Strategic Choices of Companies From the Perspective of Ambidexterity
The essence of management is to make decisions, and as such, the essence of strategic management is to make strategic decisions that affect the future of the company and its development. These decisions are often identified with strategic choices, which together constitute the strategy. However, the literature on strategic management uses the term “choice” in two meanings that can be understood either in a broad sense or in a strict sense (Urbanowska-Sojkin, 2017, p. 102). In the first case, a strategic choice means a set of actions allowing for the identification of one option (from among the permitted strategic options) which, with the current state of knowledge and the criteria of the choice, will subsequently be implemented. This approach therefore emphasizes the functional aspect of making a choice. In the second case, a strategic choice is considered in a material sense as a result of the choice and means a strategic decision being the result of the process of comparatively analyzing the strategic options, taking into account the objectives and selection criteria set by the decision makers, which produces specific, long-term material, financial, and organizational effects for the company. It should also be emphasized that making strategic choices is a dynamic process, which means that it is never finished and requires continual analysis of the environment, the company, and the relationships between them.
This book adopts the strict sense as the understanding of strategic choice—making a strategic decision about the company’s development goals and ways of achieving them in the context of the effectiveness and efficiency of that decision, that is, the outcomes it achieves for the company.
The basic strategic choices that determine the company’s development refer to two key questions, namely where to compete and how to compete (Grant, 2016). The question of “where” has multiple dimensions and concerns the sector or sectors in which the company is located, its products, its target customer groups, and the countries and regions in which it operates. In other words, “where” relates to product and market choices, defining the domain(s) of the company’s operations. This is a basic strategic choice, as managers responsible for strategy must always answer the fundamental question, “What products should the company introduce and what markets should it serve?” (De Wit & Meyer, 2010; Jenkins &c Williamson, 2015; Lynch, 2018).
When answering this question, strategists need to make a key decision: whether to concentrate on a single business or to diversify (Sigismund Huff et al., 2008). Concentration on a single business (specialization) consists in engaging the company in one area of activity and concentrating all of its potential on it, thanks to which it is possible to achieve the highest competences in this area and to gain a decisive competitive advantage.
Figure 1.5 Specialization vs. Diversification of Product and Market
Diversification, on the other hand, means that the company expands its areas of operation and divides its potential between them. It requires the organization to go beyond its current products and/or markets and allows it to reduce the risk of business activity, achieve a synergy effect, rationalize the portfolio of activities, or create a better image of the company (Sutherland & Canwell, 2004). The strategic choices for product and market are presented in Figure 1.5.
The classic combination of market and product choices was proposed more than 50 years ago by Ansoff (1965), who distinguished four models, such as market penetration strategy, market development strategy, product development strategy, and diversification strategy.
The market penetration strategy means increasing sales of the existing products manufactured in the existing markets. This occurs as a result of improving a product’s quality, lowering its price, or intensifying marketing activities, which results in increased consumption by the existing buyers, acquiring customers from competitors, or potential buyers who have not yet purchased the product. This strategy works well in the early stages of market growth, but is not recommended in mature markets. The market development strategy is finding new markets in which to sell existing products. New markets may involve either geographic expansion or expansion into new segments of an existing market. This strategy works well in markets with high growth potential. The product development strategy means creating new products and introducing them to existing markets. It involves spending on R8cD in order to create innovative products that will replace the “old” ones or expand the range of products offered by the company. In turn, the diversification strategy refers to selling new products in new markets. It can reduce risk because the company is no longer dependent on individual markets or products. It requires high strategic potential, surplus capital, and the ability to operate in new markets.
In reference to Ansoff’s classification of the choice between specialization and market/product diversification, it can be assumed that market penetration is a choice of product and market specialization, product development strategy is a choice of market specialization and product diversification, market development strategy is a choice of product specialization and market diversification, and diversification strategy is a choice of both product and market diversification.
Ansoff’s matrix was modified and supplemented by various researchers. Among other things, an additional dimension was added in the form of market needs (oriented toward existing or new demand; Ansoff, 1988), and the “virtual” dimension covering the modern world’s virtualization (virtual product/virtual market; Dziekonski, 2013); consolidation and withdrawal were also taken into account (Lynch, 2006). Therefore, Ansoff’s classic matrix is constantly being updated due to dynamic changes in the operating conditions of companies. Taking an ambidextrous perspective, the product/market strategic matrix, which is the basis for the first key strategic choice, that is, the decision on where to compete, should also be modified, as shown in Figure 1.6.
