CONTINUOUS INNOVATION IN ...

October 21, 2009 19:41 WSPC/108-JEC

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Journal of Enterprising Culture Vol. 17, No. 3 (September 2009) 297–322

CONTINUOUS INNOVATION IN ENTREPRENEURIAL GROWTH COMPANIES: EXPLORING THE AMBIDEXTROUS STRATEGY

TOBIAS KOLLMANN, ANDREAS KUCKERTZ and CHRISTOPH STÖCKMANN Department of Economics and Business Administration University of Duisburg-Essen, Germany D-45141 Essen, Germany [email protected]

This paper applies ambidextrous management to entrepreneurial growth companies. Ambidexterity aims at overcoming organizational inertia that threatens organizational survival. The concept is typically applied to established corporations in order to cure existing inertia. However, ambidextrous management may also help to avoid the emergence of inertia in entrepreneurial growth companies. We therefore discuss ambidexterity against the background of entrepreneurial growth companies and reveal how it can be used to build sustainable organizations. Our reasoning is based on organization science and entrepreneurship theory; in doing so we derive two groups of theoretical propositions explaining the antecedents of emergence and the antecedents of success of ambidextrous management in entrepreneurial growth companies. Keywords: Ambidexterity; growth; organizational inertia; entrepreneurship; innovation; exploration; exploitation.

INTRODUCTION Entrepreneurs exploiting a perceived opportunity (Kirzner, 1985; Shane and Venkataraman, 2000) usually possess a long-term involvement with and commitment to their venture (Timmons, 1978). Consequently, they strive for a thriving and prospering organization (Carland, Hoy, Boulton, and Carland, 1984). However, most ventures fail in the short-term (Brüderl and Preisendörfer, 1998), taking the entrepreneurs’ dreams with them. To facilitate survival and progress as well as to overcome “liabilities of newness” (Stinchcombe, 1965, p. 148; Aldrich, 1999), entrepreneurs have to 297


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Tobias Kollmann, Andreas Kuckertz and Christoph Stöckmann

install structures, systems, procedures, controls and rewards; i.e., they have to convert the entrepreneurial venture to a managed firm. Along with routines, structures and systems come bureaucracy, conservative tendencies, risk avoidance, and a focus on proven procedures (Tushman, 1997). Such tendencies can become so ingrained within an organization that serious problems with flexibility and change might arise. The link between size, age, complexity, formalization and resistance to evolutionary progress is well established in the literature (Schumpeter, 1934; Downs, 1967; Hannan and Freeman, 1984; Tushman and Romanelli, 1985). Reluctance to change due to evolutionary maturation is known as “liability of age” (Aldrich and Auster, 1986, p. 165; Aldrich, 1999). In organizational theory such tendencies are collectively called organizational inertia, and may threaten both the survival and progress of the venture. Organizational inertia, however, is not inevitable for an organization. Only early life cycle models of organizations postulate organizational inertia as unavoidable; they predict an irreversible momentum of increasing bureaucratization and goal-displacement (e.g., Weber, 1978; Merton, 1968). However, Blau (1963) suggests that bureaucratic flexibility and goal succession do exist, and some authors argue that failure is not an inescapable fate of every enterprise (Kimberly, 1980; Quinn and Cameron, 1983). In contrast to models assuming that “organizations evolve in a consistent and predictable manner” (Hanks, Watson, Jansen and Chandler, 1993, p. 5), later evolutionary approaches recognize that ambiguity and uncertainty exist as firms develop (Aldrich, 1999). Such models include phases of revitalization and renewal as immanent parts of every organization’s life cycle (Churchill and Lewis, 1983). In order to enable revitalization, strategic renewal, and pursuing new business opportunities, firms have to overcome strong internal forces for stability (Hammer and Champy, 1994). Possible solutions to this organizational inertia have been developed in entrepreneurship research. The line of research that analyzes entrepreneurial phenomena in established companies at the organizational level is termed corporate entrepreneurship (Morris and Kuratko, 2002; Katz and Shepherd, 2004; Elfring, 2005). Most approaches to overcoming organizational inertia focus on implementing entrepreneurial processes and behavior patterns, but disregard the importance of preserving existing efficient processes. To address this shortcoming, we explore the idea of ambidextrous management or ambidexterity; a concept that has emerged in the wider management literature (Duncan, 1976; Tushman and O’Reilly, 1996; Gibson and Birkinshaw, 2004) and potentially can inform the literature stream of corporate entrepreneurship as well. Ambidexterity integrates

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Continuous Innovation in Entrepreneurial Growth Companies

seemingly opposing activities within an organization with the aim of preserving existing business (exploitation) while discovering entrepreneurial opportunities (exploration) (March, 1991). The concept has been discussed widely in the extant organizational literature; its relevance and topicality is reflected, for instance, by the recent “Special Research Forum on Managing Exploration and Exploitation” in the Academy of Management Journal (Gupta, Smith and Shalley, 2006). However, until now the concept has primarily been discussed against the background of large corporations, such as IBM or SEIKO, and is mainly utilized with the goal to cure the issue of existing organizational inertia. Considering the negative consequences of organizational inertia and the large number of approaches to overcoming existing inertia, it is surprising that there is almost no research on avoiding the emergence of inertia. This paper develops a preventive approach to help companies at the early stages of development avoid inertia; i.e., allowing entrepreneurial growth companies to remain entrepreneurial. We explore ambidexterity against the background of entrepreneurial growth companies, which are defined as just having survived the birth stage — characterized by explorative behavior — and entered the phase of rapid growth in which the venture is transferred into a managed firm (Kimberley and Miles, 1980; Churchill and Lewis, 1983; Smith and Miner, 1983; Kazanjian, 1988). We suggest that building ambidextrous structures and mindsets at the very early stages of an entrepreneurial growth company’s development will enhance sustainability of firms. In the remainder of the paper we will therefore explore what individual, organizational and external antecedents determine the emergence of ambidexterity in entrepreneurial growth companies and, furthermore, will show what measures entrepreneurs can take to successfully implement ambidextrous structures. To address these questions, the paper proceeds along the following lines. First, we review the existing knowledge on antecedents of organizational inertia. Second, we discuss ambidextrous management as a possible cure for organizational inertia, apply the concept to entrepreneurial growth companies and develop propositions distinguishing the emergence of ambidexterity in entrepreneurial growth companies from ambidexterity in established corporations. In a subsequent step, the paper sheds some light on the question of how to successfully organize ambidexterity in entrepreneurial growth companies. The paper concludes with a discussion of our theoretical contribution and suggests avenues for future research.

