Innovation Streams and Ambidextrous Designs: On Building Dynamic Capabilities

1. Innovation Streams and Ambidextrous Designs: On Building Dynamic Capabilities Michael Tushman Wendy Smith George Westerman Robert Wood Charles O’Reilly

2. Research Question: What are the Strategic, Organizational, and Senior Team Roots of Dynamic Capabilities?

3. Building Dynamic Capabilities is Difficult? (Wiggins and Ruefli, 2002) IBM(1993-2004) Firestone NCR Kodak Kuhn Loeb Boeing SSIH/Asaug Bausch & Lomb Philips Sears U.S.Steel Levi Strauss Kidder Peabody Oxford Health Polaroid Ciba-Geigy Intertype/Varityper DEC

4. Number of Firms and Workers in the Swiss Watch Industry, 1950-1985 Year Number of Firms Employees 1945 2,500 80,000 1950 1,863 60,239 1955 2,316 70,026 1960 2,167 74,216 1965 1,927 83,922 1970 1,618 89,448 1975 1,169 62,567 1976 1,083 55,182 1977 1,021 54,825 1978 979 52,669 1979 867 46,716 1980 861 46,998 1982 730 38,200 1985 600 32,000 Worldwide Watch Production

5. Percentage of Tires Shipped by Construction Type: 1961-1989 Sources: Rubber Manufacturers Association, “Tire Shipments by Construction,” Tire Industry Facts (Akron, Ohio, 1990); Firestone Tire & Rubber Company, “Sales Forecasts,” Corporate Archives (Akron, Ohio, 1980). Citation: Sull, Donald. “The Dynamics of Standing Still: Firestone Tire & Rubber and the Radial Revolution,” Business History Review, 1999, pp. 430-464.

6. Disk Drive Industry Evolution146 firms founded; 125 failures 2.5” Prairietek, Quantum,Conner, Western Digital MarketSize 3.5” Conner, Quantum, Maxtor,Western Digital, Seagate 5.25” Seagate, Miniscribe, Maxtor,Micropolis, Computer Memories 8” Shugart, Micropolis,Priam, Quantum 14” Control Data, IBM, Memorex,Diablo, DEC, Ampex 1976 1981 1986 1991 1996

7. Henderson and Clark, ASQ, 1990. – Photolithography Industry – Contact aligners (Cobuilt, Kasper) – Proximity aligners (Canon) – Scanners (Perkin-Elmer) – Steppers – 2nd generation steppers (Nikon) – Subsystems and linkage mechanisms light lens alignment system mechanical system

8. CIBA VISION Innovation Pharmaceutical (Visudyne) Emerging Market Innovation Fashion Lenses New Customers Markets Existing Conventional Lens Solution Innovation Daily Disposible Extended Wear Process Innovation Current Customers Incremental Innovation Architectural Innovation Discontinuous Innovation Technology Dynamic Capabilities and Innovation Streams • Innovation Streams • Incremental change with existing product • Non-incremental defined by change in • technology • markets

9. The Challenge: March (1991), Levinthal (1997): Explore and Exploit Weick (1979): Learn and unlearn, hypocritical Thompson (1967): efficiency and flexibility Abernathy (1978): productivity dilemma

10. The Response: Ecology/Selection: Spin-outs (Christensen, 1997; Baghai et al, 1999) ICV, New Business Groups, Skunkworks (Van de Ven, 1999; Burgelman, 2002) Contingency and Punctuated Change: Romanelli and Tushman (1994) Siggelkow (2001) Miller (1990) Switch Between Modes: Louis and Sutton (1989) Duncan (1976)- initiation vs implementation Brown and Eisenhardt (1998)-loose and tight semistructures linked in time, incremental change, choreographed transitions, edge of chaos

