Entrepreneurial culture and disruptive innovation in established firms – how to handle ambidexterity

2.1 Disruptive innovation and response strategies

Incumbent companies' threat perception has led to intense strategic resource commitment (Gilbert, 2005). Though many scholars agree on digitization as a main source of disruption, their response strategy propositions differ widely, ranging from either aggressive investment in existing capabilities (Chen et al., 2010) and fostering continuous innovation (Denning, 2012), partnering with disruptive entrants once they start challenging incumbents to acquiring them outright (Kapoor and Klueter, 2015). However, the major research stream on effective response strategies suggests that established companies can form a separate business unit (Christensen and Raynor, 2013) to explore and develop radical or disruptive innovations (Valeri, 2021). Christensen et al. (2018) explicitly point to this line of thinking, and propose future research on response strategies. Another research field is increasingly focusing on the organizational component of strategic management of disruptive innovation (e.g. Slater et al., 2014). In sum, there is an increasing awareness of underestimated complexity in modeling organizations with disruptive innovation capabilities (Slater et al., 2014); these go so far as to propose approaches on how to increase the capabilities to handle this complexity (Fahey and John, 2016).

Utoyo et al. (2020) investigate key variables to enhance innovation performance using entrepreneurial leadership and entrepreneurial culture frameworks. Entrepreneurial orientation and the success of radical innovation have been combined with each other in a radical innovation launch model (Cake et al., 2020). More generally, organizational culture and the role of senior management are two other areas of research connected to disruptive innovation. A common theme for incumbents is the important role of senior management (e.g. O’ Reilly et al., 2016; Slater et al., 2014) enabling cross-boundary cooperation and permission to pursue greater risk when pursuing long-term opportunities (Skarzynski et al., 2014).

Building own radical innovation capabilities and modeling the organization also appears to contain underestimated complexity issues for established companies. Entrepreneurial leadership and culture are ongoing research streams, aiming to better understand how to increase innovation performance and effectively respond to disruptive innovation, while importantly keeping in mind that launching a separate unit to solely focus on radical innovation neglects the tradeoffs that occur when balancing both incremental and radical innovations.

2.2 Ambidexterity

March (1991) and his initial ideas about tradeoffs between exploration and exploitation challenged the response strategy of launching a separate business unit, proposing ambidextrous organizations (O’ Reilly et al., 2013) that simultaneously explore and exploit to pursue different types of innovations: sustaining/incremental (exploit) and radical/disruptive (explore) innovation (Danneels, 2006) –IA. However, the capabilities and organizational success components in both areas differ strongly, and include organizational design, organizational culture, leadership, development processes (Al-Mashari and Zairi, 1999) and product launch strategy (Slater et al., 2014).

Many scholars agree that a cross-functional, informal organizational structure performs best when it comes to radical innovation, whereas functional structures perform better for incremental innovation (e.g. Menguc and Auh, 2010). Separation that nevertheless maintains organizational alignment between company culture, human resources and the formal organization is suggested (O’ Reilly et al., 2016) for ambidextrous organizations aiming to overcome the so-called innovators' dilemma (Christensen et al., 2018). Egelhoff (2020) therefore, proposes a flexible matrix structure organization where rule-based (functional) decision-making is used in business units working on incremental innovations, with “balanced” interdisciplinary (both sides of the matrix) decision-making for business units targeting radical innovations.

Consequently, creating an organizational culture to foster ambidexterity and the role of senior leadership represent continuous areas of research (e.g. Lin et al., 2013; O’ Reilly et al., 2013). Porck et al. (2019) state that social identification with a sub-team result in higher performance than identification with a multi-team. Enacting and maintaining dual structures, processes and subcultures under one roof increases organizational complexity and requires a cognitively flexible team (O’ Reilly et al., 2016) to manage tensions. These innovation tensions and paradoxes require senior management to not only maintain a vital mindset, fill several roles and create a strong organizational identity but also to maintain two concurrent foci while anticipating and preparing for change due to ambidextrous thinking.

2.3 Organization design and entrepreneurship culture

Burton et al. (2019) define the term organizational design that includes three elements: the decision system, an organizational structure and managerial practices. Van Dijk et al. (2011) propose that incumbents should establish “micro-institutions” within their organization to foster radical innovation and overcome legitimacy issues. In accordance with this, O'Connor and Danneels (2022) suggest that ambidextrous organizations, on the one hand, separate their radical (explorative) units and provide them with dedicated resources, while on the other hand, integrating them into the core business through governance, domains of innovation intent and legitimacy of the radical innovation effort.