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ON EMERGING ORGANIZATIONAL INERTIA From their inception, organizations are sieged by inertial pressures. For instance, the most promising entrepreneurial projects usually have to fall back on venture capital (Gompers and Lerner, 2000). In doing so, entrepreneurs have to create business plans and are pressed to pursue these plans by their investors. In selling their first products, companies raise customer expectations of long-term engagement in this realm. These and many other external factors, such as legal restrictions of organizational activity, constitute strong barriers that hinder organizations from exiting particular activities, and consequently can restrain progress (Hannan and Freeman, 1977). By forming alliances and establishing relations with business partners, an entrepreneurial growth company is also exposed to interorganizational pressures that demand continuity. Moreover, the creation of an organization is associated with mobilizing various scarce resources (e.g., capital, commitment of potential members, legitimacy) that are difficult to recover and are lost when the organization is disbanded (Hannan and Freeman, 1984). Establishing systems, structures and routines is of course vital to an organization’s growth and progress (Stinchcombe, 1965; Tushman, 1997). However, the dark side of the striving for efficiency is bureaucracy, risk avoidance and resistance to evolutionary progress. These tendencies threaten an organization’s survival and, ironically, may result from the very congruence that made the firm successful (Tushman and O’Reilly, 1996). Organizations may fit best into a given environment at a certain point in time and become successful. However, internal forces for stability that originate in a company’s past and present success lead to structural and cultural inertia, which retards the organization from executing necessary changes when the environment shifts (Hammer and Champy, 1994; Tushman and O’Reilly, 1997). In rapidly changing environments, avoiding organizational inertia becomes an issue of utmost importance. Organizational misalignments may result from past organizational strengths that, if not modified, can become a future liability (“the paradox of success”, Tushman and O’Reilly, 1996, p. 18). Consequently, an organization’s culture is one of the main reasons for both short-term success and long-term failure. Cultural inertia, which exists in the minds of the executive team and other employees, can be ascribed to internal political forces (Milgrom, 1988), paradigms of how work should be done (Tushman, 1997), or attempts to protect or enlarge individual quasi-rents (Schaeffer, 1998). Cultural inertia in organizations often inhibits individuals from perceiving the need for action as well as the action itself. 300


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Breaking up organizational inertia is usually not realized without difficulties. Any change of a firm’s organization implies sunk costs, and its returns are uncertain by nature. Likewise, revolutionary change might impair reliability, accountability and reproducibility, which are all needed to operate effectively and efficiently (Stinchcombe, 1965). Consequently, revolutionary change in entrepreneurial growth companies or mature companies might cause the same problems as those firms newly setup are faced in their inception (Hannan and Freeman, 1984). Even more serious is that organizations are rarely able to time structural changes to their competitive environment (the relative inertia thesis) (Ruef, 1997). Consequently, a tendency of incremental processes exists “to strangle discontinuous and architectural ideas” (Gary, 2003, p. 5); i.e., the need to improve existing processes negatively influences the reconfiguration of existing technologies and the implementation of new operating systems. Concentrating on exploitation and development of the existing business is one important side of ambidextrous management. Nevertheless, against the background of possible opportunities and threats, entrepreneurs must not lose sight of necessary future developments.

ESSENTIALS OF AMBIDEXTROUS MANAGEMENT Ambidexterity can be defined as the dual management of seemingly opposing tasks, forcing managers to accept the challenge of paradox management. The term was coined in the 1970s by Duncan (1976), who points out that different organizational structures are appropriate for different organizational tasks and that organizations need to be able to switch to different operational modes when pursuing innovative endeavors. Duncan heavily relies on Ansoff and Brandenburg (1971) as an example for a distinction between operational and strategic tasks, but is the first one to relate this particular issue to innovation. Since then, the ambidexterity concept has been applied to a variety of disparities. What unifies these disparities is that the dimensions of ambidexterity are always diametrically opposite to each other. For instance, some scholars see ambidextrous firms as capable of implementing incremental and revolutionary change at the same time (Tushman and O’Reilly, 1996), while other authors address the ambidextrous distinction of efficiency versus flexibility (Carlsson, 1989; Adler, Goldoftas and Levine, 1999), differentiation versus low-cost strategic positioning (Porter, 1980), enabling versus coercive bureaucracy (Adler and Borys, 1996), centrifugal versus centripetal forces (Sheremata, 2000), and global integration versus local responsiveness (Bartlett and Ghoshal, 1989; for an extensive overview, cf. Gibson and 301


