousProfessor of Strategy

Warwick Business SchoolAssociate FellowOxford University

www.heracleous.org@strategizing

Organisations face a fundamental challenge…

Both And…

Exploitation Exploration

High efficiency Superior quality & innovation

Alignment Adaptability

Global standardization Local customization

Differentiation Integration

Control Empowerment

o Strategies need to be focused and clear, and resources /capabilities need to be aligned behind these strategies

o …yet there are competing tensions

o Often, excelling in one type of compeencies can grant competitive advantage (e.g. Ryanair, Ferrari)

o Some orgs go beyond balancing tensions, to reach exceptional, industry-leading levels in each dimension

Porter, 1996; March, 1991

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From iso-value line to pushing frontiers (Market driven vs market driving)

Competency 2(e.g. efficiency, reliability, exploitation)

Low High

Competency 1(e.g. Service excellence, innovation, exploration)

Low

High

* *

**Iso-value

line

**Strategic ambidexterity

Kumar, Scheer & Kotler, 2000

Forbes’ most recent list of billionaires includes the founders of…

Competency 2 (e.g. efficiency, reliability, exploitation)

Low High

Competency 1 (e.g. Service excellence, innovation, exploration)

Low

High

* *

* * Iso-value line

* * Strategic ambidexterity

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Ambidextrous organisations

Industry-leading service

quality at budget level

efficiency

Strategic innovation and leading quality, with industry-leading efficiency

Highest quality cardiac

surgery with lowest cost in

industry

Lowest rate of warranty claims with highest efficiency in peer group (lean manufacturing)

Heracleous & Wirtz, 2010; Heracleous, 2013; Singh, Pangarkar & Heracleous, 2013; Bruce & Heracleous, 2015

Heracleous & Gonzalez, 2014

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…and some orgs make instructive case studies of how ambidexterity may be lacking or compromised

Heracleous et al., 2015

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Xerox• Founded in 1906 as “The Haloid Company” in Rochester, NY• Introduced the Xerox 914, the first automatic copier in 1959• By 1970 it achieved 95% market share, gross margins of 70-80%• In same year Xerox created Xerox PARC in order to create

technologies for the “office of the future”• Xerox PARC attracted the top computer scientists of the day• …who were left to explore away from the bureaucracy of HQ• A classic “structural ambidexterity” organization design

Xerox PARC inventionsYear Invention

1971 Laser printing

1972 Object-oriented programming

1973 Alto personal workstation, start development of Ethernet

1974 Bravo word processing program, WYSIWYG editing protocol

1975 Graphical User Interface (GUI) with point-and-click interaction

1980 Non-erasable, magneto-optical storage devices

1982 Optical fiber-cable based local area network (LAN)

1986 Multibeam lasers for 2nd generation laser printing

1987 16-bit coding system later developed into Unicode standard

1988 Ubiquitous computing vision, PARCTab and PARCPad prototypes

1992 Helped to design internet governance standards

2000 Electronic reusable paper

2002 PARC spun off, becomes wholly owned subsidiary of Xerox

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Risk%aversion,%slow%opportunity%recogni5on%

Leasing%copiers%to%corporate%customers%

Sales%force%and%a;er%sales%service%essen5al%

Xerox%brand/reputa5on%as%key%resources%

Whole%copier%system%/%proprietary%technology%

Targe5ng%high%end%with%expensive%products%

Focus%on%core%business%

Performance%pressures%

Dominant%logic%Core%competencies%

Execu5ve%mindset%

Geographical%distance%between%Xerox%&%PARC%

PARC%allowed%to%pursue%radical%innova5ons%

No%system%for%moving%inven5ons%to%market%

Lack%of%knowledge%transfer%

Structural%separa5on%

Lack%of%integra5on%mechanisms%

Business%model%

Disjointed%inven5ons%

High%org%complexity%and%bureaucracy%

Goal%misalignments%between%Xerox%&%PARC%

Lack%of%mutual%understanding,%hos5lity%

Xerox%execs%unwilling%to%experiment%

Culture%clash%

Compe55on%for%resources%

Ac5ve%campaigning%based%on%agendas%

PARC%losing%key%decisions%

Poli5cking%

Organiza5onal%tensions%

Barriers to ambidexterity at Xerox PARC

Heracleous et al., 2015

How to accomplish ambidexterity?Structural ambidexterity

Contextualambidexterity

Ecologicalambidexterity

How Set up separate subsidiaries with their own resources, systems, values and procedures, to be coordinated by the top management team

Develop values and processes that empower individuals to make their own decisions about how to balance conflicting demands

Create networks and partner with others with complementary capabilities. Createsynergies in joint projects in terms of outcomes & learning

Why This way the new subsidiary will not be dragged down by dominant organisation

Individuals and processes, rather than structures, is where balancing takes place

Value is developed in ecosystems rather than in stand-alone entities

…but, this is not the whole answer; the how is still unclear

Tushman & O’Reilly, 1986; Birkinshaw & Gibson, 2004, Stadler et al., 2014

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Apple Inc: Strategic innovation at rock bottom cost

• Consistently ranks as one of world’s most innovative companies, also winning innovation and design awards...

