Why Some Companies Seem To Last Forever
All companies hit rough patches from time to time. But only a few manage to survive decade after decade — some of them in a form that bears no resemblance to the original organization.
Nokia began in 1865 as a riverside paper mill along the Tammerkoski Rapids in southwestern Finland. In the late 1880s, Johnson & Johnson got its start by manufacturing the first commercial sterile surgical dressings and first-aid kits.
And in 1924, the founder of Toyota came out with his company’s first invention — an automatic loom.
What explains this longevity? Stanford Graduate School of Business Professor Charles O’Reilly calls it “organizational ambidexterity”: the ability of a company to manage its current business while simultaneously preparing for changing conditions. “You often see successful organizations failing, and it’s not obvious why they should fail,” O’Reilly says. The reason, he says, is that a strategy that had been successful within the context of a particular time and place may suddenly be all wrong once the world changes.
Staying competitive, then, means changing what you’re doing. But the change can’t be an abrupt switch from old to new — from print to digital distribution, say, or from selling products to selling services — if that means abandoning a business that’s still profitable. Hence the call for ambidexterity. You can’t just choose between exploiting your current opportunities and exploring new ones; you have to do both. And the companies that last for decades are able to do so time and time again.
O’Reilly’s work builds on that of other organizational scholars who have noted the value of a two-pronged survival strategy. In a seminal paper published in 1991, Stanford Professor James March wrote about the need for organizations to do two things at once, and articulated the challenge. “Both exploration and exploitation are essential for organizations,” March wrote, “but they compete for scarce resources.” That means organizations that try to do both face difficult trade-offs, choosing one only at the expense of the other. Harvard Professor Clayton Christensen went a step further, pointing out in The Innovator’s Dilemma in 2011 that the very things that make an organization successful today will actually work against it as conditions change. It’s not just that resting on your laurels is tempting, or that managers are blind to the changes around them. Rather, innovation can easily seem like a threat to a business that is already working well.
When Christensen wrote The Innovator’s Dilemma, he saw no way out, O’Reilly says, except to spin out the innovative part of the organization. According to that approach, the best way for Wal-Mart Stores Inc., for example, to cope with the advent of internet retailing was to continue to focus on its brick-and-mortar stores and to spin off website Walmart.com as a separate company, as it did in 2000.
But a spinoff doesn’t really solve the problem, O’Reilly says, because it doesn’t help Wal-Mart make money in the long run. A better way, his research suggests, is to run the mature business alongside the newer business under the same organization — but, crucially, to do it in a way that makes smart use of the organization’s resources.
Read more: http://www.gsb.stanford.edu/news/headlines/charles-oreilly-why-some-companies-seem-last-forever#ixzz2XQeoeY2q