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Birkinshaw, 2004). However, most of these dichotomies do not really apply to the issue at hand; our investigation of exploitative and explorative activities in entrepreneurial growth companies is best related to the view of Gibson and Birkinshaw, who define this particular variation of ambidexterity as a firm’s “capacity to simultaneously achieve alignment and adaptability at the business unit level” (2004, p. 209). Our paper adopts this basic distinction, but rather than focusing on the business unit level in large, established corporations, applies the concept to entrepreneurial growth companies. Based on Gibson’s and Birkinshaw’s concept, we define ambidexterity for the purposes of this paper as simultaneously achieving exploration and exploitation. Ambidextrous organizations that integrate exploitative and explorative activities are built with the explicit goal of excelling both in the present and in the future. What complicates the attainment of this goal is the need to execute both kinds of activities simultaneously. Early conceptualizations of ambidexterity did not talk about the simultaneous pursuit of opposing goals, but rather recommend a sequential pursuit (Duncan, 1976). This sequential pursuit is linked to the notion of “punctuated equilibria” (Burgelman, 2002; Tushman and Romanelli, 1985), wherein long periods of exploitation are punctuated by short periods of exploration. However, the need for a simultaneous balancing of exploration and exploitation through ambidextrous management is now widely accepted (Levinthal, 1997; Benner and Tushman, 2002; Benner and Tushman, 2003; Eisenhardt and Martin, 2000; March, 1991; March, 2006). One of the first studies to propose that organizations can indeed utilize multiple structures, depending on the task at hand, was by McDonough and Leifer (1983). Their basic assumption is that the external complexity of most organizations is, in fact, so high that organizations are forced to deal with several environmental factors at the same time. Therefore, every work unit within a company has to use several structures simultaneously. By integrating entrepreneurial activities as a complement to everyday business, ambidextrous management can help to overcome the paradox of success (Tushman and O’Reilly, 1996). There is a plethora of examples of how established corporations have been successful in building an ambidextrous organization; these include Nokia and GlaxoSmithKline (Birkinshaw and Gibson, 2004), and Seiko, Hewlett-Packard and Johnson and Johnson (Tushman and O’Reilly, 1996). The concept of ambidexterity is, to some degree, counterintuitive. Ambidextrous organizations are diametrically opposed to the notion of internal consistency — which has dominated the organizational discourse for some time (Van Looy, Martens and Debackere, 2005) — and might therefore 302


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be perceived as inferior to aligned or exploitative organizations. There are tensions between the exploitative and entrepreneurial parts of an organization, given that they compete for scarce resources (March, 1991) and because they are characterized by different underlying logics (He and Wong, 2004). As a consequence, ambidextrous organizations might face additional organizational costs, making them financially inferior businesses (Van Looy et al., 2005). Gupta et al. (2006) therefore suggest a macro perspective, i.e., when focusing on the societal or industry level, a balance between exploitative and explorative activities might well be achieved through specialization and the interplay of pure R&D companies and pure production companies. However, such a position is only acceptable for a short-term perspective; a longterm perspective for ambidextrous management is the only way to prevent organizations from being trapped in their past and experiencing failure as environmental settings shift (Tushman and Smith, 2004). Focusing on only one mode of ambidextrous management is nearly a guarantee for success in the short term — especially when focusing on alignment — but guarantees failure in the long term (Tushman and O’Reilly, 1996). Dichotomous Aspects of Ambidexterity — Exploitative versus Explorative Activities To sustain an organization in the long run, entrepreneurial growth companies need to engage in two fundamentally opposing activities: developing and preserving their existing business, and developing and exploring their future business. This dichotomy was introduced by March (1991), who modeled the exploration of new possibilities in contrast to the exploitation of old certainties, and has been the basis for a variety of alternative terms, all capturing particular aspects of the fundamental difference. Table 1 summarizes prevalent disparities, comparing exploitative and explorative aspects of ambidextrous management. There are three main classes of models for the ambidexterity dichotomy (March, 1991): evolutionary models, organizational models, rational models of choice. Evolutionary models explain ambidexterity theoretically by processes of variation and selection. Organizational models contrast existing technologies and the invention of new technologies. Rational models of choice aim at balancing exploitative and explorative activities. The reason for this analytical differentiation of organizational activities can be ascribed to the fact that, along the organizational life cycle curve, different innovative activities have different requirements (Tushman and O’Reilly, 1997). While entrepreneurial activities prevail at the beginning, 303


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Tobias Kollmann, Andreas Kuckertz and Christoph Stöckmann Table 1. Prevalent Aspects of Ambidextrous Managementa Exploitative Aspects

Explorative Aspects

• • • • • • • • • • • • • • • • • • •

• • • • • • • • • • • • • • • • • • •

Incremental change Exploitation Incremental innovation Existing business Short-run perspective Selection Operational tasks Existing technologies Certainties Alignment Efficiency Mechanic structures Routine Conservatism Stability Preservation Sustaining advantages Convergent behavior Path dependence

Revolutionary change Exploration Radical innovation Future (emerging) business Long-run perspective Variation Strategic tasks New technologies Possibilities (opportunities) Adaptability Effectiveness Organic structures Non-routine Entrepreneurship Flexibility Change Creating advantages Divergent behavior Path creation

a Ansoff

and Brandenburg, 1971; McDonough and Leifer, 1983; March, 1991; Grant, 1996; Volberda, 1996; Van de Ven et al., 1999; Gary, 2003; O’Reilly and Tushman, 2004; Birkinshaw and Gibson, 2004; Van Looy et al., 2005.