Organizational culture aspects such as entrepreneurial motives correlate with higher innovation performance (Sauermann, 2018). Entrepreneurs with an effectuation mindset are likely to avoid hierarchical procedure-based cultures while creating participatory ones (Sarasvathy, 2001). Entrepreneurial behavior and mindset favor innovation, proactivity and risk (De Jong et al., 2015; Kallmuenzer and Peters, 2018), which positively correlate with job autonomy, decentralization and low formalization (Nielsen et al., 2019) and fit startup employees' values, including independence (autonomy) and responsibility rather than job security (Sauermann, 2018).

Radical innovation projects are appropriately more effective when autonomous teams address them (Patanakul et al., 2012). Ireland et al. (2003 p. 970) post that “an effective entrepreneurial culture is one in which new ideas and creativity are expected, risk-taking is encouraged, failure is tolerated, learning is promoted, product, process and administrative innovations are championed, and continuous change is viewed as a conveyor of opportunities.” Corporate entrepreneurship (“intrapreneurship”) success factors here include processes, values (meaning and identity), resources, organizational structure, culture and entrepreneurial leadership (Ensign and Robinson, 2016). Entrepreneurial characteristics such as proactiveness and autonomy are particularly relevant to financial performance (Kallmuenzer et al., 2018) and the entrepreneurial mindset of individuals such as senior managers amplifies entrepreneurial culture aspects in organizations (Shepherd et al., 2010), whereas organizational conservatism and limited cognitive diversity in senior management teams dampen radical innovation practices (Choi et al., 2018).

Holahan et al. (2014) argue that radical innovation projects in practice are often the result of formal ideation methods, which contradicts the partial findings about entrepreneurial mindsets valuing low formalization as well as regarding how informal organization structure positively correlates to product innovation capabilities (Menguc and Auh, 2010).

Relatively autonomous teams are in summary an effective organizational arena for developing radical innovations. The large autonomy in these units fosters entrepreneurial cultures and mindsets; the entrepreneurial culture is a prerequisite for successfully building radical innovation capabilities as a result. Prior research recommends further studies on entrepreneurial culture in the exploiting business units of ambidextrous organizations (O’ Reilly et al., 2013) as part of a successful response strategy to disruptive innovation. Furthermore, systems theory can help derive answers to how concepts such as autonomy and (organizational) complexity relate and interact.

2.4 Systems theory and complexity

In the relationship between learning capability and firm performance (Lin et al., 2013; Mai et al., 2022), learning capability was shown to foster IA as a firm performance mediator, even though the inherent organizational complexity of IA (Hsu et al., 2013; Turner et al., 2013) and the complexity resulting from integration of innovation costs (Marino et al., 2015) dampen this effect. Here, digitization and adequate IT to master this complexity are essential for achieving ambidexterity (Hautala-Kankaanpää, 2022; Park et al., 2020).

In his fundamental law of requisite variety, Ashby (1961) stated that only variety can destroy variety. This implies that, for incumbents, increasing organizational complexity by enacting ambidextrous organizational structures not only allows the pursuit of different types of innovation but also generally attempts to cope with the increasing external complexity of digital markets. Mirow (2022) offers a practical view of systems theory application fundamentals for handling complexity. Alizadeh and Jetter (2019) use a systems theory perspective, proposing a systemic dynamic model of organizations emphasizing factors that contribute to ambidexterity.

Simon and Ando (1961) found that for effective organization, near decomposability (ND) – a property shared by almost all complex systems in our world – signifies a hierarchical architecture of relatively independent components and elements for the effective organization of systems, something essential and fundamental for complex systems as they determine the speed of their adaptation and increase their level of fit (Simon, 2002). Effective control structures in these kinds of ND organizations concentrate on regulating only inputs and outputs, while still offering complete autonomy to the internal component and subunit processes (Simon, 2002). Scholars have stated that decentralization and low formalization – as proposed by the relative autonomy of ND subunits – also have a positive influence on employees' entrepreneurial intentions (Nielsen et al., 2019), which is even more the case in terms of the relative (job) autonomy of the subunit elements, i.e. the individuals (De Jong et al., 2015). Combining ND organization and control structure with strong entrepreneurial culture are suggested as important ingredients for responding to disruptive innovation and managing the complexity inherent in organizational ambidexterity (Schindler, 2023).

2.5 Knowledge gaps and shortcomings

Ambidexterity, the use of both exploitation and exploration methods, describes a path for coping with the delicate strategic balance of sustaining innovations and breakthrough (radical) innovations. It allows dual structures, processes and entrepreneurial subcultures, while increasing the level of organizational complexity requires leaders to anticipate and prepare for change through ambidextrous thinking. Ambidextrous innovation not only appears to be a disruption response strategy but also enhances firm performance in general, even while its inherent complexity mitigates the effect and can reduce overall performance (Schindler, 2023). Therefore, this article addresses the following knowledge gaps and shortcomings:

1. The practical matter of how to efficiently manage the overall inherent complexity of IA appears insufficiently investigated to date.

