Dual Innovation: Key Principles and Future-Proofing Corporate Innovation - Part 1

This is part 1 of a multi-part white paper, co-authored by:

Dr. Ralph-Christian Ohr, Corporate Innovation Advisor on Dual Innovation and Scaling-Up (lead author of part 1)

Dr. Eva Mitterreiter, Head of New Business Building & Innovation, Consulting at Bosch Engineering

Sebastian Budischin, VP and Head of Venture Building & Strategy at Bosch Stationary Solid Oxide Fuel Cells (SOFC)

Outline of this white paper:

• Part 1 - Cornerstones of Organizational Ambidexterity?
• Part 2 - Dual Innovation: How to Set Up for Organizational Ambidexterity
• Part 3 - Scaling-Up: The Crux of Dual Innovation ?
• Part 4 - Dual Innovation Principles at Bosch
• Part 5 - Establishing Dual Innovation at Bosch ?
• Part 6 - Dual Innovation in Practice at Bosch Engineering
• Part 7 - Scaling up a Bosch Venture: Solid Oxide Fuel Cells (SOFC)
• Part 8 - Wrap-up and Recommendations

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Part 1 - Cornerstones of Organizational Ambidexterity

In the light of accelerating industry disruption and technological change, emerging sustainability goals and decreasing business life cycles, companies expect half of their revenues five years from now to come from new businesses and offerings that do not yet exist. Therefore, it comes with no surprise that building new businesses that aim to reach beyond a company’s existing core business has become one of the top strategic priorities at those organizations - double the share of recent years. In contrast to an M&A-only strategy (in which corporations buy or merge with established companies) and CVC/corporate venturing (in which they mostly invest in external startups), internal business building makes the most of a core organization’s existing assets and capabilities to create separate but linked businesses. As a consequence, many companies have set out to become Ambidextrous Organizations that concurrently exploit and explore, i.e., sustain their existing businesses and build new ones. Indeed, latest McKinsey research (here and here ) shows that top-performing companies in various industries?

• divide their capital evenly between transforming their existing core businesses and developing new ones (exhibit 1),
• generate twice the share of revenues from offerings introduced in the past three years compared to their industry peers,
• stand out in their willingness and ambition to ‘explore beyond their core’ (exhibit 1).

Exhibit 1: [Top] Share of digital capital allocated to Digitizing Core Business (Exploit) vs. Developing New Digital Business (Explore). [Bottom] Share of innovation spending allocated to core and beyond-core innovation.

Cornerstones of making Organizational Ambidexterity work

It has also been frequently shown that taking an ambidextrous approach is linked to superior company performance. The preponderance of evidence shows a clear pattern: Organizational Ambidexterity is positively associated with sales growth, innovation, market valuation and firm survival. In its widely used form, Ambidexterity structurally separates a corporate’s exploratory (beyond-core innovation) from its exploitative activities (core business and related innovation). Based on the pathbreaking work from Michael Tushman and Charles O’Reilly , those Ambidextrous Organizations are built and managed on the following cornerstones - regardless of their specific context:

• A clear strategic intent that justifies the need for exploitation and exploration, including the explicit identification of those organizational assets and capabilities that can be used for competitive advantage by the exploratory unit or activity.
• Senior management commitment and oversight to nurture and fund the new venture and protect it from those who would kill it.
• Sufficient separation of the exploratory unit or activity from the exploitative business so that the new venture can develop its own architectural alignment and the careful design of the organizational interfaces needed to leverage the critical assets and capabilities from the mature side of the enterprise, including clear criteria to decide when to either drop the exploratory unit, integrate it back into the organization or spin it out.
• A vision, values and a culture that provide for a common identity across the explore and exploit units that helps all involved see that they are on the same team.

These fundamental ingredients can be considered necessary, while not sufficient, without which Ambidexterity is likely to fail. Research indicates that this separated approach works particularly well in manufacturing- or technology-intensive companies as well as high-paced environments in general. The reasons can be mainly traced back to 'purpose-fit' corporate Explore- and Exploit-environments (incl. culture and mindset), increased focus for people pursuing either of the two directions as well as pooling of occasionally scarce exploratory resources and capabilities. In his foreword to the second edition of the book Lead and Disrupt by Tushman and O’Reilly, Steve Blank underpins the importance of companies becoming ambidextrous:

Companies built around exploitation emphasize efficiency, productivity, and the reduction of variance, whereas exploration demands searching, discovering, and accepting risk and failure. To accomplish both simultaneously - to be an?ambidextrous company - requires not only separate organizations for each function, but also different business models, competencies, systems, processes, incentives, and cultures. In short, it requires a different way not only to manage a company, but a different way to organize it as well. This is a really big idea.

