Norihiro
The management concept of ambidexterity (“ryōkiki”) shared in your book, Lead and Disrupt, is very insightful. Please tell us why this approach is even more relevant today, in this era defined by VUCA (volatility, uncertainty, complexity and ambiguity), including the current coronavirus pandemic.

Charles
We see that the pace of technological change is increasing. The rate of penetration of the internet, computers, mobility, and probably artificial intelligence and machine learning is faster than ever.

 
Now, we understand that; but I think what companies don't pay enough attention to, at least in the U.S., is that great companies are becoming irrelevant, they are being acquired by other companies, and in some cases, they are failing. The increasing pace of change puts great pressure on leaders of companies not only to compete in their existing businesses, where they make their money and satisfy their customers' needs today, but also to explore the future.

 
Fifty years ago, the role of managers was easier because the pace of change was slower. They didn't have to be as agile at both exploring and exploiting. With the increasing pace of change, the pressure is greater because you have to be successful today, but you also have to be successful in the future. The fact that many successful companies are failing I think is a warning sign for managers.

 
I live in Silicon Valley, and many of my students either found companies or go to work in small companies, and they're very entrepreneurial. But I think big companies should be more innovative than small companies because big companies have more resources, they have more access to customers and they have deeper technology. They ought to be more adaptable and more innovative than small companies, but often they're not.

 
If we were having this conversation 40 years ago, 30 years ago, we would say, look at Kodak, look at Xerox, aren't they innovative? But, of course, today, they're facing many challenges. The future is not guaranteed.

Norihiro
At Hitachi, we have started corporate venturing. We have already invested in some startup companies, and we are now promoting collaborative projects with them. I would like to further promote the enhancement of entrepreneurship and mindset change within business divisions.

Charles
If you ask any executive around the world today, they will say that innovation is important, no question about that. But here's where they make a mistake: To be innovative, you have to have three separate disciplines. First, you have to have a process to develop new ideas: ideation. That is corporate venture capital, that's R&D, that's design thinking, that's internal contests. My experience is that companies around the world are doing a pretty good job at that.
The second discipline, which is completely separate, is incubation. You can come up with a lot of great ideas, but how do you figure out which of those ideas are likely to be accepted by customers? That is, how do you validate those ideas? Many companies, including Hitachi, have done a good job with the business model canvas, with lean startups. They have disciplined processes to actually figure out which ideas might work in the market.
It's the third area where big companies run into trouble. That is scaling. So, you need to have ideation, incubation and scaling. Almost every company is willing to spend money for ideation and do experiments for incubation. It's when the time comes to invest, when you are going to take assets and capabilities away from existing businesses and devote them to new businesses, that's when many companies run into trouble.
Let me tell you a story of a company in Germany. This company has great processes for ideation. They've set up separate business units in Munich and Berlin for incubation. But they are failing completely at scaling because their existing managers are unwilling to devote resources to new businesses that cannibalize their existing businesses. So, what I worry about when talking to executives is not that they don't understand that they need to be innovative, but that they don't have the discipline necessary to scale these businesses.

Norihiro
That's a good point. At Hitachi, we have a business pipeline. R&D's role is the first part, the process of ideation, or the birth of a business. Then our Social Innovation Business division's main focus is on making the business model. The final piece is scaling, which is the role of the business unit. It has the business channel and connection with customers. These three need to work together to make the business succeed.

Charles
That makes good sense. But the problem is that within the business unit, they are less likely to adopt new ideas that provide lower margins for their existing business.
I spent some time with a big German software company. They knew the world was shifting to software as a service. They had a software-as-a-service product that they wanted to sell to their existing customers, but their existing business units were unwilling to do that because it was a lower-margin product. So, business units can scale, but they scale for product extension. They scale for adding new products and services. Existing business units are slow to adopt new innovations if they cannibalize existing products or provide lower margins.

 
One way to address this problem is to separate the new business, at least until it becomes big enough that it is viable. Then you can reintegrate it.

 
A second way to do it is to ensure the senior managers are monitoring this business and making sure that it gets the assets and capabilities that it needs.

Norihiro
Many companies are still trying to figure out what is or will be normal. Maybe they even think they can continue the business as before once things settle down. Your book warns us about the success syndrome, in which managers' ability to explore is actually undermined by success at exploitation. What sorts of leaders, changes, and organization are needed to overcome its pitfalls?

Charles
I think one of the warning signs is a focus on short-term metrics. A focus on the business this year at the expense of the future. That's why I think it takes leaders, not the managers. Let me make a distinction that I suspect you know.

 
A manager is somebody who makes sure the things get done right. A manager worries about efficiency and making sure the customers are happy. A leader worries about the future and makes sure the company is going to survive not just for 5 years but for another 20 or 50 years.

