26 Apr 2004  Research & Ideas

A Clear Eye for Innovation

How did a weakening contact-lens company set its sights on a series of breakthroughs? A Harvard Business Review excerpt by Charles A. O’Reilly III and HBS professor Michael L. Tushman.

 

The Roman god Janus had two sets of eyes—one pair focusing on what lay behind, the other on what lay ahead. General managers and corporate executives should be able to relate. They, too, must constantly look backward, attending to the products and processes of the past, while also gazing forward, preparing for the innovations that will define the future.

This mental balancing act can be one of the toughest of all managerial challenges—it requires executives to explore new opportunities even as they work diligently to exploit existing capabilities—and it's no surprise that few companies do it well. Most successful enterprises are adept at refining their current offerings, but they falter when it comes to pioneering radically new products and services. Kodak and Boeing are just two of the more recent examples of once dominant companies that failed to adapt to market changes. Kodak excelled at analog photography but hasn't been able to make the leap to digital cameras. Boeing, a longtime leader in commercial aircraft, has experienced difficulties in its defense-contracting businesses and has recently stumbled in the face of competition from Airbus.

The failure to achieve breakthrough innovations while also making steady improvements to an existing business is so commonplace—and so fascinating—that it has become a battleground of management thought. For decades, scholars have spun theories to explain the puzzle and offered advice on how to solve it. Some have argued that there's no way out of the conundrum—that established companies simply lack the flexibility to explore new territory. Some have suggested that big companies adopt a venture capital model, funding exploratory expeditions but otherwise staying out of their way. Others have pointed to cross-functional teams as the key to creating breakthrough innovations. Still others have claimed that a company may be able to shift back and forth between different organizational models, focusing on exploitation for a period and then moving into exploration mode.

We recently decided to test these and other theories by taking a close look at the real world, examining how actual, contemporary businesses fare when they attempt to pursue innovations that lie beyond their current products or markets. Do they succeed in achieving breakthroughs? Do their existing businesses suffer? What organizational and managerial structures do they use? What works, and what doesn't?

First and perhaps most important, [Bradley] had the leaders of all the breakthrough projects report to a single executive.

We discovered that some companies have actually been quite successful at both exploiting the present and exploring the future, and as we looked more deeply at them we found that they share important characteristics. In particular, they separate their new, exploratory units from their traditional, exploitative ones, allowing for different processes, structures, and cultures; at the same time, they maintain tight links across units at the senior executive level. In other words, they manage organizational separation through a tightly integrated senior team. We call these kinds of companies "ambidextrous organizations," and we believe they provide a practical and proven model for forward-looking executives seeking to pioneer radical or disruptive innovations while pursuing incremental gains. A business does not have to escape its past, these cases show, to renew itself for the future. [...]

A new lens on growth

One company that has used an ambidextrous organization to spur growth through radical innovation is Ciba Vision. Established in the early 1980s as a unit of the Swiss pharmaceutical giant Ciba-Geigy (now Novartis), the Atlanta-based Ciba Vision sells contact lenses and related eye-care products to optometrists and consumers. Although the company produced some innovative new products in its early years, such as the first FDA-approved bifocal contacts, by the mid-1980s it remained a distant second to market leader Johnson & Johnson. Making matters worse, in 1987 J&J brought out a new, disposable contact lens that threatened Ciba Vision's sales of conventional contacts. By the early 1990s, it was clear to Glenn Bradley, Ciba Vision's president, that J&J's dominance provided economies of scale that would doom his company to ever-shrinking profits. Without radically new products, Ciba Vision would slowly decline and ultimately fail. To survive and grow, Bradley saw, his organization would have to continue making money in the mature conventional-contacts business while simultaneously producing a stream of breakthroughs.

In 1991, Bradley launched six formal development projects, each focused on a revolutionary change. Four entailed new products, including daily disposables and extended-wear lenses, and two involved new manufacturing processes. In a controversial but necessary move, he canceled dozens of small R&D initiatives for conventional lenses to free up cash for the breakthrough efforts. While the traditional units would continue to pursue incremental innovations on their own, the entire corporate R&D budget would now be dedicated to producing breakthroughs.

Bradley knew that attempting to manage these projects under the constraints of the old organization would not work. Inevitably, conflicts over the allocation of human and financial resources would slow down and disrupt the focus needed for breakthrough innovations. Further, the new manufacturing process required different technical skills, which would make communication across old and new units difficult. He therefore decided to create autonomous units for the new projects, each with its own R&D, finance, and marketing functions, and he chose the project leaders for their willingness to challenge the status quo and their ability to operate independently.

Given the freedom to shape their own organizations, the new units created very different structures, processes, and cultures. The extended-wear team remained in Atlanta, though in a facility separate from the conventional-lens business, while the daily-disposables team was located in Germany. Each team hired its own staff, decided on its own reward system, and chose its own process for moving from development to manufacturing.

But even as Bradley understood the importance of protecting the new units from the processes and cultural norms of the old business, he realized they also had to share expertise and resources, both with the traditional business and with one another. He therefore took a number of steps to integrate management across the company.

First and perhaps most important, he had the leaders of all the breakthrough projects report to a single executive, Adrian Hunter, the vice president of R&D, who had a deep knowledge of the existing business and tight relationships with executives throughout the firm. Working closely with Bradley, Hunter carefully managed the trade-offs and conflicts between the old business and the new units. All the leaders of the innovation projects, moreover, were asked to sit in on Bradley's executive team meetings.

Hunter carefully managed the trade-offs and conflicts between the old business and the new units.

Bradley and his team also enunciated a new vision statement for Ciba Vision— "Healthy Eyes for Life"—that was meaningful to all parts of the business. While this move was largely rhetorical, it had an important effect. It underscored the connections between the breakthrough initiatives and the conventional operation, bringing together all employees in a common cause and preventing organizational separation from turning into organizational fragmentation. As Bradley noted, the slogan gave people a social value as well as an economic reason for working together. Like USA Today, Ciba Vision also revamped its incentive system, rewarding managers primarily for overall company performance rather than for the results of their particular units.

The ambidexterity paid off. Over the next five years, Ciba Vision successfully launched a series of contact-lens products, introduced a drug for treating age-related macular degeneration, pioneered a new lens-manufacturing process that dramatically reduced production costs, and overtook J&J in some market segments. The conventional-lens business, moreover, remained profitable enough to generate the cash needed to fund the daily disposables and extended-wear lenses.

At the time the new strategy was adopted, Ciba Vision's annual revenues were stuck at about $300 million. Ten years later, its sales had more than tripled, to over $1 billion, and the new drug, transferred to Novartis's pharmaceutical unit, was on its way to becoming a billion-dollar business. More recently, Ciba Vision has continued to reap the benefits of ambidexterity by pioneering so-called fashion lenses that allow people to change the color of their eyes.

About the author

Charles A. O'Reilly III is the Frank E. Buck Professor of Human Resource Management and Organizational Behavior at the Graduate School of Business at Stanford University.

Excerpted with permission from "The Ambidextrous Organization," Harvard Business Review, Vol. 82, No. 4, April 2004.

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