11. Plural, Dual, or Ambidextrous Designs: Explore and Exploit Tushman and O’Reilly (1997), Nonaka (1988), Bradach (1998), Adler et al (1999), Sutcliffe et al (2000) High Structural Differentiation: Intra Unit Contradictions Limited/Tactical Structural Integration Strong Senior Team Integration Not switch back and forth, but simultaneous exploit and explore Not spin out, ICV, but internally contradictory architectures Not semi structures, but ambidextrous designs Not induced and autonomous, but strategic innovation Not incremental or punctuated, but both

12. On Innovation Streams and Dynamic Capabilities

13. Products/Services As Systems: Subsystems and Linking Mechanisms 1860 1950s 1970 1980 Subsystems Energy Oscillation Linkage Face Case Spring Battery Battery Battery Battery Escapement Escapement Tuning Fork Quartz Quartz Gears Gears Gears Gears Electronics Analog Analog Analog Analog Digital Gold Gold Gold/Plastic Gold Plastic Subsystems: Core and Peripheral

14. Henderson and Clark, ASQ, 1990. – Photolithography Industry – Contact aligners (Cobuilt, Kasper) – Proximity aligners (Canon) – Scanners (Perkin-Elmer) – Steppers – 2nd generation steppers (Nikon) – Subsystems and linage mechanisms light lens alignment system mechanical system Fan Small Copiers Small Radio Proximity Aligners Contact Aligners Architectural innovation

15. Rosenbloom and Christensen. Industrial and Corporate Change, 1994. Disk drives industry: 14”, 8”…3.5” (Winchester, Seagate, Conner) “Issue in disk drives may be relative abilities of incumbents to change strategies (value networks), not technologies.” Disk Drives (8”… 3.5”) New Markets 14’’ Existing Discontinuous Incremental Architectural Technology

16. Innovation Streams and Dynamic Capabilities Quartz Watch Vysodyne HP/Zorro 8” Disk Drives IBM Micro: Network, Imaging New HP/Wanda Fashion Lens Markets USAT.com Flat Bed Scanner Conventional lens USAToday Bias Ply Tires Contact Aligner Mechanical Watch IBM Micro: ASIC Existing Radial Tires Disposable Lens Extended Wear Lens Proximity Aligner Architectural Incremental Discontinuous CD/Core NCA/Core Types of Innovation • Dynamic Capabilities Rooted in Innovation Streams.

17. Organizational Architectures & Innovation Streams: Multiple Selection Environments Exploration: Variation Exploitation: Retention General Managers and Senior Team loose processes tight processes mfg./sales competencies tight culture loose culture R&D/entrepr. competencies loose organization arrangements tight/formal organization arrangements Selection

18. Executive Team Multiple strategies Single vision Few Core Values Tasks Mgmt. Team Individuals Informal Ciba Vision / Vysodyne, Daily Disposables Seiko/Quartz USAToday.com IBM Network Tech/Transport HP Scanner/Zorro Organization Arrangements Mgmt. Team Ciba Vision/Conv. Lens, Seiko/Mechanical, USAToday IBM Network/ ASIC HP Flat Bed Scanner Exploitation: Consistency, incremental change, and continuous improvements Tasks Mgmt. Team Individuals Informal Organization Arrangements Strategic Re-orientations, Discontinuous Change Exploration: Multiple failures, experiments, variants Ambidextrous Designs, Innovation Streams and Dynamic Capabilities

19. Ambidextrous Design J. Kelley(Meta Manager)Group Executive Mfg. Chris King (Ambidextrous Manger)Network Technologies Wireless Tactical Integration Senior Team ASIC(Exploitation) Network(Innovation Manger) Transport(Innovation Manger) Exploration