 
Of course, we have to do well in our existing businesses, but we have to be willing to devote both attention and the assets and capabilities to these exploratory ventures.

Norihiro
You talked about how executives behave. The question also includes cultural and organizational changes. Do you have some suggestions for executives about how to change their culture or organization?

Charles
I am actually writing a book on how to do that. I have heard that in Japan culture is often talked about as “bunka,” or DNA. I don't think that's helpful because you can't change your DNA. “Bunka” is too broad. I think culture is “yarikata,” the way things are done. You can change and manage that. And you can align that with strategy. I think we know how to change culture.

Norihiro
How about an organization? Do you have an opinion on that?

Charles
Yes, I think a more helpful way to think about culture is the pattern of behavior in an organization that is rewarded by people and systems. If I come to work as a new employee, it's very important for me to understand how I need to behave to be seen as a good person, to fit in, to learn the company way. I will do that by listening to my senior managers, listening to my boss, seeing who is getting promoted, who is seen as successful or not. Think about culture as the pattern of behavior. Once you think about culture that way, you can manage it, because we can change a pattern of behavior.

Norihiro
As you know, Hitachi tries to realize a human-centered society. So, to change our culture or mindset, our starting point is the challenges that people face and want to do something about. In other words, we begin with a sense of ownership of social agendas as the end goal and then take steps to achieve that idea of the future. As each person participates and thinks as a member of society, the society's issues become more apparent. This kind of culture change or sense of ownership is important for realizing Society 5.0.

Norihiro
The current pandemic has affected all of us, changing values and how we interact with society. We are all trying to find the new normal. Is there any innovation or trend that has caught your attention and that you feel is particularly noteworthy?

Charles
As I said at the beginning, the pace of change is increasing. The rate of adoption of new business models, of new technologies like AI and machine learning, is happening faster. Consumer preferences are shifting. In the U.S., for example, the way young people think about automobiles is completely different from the way people of my generation did. They are perfectly happy to use Uber or ride sharing and get their driver's license at a much later age.

 
Another shift that is relevant for us today in the U.S., and perhaps in Japan, is how people work. Because of COVID-19, working from home is becoming, and I think will continue to be, a big shift. We have been tracking a number of companies, mostly in the U.S., and working from home is becoming much more important. People like it, they are more productive, they have more control of their schedules. They are actually working longer hours when working from home. I think that will continue even after the pandemic is over, and some of that change will stay. Some companies are even selling their real estate because they realize they don't need all these offices.

Norihiro
The final question addresses the main part of your book: What is your advice for adopting an ambidextrous approach? The right balance of exploitation and exploration seems to be the key, but I assume that this will be different for everybody. What factors should we consider in deciding the right balance?

Charles
It depends on what markets you are in. Some markets are changing relatively slowly, so I think the balance can be much more toward exploit than explore. But in markets where things are moving rapidly, the balance needs to shift more toward explore.
Exploit is about efficiency; it's about staying close to customers and driving cost down. And that's where you make your money. Explore is inefficient because you are doing experiments and don't have a guarantee. So, the amount of exploration depends on your judgment about how rapidly the particular technology or market is likely to be disrupted.

 
For example, the energy industry is being disrupted. But it'll be probably another 10-20 years before we are not reliant on some of the conventional energy resources. So, those companies have 10-20 years to do this. Other industries, like financial, with fintech in its markets, are changing much more rapidly.

 
I think it is a matter of judgment, on the part of the leaders, of how big the threat of disruption is. If the threat is likely to occur within 5-10 years, then I think the balance needs to be aggressive toward exploration. If the judgment is that it is 20 years out, then I think you can be a little more cautious about it.

 
Also, innovation is not just technology. It's business models as well. Experimenting with different business models is interesting, and technology can allow for a business model change. So, it's not just making new refrigerators, but it's also selling me the service that my refrigerator will automatically order and refill whatever I need.

Norihiro
Do you have any comments or advice to Japanese companies, specifically, about the challenge of driving innovation for sustainable development?

Charles
My experience is that Japanese companies and the leaders of Japanese companies have a longer-term perspective. And I think that gives you an advantage. “Ryōkiki” is probably not easier for Japanese companies, but it is more acceptable to them than it is to many American companies.

 
My wife, a Japan scholar, tells me that open innovation in Japan is really focused on corporate venture capital, ideation and incubation. So, I hope that Japanese companies will worry a lot about the scaling issue that we talked about. That's where it gets very difficult. It's easy to come up with new ideas and test them; we know how to do that. It's harder for leaders to actually grow these new businesses. I think that Japanese companies probably will be better at this than American companies. That is my hope for Japanese companies, and I hope this material is useful for them. I'm also looking forward to seeing what Hitachi does with its new Midterm Management Plan.

Norihiro
I hope that our activity will be in your book as a good example. I look forward to reading it.