Balancing Innovation via Organizational Ambidexterity – Part 2

This is part two of a three-parts article co-written with innovation-3‘s Frank Mattes.

In the first part we worked out why successful firms need to balance radical and incremental innovation. We introduced the concept of organizational ambidexterity as an appropriate way for simultaneously conducting exploration and exploitation, the two paradigms behind radical and incremental innovation.

This second part shows some best practice examples of how some of the most innovative firms are setting up organizational ambidexterity.

The challenges for innovation management are mounting: convergence of industries, shortening product life cycles, explosion and globalization of knowledge, rising importance of business model innovation, increasing impact of internet-based social networks are just a few of the megatrends that generate new realities for innovation managers.

These new realities require innovation leaders to find out how exploration and exploitation can be run simultaneously and balanced concurrently. In theory, there is also the concept of a consecutive balancing in which a firm “switches” between exploration and exploitation. From a practitioner’s perspective, however, this is not a real option since the management of the switching cycles is overly complex and the whole approach is too sluggish to adapt to swiftly changing conditions.

Firms use contextual and structural ambidexterity

Analyzing some of the most innovative firms, we found that these achieve concurrent balancing of radical and incremental innovation via two generic forms of organizational ambidexterity: contextual ambidexterity and structural ambidexterity.

Table: Key differences between structural and contextual ambidexterity

In the remainder of this article we will look at some selected best practice examples that show how contextual and structural ambidexterity may be set up.

Contextual ambidexterity set-ups

There are two distinct types of contextual ambidexterity:

• Set-up 1 is a permanent set-up: a certain percentage of the work time is set aside for work on breakthrough ideas.
• Set-up 2 is a project-based set-up: the individuals are spending a percentage of their work time for a defined period of time to work on breakthrough ideas. After the project has finished, the individuals return to their assigned business functions. This type is also called “task force” where the mentioned percentage can run up to 100%.

Let’s have a look at best practice examples on how this is done in practice.

C-1: Permanent contextual ambidexterity (Google and 3M)

Google Inc. is one of the most influential Internet firms. Its 53,000 employees generate annual revenues of more than USD 50 Billion.

Google has a famous approach for radical innovation: Give each engineer one day per week to work on blue-sky, big potential ideas of their own choosing. According to company sources, this 20% rule for contextual ambidexterity additionally stimulates the entrepreneurial level of the whole firm.

The strength in this approach lies in the fact that employees actually work as entrepreneurs within the company. When they need marketing information, they go to a marketing specialist; when they need technical feedback, they go to their peers and get it. All this cross-functional feedback and collaboration comes without the need for coordinating functions.

Google was not the first company to introduce such a percentage-based ambidexterity rule. In 1948, 3M launched a similar set-up by asking its engineers to spend 15% of their paid time on projects of their own choosing. Some of 3M’s top innovators remark that they use the 15% frequently to follow up on some interesting discoveries they made in the usual course of work.

There is one more point that speaks for this type of contextual ambidexterity: in many cases, top talent these days is looking for the opportunity for intrapreneurship – and such an ambidexterity rule offers essentially a certain degree of personal freedom and variety.

C-2: Project-based contextual ambidexterity (Volkswagen)

Volkswagen is the third-largest automobile manufacturer with annual revenues of EUR 104 Billion.

It developed an interesting, cross-functional and cross-hierarchy approach for supporting the search for radical innovations. On a project basis, for a 3-months period, Volkswagen’s “concept teams” are staffed from Corporate Research, Technical Development and other business functions. Within this period, a concept team works on breakthrough ideas for topics that are related to mobility – which Volkswagen sees as its wider business context.

Members of a concept team dedicate 50% of their time for work on the breakthrough concept and the other 50% for their usual job. Any concept team is working in a “start-up” mode, i.e. in an entrepreneurial setting with a defined budget. Concept teams may use corporate resources and networks – but there is no obligation to do so.

Every concept team reports to a defined Innovation Committee which comprises high-ranking executives, including board members. So the big incentive for the members of a concept team is not only to generate fascinating breakthrough concepts but also to get some visibility and to earn some career points. The Innovation Committee is also the gate keeper for initiating the next steps in the innovation value chain after a concept team has finished its work.

After initial trials, Volkswagen has concluded that concept teams are an effective way to stimulate exploratory thinking and the search for breakthrough concepts in a wider context of the core business: currently, Volkswagen runs three concept teams per year.