Michael Nichols, Director of Corporate Ventures at MANN & HUMMEL and former Head of Bosch Innovation Consulting Asia-Pacific, recently also nailed it :

Innovation at the end of the day is about organizational setup, leadership, and clear ambitions. Processes, tools, and methods - yes, of course. However, if you do not solve the innovator’s dilemma and accept the ambidextrous challenge, you, like Sisyphus, will be condemned to innovation theater eternally watching the boulder roll back down the hill.

Bottom line: Future-proof companies need to be ambidextrous by nature. Still, few have managed to implement a functioning ambidextrous approach to innovation and transformation. Why is that? What does it actually take to make Ambidexterity work in organizations?

Implementing Organizational Ambidexterity - key questions

In our view, implementing an Ambidextrous Organization essentially comes down to addressing three key questions: Why? - What? - How? (exhibit 2).

Exhibit 2: Making Organizational Ambidexterity work can be boiled down to three key qustions.

Let’s take one question at a time:

Why do we need to become an Ambidextrous Organization?

This is all about creating awareness and legitimacy - particularly among the company’s C-suite. High C-level alignment sets the stage and presents a necessary precondition for functional implementation across the entire company. Awareness and legitimacy are mainly reflected in defining a set of overarching, compelling vision and values as well as shaping a shared identity (we are one team), rather than two distinct identities for Explore and Exploit (us vs. them).

What is our future-proofing aspiration to Explore?

This key question breaks down to the following mission-critical issues (exhibit 3):

• What does Explore in fact mean to a company? Entering new markets? Building new capabilities? Or both in tandem?
• What is the company’s strategic intent to explore? Is it targeted at defending and extending the existing core business, creating entirely new businesses or even self-disrupting own businesses and the industry the company is in?
• How far is a company willing to move away from its current core business - i.e., how high is its risk propensity? (Side note: research on 5,000 publicly listed companies?shows that those which expand into adjacencies closely related to their core business are twice as likely to generate excess shareholder returns as companies expanding further afield.)
• What are the company's existing strengths and capabilities they can draw upon to endow exploratory ventures with a corporate unfair advantage?
• How does building new businesses (Explore) buy into the future of the core business (Exploit) - i.e., how well are both value streams aligned?

Exhibit 3: Aligned delimitation of Sustain Core Business (Exploit) and Build New Business (Explore) as vital building blocks of Organizational Ambidexterity.

This strategic consideration and thinking process ideally results in the definition of strategic search fields (also called hunting zones), supposed to act as corporate guardrails on strategically relevant topics stretching beyond a company's core business. ??

How do we organize Ambidexterity in our company?

Implementing Ambidexterity in companies properly presents in large part an organizational issue. This entails a set of required measures that are discussed more in-dept in the following parts:

• Setting up a dedicated corporate space to explore
• Building up an Explore-capability
• Establishing a systematic approach to manage the inherent uncertainty of new ventures
• Organizing, leading and managing optimal interplay between Explore- and Exploit-activities by carefully balancing separation and integration over time

If done right, these measures result in a functioning dual capability, enabling a company to successfully and repeatably build exploratory new businesses in parallel to sustaining existing ones.?

[End of part 1]

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Up to more insights? Stay tuned for forthcoming part 2 of our white paper!

Do you want to access the complete white paper (after finished publishing here) or discuss Dual Innovation for your company? Please get in touch with us by leaving a comment or dropping a direct message - we look forward to it!

Last but not least: We truly believe in open and free sharing of our ideas and experiences in order to move this crucial and forward-looking topic forward. In return, we kindly ask you to credit us in case you use the insights, made available in this white paper, for your purposes. Unfortunately, we have frequently found that this 'take and give' doesn't seem to be self-evident for all.?