• With premium offerings that have redefined entire industries…• Accomplishing exceptional financial performance• What is not usually appreciated is the level of efficiency with

which this is being done

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10

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Dell Apple Inc HP IBM RIMM Google Intel

5-year R&D intensity

Heracleous, 2013

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0

10

20

30

40

50

60

70

80

Apple Inc Dell IBM RIMM HP Sony Intel

Inventory turnover

Heracleous, 2013

0

5

10

15

20

25

Apple Inc

HP Dell RIMM Intel Google IBM Sony

5-year SG&A as % of revenue

Heracleous, 2013

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0

5

10

15

20

25

30

Google Apple Inc

Intel RIMM IBM HP Dell Sony

5-year Net Profit Margin

Heracleous, 2013

Exceptional innovation & design... At rock bottom cost

Indicators of differentiation Indicators of efficiency

Winner of several innovation and design awards; consistent groundbreaking offerings

Lowest SG&A costs; highest inventory turnover; both more efficient than Dell

Ability to command premium prices and achieve exceptional profit margins and revenue growth

R&D intensity lowest in peer group (while recognised as world’s most innovative company)

How Apple achieves differentiation How Apple achieves intense efficiency

Focus on, and investment in, innovation capability; deep collaboration approach

Strategic focus in terms of product-markets, types of products, and product features

People strategy – hiring the best people and motivating them to excel (location advantage from being based in Silicon Valley)

Distributed org design – high value added functions in California, manufacturing outsourced to cheapest locations

Branding – image of maverick creativity; Investment in Apple Stores in high profile locations

Synergies from related diversification in terms of industries as well as products (e.g. technological platforms)

Apple’s proprietary ecosystem allows higher pricing control and customer capture

Intense focus on supply chain efficiency (less warehouses, reduction of supplier numbers)

Historically, Steve Jobs’ leadership –demanding, perfectionist, visionary

Flat organization and simplified processes increase efficiency

Exploration ExploitationHeracleous, 2013

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Implementing ambidexterity at Apple Inc• Configure culture and processesØ High performance culture (discretionary effort in context of

optimized organization design and supply chain); SHRM cycleØ Flat, simple organization design reduces cost and fosters “deep

collaboration”• Make strategic use of technology to support ambidexterityØ Proprietary ecosystem supports strategic innovation and reduces

bargaining power of suppliersØ Synergies (economies of scope) accruing from products sharing

technology (e.g. operating system); while user friendliness and customer loyalty increase

Implementing ambidexterity at Apple Inc

• Make investment decisions that go beyond financial criteria towards supporting ambidexterity

Ø Acquires small companies to access critical competencies swiftly, at lower cost & low transaction risk, vs lengthy in-house development

Ø Focus in terms of markets / products / features enables economies of scale, scope & learning, and makes best use of scarce mngt attention

Ø Harness power of business systems and networks to support ambidexterity

Ø Apple is a network organization, outsourcing everything except critical functions (design, branding, distribution)

Ø Acquires critical inputs efficiently employing vast bargaining power, closely controlling quality through partnering with core suppliers

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Quantum Strategy at Apple Inc

Loizos Heracleous

Over the last 15 years, Apple Inc has revolutionized thepersonal electronics, telecom, computer and media indus-tries through a string of blockbuster products that offerunique, designer, integrated customer experiences. In theprocess, the company has helped to accelerate the blurringof industry boundaries through the spread of devices thatoffer convergent technologies, and to position itself so that itexerts significant power over both consumers and industryplayers, with outstanding performance results. Applebecame the most valuable listed company, with a marketvalue of US$623 billion in August 2012, and has gathered thehighest accumulation of cash reserves ($121 billion in Sep-tember 2012) of any listed company. It regularly achieves netmargins of above 20 percent in industries where most com-petitors achieve single-digit margins. Its net margin was 26.7percent during 2012, having increased from 23.9 percent in2011 and 21.5 percent in 2010. During the same period,Apple’s revenues increased from US$65.2 billion in 2010 toUS $108.2 billion in 2011 and to US$156.5 billion in 2012.

The chief architect of the business model and valuesystem that led to this exceptional performance is widelyacknowledged to be the late Steve Jobs. With Jobs’ passing inOctober 2011, many have wondered whether the magic atApple would last, or gradually fizzle out. In this article, I takean in-depth look at the strategy and organization of Apple toargue that the magic will last. This is not only due to clear andconsistent strategic choices over time that have served toinstitutionalize the Apple way; it is also due to the fact thatApple has achieved what might be called Quantum Strategy —a strategy that is both rare, and incredibly difficult forcompetitors to imitate.