2. The role of entrepreneurial culture in ambidextrous organizations: Prior research has encouraged scholars to study (relatively autonomous) entrepreneurial culture and mindsets in ambidextrous organizations (O’ Reilly et al., 2013) as part of a successful response strategy to disruptive innovation, and even as an eventual solution to the innovators' dilemma (Christensen et al., 2018; O’ Reilly et al., 2016).

3. The practical demands placed on ambidextrous leadership: This study follows an additional call from Pertusa-Ortega et al. (2020) to research the topic of ambidextrous leadership and derive practical implications.

In accordance with Turner et al. (2013), this study pursues generalizable theory, addressing how ambidexterity can be achieved as a deliberate strategy within complex organizational structures. This qualitative research on how to reach effective IA and respective organizational design and culture in the context of managing inherent complexity proposes a practical strategic toolset as a result.

A missing connection between the fundamentals of systems theory and ambidextrous organization theory are furthermore accompanied by a tendency to shed more light on how to facilitate entrepreneurial culture and mindset, which is why this study discusses effective IA from a systems theory perspective. In summary, this article aims to improve the understanding of how established companies can respond to disruption, manage increasing complexity and facilitate entrepreneurial culture to reach effective IA.

3.1 Approach and data gathering

A qualitative multiple case study approach to explore successful practices and understand how established companies respond to disruptive innovation, cope with increasing complexity and manage organizational ambidexterity (Eisenhardt, 1989; Yin, 2014) was applied. A case study was particularly suitable in how it attempted to achieve a deep understanding of complex, new and context-specific phenomena.

Exploratory interviews in particular with “How?” and “Why?” questions regarding strategic management and incumbents' decision-makers were conducted to collect in-depth narratives on a variety of perspectives (Yin, 2014). In this multi-case study, interviewees were intentionally selected who represent maximum variation with respect to their functional accountability, ranging from strategic management and general managers who lead ambidexterity efforts and are confronted with it on a daily basis; intrapreneurs (leaders of internal startups/ventures); as well as managers and directors of very established core business units in parent companies (Williams, 2007). Pseudonyms were used instead of the original names of the interview partners to ensure anonymity (Table 1). The data collection process was continued until a saturation point was achieved where further data collection did not bring any additional insight (Guest et al., 2006).

The findings were reflected upon in light of prior research (Eisenhardt, 1989). Guidelines for meaningful and valid qualitative research (Crouch and McKenzie, 2006) were followed, restricting the sample to a small handful of highly knowledgeable informants (Eisenhardt and Graebner, 2007) from organizational innovation management.

The company sampling was done according to four criteria: (1) digital innovation focus, (2) long-term established business (>50 years), (3) comparable firm size (>€1bn revenue and international (worldwide) operations) and (4) existing IA programs in place, i.e. corporate venturing and/or internal startups to attempt disruptive innovations (Christensen and Raynor, 2013; Danneels, 2006).

Two established companies responded to these criteria and were selected according to theoretical sampling to achieve the desired insight (Eisenhardt, 1989) and explore their ambidextrous approaches in-depth.

1. Case 1, founded 1847 in Germany, is a global technology products and services company with its main businesses in digital industries, smart infrastructure and mobility. Other business areas include financial- and real estate services, solutions and consulting services and independent separately managed businesses, including global venture firms and healthcare. The group reported 293,000 employees worldwide and €62.3bn in revenue in 2021. This research focused on its digital industries (78,000 employees, €16.5bn in revenue) and its factory automation business unit.

2. Case 2, founded 1950 in Germany, is a global construction and mining equipment provider offering solutions for the industries of agricultural machinery, rental, construction logistics and construction site management, drive systems and energy, engineering and plant engineering. The group reported 10,000 employees worldwide and €3.7bn in revenue in 2021.

Both organizations have strongly pursued the use of new technology and business models with disruptive potential such as cloud computing, artificial intelligence and digital transformation within the last decade, including both venturing and internal innovation programs (internal startups).

Fifteen narrative interviews were conducted within a three-month time frame, cf. (Leedy and Ormrod, 2019) during Q1 of 2022. Each interview lasted between an average of 45–80 min. All interviews were both video- and audio recorded and transcribed verbatim using the Microsoft Teams live capture feature. This procedure was uniformly accepted by all participants, especially during the COVID-19 pandemic. The automatically generated transcripts were verified afterward by simultaneously watching the recordings and reading the transcripts; filler words were removed from the transcripts as well, cf. (Wolf, 2022).