20. Methods • Research Design • Multi Case Design (Van de Ven, 1999; Brown and Eisenhardt, 1997) • Chose Sites Based on Innovation Streams • Business Unit as Level of Analysis • Longitudinal Data (Lewin et al, 1999) • Sample • 15 Business Units (9 Industries) • 24 non-incremental innovations • 36 Innovation Episodes • 7 Business Units with multiple non-incremental innovations • 11 innovations with multiple innovation- episodes • 5 out of 6 types of non-incremental innovation • Data Collection • 6-12 Interviews per firm (106 in all): open ended and targeted • Mini-cases • 5 coders independently coding • differentiation (distinct unit, physical location, culture, rewards, competencies) a = .92 • strategic integration (general manager support, relationship, on senior team) a = .91 • innovation performance (technical, market, and commercial) a = .86

24. Results: Innovation Streams Target Market Software Co: E-Learning Regional News: City Search.com HP Scanner: Handheld Scanner B, C Regional News: News.com A, B USA Today: USAT.com A Ciba Vision: Visudyne A, B HP Scanner: Handheld Scanner A Turner Technology:Imaging Chip A, BMicro Display Chip A, B IBM Network Technology:Network Chip A, BTransport Chip A, B Emerging Market • RESULTS • Innovation Streams exist • No performance difference by: • technology (t=.87, ns) • markets (F=2.14, ns) USA Today: Direct A, B USA Today: USAT.com B Software Co: Knowledge Management Software Co: Advanced Collaboration Polaroid: Helios A, B Polaroid: Digital Camera A, B New Customers Polaroid: Analog Camera Software Co: ICE IBM Software: COBOL Med. Imaging: B&W Ultrasound UtilityCo: Power Plants Ciba Vision: Conventional Lens IBM Network Tech: ASIC Turner Technology: ASIC Goodyear: Bias Ply Tires Firestone: Bias Ply Tires BF Goodrich: Bias Ply Tires Regional News: Newspaper HP Scanners: Flatbed Scanners USA Today: Newspaper Med. Product: Medical Devices Firestone: Radial Tires Goodyear: Radial Tires BF Goodrich: Radial Tires UtilityCo: On Site Power Plants Ciba Vision: Extended Wear Ciba Vision: Daily Disposable Current Customers IBM Middleware: Websphere Medical Imaging: Color Ultrasound Medical Products: Integrated Healthcare System Incremental Architectural Discontinuous Non-Incremental Technological Change

25. Innovation performance by number of non-incremental innovations RESULTS No difference in performance by number of innovations in innovation stream: One vs. Multiple (t= .21, n.s.)

26. Results: Does Ambidexterity Exist? Structural Differentiation LOW HIGH Cross-Functional Teams Unsupported Teams HP Scanners: Handheld Scanner A Regional News: News.com B Turner Technology: Micro Display A Turner Technology: Imaging A Firestone: Radial Tires BF Goodrich: Radial Tires Software Co: E-Learning Software Co: Knowledge Management Software Co: Advanced Collaboration USA Today: USAT.com A Polaroid: Digital Cameras B USA Today: Direct A HP Scanners: Handheld Scanner C LOW N=4 N=9 Senior TeamIntegration Functional Design Ambidextrous Design HP Scanners: Handheld Scanner B USA Today: USAT.com B USA Today: Direct B Regional News: City Search.com Regional News: News.com A Turner Technology: Micro Display A Turner Technology: Imaging B IBM Middleware: Websphere UtilityCo: Power Plants IBM Network Tech: Network Chip B IBM Network Tech: Transport Chip B CIBA Vision: Extended Wear CIBA Vision: Daily Disposable CIBA Vision: Visudyne A Polaroid: Helios B Medical Imaging: Color Ultrasound Goodyear: Radial Tires IBM Network Tech: Network Chip A IBM Network Tech: Transport Chip A Medical Products: Integrated Health Care System Polaroid: Helios A Polaroid: Digital Cameras A HIGH N=7 N=15

27. Characteristics of Ambidexterity • Characteristics of • Ambidextrous Forms • Structural differentiation of explore/exploit units • Integration at senior team level • Investment by ‘Meta Manager’ • Targeted integration of functional resources • Common fate rewards system • Overarching vision of senior team including both explore and exploit • IM internal/external, staff external VISION: # 1 Supplier of Network Technology chips by 2000 J. Kelley(Meta Manager)Group Executive Mfg. Chris King (Ambidextrous Manger)Network Technologies Wireless Tactical Integration Senior Team ASIC(Exploitation) Network(Innovation Manger) Transport(Innovation Manger) Exploration