A key aspect of Apple’s strategy is the ability to balanceintense efficiency in operations (in fact the highest efficiencylevels in its peer group), with outstanding serial innovationand addictive product design, both of which command pre-mium pricing and redefine markets. This combination begsconventional wisdom, which maintains that if a company’scompetitive advantage is based on intense efficiency andvalue, it won’t invest beyond what’s necessary in innovation,

design, or service. In fact it will strive to cut costs every-where along its value chain, so as to align these elementswith its strategy. Conversely, conventional wisdom holds thata company competing on innovation, outstanding design, orservice excellence will not be able to reach intense levels ofefficiency, since these capabilities are costly to develop andmaintain.

Apple, however, has achieved both — what might be seenas the holy grail of strategy — and it is worth asking how. Theanswer can help us gain insight into the trickiest of stra-tegies to execute, and one that most companies do not eventry to achieve. This strategy, if successfully executed,represents a shift of the iso-value curve to the right inany industry it is employed in, not just movement along thecurve where most competitors are positioned. I call thisQuantum Strategy, after the idea that at the quantum levelof reality, the same electron can be at two places at thesame time, and two different electrons can occupy the verysame physical space. Both seem to be logical and naturalimpossibilities, but nevertheless do occur. An understand-ing of Quantum Strategy offers important lessons for execu-tives. In particular, we can understand the principles areinvolved in breaking the trade-offs that are conventionallyassumed to constrain strategic choices and to lock firms insingle generic strategies.

FROM GENERIC STRATEGIES AND ONE-DIMENSIONAL STRATEGIC CHOICES, TOBREAKING TRADE-OFFS

Porter’s classic strategies have shaped strategic thinking fordecades, and Porter’s ideas have consistently been recog-nized as among the most influential in business. Most com-panies have employed differentiation, cost leadership orniche strategies as a first approximation to their strategicthinking. The belief has been, as Porter had argued, that it isimpossible to achieve a sustained, true combination ofcost leadership and differentiation because of the inherent

Organizational Dynamics (2013) 42, 92—99

Available online at www.sciencedirect.com

jo ur n al h o mep ag e: www .e lsev ier . co m / loc ate /o r gd yn

0090-2616/$ — see front matter # 2013 Elsevier Inc. All rights reserved.http://dx.doi.org/10.1016/j.orgdyn.2013.03.002

More detailed analysis of Apple’s strategy can be found here

How to be ambidextrous

Configure culture and processes

Make strategic use of technology

Investment decisions beyond financials towards

ambidexterity

Harness the power of

business systems and networks

Ambidextrous leadership

Loizos Heracleous ©

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Competency traps• Over-emphasizing what made us successful (exploitation),

downplaying search for new competencies (exploration)• History filled with examplesq Xerox and PARCq Blackberryq Kodak• Competency traps are multi-dimensional and endemicq Cognitive dimension – dominant logicq Organizational dimension – structural separation &

disjointed inventionsq Behavioral dimension – culture clash and politics

Heracleous et al., 2015

How to mitigate competency traps• Balanced top team…• Reflecting on and challenging the dominant logic through

vibrant debates• Developing productive ways to deal with tensions and conflict• Making conscious efforts to balance exploration and

exploitation• Creating effective cross-functional and cross-divisional

integration mechanisms

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References• Birkinshaw, J. & Gibson, C. 2004. The antecedents, consequences, and mediating role of organizational

ambidexterity. Academy of Management Journal. • Bruce, K. & Heracleous, L. 2015. Narayana Health: Bringing quality healthcare to the masses. Case

Centre, case no. 315-202-1. • Chesbrough, H. 2002. Graceful exits and missed opportunities: Xerox's management of its technology

spin-off organizations. Business History Review, 76(04): 803-837.• Eisenhardt, K. M. & Graebner, M. E. 2007. Theory building from cases: Opportunities and challenges.

Academy of Management Journal. • Heracleous, L. 2013. Quantum strategy at Apple Inc. Organization Dynamics. • Heracleous, L. & Gonzalez, S. 2014. Two modest propositions for propelling NASA forward. Space

Policy. • Heracleous, L., Papachroni, A., Andriopoulos, C., & Gotsi, M. 2015. Structural ambidexterity and

competency traps: Insights from Xerox PARC. Work in progress. • Heracleous, L. & Wirtz, J. 2010. Singapore Airlines’ balancing act. Harvard Business Review. • Kumar, N., Scheer, L. & Kotler, P. 2000. From market driven to market driving. European Management

Journal.• March, J. G. 1991. Exploration and exploitation in organizational learning. Organization Science. • Porter, M. E. 1996. What is strategy. Harvard Business Review. • Stadler, C., Rajwani, T. & Karaba, F. 2014. Solutions to the exploration/exploitation dilemma. Networks

as a new level of analysis. International Journal of Management Reviews• Singh, K., Pangarkar, N. & Heracleous, L. 2013. Business Strategy in Asia. Cengage Learning. • Tushman, M. L. & O’Reilly, C. A. 1986. Ambidextrous organizations: Managing evolutionary and

revolutionary change. California Management Review.• Tushman, M. L., Smith, W. K. & Binns, A. 2011. The ambidextrous CEO. Harvard Business Review.