The raise of ambidextrous organizations as a corporate strategy to cope with disruption

The average age of an S&P 500 company has substantially decreased in the last decades, and it is now estimated to be 20 years. At the current churn rate, half of the S&P 500 will be replaced in the next ten years

By
Andrea Giordano
on
July 13, 2020
Category:
Startup

The average age of an S&P 500 company has substantially decreased in the last decades, and it is now estimated to be 20 years. At the current churn rate, half of the S&P 500 will be replaced in the next ten years. Those numbers are a remarkable sign of the role of disruptive technologies and  increase in competition in any industry.

Unfortunately, the solution to the problem is not as easy as increasing expenditure on research and development. A study made by PWC some years ago shows that the relationship between R&D expenditure and financial performance for the most innovative 1000 companies are not correlated.

graph-performance

I find it fascinating that some corporates with a strong management have been victims of disruptive innovations. In a post-mortem analysis of famous cases such as Kodack, Polaroid, and Blockbuster, it seems they didn’t account that one of the major changes in the business of the last years has been a reduction of go-to-market time and decrease the lifespan of products and services.

People are evolving their needs much faster than before, and potential supply exceeds demand in many industries. Competing for a share of a crowded market, while necessary, will not be sufficient to sustain high performance in the long term. A clear innovation strategy for long term growth has become essential, and it’s the right time to integrate old best practices with new ones designed to tackle the disruption coming from new technologies.  

The cold start on tackling disruption might be related to the complexity of how to manage innovation.

When corporates approach innovation for the first time, they usually come up with hackathons, brainstorming sessions, corporate coaching in lean startups, platforms for ideas and feedback, etc. All significant initiatives, but they rarely bring the hoped results.

brand-logos-d100

Famous victims of disruptive technology

Why do they fail?

Well, innovative projects are often not even rolled out:

Try for a moment to be in the feet of a manager working for large corporations. How do you show the opportunity, and then how do you convince your director, to spend time and resources to initiate something unexplored?

You probably have to stick to the internal rules and make a business plan by showing ROI, IRR, and NPV. Here is where all the problems start. A typical corporation will always tend to leverage its economy of scale and avoid risk. It prefers to push projects with a high return on assets. They are almost always more profitable and less risky than a startup in the medium term. Innovation has a high chance of failing, and zero added value to the P&L in the short term.  

Innovation system built in the last decade were aimed at “exploiting” expertise and technologies of existing markets. To achieve those goals, firms standardized all the processes related to the introduction of new products and services by employing gate schemes and master plans for new Product Development all of these introduced to take control over the innovation process and to reduce the  risks in associated with innovative projects.

Those systems consistently fail to deliver disruptive innovation because they are not designed for that.

Indeed, they do not solve fundamental problems such as how to innovate while avoiding compromising the core business, and then, how to balance financial predictability with uncertain options.

A promising solution- Ambidextrous corporates

The first step is to design the corporation as an ecosystem where both exploitation and exploration systems coexist. They are represented by Core co. and New co.

Core co. is responsible for the exploitation system. We may definite it as the group of people within the company seeking to continually optimize the current business model, value chains, and existing assets of the company. The standard management system has a long-time heritage of know-how and best practices on how to do that. We can see Core co. more or less equal to the typical corporation

New co. is responsible for the exploration system: we may definite it as the group of people within the company seeking to challenge the core products and business model of the company, with the goal of recognizing opportunities, test them, and convert them into new products and alliances. A different management process must be applied for testing opportunities and allocate capital. The research work made by professors Clayton Christensen, Erick ries, Steven blank, Tendayi viki, and r Jake Knapp (google venture) could be used to structure the exploration unit.  

It’s important to keep in mind that it is essential to grant a high level of independence to New Co., to avoid mixing its agenda with the one from Core Co.  

Core Co. and New Co. have different decision-makers, and they both report to the Board, which assesses the potential profitability of existing and future business models and split financial resources between the two.

This division frees the Core.co management from making complex choices not supported by hard data and avoids to create conflicts of interest with current stakeholders.

Quite a long article. In the next one, we’ll discuss how to integrate the two systems by employing an innovation thesis and a balanced portfolio. Decision frameworks to manage the exploration business unit will be shared in future articles.

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Andrea Giordano

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