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To compete successfully, managers must balance contradictory structures, skills and cultures. In a new book, Charles O'Reilly and Michael Tushman examine how some leading companies have managed this balancing act for long-term success.
It is not unreasonable to fear that a company now at the top of its game may inescapably fall short one day. The business press is overflowing with tales of inspiring innovators, among them Apple and Philips, that found themselves fighting for survival. The stories of failure among industry giants such as IBM, General Motors and Sears illustrate just how easily competitive advantage can vanish.
Success followed by failure, innovation followed by inertia. The "success syndrome" is a global disease that can strike companies in any industry. In hindsight, it's clear that most of these organizations became complacent in the false security of short-term success and were blindsided by unconventional competitors and new technology. This trap reflects the most critical and common leadership challenge for executives and their firms.
In a new book, Winning Through Innovation: A Practical Guide to Leading Organizational Change and Renewal, the Business School's Charles O'Reilly and Columbia University's Michael Tushman explain why short-term corporate success often increases the chances of long-term failure. To avoid the success syndrome, the authors urge managers to do two very different things at once: Make small, incremental changes and lead revolutionary change. The greatest managers, says O'Reilly, foster a culture that celebrates both stability and change, ensuring tomorrow's success.
Like good jugglers, managers must balance the contradictory structures, skills and cultures required to successfully compete. The dilemma confronting them is this: In the short run, they must respond to changes in their marketing environment with step-by-step changes to ensure they survive as the fittest competitor. But in the long run, they may have to shelve the very strategy or product that has made their organization successful. These contrasting managerial demands require that managers periodically destroy what has been created in order to reconstruct a new organization better suited for the next wave of competition or technology.
The authors liken corporate survival to evolutionary biology. In the animal kingdom, adaption to change occurs gradually over long time periods. The process is one of variation, selection and retention. The Darwinian premise is that animals adapted slowly to environmental changes. However, this ignores a crucial point, says O'Reilly. What happens when periodic discontinuities occur, such as rapid changes in temperature or the sudden disappearance of a food source? Under those conditions, reliance on gradual change is a one-way ticket to extinction.
"Discontinuities required a different version of Darwinian theory that of punctuated equilibria, in which long periods of change were punctuated by massive discontinuities," say the authors. "Survival went to those species with the characteristics needed to exploit the new environment."
The same is true of corporations. "Organizations most able to adapt to a given market will survive until there is a major discontinuity, at which point managers are faced with the challenge of reconstituting their organizations to adjust to the new environment. Those who respond with incremental change alone are unlikely to succeed," the authors say.
Consistently successful corporations use various resources, skills and cultures in different parts of the firm to take advantage of technology cycles and to develop new products. These institutions are what O'Reilly and Tushman call ambidextrous organizations companies with a variety of business units that support different structures, competencies and cultures. They are the key to creating constant innovation streams and ensuring long-term survival.
To illustrate how firms can develop a winning organization, consider three successful ambidextrous companies: Hewlett-Packard (HP), Johnson & Johnson (J&J) and Asea Brown Boveri (ABB). Each of these has been able to compete in mature market segments through incremental innovation and in emerging markets and technologies through what the authors call discontinuous innovation shedding cumbersome corporate baggage in favor of new businesses. HP went from an instrument company to a minicomputer firm to a personal computer and network company. J&J moved from consumer products to pharmaceuticals. ABB transformed itself from a slow heavy-engineering company based primarily in Sweden and Switzerland to an aggressive global competitor with investments in Eastern Europe and Asia.
Although these three companies represent more than 350,000 employees combined, each has found a way to remain small by emphasizing autonomous groups. J&J has more than 165 separate operating companies that scramble relentlessly for new products and markets. ABB relies on 5,000-plus profit centers, with an average of 50 people in each, that operate like small businesses. HP has more than 50 separate divisions and a policy of splitting divisions larger than a thousand or so people. The logic in these organizations is to keep units small so employees feel a sense of ownership and take responsibility for their own results. This encourages a culture of autonomy and risk-taking that could not exist in a large, centralized organization, O'Reilly says.
Size is used to leverage economies of scale, not to slow the organization down. These companies retain the benefits of size, especially in marketing and manufacturing. Hewlett-Packard, for example, uses its relationships with retailers developed from its printer business to market and distribute its new personal computer line. These firms accomplish this without top-heavy staffs found at other firms. ABB reduced its hierarchy to four levels, and a skeleton headquarters staff of 150 keeps the structure fluid.
At Hewlett-Packard, former CEO John Young, MBA '58, recognized in the early 1990s that the more centralized structure HP had adopted in the 1980s to coordinate its minicomputer business had resulted in a suffocating bureaucracy. He wiped it out, flattening the hierarchy and dramatically reducing the role of the center. Now, decisions are kept as close to the customer or technology as possible; headquarter's role is to make operations go faster. Staff have only the expertise that the field wants and needs. Reward systems are specific to the nature of the business unit and emphasize results and risk-taking.
At ABB, CEO Percy Barnevik swears by his 7-3 formula. Better to make quick decisions and be right 7 times out of 10 and wrong 3 than waste time trying to find a perfect solution. At J&J there is a tolerance for certain types of failure, which extends to congratulating managers who take informed risks even if they fail. An important part of the solution for ambidextrous firms is massive decentralization of decision making, with consistency achieved through information sharing, strong financial controls and individual accountability. But couldn't such a scheme easily lead to fragmented strategies and operations?