28. Table 4: Characteristics of Ambidextrous Organizational Forms Innovation Manager onSr. Team Ambidextrous Manager1 Overarching Aspiration DistinctUnit Innovation Manager1 TargetedStructuralIntegration Senior Team Incentives MetaManager MIS/HR/Finance YES HP ScannerHandheld (B) GM / Outside NONE Yes Inside Joint Bonus Yes USA Today.Com (B)Direct (B) GM / Inside Editorial NONE Local paper for global village Yes Yes Inside Outside Joint Bonus / Common Fate Yes Yes Regional NewsCity Search.comNews.com (A) Publisher / Inside Primary information source for city Yes Yes Outside Outside HR/Finance EditorialAdvertising Individual Incentive and Joint Bonus Yes No N/A Polaroid Helios (B) CEO / Inside None Yes Outside Sales No Data Yes N/A Turner TechnologyMicro (B)Imaging (B) GM / Outside Be in top 10 manufacturers of semiconductors within 3 years Yes Yes Inside Inside Mfg. No Data No Yes YES IBM Network Tech Network (B) Transport (B) GM / Inside #1 supplier of Network Tech by 2000 Yes Yes Outside Outside Mfg./ Sales Joint Common Fate Yes Yes YES IBM Middleware Web Middleware GM / Inside “Beat BEA” Yes Inside Software R&D Common team Incentives No YES Yes Utility Co. On-Site Power Plant GM / Outside A value creating, respected public utility Yes Outside Marketing Company based stock options YES Ciba VisionExtended Wear Daily DisposableVisudyne (A) GM & Head of R&D / Inside Healthy Eyes for Life Yes Yes Yes Inside Inside Inside R&D / Mkt. Joint / Common Fate Yes Yes Yes YES 1 Inside & Outside refers to whether the manager came from inside or outside the business unit.

29. Figure 1: Innovation Space Target Market Software Co: E-Learning Regional News: City Search.com HP Scanner: Handheld Scanner B, C Regional News: News.com A, B USA Today: USAT.com A Ciba Vision: Visudyne A, B HP Scanner: Handheld Scanner A Turner Technologies:Imaging Chip A, BMicro Display Chip A, B IBM Network Technology:Network Chip A, BTransport Chip A, B EmergingMarket New Customers /Defined Market USA Today: Direct A, B USA Today: USAT.com B Software Co: Knowledge Management Software Co: Advanced Collaboration Polaroid: Helios A, B Polaroid: Digital Camera A, B IBM Network Tech: ASIC HP Scanners: Flatbed Scanners Ciba Vision: Conventional Lens Polaroid: Analog Camera Software Co: Integrated Collab. IBM Middleware: Cobol / Cics UtilityCo: Power Plants Turner Tech: ASIC Firestone: Bias Ply Tires BF Goodrich: Bias Ply Tires Regional News: Newspaper USA Today: Newspaper Med. Product: Medical Devices [ Med. Imaging: B&W Ultrasound ] [ Goodyear: Bias Ply Tires ] IBM Middleware: Web Based Middleware Medical Products: Integrated Healthcare System [ Medical Imaging: Color Ultrasound ] Firestone: Radial Tires BF Goodrich: Radial Tires UtilityCo: On Site Power Plants Ciba Vision: Extended Wear Ciba Vision: Daily Disposable [ Goodyear: Radial Tires ] ExistingMarket Technological Change Incremental Architectural Discontinuous Non-Incremental NOTE: Ambidextrous Designs are in Bold Product Substitutions are in [ ]