subsequent steps in an organization’s development require incremental innovation in order to adjust to a gradually changing competitive environment (Myers and Marquis, 1969). As a result, organizations adapt gradually and slowly in serial steps (Mintzberg, 1973). Examples of incremental activities related to the exploitative dimension of ambidextrous management include implementing, executing, and refining processes to fabricate products and services efficiently (March, 1991). The main idea here is to manage the existing organization by developing it incrementally (Tushman and O’Reilly, 1997). The key assumption of ambidextrous management is that entrepreneurial activities are not only necessary at the beginning of the organizational life cycle, but are continually required to build a sustainable organization. Such entrepreneurial goals are not achieved by innovating incrementally, but rather involve architectural or discontinuous innovation (Henderson and Clark, 1990), i.e., the reconfiguration of existing technology 304


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or the design of totally new core subsystems or processes that follow radically new principles (Tushman and O’Reilly, 1997). Exploring entrepreneurial opportunities is thus a task that is closely related to strategic management concepts such as environmental scanning and external learning (Elenkov, 1997; Beal, 2000; Zhang, Macpherson and Jones, 2006; Santoro, Bierly and Gopalakrishnan, 2007; Stuart, May and Kali, 2008). In other words, entrepreneurial activities seek to develop designs that change industries profoundly (Tushman and Smith, 2004). An example is Google’s search algorithm, which nearly completely replaced prior solutions for searching the web. This type of innovation is rarely achieved in a managed organization, and requires different activities. Typical activities that can be included in the explorative dimension of ambidextrous management include the search for new business opportunities, variation, experimentation, play, flexibility, discovery, innovation, and, as a consequence, risk taking (March, 1991). An excellent example of these three types of innovation in an established firm would be Microsoft’s product policy: while old operating systems such Windows 2000 are supported through frequent bug-fixes (incremental innovation), new operating systems such as Windows Vista are developed (architectural innovation), along with radically new products, such as the Zune portable media player (discontinuous or radical innovation). While ambidextrous management involves two seemingly opposing tasks, entrepreneurs must pursue both in order to grow their organization. Firms concentrating only on one side are unlikely to succeed in the long run. For instance, focusing on preserving and refining the existing business model to the exclusion of developing new business opportunities could theoretically have short-run advantages such as lower costs of production. But such firms will face disadvantages in the long run: they will find themselves in suboptimal stable equilibria that may well be destroyed by discontinuous environmental changes. In this case, substantial organizational inertia may arise from only striving for efficiency by changing the organization just incrementally (Tushman and Smith, 2004). On the other hand, firms purely concentrating on entrepreneurial activities will “suffer the costs of experimentation without gaining many of its benefits” (March, 1991, p. 71). Ericsson has been an interesting example of this type of behavior. It employed more than 30,000 people in approximately 100 technology centers at the turn of the 21st century (Birkinshaw and Gibson, 2004) and was — compared to its competitors — disproportionately affected by the downturn in the telecommunication markets. This can be primarily attributed to Ericsson’s greater amount of entrepreneurial activities. On a smaller scale, entrepreneurs failing to transform their venture into a stable organization because of a focus 305


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on alternative entrepreneurial opportunities are another example of this mislead concentration on only one side of the ambidextrous dichotomy. As a result, we can conclude that, in the long run, firms exaggerating one side of ambidexterity either suffocate in conservatism or drown in chaos caused by too much change. Usually, organizations excel at preserving their existing business but lose sight of necessary entrepreneurial activities. This is, on the one hand, due to the fact that entrepreneurial projects are risky activities and normally generate a larger performance variation (He and Wong, 2004), both positive and negative. On the other hand, the need for entrepreneurial activities is mostly driven by outside pressures (Tushman and Smith, 2004), while internal organizational inertia resists such activities. Ambidexterity is therefore only necessary in response to environmental demands; if we focus solely on the internal operations of the firm, efficiency would be the only rational goal a firm could pursue. Only an organization that “engage[s] in sufficient exploitation to ensure its current viability and, at the same time, [devotes] enough energy to exploration to ensure its future viability” (Levinthal and March, 1993, p. 105) will survive in the long run. The next paragraphs will explore this assumption against the background of entrepreneurial growth companies. General Aspects of Ambidexterity in Entrepreneurial Growth Companies When comparing ambidextrous management in entrepreneurial growth companies to managing in established corporations, one particular difference becomes immediately evident: entrepreneurial growth companies have not had the chance to develop organizational inertia and therefore do not have to undergo significant organizational changes. However, they still need to avoid the emergence of organizational inertia. To manage the growth of a venture ambidextrously is nonetheless challenging; entrepreneurs are usually advised to make the transfer from their chaotic beginnings into a managed firm as fast as possible. However, resources may already be devoted to the refinement of the existing business, and these can hamper entrepreneurial activities (Van Looy et al., 2005). Pursuing both the exploitative and the explorative goals is, however, not easily achieved. For instance, empirical research has shown that organizational characteristics such as the degree of entrepreneurial orientation may have different effects on exploitative and exploratory activities (Kollmann and Stöckmann, in press). Consequently, switching in a sequential manner 306


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between exploitative and explorative activities whenever necessary may be hard to realize. The task of ambidextrous management is greatly complicated by the need to pursue all innovative subtasks simultaneously. I.e., from an entrepreneurship theoretical perspective, entrepreneurs are called to take up several parallel entrepreneurial processes (Moore, 1986; Bygrave, 1989) that include innovating and implementing in different entrepreneurial projects at the same time (Figure 1). The subsequent paragraphs will show how this simultaneous management of opposing tasks in entrepreneurial growth companies is affected by environmental, organizational, and personal factors alike. INNOVATE

INNOVATE

IMPLEMENT

IMPLEMENT

GROW

GROW

INNOVATE

IMPLEMENT

GROW

Figure 1. The Basis of Ambidextrous Management in Entrepreneurial Growth Companies: Initiating Multiple Entrepreneurial Processes over the Course of Time.