Structural ambidexterity set-ups

In researching how the world’s most innovative firms have set-up organizational ambidexterity, we found a large number of examples for structural ambidexterity. Most of the explorative units we found at these firms are at the corporate level, predominantly within corporate research or corporate innovation management units.

For the purpose of this article we picked five remarkable examples. Each of the cases described below shows a particular aspect that sets it apart from others. We did not find a single firm in which its explorative units combine all of these aspects in an outstanding way so that we would call it a global benchmark. However, looking at the examples described below, we feel confident that you might be getting some ideas on how your firm might set up or improve its specific design in balancing radical and incremental innovation via structural ambidexterity.

S-1: The “Business Builder” (Evonik Industries)

Evonik Industries is one of the global leaders in Specialty Chemicals. Some 33,000 employees generate annual sales of ca. Euro 13.6 Billion. Evonik’s performance is remarkable: as an industrial company, Evonik generates an EBITDA of ca. 20% and more than 20 per cent of the revenue comes from products that are less than 5 years old. One of the key pillars of Evonik’s innovation performance is a unique approach for structural ambidexterity. Evonik splits its innovation resources between exploitation and exploration 85%:15%, where operational units get the larger share for incremental innovation. The smaller part of the R&D budget is spent on exploration activities which are managed by Creavis, a unit within Evonik’s corporate innovation management.

Creavis’ mission is to build new and sustainable businesses for Evonik. It targets topics that point at entirely new markets and technologies. Depending on the maturity level of the topic, the corresponding activities are managed in “Science-to-Business Centers” or in “Project Houses”.

Science-to-Business Centers

Science-to-Business Centers are set up for topics which involve some fundamental research. They usually comprise academia, research institutes and potential clients as equal partners. In a physical co-innovation center, all steps of the relevant value chain are assembled under one Roof – from basic research via product and process development to pilot plant production. This open approach to innovation ensures that fundamental research and customer requirements are integrated very early in the innovation process. As a consequence, production-ready new businesses and complete systems for customers can be developed.

Project Houses

Project Houses address strategic research topics that cut across Evonik’s business units. Project Houses assemble experts from the relevant business units under one roof for a typical period of three years. After the three years, the experts return to their home business Units – taking along with them the knowledge they acquired and the professional networks they built up. The results of a Project House – in particular products and Technologies – are then taken over by one of Evonik’s business units.

Creavis also manages Evonik’s internal start-ups, which take over promising results outside of the focus of the business units from S2B Centers and Project Houses and turn them into profitable and sustainable businesses. These internal start-ups develop the business from the ground up until revenues and earnings of a typical middle-range product line can be realized. Only then, the business will be integrated into an Evonik business unit.

S-2: The “Lead User-driven Technology Builder” (Schindler)

Founded in Switzerland in 1874, the Schindler Group is a leading global provider of elevators, escalators and related services. Its products move one billion people every day. In 2012, some 45,000 employees generated sales of more than CHF 8.2 Billion.

Schindler’s exploratory unit, “Research and Advanced Development” (AD), aims at radical approaches in escalators and elevators beyond existing technology platforms. AD’s mission is threefold: identifying breakthrough technologies, demonstrating market need for these technologies and ensuring smooth transfer of these technologies to product management.

The remarkable point about AD’s work is the early integration of lead users in the process. In order to show market need, AD integrates a high-profile customer right from the start of explorative research in order to bring in the voice of the customer. By doing so, AD is able to arouse interest and to testify customer demand to operational business units which are working in exploitation mode but are supposed to take over the breakthrough innovation at a later point in time.

The selection of suitable lead users is done on the basis of specific projects. Once a lead user is found, AD develops and builds pilot installations based on own mock-ups and concept elevators. These pilot installations are presented to the operational business units, the public and the media.

S-3: The “Showcase Builder” (Bayer MaterialScience)

With annual sales of EUR 11.5 Billions, Bayer MaterialScience is among the world’s largest manufacturers of high-tech materials made out of polyurethanes and polycarbonates. It is also one of the world’s leading suppliers of materials for coatings and adhesives.

Located within Bayer MaterialScience’s New Business unit, the “Creative Center” (CC) is responsible for discovering radical market innovations. In order to spot these early on, CC uses a number of open approaches to innovation, in particular a global cross-industry/cross value-chain net of firms in the building sector. One of the tasks of this innovation net is to jointly work out future scenarios that help the participants in refining their innovation strategies.