Exploration in the product area means the creation of new products, new technologies, and production possibilities, while product exploitation refers to existing products and places the emphasis on improving them and becoming more efficient by reducing costs. Exploration in the market area means entering new markets and searching for new customer groups, while the exploitation of the market is aimed at maintaining and increasing the purchases of existing customers. In other words, exploration involves the diversification of a product or market, and exploitation involves specializing in both domains.
Since product and market characteristics are dynamic, the continued exploitation of existing markets and products involves incremental innovation, product improvement, and increased satisfaction of existing
Figure 1.6 A Company’s Product/Market Matrix From the Ambidexterity Perspective
customers (Tushman Smith, 2002). In turn, product exploration can lead to breakthrough innovations that change its basic subsystem (Tushman et al., 2010), while market exploration may be directed toward a new geographic market or may extend the market with additional segments not yet served.
Companies that look for new products and new markets at the same time are pursuing a pure exploration strategy (defined in Ansoff’s matrix as diversification), while companies offering existing, modified, and improved products to increase sales in current markets are pursuing a pure exploitation strategy (defined in Ansoff’s matrix as market penetration). Focusing exclusively on exploration or exploitation in both domains (product and market) is internally consistent and operationally effective, especially for smaller companies (Ebben &c Johnson, 2005), because there are clear guidelines as to what to do and why it is worthwhile (Voss, Cable & Voss, 2006) and because pure strategies use similar cognitive models and patterns, which facilitate communication, ensure internal consistency and complementarity between domains (Voss &C Voss, 2013). Such strategies are also recommended for separate organizational units of larger companies that focus either on pure exploration or on pure exploitation, but then the challenge is to integrate and exchange knowledge between them (Jansen et ah, 2009).
Ambidexterity requires both activities related to exploring and exploiting. In relation to product and market choices, this can be achieved in two ways. First, by carrying out these activities in different domains through different functions (Qaiyum & Wang, 2016): in such a case, we are dealing with a product development strategy (when we combine product exploration with market exploitation) and a market development strategy (when we combine product exploitation with market exploration). This functional departmentalization is the most basic mechanism for easing the tension between exploration and exploitation (Levinthal & March, 1993), as there is no need to compromise on the allocation of resources between exploration that takes place in one domain and exploitation that takes place in another.
Tensions and compromises increase in the second situation, namely, when exploration and exploitation take place simultaneously within one domain, both product and market (Andriopoulos & Lewis, 2009; Benner & Tushman, 2003; Gupta, Smith, & Shalley, 2006). Product ambidexterity can be achieved sequentially (Burgelman, 2002)—when exploration creates new products that are then exploited—or simultaneously (O’Reilly & Tushman, 2004), when exploration and exploitation of a product coexist and are complementary to each other, which requires both structural separation (Csaszar, 2013) to mitigate any conflicts arising from competing competencies, cultures, and processes related to these activities and appropriate contextual systems and processes (Birkinshaw & Gibson, 2004a), allowing employees to decide when to explore and when to exploit.
Similar mechanisms work in the case of market ambidexterity, when market exploration and exploitation occur simultaneously. The link between these activities occurring in a sequential manner is less obvious. There are doubts here whether exploring new markets helps companies to better exploit existing markets, or whether exploiting existing markets provides organizations with knowledge that stimulates and supports the exploration of new ones (Voss & Voss, 2013).
The choice between exploration and exploitation strategies is extremely difficult, as in each case the benefits will be accompanied by negative consequences. Many companies still find specialization strategies that correspond to exploitation to be attractive, linked not only to a narrow niche, but also to a wide market—which makes it possible to satisfy individual customer requirements and to use the unique technological competence of such companies. On the other hand, in the face of dynamic changes in the environment and a developing market of alliances (Tjemkes, Vos, & Burgers, 2017), mergers and acquisitions (Gaughan, 2018), and network connections (Jarillo, 2014), diversification strategies related to exploration are also promising. A strategy that combines the benefits of both is ambidexterity, that is, using existing organizational competencies to exploit business opportunities in the existing market while seeking to expand and renew competencies to look for new markets and take advantage of the emerging market opportunities (Khalifa, 2008).