Environmental factors. Ambidextrous management is necessary because of two different forms of environmental change. First, environments evolve incrementally so that there is a need for efficiency development within the organization. Second, a firm’s environment may be punctuated by discontinuities, requiring the organization to revolutionarily change (Tushman and O’Reilly, 1997) due to market turbulences and technology turbulences. How firms are managed varies widely across industries due to requirements from different kinds of competition. Consequently, the optimal balance of the two sides of ambidextrous management varies across industries (Sutton, 2004). In their theoretical paper, Tushman and O’Reilly (1996) stress that in stable or gradually changing environments, that is, for instance, environments where a dominant technological design already has emerged (Utterback and Abernathy, 1975), organizations can survive with incremental innovation alone, and therefore ambidextrous management might be less important. On the other hand, Jansen, Van den Bosch, and Volberda (2005) present empirical findings suggesting that business units of large corporations operating in dynamic and competitive local environments show a higher level of ambidexterity due to the need to innovate radically. For instance, Yahoo! 307


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started as a search engine and web directory in 1994. When the firm entered the growth phase it was forced to manage its growth ambidextrously due to rapidly growing competitors such as MSN, Lycos or Excite. Therefore, on the one hand, Yahoo! engaged in serious exploitation and steadily improved its existing services. However, on the other hand, Yahoo! engaged in exploration as well and diversified into a Web portal, thus expanding its range of services in order to increase the time a user stayed at the Yahoo!-platform. In doing so, the firm prevented to some extend that customers had to use other platforms to fulfill their needs. This “continuous morphing” (Rindova and Kotha, 2001, p. 1263) of an organization is especially important for long-term survival in transient environments. Overall, it can be assumed that industries that are innovative per se, such as Information and Communications Technology (ICT) or the life sciences, will have shorter product life cycles and, in many cases, will produce discontinuous innovations that force entrepreneurs to manage growth beyond pure exploitative activities. Where radical innovation is inherent to an industry, we can therefore expect ambidextrous management to be an attractive strategic option for entrepreneurial growth companies in this industry, making its emergence more likely. We therefore propose Proposition 1 (P1). Entrepreneurial growth companies in innovative industries are more likely to manage growth ambidextrously than entrepreneurial growth companies in traditional industries. Organizational factors. So far, our research has revealed that ambidextrous management is essentially a long-term endeavor. Entrepreneurs who commit themselves to this particular type of growth management aim not at superior performance today, but at outrunning competition in the medium to long run. A potential downside of ambidexterity, therefore, is the risk of being outperformed by more focused and specialized organizations — at least in the short run (Van Looy, 2005). A rigorous focus on high performance in the short run is usually observed in publicly traded companies that are expected to report increased sales and profits each quarter. We therefore propose that companies that are not yet dominated by expectations for shortrun success, such as private entrepreneurial growth companies, will tend to manage growth more ambidextrously when compared to public companies: Proposition 2 (P2). Privately held entrepreneurial growth companies are more likely to be managed ambidextrously than publicly traded companies. Personality and experience factors. Besides environmental and organizational antecedents, personality factors and the experience of the people 308


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involved influence the emergence of ambidexterity. Support of senior teams and senior managers is essential (O’Reilly and Tushman, 2004), as is the influence of the entrepreneur in the context of entrepreneurial growth companies. Especially the explorative part of the ambidextrous organization calls for a long-term commitment to the company by the entrepreneur, since rewards from this type of management do not appear instantly. Discovering opportunities and quickly establishing an organization to exploit them in order to reach a rapid initial public offering, as was the case in the dot-com era of the late 1990s, does not fulfill these requirements. It is therefore safe to assume that entrepreneurs who do not only want to exploit just one particular opportunity, but also want to build a lasting organization, will decide to grow their venture ambidextrously. “Fast-buck artists” (Timmons, 1978, p. 7) would not be able to achieve the ambidextrous organization, whereas committed entrepreneurs can. We therefore propose Proposition 3 (P3). Entrepreneurial growth companies started by entrepreneurs with long-term considerations are more likely to establish ambidextrous management structures. Motivation of the entrepreneur is, however, not enough to explain ambidexterity in this context: the specific experience of the entrepreneur is just as important. When examining the relationship between founding-team composition and firm behavior, Beckham (2006) found that the team members’ prior company affiliations can predict whether a venture will show primarily entrepreneurial or exploitative behavior. Heterogeneous teams (those with diverse prior company affiliations) encourage creativity, innovation, and change that lead to explorative firm behavior, while homogenous teams (those with shared prior company affiliations) will tend towards exploitative behavior. Consequently, founding teams that have both shared and diverse prior company affiliations integrate both types of behavior; i.e., they manage growth ambidextrously. With respect to specific entrepreneurial experience, entrepreneurs can either be categorized as novice entrepreneurs, due to a lack of prior private business ownership experience (Westhead, Ucbasaran and Wright, 2005), or as having specific entrepreneurial experience gained in preceding ventures (so-called habitual entrepreneurs, i.e., serial and portfolio entrepreneurs (Wright, Robbie and Ennew, 1997)). Novice entrepreneurs, who may even have gained specific industry experience in established corporations, will be challenged to build a stable organization for the first time. However, habitual entrepreneurs will be able to draw on prior experience and therefore will have the chance to build stable and growing organizations. Empirical 309