However, in order to increase the business-unit-pull for radical innovations, CC goes well beyond developing future scenarios and innovation roadmaps: based on the insights generated, CC develops prototypes and product concepts with the explicit intention of having an artifact for a particular innovation topic. In BMS’s experience, these artifacts enhance significantly the internal dissemination of radical innovation as they make radical innovation easy to communicate. Apart from artifacts, pictures and prototypes are distributed throughout the company to emotionalize the radical innovation and to achieve acceptance.

S-4: The “Breakthrough Evangelist” (Siemens)

Siemens is one of the world’s largest firms, operating in the industry, energy, healthcare, and infrastructure & cities sectors. Its 370,000 employees generated annual revenues of USD 102 Billion in 2012.

Siemens’ exploratory unit, “Corporate Technology” (CT), is the competence center for technology and innovation of the firm and an integral part of its global knowledge network. The mission of CT’s 7,000 experts, researchers and developers is to secure the future of Siemens through innovations within 13 managed technology areas. Furthermore, CT safeguards the business through patents and IP management.

One particularly interesting aspect of CT’s work is the approach and the energy invested in communicating breakthrough innovations and innovation insights. CT has even installed an organizational unit responsible for communication the exploratory work.

Lighthouse projects

One focal point of communication is CT’s “lighthouse projects” that are publicly communicated. Lighthouse projects are strategically important projects that have the potential to open up new fields of business via ground-breaking technologies. Lighthouse projects combine researchers from various clusters and sectors in order to develop solutions that would radically change the business for their respective operative units. The lighthouse projects send a clear signal about the long-term innovation focus areas into the organization and to the outside world.

Pictures of the future

A second focal point of communication is the “pictures of the future”. These describe in-depth – but well understandable for non-subject experts – sophisticated future studies, major technology trends and radical innovations developed by Siemens. The “pictures of the future” are also distributed outside of Siemens to support the innovation claim of the corporate brand – since 2001, the magazine is distributed twice a year.

S-5: The “Breakthrough Consensus Builder” (Hilti)

Hilti, based in Liechtenstein, provides leading-edge technology to the global construction industry. Hilti is a role model for a customer-focused firm: two-thirds of Hilti’s 21,000 employees work directly for the customer in sales and in engineering, generating more than 200,000 customer contacts every day and CHF 4.2 Billion of annual revenues.

Hilti’s exploratory unit is “Corporate Research & Technology” (CRT). Its mission is to provide radical innovative system solutions in the construction industry based on clear customer insights. While the business units develop technologies in an exploitation mode for their existing business fields, CRT focuses on exploring toward technologies new to the construction industry.

CRT’s KPIs are mainly the number of projects handed over to operational business and the number of projects advanced toward product maturity. With these KPIs in mind, CRT is well aware that a significant amount of energy needs to go into building consensus within the organization about the radical innovations. Therefore CRT manages a consensus-building process that ties in operational business, beginning already in the fuzzy front-end of the funnel.

This consensus-building process is based on a multilayered approach. On a strategic level, two co-located boards ensure close coordination between the explorative work of CRT and the exploitative innovations driven by operational business. The process also addresses middle management levels and the operational level, where milestones and deliverables are agreed.

Conclusion and Outlook

In this second part of our three-part article we showed that there are numerous ways by which exploration and exploitation may be balanced. By some selected best practice examples we showed that there are at least seven set-ups, two of them using contextual and five of them using structural ambidexterity. The examples we showed span across many industries – so we feel quite confident that each firm in every industry might be able to find its specific ambidextrous approach that best fits its innovation strategy and its organization, processes and culture. Please feel free to add more examples into the discussion in the comments below.

In the upcoming third part we will focus on the mechanisms that ensure proper integration of exploration and exploitation in structurally separated set-ups.

One question may have come up so far: which generic type of organizational ambidexterity (contextual vs. structural) is suitable for a firm’s particular context? To answer this question we have planned to conduct further research in the near future. This research is supposed to additionally work out the influencing factors and conditions under which a particular ambidextrous set-up is best.

References

M. L. Tushman, C. A. O’Reilly, Ambidextrous Organizations: Managing Evolutionary and Revolutionary Change, California Management Review (1996)

C. B. Gibson, J. Birkinshaw, The Antecedents, Consequences and Moderating Role of Organizational Ambidexterity, Acad. Management Journal (2004)

O. Gassmann, B. Widenmayer, M. Zeschky, Implementing Radical Innovation in the Business: The Role of Transition Modes in Large Firms, R&D Management (2012)

This article was first published at InnovationManagement.se.