30. Design Choices and Innovation Outcomes • RESULTS • Ambidextrous designs more effective than other designs: • Main Effect of Senior Team Integration • (F = 14.11, p < .01) • Main Effect of Differentiation • (F = 18.67; p < .01) • No interaction Effect • Other forms not employed: • No skunkworks, VC firms, spin outs Structural Differentiation LOW HIGH Cross-Functional Teams Unsupported Teams HP Scanners: Handheld Scanner A Regional News: News.com B Turner Technology: Micro Display A Turner Technology: Imaging A Firestone: Radial Tires BF Goodrich: Radial Tires Software Co: E-Learning Software Co: Knowledge Management Software Co: Advanced Collaboration USA Today: USAT.com A Polaroid: Digital Cameras B USA Today: Direct A HP Scanners: Handheld Scanner C LOW N=9 Innovation Performance = 2.27 N=4 Innovation Performance = 2.52 Senior TeamIntegration Functional Design Ambidextrous Design HP Scanners: Handheld Scanner B USA Today: USAT.com B USA Today: Direct B Regional News: City Search.com Regional News: News.com A Turner Technology: Micro Display A Turner Technology: Imaging B IBM Middleware: Websphere UtilityCo: Power Plants IBM Network Tech: Network Chip B IBM Network Tech: Transport Chip B CIBA Vision: Extended Wear CIBA Vision: Daily Disposable CIBA Vision: Visudyne A Polaroid: Helios B Medical Imaging: Color Ultrasound Goodyear: Radial Tires IBM Network Tech: Network Chip A IBM Network Tech: Transport Chip A Medical Products: Integrated Health Care System Polaroid: Helios A Polaroid: Digital Cameras A HIGH N=15 Innovation Performance = 4.27 N=7 Innovation Performance = 3.12

31. HP Scanners: Handheld Scanner A Regional News: News.com B Turner Technology: Micro Display A Turner Technology: Imaging A Firestone: Radial Tires BF Goodrich: Radial Tires Software Co: E-Learning Software Co: Knowledge Management Software Co: Advanced Collaboration Designs Shift Over Time Structural Differentiation LOW HIGH • RESULTS • Net migration of designs over time to ambidextrous designs • 6 move to ambidextrous form • 3 move out of ambidextrous form • Net performance improvement for designs migrating to ambidextrous form: • (t =5.67, p<.03)* • IBM Network Technology. • * Note: Small sample size Cross-Functional Teams Unsupported Teams USA Today: USAT.com A Polaroid: Digital Cameras B USA Today: Direct A HP Scanners: Handheld Scanner C LOW Senior TeamIntegration Functional Design AMBIDEXTROUS Design Medical Imaging: Color Ultrasound Goodyear: Radial Tires IBM Network Tech: Network Chip A IBM Network Tech: Transport Chip A Medical Products: Integrated Health Care System Polaroid: Helios A Polaroid: Digital Cameras A HP Scanners: Handheld Scanner B USA Today: USAT.com B USA Today: Direct B Regional News: City Search.com Regional News: News.com A Turner Technology: Micro Display A Turner Technology: Imaging B IBM Middleware: Websphere UtilityCo: Power Plants IBM Network Tech: Network Chip B IBM Network Tech: Transport Chip B CIBA Vision: Extended Wear CIBA Vision: Daily Disposable CIBA Vision: Visudyne A Polaroid: Helios B HIGH SPIN OUT Novartis Pharma Div: Visudyne B

33. Organization Designs Over Time: HP Greeley, HP Microelectronics Toronto Star IBM Network Technology Meta Manager (eg Kelly at IBM Microelectronics, Bradley at Ciba Vision) Boundary Conditions: Product Substitution (Goodyear, HP Medical) Spin Outs: HP Handheld Scanner C Ciba Vision, Vysodyne (B)