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Environmental antecedents

Innovative industries P1

Organizational antecedents

Privately held companies

P2

P3 Long-term considerations

Emergence of ambidexterity

P4

Individual antecedents Entrepreneur’s experience

Figure 2. Antecedents of Emerging Ambidexterity in Entrepreneurial Growth Companies.

research indicates that portfolio entrepreneurs (i.e., entrepreneurs simultaneously owning several businesses (Carter and Ram, 2003)), indeed have more diverse and better experiences when compared to other types of entrepreneurs (Westhead, Ucbasaran, Wright and Binks, 2005). For those reasons, we assume that they will pursue the rational goal of building sustainable organizations through managing ambidextrously. We therefore propose. Proposition 4 (P4). Entrepreneurial growth companies started by experienced entrepreneurs are more likely to establish ambidextrous organizations than those started by entrepreneurs with no prior entrepreneurial experience. While the preceding paragraphs have discussed environmental, organizational, and individual antecedents of ambidexterity in entrepreneurial growth companies (Figure 2), the remainder of this paper will address the question of how entrepreneurs can organize for ambidexterity in order to build a sustainable organization.

BUILDING AMBIDEXTERITY INTO ENTREPRENEURIAL GROWTH COMPANIES Generally speaking, ambidexterity is facilitated by senior executives who encourage explorative activities (Gibson and Birkinshaw, 2004). As a result, without explicit commitment of the entrepreneur, an organization will tend to 310


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specialize in exploitative behavior because such activities are the most natural within every organization. Under this condition, the firm is organized best by highly formal and mechanistic structures, along with a culture that emphasizes efficiency, low risk taking, and strong quality orientation (O’Reilly and Tushman, 2004). Unfortunately, for most organizations, anything but incremental change and exploitative activities seems to be extremely difficult to realize (Tushman and O’Reilly, 1996). Some organizations do not pursue entrepreneurial opportunities at all, while others simply decide to concentrate on the wrong environmental changes or new technologies, thus failing to manage ambidexterity successfully. Even organizations aiming explicitly at the attainment of both goals face the danger of failing because of a common inability “to play two games simultaneously” (Tushman and O’Reilly, 1996, p. 10). Thriving entrepreneurial activities need to be organized by building loose and adaptive organic structures with a culture that, contrary to the exploitative goal, emphasizes risk taking, speed, flexibility, and experimentation (O’Reilly and Tushman, 2004). Both sides, taken together, lead to two archetypes of ambidextrous management: structural ambidexterity and contextual ambidexterity. The Organizational Solution — Structural Ambidexterity The goal of ambidextrous management is to achieve the right balance between exploitation and exploration (Birkinshaw and Gibson, 2004). The first approach towards achieving such balance is an organizational approach that is often referred to as structural ambidexterity. With structural ambidexterity, exploitative and explorative tasks are organized into different innovation streams (Tushman and O’Reilly, 1997); i.e., the organization is separated into different fractions pursuing different tasks. The basic idea of this separation is that “different parts of an organization can employ those modes which best fit their particular situation” (Mintzberg, 1973, p. 51). Organizations that use structural ambidexterity can therefore be defined as “complex organizational forms that are composed of multiple internally inconsistent architectures that are collectively capable of operating simultaneously for short-term efficiency and long-term innovation” (Tushman and Smith, 2004, p. 8). The interplay between the separate parts of the organization is important — while successful, ambidextrous firms separate explorative units from exploitative units, they maintain at the same time tight links between them (O’Reilly and Tushman, 2004). Occasionally it is recommended to spin the explorative part of the organization off into a separate organization, or even to balance exploitative 311


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and explorative tasks with respect to a firm’s alliances or choice of partners over time and across domains (Lavie and Rosenkopf, 2006). However, most frequently organizations are called to have their management oversee both parts simultaneously (Gary, 2003). This approach appears to be most rewarding, because it allows leveraging customers, technologies, and infrastructure for both purposes. For instance, while working on an exploitative task, an opportunity for entrepreneurial behavior might be discovered, or vice versa. The success of ambidextrous structures is due to the fact that structural ambidexterity “allows cross-fertilization among units while preventing cross-contamination” (O’Reilly and Tushman, 2004, p. 77). Senior management teams or entrepreneurs can achieve such an integrated organization as they communicate a clear vision, have diverse competencies, and implement a few core values that apply to both dimensions of the ambidextrous organization (Tushman and O’Reilly, 1997; Gary, 2003). This structural separation should, however, in most cases only be a temporary instrument “to give a new initiative the space and resources to get started” (Birkinshaw and Gibson, 2004, p. 55). The Individual Solution — Contextual Ambidexterity Overall structural ambidexterity is, however, not the only possible solution to achieve a balance of exploitative and explorative activities within one organization. It has recently been suggested that in large corporations, single business units can become ambidextrous and pursue exploitative and explorative activities at the same time (Gibson and Birkinshaw, 2004). Jansen et al. (2005) were able to provide empirical support for this notion by showing that multiunit firms not only differentiate their organizations into explorative and exploitative parts, but also develop ambidextrous business units in order to respond effectively to dynamic environments. Taken to the extreme, one could extrapolate this line of argumentation to the level of the individual employee, who then would be expected to behave ambidextrously. With structural ambidexterity the top management has to do the “mental balancing” between the opposing tasks (O’Reilly and Tushman, 2004, p. 74); now each and every member of the organization is asked to contribute to the successful balancing. This new approach to ambidextrous management has been coined “contextual ambidexterity” (Birkinshaw and Gibson, 2004, p. 49). If a firm is structurally ambidextrous, the different organizational parts will need employees with different competencies and attitudes: mainly a flexible, high-performance–oriented workforce for the explorative business units, and a more stable workforce oriented towards long-term performance 312