Product and market choices indicate the direction of the company’s development, but they should be complemented by additional decisions related to the scope of vertical integration and the method (way) of development. Vertical integration refers to the proportion of a company’s activities that are vertically integrated; the greater the company’s involvement in the subsequent stages of the value chain, the greater the degree of vertical integration (Grant, 2016). On the other hand, the reduction of the value chain through outsourcing or offshoring is connected with virtualization and the concept of a lean organization (Chiarini, 2012). The way of developing may be internal or external. Internal development prefers the independence of the company and is based on company resources and investments, building the potential of the company on the basis of existing assets. It most often takes the form of material investments in production capacity, resulting in the possibility of increasing the size of the company, its market share, and, finally, its financial potential (as measured by market value). An alternative to internal development is external development, which is manifested in various types of cooperation with other economic entities, from very loose cooperative relationships to close capital and ownership ties. In the first case, the effect of external development is generally a rationalization of the use of the potential of cooperating enterprises, while in the second case there is a revolutionary change in the organizational, legal, and ownership status (Sutherland & Canwell, 2004). The way of development and the scope of vertical integration are determined by the company’s objectives as well as the prod- uct/market choice, with exploration being more conducive to external development and a greater scope of vertical integration, and exploitation being more conducive to internal development and virtualization in the value chain area.
Apart from the choice of where to compete, the second fundamental strategic choice is the decision on how to compete, which is related to business strategy and building a competitive advantage of the company (Grant, 2016). One of the first typologies for this issue was the proposal of the types of strategic behavior toward competitors proposed by Miles and Snow (1978). The researchers—taking into account the tensions between stability and change, certainty and uncertainty, conservatism and risktaking, and adaptation and adjustment (Khalifa, 2008)—proposed the following four types of strategy (Miles &c Snow, 1978):
- • Prospector—constantly searching for market opportunities and regularly experimenting in response to the trends in the environment. It is an innovation strategy focused on growth and seeking new products and markets, which involves taking risks. The efficiency of new products is measured more by market acceptance than by economic calculation. The key competences here are focused on R&D and marketing functions; and the organization aims to develop its technological potential. This strategy requires organic structures, that is, ones that are flat, decentralized, and highly flexible.
- • Defender—protecting market position by focusing on efficiency and effectiveness. It is a conservative strategy, aimed at continuously improving proven technologies, building barriers to market entry, ensuring good customer relations, and developing control mechanisms. This strategy does not involve breakthroughs or radical innovations, but focuses on improvement and the effectiveness of actions, which may result in incremental innovations. Here, companies prefer to compete on price and quality rather than investing in the development of new products or searching for new markets. It is a characteristic of mature markets and requires more mechanistic organizational solutions, in which procedures regulate every aspect of operations, making structures rather slender and centralized with strong central coordination.
- • Analyzer—combines the strategy of a prospector and a defender. It is about maintaining the existing position while looking for new products and markets, but it is not as innovative as the prospector’s strategy. Companies are not pioneers here, as they avoid excessive risk, instead following the changes in the market and the actions of innovative companies, quickly imitating new, proven solutions. The portfolio of such organizations includes products with both stable and variable positions, which requires binary operating models and structures that ensure a balance between autonomy and control, which raises the problem of coordination and allocation of resources.
- • Reactor—reacting passively or inconsistently to events in the environment. The strategy is not formalized and the company is drifting, with changing policies and structures that are transformed by the coercion resulting from the changing environment. There is a lack of consistency between strategy, structure, and culture, which often results in ineffective actions.
This typology, which defines the coherence between strategy, structure, and processes while taking into account the adaptability of a company to changes in the environment, reflects the strategic concept of fit. This concept has common points with the concept of ambidexterity, in that it indicates the main factors for the success of an organization. The tensions considered by Miles and Snow (1978) are consistent with the discussion on exploration and exploitation taking place in the literature on ambidexterity. From this perspective, the prospector’s strategy is close to that of exploration, the defender’s strategy resembles exploitation, while the analyst’s strategy has become the foundation for the development of ambidexterity. The analyst shows an aversion to risk, while an ambidextrous strategy assumes taking significant risk. Thus, the concept of strategic fit is different from ambidexterity, losing its power to explain a company’s high performance in favor of the latter. Wulf, Stubner, and Blarr (2010) considered this topic extensively, and their study on the management of 175 small- and medium-sized German companies demonstrated that the fit concept explains organizational efficiency to a lesser extent and that a high level of ambidexterity in an organization has a positive effect on its performance. Menguc and Auh (2008), based on their research on
260 leading Australian companies, noted that defenders face greater challenges than prospectors in achieving good results from implementing this strategy. Therefore, taking into account the perspective of ambidexterity, the typology of Miles and Snow becomes obsolete.
