How Big Companies Can Exploit and Explore

Harvard Business School (HBS) Paul R. Lawrence MBA Class of 1942 Professor of
Business Administration, Michael Tushman, has been studying how some big
companies can act like geniuses. After all, it was F. Scott Fitzgerald who wrote,
"The test of a first-rate intelligence is the ability to hold two opposed ideas in the
mind at the same time, and still retain the ability to function."

And that's the key to creating an ambidextrous organization -- a big company that
can make its core business more efficient -- what Tushman calls Exploit; while at
the same time find new growth opportunities -- Explore.

He ought to know. As Tushman explained in a February 24th interview, his work --

with Stanford professor, Charles O'Reilly, and Bruce Harreld who retired from
International Business Machines (IBM) and now lectures at HBS -- has focused on
how incumbent firms deal with the challenge. As Tushman explained, O'Reilly was
his collaborator on ambidexterity's "core work" while its "most thorough and
systematic implementation was at IBM" with Harreld.

An example of an ambidextrous organization is Ciba-Geigy's crop protection

division -- a part of Novartis (NVS) since 1996 when it merged with Sandoz. Ciba-
Geigy's managers in Basel Switzerland were able to exploit its chemical plant
protection business -- its products include plant pesticides -- by cutting costs while
simultaneously exploring in its North Carolina R&D lab -- thus yielding a bio-
engineered plant that was insect-resistant.

Cleverly, both outcomes helped to realize Ciba-Geigy's "aspiration" of keeping

plants healthy -- whether through chemicals or biotechnology. Thanks to this
clearly understandable "overarching aspiration," the head of its agribusiness,
Wolfgang Samo, was able to engage people in both activities in a way that they
could easily understand and use as the basis for action.

For a closer-to-home example, Tushman picked USA Today, a very valuable

Gannett (GCI) property. Back in the 1990s, Tom Curley ran the print version of the
paper and was not sure what the impact of the Internet would be but decided he
had to build a web version.

To that end, he hired different people to create USAToday.com. These included

"computer jockeys, aggregators, and web savvy" people who were housed in a
different building from the print part of USA Today.

The heads of the print and web units both reported to Curley. And he demanded
that they both "duke it out" in the battle for resources. Ultimately, the web part
became so successful that it brought in more readers and, over time, more
advertisement than the paper version.

But a key to making this work was Curley's incentive system that motivated the
two divisions to work together even as they competed for resources. Specifically,
the person running USAToday.com's bonus depended on the paper achieving its
profit goals -- just as the paper head's bonus was linked to USAToday.com meeting
its targets.

Getting this approach to work depends on whether the core business has resources
-- such as customers, content, distribution channels, or a brand -- that can be
valuable to the explore part of the business. And if the exploit business
offers nothing worth leveraging, the company should spin out the explore business
in Tushman's view.

To make the ambidextrous organization work, Tushman argues

the exploit and explore divisions must operate with different strategic intent, critical
tasks, competencies, structures, controls/rewards, culture, and leadership roles.

How so? The exploit business focuses on cost and profit; spurs efficiency
improvement and incremental innovation; is strong at operations; has a formal
structure; controls for margin improvement and productivity, values efficiency,
quality, and customers; and leads in a top-down manner.

By contrast, the explore unit focuses on innovation and growth; spurs new products
and breakthrough innovation; is strong at entrepreneurship; has a loose,
adaptive structure; controls for milestones and growth, values risk-taking, speed,
and experimentation, and leads in a visionary and involved manner.

In his research, Tushman has found that the idea of an ambidextrous organization
regularly fails if the CEO "delegates the tension." Simply put, unless
the exploit and explore divisions both report to the CEO, the exploit division will
always find a way to use its superior corporate clout to sideline and ultimately
neutralize the explore one.

Tushman is optimistic that his idea can spread. In his work at IBM, he has found
that by providing a language for discussing the tension, he frees up executives to
figure out how to make it work.

And if the idea of the ambidextrous organization catches hold -- perhaps many
more big companies will -- like IBM whose market capitalization is $233 billion -- be
worth more to investors than ever in their long history.