34. Table 7: Existing Product Performance by Organization Form Improving or Steady • Declining • Polaroid: Helios (B) • Turner Technologies : Micro Display (A), Imaging (A) • USA Today: USAT.com (A), Direct (A) • IBM Network Tech: Transport Chip (A), Network Chip (A) • Software Co: Adv. Collab., Knowledge Mgmt., E-Learning • Firestone: Radial Tires • BF Goodrich: Radial Tires • Polaroid: Digital Cameras (B) • HP Scanner:Handheld Scanner (B) • Turner Technologies : Micro Display (B), Imaging (B) • CIBA Vision: Extended Wear,Daily Disposable, & Visudyne (A) • IBM Middleware: Web Based Middleware • IBM Network Tech: Network Chip (B), Transport Chip (B) • HP Scanner: Handheld Scanner (C) • Regional News: News.com (A), City Search.com • USA Today: USAT.com (B), Direct (B) • UtilityCo: On-Site Power Plants • HP Scanner:Handheld Scanner (A) • Regional News: News.com (B) • Medical Products: Integrated Health Care System • Polaroid: Helios (A), Digital Cameras (A) 9 AmbidextrousDesign 1 8 Non-AmbidextrousDesign 12 7 5 Total 13 8 21 Fisher’s Exact Test,p = .05

35. Ambidextrous Organizations • Multiple Inconsistent Alignments – Structure – Culture – Process – Competencies – Physical Location • Tactical Integration (eg USAT editorial meetings) • Strategic Integration • Integration at General Manager level • Ambidextrous Senior Teams and common fate • Consequences of strategic integration being too high or too low. GM Too High Too Low Ciba Vision/Disp HP/Handheld(C) HP/Handheld(A) USAT.com USAT/Live(A) Ancona/Polaroid HP/Handheld (B) Software Co./e Learn Toronto Star (A) Regional News (B)

36. Ciba Vision: Fashion lens Vysodyne Daily Disposibles Extended wear Discontinuous Process Innovation (10¢ vs. 40¢) Markets Technology Executive Teams, Innovation Streams and Strategic Reorientations Conventional Lens Size, shape, packaging • Executive Team • Challenging, emotionally engaging (yet equivocal) vision • Stretch objectives • Continuity in CEO, heterogeneous, young senior team • Create variation, selection, project book, even with continuous improvement • Autonomous teams report to general manager • Proactive reorientations

37. Organizational Evolution How do organizations evolve? • Through incremental change in exploitative unit coupled with proactive discontinuous change in exploratory unit (eg. Ciba Vision, IBM Middleware, USAToday) • Or, periods of convergence with increasing congruence • punctuated by re-orientations, often requiring • new top management teams (eg. HP Handheld Scanners, IBM Network Technology, Goodyear)

38. Patterns in Organizational Evolution Magnitude of Change Discontinuous Change Incremental Change Time • Organization Evolution: Incremental and punctuated change or Periods of incremental change punctuated by discontinuous change • Executive team succession often associated with discontinuous organizational change.

39. In Sum: Innovation Streams Exist: Business Units Explore and Exploit Simultaneously Ambidextrous Designs: Stable Organizational Form Can Be Learned Over Time Set of Interrelated Dimensions—High Differentiation Tactical Structural Integration Senior Team Integration Role of General Manager Meta Manager Ambidextrous Designs Permit Exploitation and Exploration: More Effective Than Other Designs and seems to facilitate performance of existing product

40. Dynamic Capabilities not through: semi structures tight/loose coupling choreographed transitions spin outs, ICV, skunk works Dynamic Capabilities through embracing contradictions through: High Differentiation-contradictory architectures Targeted Integration Senior Team Integration: roles, processes, incentives, vision General Manager Meta Manager On Organizational Evolution: Targeted incremental and punctuated change Or, Organization-wide punctuated change

41. Innovation Senior Team Markets EXISTING Innovation Technology Next Steps Boundary conditions: Product Substitution Process innovation? Service innovation (IGS/Canada)? Senior Team Characteristics, Processes and Behaviors Corporate Ambidexterity (EBO’s)