The second commonly known classification of strategies indicating how to compete are the generic strategies proposed by Porter (1985), who characterized them according to two criteria: the scope of the market (the whole market [sector] vs. a segment) and the way of competing, that is, gaining a competitive advantage (the advantage of low costs vs. the advantage of unique products and useful value for the customer). He distinguished three basic generic strategies, such as cost leadership strategy, differentiation strategy, and focus strategy.
The strategy of cost leadership is to minimize costs, thus focusing the company’s resources and attention on making its operations more efficient than those of its competitors. The basis for success is the constant pursuit of satisfactory profit margins despite the low price and the allocation of a portion of the profits to investments that further reduce costs. A company may reduce costs by increasing the scale of production—using the economies of scale and experience—reducing fixed costs, increasing the productivity and innovativeness of products and services, or through managing the company. This strategy requires the use of systems and instruments for strict cost control, as well as standard products that are easy to manufacture and distribute.
The differentiation strategy consists in offering the customer a unique proposition (quality, service system, marketing activities, etc.), which focuses the company’s resources and attention on distinguishing its products from its competitors’ products. The goal is to attract customers who will remain loyal in the long term. It requires additional costs, but these expenses are compensated for by the higher price the company charges for its unique product. Differentiation can be achieved either by reducing the cost of the product used (using technical solutions that make the product cheap to use) or by increasing the utility value of the product (giving it unique features and functions). Brand creation plays a special role here, as branded products are synonymous with high quality for the customer and increase their prestige and satisfaction. In addition, differentiation uses innovation, which is a source of high quality.
The focus strategy refers to a selected group of customers (a segment), defined as a geographical market or a range of products/services. Depending on the type of advantage, it is divided into a strategy of focusing on differentiation (the company focuses on one market segment where it tries to offer its customers a unique product) and a strategy of focusing on costs (the company focuses on one market segment and tries to be the supplier with the lowest prices). It therefore includes the two previous strategies, but in relation to a narrow part of the market.
These three strategies are treated as mutually exclusive choices, which has been the subject of fierce criticism since quality and cost advantages can be combined. Therefore, Porter (1996) proposed a hybrid strategy (integrated, total advantage) that combines both advantages at a high level, that is, seeking high quality and low cost, which is related to the opportunities offered by the global scale of production and sales, the development of information technologies, and the globalization of buyers’ tastes. This strategy may be implemented in various ways: successively, through innovation and value analysis, inexpensive distinction, or price differentiation.
From the perspective of ambidexterity, the cost leadership strategy is close to the exploitation strategy, while the differentiation strategy—due to its links to the search for innovation—is closer to the exploration strategy. In this context, a hybrid strategy combining the two advantages can be applied to the concept of ambidexterity. However, such a literal reference is not entirely appropriate. First, generic strategies focus on competitive behaviors, while competitive advantage may also be created through cooperation and coopetition strategies (taking into account the simultaneity of cooperative and competitive activities; Ritala & Ellonen, 2010), which is used in the concept of ambidexterity. Second, ambidexterity as a dynamic capability requires that opportunities be sensed and resources be reconfigured in order to seize them (Birkinshaw, Zimmermann, & Raisch, 2016), thus adopting a perspective of resources rather than of a sectoral economy, which is the basis for classifying the generic strategies. Third, a hybrid strategy, combining cost leadership and differentiation, can lead to the effect of being “stuck in the middle”, which can result in mediocre results, while the strategy of ambidexterity focusing on the right balance between exploration and exploitation can generate many temporary competitive advantages (Hughes et ah, 2010).
Therefore, adopting one of these strategies4 in today’s business environment will not allow a company to keep up with industry competition and evolving customer preferences (Markides, 2013; Scott, 2014), so an ambidextrous strategy is an attractive proposition. From this perspective, and in response to the question of where and how to compete, three strategies were distinguished—exploration, exploitation, and ambidexterity—each characterized by different strategic choices. They are synthetically presented in Figure 1.7. Choosing one of these depends on internal as well as external factors, which are discussed in detail in Chapter 2.
The exploration strategy aims to actively seek new market opportunities and to introduce new products that offer unique value to customers (differentiation), in addition to the value already offered by existing products (Siren, Kohtamaki, & Kuckertz, 2012; Smith & Tushman, 2005). It is oriented toward radical innovation (O’Reilly & Tushman, 2004; Dutta, 2012), enabling companies to develop new knowledge and create the capabilities needed for long-term survival (Uotila et ah, 2009) and
Figure 1.7 Corporate Development Strategies From the Ambidexterity Perspective
entailing a high level of risk (Judge & Blocker, 2008). It covers entering new markets and/or new segments of the existing market (Voss & Voss, 2013) in order to consistently pursue a growth strategy, with the recommendation to maintain loose links with existing customers, increasing flexibility and market adaptability (Danneels, 2003).