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for the exploitative business units. In the event of contextual ambidexterity, a firm needs to employ totally different staff over the whole organization. Specifically, such a firm will require individuals that take the initiative, seek opportunities for synergies across the organization, are alert to entrepreneurial opportunities in the firm’s environment, try to link parts of the organization, and are comfortable with “wearing more than one hat” (Birkinshaw and Gibson, 2004, p. 49), i.e., they should be able to cope simultaneously with multiple tasks. Individuals behaving in this way show ambidextrous behavior in the contextual sense and consequently operate in two modes on the front line of the business. Contextual ambidexterity is best achieved by avoiding the creation of structural ambidexterity within the firm (Gibson and Birkinshaw 2004). Empirical findings by Jansen et al. (2005) suggest that internal decentralization and connectedness (i.e., dense networks of individuals) will lead to higher levels of ambidexterity. Moreover, so that individuals can develop ambidextrous behavior, the organization needs to provide an appropriate environment by offering social support and at the same time setting aggressive performance targets (Birkinshaw and Gibson, 2004). Building Ambidexterity within the Entrepreneurial Growth Company In transferring the contextual and structural ambidexterity approaches to entrepreneurial growth companies, it becomes evident that different types of ambidexterity are appropriate for different types of organizations. For instance, the size of an organization may well determine the form of ambidexterity: large corporations have the necessary resources to establish corporate venture units, while smaller organizations, such as entrepreneurial growth companies, usually will be forced to manage ambidexterity contextually due to their limited resources. Contextual ambidexterity may even not be an appropriate management approach for large organizations. Siggelkov and Rivkin (2006) show that unleashing low-level members of an organization to explore extensively does not inevitably cause a higher level of entrepreneurial activity for an organization as a whole. Due to parochial interests of low-level managers and cross-departmental interdependencies, it can even reduce overall exploration, become a source of inertia, and diminish performance. Hence, decentralized innovation is only likely to boost firm-wide exploration when decisions are well modularized, i.e., interdependencies arise only within departments, and when department managers cannot hide options they dislike. In other words, large organizations 313


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achieve simultaneous incremental and revolutionary change by establishing appropriate structures. Smaller, entrepreneurial organizations, however, need staff that is capable of perceiving both entrepreneurial opportunities and opportunities for incremental change, i.e. for preserving the existing business. We therefore propose Proposition 5 (P5). Entrepreneurial growth companies will prefer managing ambidexterity contextually to managing ambidexterity structurally. Entrepreneurs can approach the growth issue in various ways — not all of them measurable — when concentrating on the firm as the unit of analysis (Carter and Ram, 2003; Rosa and Scott, 1999). Based on the everyday observation that every organization operates within a broader social system and, as such, is more or less interdependent with other organizations (Child, 1972; Pfeffer and Salancik, 1978; Thomson, 1967), Gupta et al. (2006) suggest that, under certain conditions, the balance between exploration and exploitation can be achieved at the level of the broader social system rather than at the level of the individual organization. This alternative approach to growth in the entrepreneurial context involves the ownership of multiple enterprises, so-called portfolio entrepreneurship. Portfolio entrepreneurship is essentially a diversification strategy in order to reduce risk (MacMillan and Katz, 1992), but has been shown to offer attractive growth prospects as well (Westhead, Ucbasaran, Wright and Binks, 2005). We therefore argue that, if ambidexterity is to be achieved structurally, starting and managing several businesses simultaneously is a preferable option. Instead of managing one entrepreneurial growth company, an entrepreneur creates a portfolio of explorative and exploitative enterprises, consisting of some organizations specialized in exploration and others specialized in preservation. Structural ambidexterity is achieved via a (market) interface between these organizations (Gupta et al., 2006). The entrepreneurial growth portfolio can be created by starting a new innovative venture at the time an existing business has been transferred into a managed firm. We therefore propose Proposition 6 (P6). Structural ambidexterity in entrepreneurial contexts is better achieved through building a portfolio of organizations than through internal separation. If entrepreneurs are aiming at managing growth ambidextrously, they are likely to encounter internal organizational resistance. This resistance is primarily due to the part of ambidexterity that pursues radical change and innovation. Because innovation is a complex task with, to some extent, 314


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incalculable consequences for the individual, one can assume that people are essentially non-innovative (Duncan, 1976). This resistance may be conscious or unconscious — it is a result of inertia, complacency and arrogance routed in past success (Tushman and Smith, 2004). However, we can assume that entrepreneurial growth companies are not as averse to innovation because the organization’s last “triggering” (Bygrave, 1989, p. 9) or “entrepreneurial” (Shapero, 1984, p. 23; Kollmann and Kuckertz, 2006) event is still sharp in the memories of the firm’s employees, and not some historic event of a corporation established decades or even centuries ago. Thus, radical innovation is part of the collective identity. We therefore propose Proposition 7 (P7). Entrepreneurial growth companies will experience significantly less internal resistance to ambidextrous management than established corporations. Another crucial question is when in an entrepreneurial organization’s life cycle is ambidexterity best implemented. The curative approaches in the academic literature that explain ambidexterity in the context of established corporations call for immediate implementation. However, since entrepreneurial growth companies usually have not yet encountered organizational inertia, the question arises whether another point in time is better suited for the implementation of new entrepreneurial processes. We argue that a more optimal point in time exists; hence, entrepreneurs are well advised to think early about ambidexterity, but are asked to realize ambidexterity somewhat later. For instance, Kuckertz, Kohtamäki and Droege, gen. Körber (in press) provide first empirical evidence that newly founded firms tend to start additional innovative activity on average 14 months after their launch and that the timing of the second innovation project after start-up, i.e., the point in time when ventures become potentially ambidextrous, plays a decisive role for the success of the firm. Concentrating too early on the next revolutionary steps may well lead to insufficient exploitation of the current project. Conversely, waiting until the first idea has fully matured and is in decline before searching for the next opportunity may be much too late. Figure 3 illustrates this argument. Diagram A shows the ideal revenue functions of three entrepreneurial projects sequentially started. Diagrams B to D display the aggregated curves of these three projects; each diagram shows a different timing of the projects. Diagram B illustrates that companies starting ambidextrous endeavors too late face the risk of generating negative returns despite a successful start. 315