The answer, says O'Reilly, is strong social control, exercised through the corporate culture. Culture is the key both to short-term success and, if not managed correctly, long-term failure when it creates obstacles to innovation and change. Consider IBM, one of America's great corporate icons. Its failure cost nearly 200,000 jobs and billions in shareholder value. The IBM culture was "characterized by an inward focus, extensive procedures for resolving issues through consensus and 'push back,' an arrogance bred by previous success, and a sense of entitlement on the part of some employees that guaranteed jobs without a quid pro quo. This culture, masquerading as the old IBM's basic beliefs in excellence, customer satisfaction, and respect for the individual, led to a preoccupation with internal procedures rather than an understanding of the changing market," write Tushman and O'Reilly.
But a common overall culture can be the glue that holds companies together. The key is reliance on a strong, widely shared corporate value system to promote integration across the company and to encourage identification and sharing of information and resources. Yet, the authors argue, the culture should be loose in the sense that the way values are expressed varies according to the type of innovation required in different parts of the company. At HP, for example, managers value openness and the consensus needed to develop new technologies. Yet, when implementation is critical, managers recognize that consensus can be fatal. O'Reilly reports that one senior manager in charge of getting out a new workstation prominently posted a sign saying, "This is not a democracy."
Individual units may have widely varying subcultures that fit their businesses. For example, there are distinct differences between HP's new video server unit and an old-line instrument division. What constitutes a risk at a mature division is different from risk-taking in a unit struggling with a brand-new technology. Strategy flows from the bottom up. HP's $7 billion printer business emerged not because of strategic foresight and planning at headquarters but rather because of the entrepreneurial drive of a small group of Boise managers who were given freedom to pursue what was then believed to be a small market.
The bottom line is that ambidextrous organizations learn by the same evolutionary mechanism that sometimes kills successful firms: variation, selection and retention. They promote variation in products and technologies by decentralizing and encouraging individual autonomy and accountability. They select winners in markets and technologies by staying close to their customers, by being quick to respond to market signals and by having clear mechanisms to kill products and projects. This process allowed the development of computer printers at HP to move from a venture that was begun without formal approval to a business that now accounts for almost 40 percent of HP's profits. Finally, products and managers are retained by the market, not by a hierarchical staff removed from real customers.
Corporate vision provides the compass by which senior managers can make decisions about which of the many alternative businesses to invest in, say the authors, but the market is the ultimate arbiter of the winners and losers. Just as success or failure in the marketplace is Darwinian, so too is the method by which ambidextrous organizations learn. "They have figured out how to harness this power within their companies and organize and manage accordingly," O'Reilly says.
For managers, the challenge is clear. "Managing an organization that can succeed at both incremental and radical innovation is like juggling. A juggler who is very good at manipulating just a couple of balls is not interesting. It is only when the juggler can handle multiple balls at one time that his or her skill is respected. For organizations, success for both today and tomorrow requires managers who can simultaneously juggle several inconsistent organizational structures and cultures and who can build and maintain ambidextrous organizations."
Excerpted from Winning Through Innovation
©Harvard Business School Press, 1997
Excerpt from the book detailing two corporate examples: successful and unsuccessful)
In the mid-1950s, vacuum tubes represented roughly a $700 million market. Yet from 1955 to 1982, there was almost a complete turnover in industry leadership brought on by the advent of the transistor. By 1965, new firms such as Motorola and Texas Instruments had become the important players, while Sylvania and RCA had begun to fade. Over the next 20 years still other upstart companies like Intel, Toshiba, and Hitachi had become the new leaders, and Sylvania and RCA exited the product class.
What happened to companies like RCA? RCA was initially successful at making the transition from vacuum tubes to transistors. But within RCA, bitter disputes raged about whether the company should enter the transistor business and risk cannibalizing its profitable tube business. Some made reasonable arguments that the transistor business was new and potential profits from it uncertain. Others, without knowing whether transistors would catch on, felt that it was risky not to pursue the new technology.
But even if RCA were to enter the solid-state business, thorny organizational issues would have to be worked through. How could the firm manage both technologies? Should the new solid-state division report to the head of the electronics group and to a manager steeped in the old culture of vacuum tubes? With its great marketing, financial, and technological resources, RCA decided to enter the solid-state business, but in the absence of a clear strategy and an understanding of the cultural differences required to compete in both the solid-state and vacuum tube markets, RCA failed.
Notes Richard Foster, a director at McKinsey & Company, "Of the 10 leaders in vacuum tubes in 1955, only two were left in 1975. There were three variants of error in these case histories. First is the decision not to invest in the new technology. The second is to invest, but pick the wrong technology. The third variant is cultural. Companies failed because of their inability to play two games at once: to be both effective defenders of what quickly became old technologies and effective attackers with new technologies." Firms like Intel and Motorola were not saddled with internal conflict and inertia, and as they grew, were able to re-create themselves. Other firms, like RCA, were unable to manage these multiple technological approaches; they were trapped by their successful pasts.
Although Hattori-Seiko was the dominant Japanese watch producer during the 1960s, Japanese firms were small players in the global watch market. Driven by an aspiration to be a global leader in the business and informed by internal experimentation among alternative oscillation technologies (quartz, mechanical, and tuning fork), Seiko's senior management team made a bold bet. It spearheaded Seiko's transformation from merely a mechanical watch firm into a quartz and mechanical watch company.
This move into low-cost, high-quality watches triggered wholesale change within Seiko and, in turn, within the worldwide watch industry. Even though the Swiss had invented both the quartz and tuning fork movements, they chose to reinvest in mechanical movements.
Ultimately, the quartz movement won the oscillation battle to become the industry standard. As Seiko and other Japanese firms prospered, the Swiss watch industry suffered drastically. By 1980, SSIH, the largest Swiss watch firm, was less than half the size of Seiko. Only when SSIH and Asuag, the two largest Swiss firms, went bankrupt and were taken over by the Swiss banks and transformed into SMH, would the Swiss move to recapture the watch markets.
By Barbara Buell