The aim of the exploitation strategy, on the other hand, is to use the company’s current competitive advantage by effectively managing its existing resources and capabilities in order to improve current products and/or strengthen current customer relations (Hitt et al., 2011; Lubatkin et ah, 2006). The strategy of exploitation is aimed at increasing operational efficiency and improving adaptability to the environment by understanding and meeting the needs of existing customers (Judge & Blocker, 2008; Siren, Kohtamaki, & Kuckertz, 2012). It is characterized by incremental innovations and cost-reduction measures (O’Cass, Heirati, & Ngo, 2014).
Ambidextrous strategy, on the other hand, combines activities resulting from exploration and exploitation strategies, balancing between them in different ways—that is, through structural, temporal, or domain separation at the company level (Lavie, Stettner, & Tushman, 2010) or a lack of such separation at the individual level (Birkinshaw & Gibson, 2004a)— and using the advantages and opportunities of each within the whole organization (Birkinshaw & Gupta, 2013), as well as outside of it (Kauppila, 2010). It aims at both new markets and new products and at improving and taking full advantage of existing ones, which should lead to better performance (O’Reilly & Tushman, 2013). Therefore, it is argued that it should be characterized by proactivity, an effective defense of an existing advantage, and the ability to balance between exploration and exploitation in order to solve the tensions that arise between them (Scott, 2014). It should be, therefore, noted that a pure ambidextrous strategy (including simultaneous product and/or market ambidexterity) can be balanced when exploration and exploitation activities are in equilibrium (March, 1991; He &C Wong, 2004) or unbalanced when it is characterized by a high level of both activities (combined ambidexterity) and the company should strive to maximize them (Cao, Gedajlovic, & Zhang, 2009).
An important strategic choice is also the way of creating a strategy, and this is one of the most disputed issues of strategic management (Grant, 2016). The importance of strategic analysis (Zanoni, 2011) supports the view that strategy is a result of rational/analytical processes directed by top managers. Such strategies are referred to as deliberate strategies because they arise from deliberate decisions (Johnson, Scholes, &c Whittington, 2008). On the other hand, strategies may emerge through adaptation to the circumstances (Mintzberg & Waters, 1985), as indicated by evolutionary theory, and may arise in the course of actions carried out in a given direction. Therefore, they are the result of ad hoc, incremental, or even accidental actions taken at the lower levels of management. The process of creation is a result of experimentation and searching for the best way to develop, and the resulting strategies are called emergent strategies. Deliberate strategies are characteristic of pure exploitation strategies, as they set clear directions of activities and allocate resources, which allows the objectives to be achieved efficiently and effectively (Chen, 2017). However, such strategies may hinder the search for new opportunities, which is why emergent strategies are dedicated to exploratory activities (Burgelman, 2002), which are also indicated as a critical condition for organizations operating in a turbulent environment (King, 2008). The ambidexterity strategy combines these two ways of forming a strategy, as indicated in previous studies. Moreover, Qaiyum and Wang (2016) argued that the integration of deliberate and emergent strategic processes has a positive impact on the ambidextrous strategy pursued through different domains (market development strategy or product development strategy) as well as within a single domain (ambidextrous product and/or ambidextrous market).
It should be noted, however, that in practice, the process of creating a strategy is almost always a combination of centrally created rational design and decentralized adaptation (Andersen & Nielsen, 2007; Bodwell & Cher- mack, 2010; Grant, 2016). However, a strong focus on a rational/analytical approach and a weak focus on an emergent approach reinforces the choice of exploitation strategy, while conversely, a weak focus on a rational/analytical approach and a strong focus on an emergent approach reinforces the choice of exploration strategy. An ambidextrous strategy should combine these two approaches. Therefore, the following hypothesis was formulated:
HI. The choice of ambidextrous strategy is positively linked to the process of forming and implementing the strategy in an enterprise, in the sense that it requires both a rational/analytical and an emergent approach.
In conclusion, it can be stated that a strategy refers to strategic choices and the readiness to implement them, although this varies according to the direction of development adopted. Exploration and exploitation strategies are based on completely different development concepts, while an ambidextrous strategy combines both of them.