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t

t

(A)

(B)

t

t

(C)

(D)

Figure 3. Optimal Point in Time to Start Ambidextrous Initiatives in Entrepreneurial Growth Companies.

Diagram C illustrates the extreme of starting all three projects simultaneously, which causes great negative returns at the beginning of a company’s life cycle. Such companies also lose the benefits of ambidextrous management, such as positive learning effects resulting from earlier entrepreneurial projects. The optimal timing for implementing ambidexterity, illustrated in Diagram D, is when organizational stability has just been achieved, because only then has a reliable basis for a new innovation stream been built. We therefore propose Proposition 8 (P8). Entrepreneurial growth companies establishing ambidextrous management structures immediately after they have reached organizational stability are more likely to achieve long-term survival and growth. All in all, our research shows that ambidextrous management in entrepreneurial growth companies differs significantly from the management 316


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Contextual ambidexterity Portfolio entrepreneurship Entrepreneurial growth company

P5 P6 Success of ambidexterity

P7 P8

Optimal point in time

Figure 4. Antecedents of Success of Ambidextrous Management in Entrepreneurial Growth Companies.

of incremental and radical innovation in established corporations. Figure 4 summarizes our last four propositions.

CONCLUSION Our theoretical reasoning revealed how ambidexterity is organized in entrepreneurial growth companies. The concept of ambidextrous management is indeed a suitable instrument to solve the paradox of success in both established corporations and entrepreneurial growth companies. Ambidextrous management also solves the dilemma that precisely those organizational characteristics that trigger innovation slow down its successful implementation (Duncan, 1976). Empirical findings support the idea that firms that effectively apply ambidexterity have a competitive edge over companies that focus on either exploitative behavior or explorative behavior (Gibson and Birkinshaw, 2004). Moreover, when the two dimensions of ambidexterity get out of balance, a negative influence on sales growth has been detected (He and Wong, 2004). Our theoretical reasoning reveals that entrepreneurial growth companies are most likely to be managed ambidextrously when they are founded by habitual entrepreneurs with explicit long-term aspirations, who are active in innovative industries, and whose companies are still privately held. Moreover, we can expect ambidextrous management to occur more often in entrepreneurial than in established firms. With respect to the actual management of ambidexterity, we propose that entrepreneurs prefer contextual 317


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over structural ambidexterity, that they will encounter less internal resistance than their established counterparts, and that the optimal time to implement ambidexterity is right after organizational stability has been achieved. If entrepreneurs decide to manage ambidexterity structurally, we conclude that this type of ambidexterity is best achieved by building a portfolio of entrepreneurial companies. Entrepreneurs managing growth in the way discussed in this paper are well equipped to build a sustainable organization. There are manifold avenues for future research. Despite recent efforts to extend the body of empirical research on ambidextrous management (for an extensive overview, cf. Gupta et al., 2006), empirically grounded knowledge, especially about ambidexterity in the context of entrepreneurial growth companies, is still rare. In this paper we have provided a rationale for why ambidextrous management might be a suitable approach to managing growth of entrepreneurial companies. Still, it is unclear whether the positive relationship between ambidexterity and performance seen in studies of established corporations will also appear in empirical studies on entrepreneurial growth companies. Moreover, empirical research on the concrete relationship of entrepreneurial growth companies’ characteristics and the features of ambidexterity is extremely desirable. If this relationship stands rigorous empirical tests, the development of practical instruments utilizable in actual management is the next important step. REFERENCES Adler, P. and Borys, B. (1996). Two types of bureaucracy: Enabling and coercive, Administrative Science Quarterly 41: 61–89. Adler, P., Goldoftas, B. and Levine, D. (1999). Flexibility versus efficiency? A case study of model changeovers in the Toyota production system, Organization Science 10: 43–68. Aldrich, H. (1999). Organizations Evolving. Sage, London. Aldrich, H. and Auster, E. R. (1986). Even dwarfs started small: Liability of age and size and their strategic implications, in B. M. Staw and L. L. Cummings (eds.). Research in Organizational Behaviour. An Annual Series of Analytical Essays and Critical Reviews, 165–198. JAI Press, Greenwich, CT. Ansoff, H. I. and Brandenburg, R. G. (1971). A language for organization design. Part II, Management Science 17: 717–731. Barlett, C. and Ghoshal, S. (1989). Managing Across Borders: The Transnational Solution. Harvard Business School Press, Boston, MA. Beal, R. M. (2000). Competing effectively: Environmental scanning, competitive strategy, and organizational performance in small manufacturing firms, Journal of Small Business Management 38: 27–47. Beckman, C. M. (2006). The influence of founding team company affiliations on firm behavior, Academy of Management Journal 49: 741–758. 318


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