Questions including “Could you please explain that more in detail?” and some explanations of key terms like disruptive innovation helped guide the interviews.

Questions were asked regarding radical or disruptive innovation, organizational design and entrepreneurial culture such as: “How does your organization respond to the increasing threat/opportunity of disruptive innovation?” (Christensen et al., 2018); “Please describe your company's organizational setup to foster radical or disruptive innovations” (Slater et al., 2014); “How would you describe your entrepreneurial culture?” (Ireland et al., 2003; Shepherd et al., 2010).

In terms of increasing complexity, ambidexterity and systems theory, the following questions were asked: “Which characteristics and processes differ the most and how?” (O’ Reilly et al., 2016; Sarasvathy, 2001); “How does the leadership team act, decide and communicate when facing these differences?” (Ancona et al., 2001; Porck et al., 2019); “Where/when do you experience limits of the venture subunit's autonomy?” (Patanakul et al., 2012; Simon, 2002).

All interviewees were asked to start with a description of their firm's past development up to and including its current state. A preliminary test was conducted in Q4 2021 with the two heads of strategy to avoid communication errors and any further interview guideline ambiguities.

To triangulate the interview findings with important background information on the respective companies (Jick, 1979), additional data sources were considered. These encompassed information from internal documents, reports, companies' websites and most particularly two in-depth workshops on the subject that were conducted with the two companies. These sources provided rich information on background motivation, strategic projects, organizational structure and specific innovations launched and helped interpret the interview responses and compare the firms' approaches with each other.

3.2 Data analysis

The combined transcribed interviewees' comments comprised more than 126,000 words, and the MAXQDA qualitative data analysis software was used for the text analysis. The transcripts were analyzed in a systematic, step-wise and rule-based manner. Despite the exploratory nature of the study, no purely inductive approach was chosen, cf. (Gioia et al., 2013). The coding scheme initially relied on the research questions and categories of an initially conducted literature review. Analysis and coding was conducted in an iterative process between the data and the literature, starting with a template analysis approach (King et al., 2018), combining deductive and inductive elements to assign meaningful text segments to thematic codes (Bichler et al., 2022) – the first-order concepts. Identifying similarities and differences in the first-order concepts led to defined second-order themes (Gioia et al., 2013). Clustering into categories and contexts using the MAXQDA offered context networks, helped identify relevant interview quotes and provided transparency for potential reviewers' remarks (Aguinis et al., 2018). Finally, the higher-order theoretical dimensions were defined as aggregations of the second-order schemes. Analysis was based on the data in German, and the categories and related quotes were translated into English. One scholar critically reviewed the data work done by the other to further increase its validity (Eisenhardt, 1989).

4.1 Motives for innovation ambidexterity

4.2 Innovation ambidexterity strategy

4.3 Challenges

4.4 Effective innovation ambidexterity

5.1 Ambidexterity and complexity

Managing inherent, increasing complexity (Turner et al., 2013) appears to be a decisive successful organizational ambidexterity factor. Although this study's deeper understanding points to a quick adaptation of organizations reaching a similar perceived level of complexity after a period of time, these adaptations are part of the practical toolset for the effective ambidextrous innovation this study analyzed. Segmentation into small units such as organizationally-aligned micro-institutions (Van Dijk et al., 2011), and granting them with significant autonomy, empowerment (delegation), trust and reducing controlling structures to a minimum are key in effectively managing highly complex organizations. This is consistent with practically applying systems theory fundamentals. Following Ashby's law (1961), companies need to increase variety in their organizational structure and segmentize into many small micro-institutions to “destroy” variety, i.e. the external complexity of digital markets in general. Also, in accordance with Simon (2002), the results point to a ND organizational structure to effectively handle complexity. The leadership of ND organizations concentrates on regulating inputs and outputs only, offering complete autonomy to the inside processes of the components and subunits (Simon, 2002), which our results support. In addition, employees' entrepreneurial intentions are positively influenced by relative autonomy (Nielsen et al., 2019) and for addressing radical innovation projects, autonomous teams are more effective than other constellations (Patanakul et al., 2012). It can be concluded that granting autonomy to the internal startup unit is a path not only toward managing increasing complexity but also toward fostering entrepreneurial culture and increasing the effectiveness of the unit.

5.2 Ambidexterity and entrepreneurial culture

The findings contribute to understanding the role of entrepreneurial culture and mindset in an ambidextrous organization, as called for in O’ Reilly et al. (2013). On the one hand, entrepreneurial behavior and mindset favor innovation, proactivity and risk (De Jong et al., 2015), and entrepreneurial motives correlate with higher innovation performance (Sauermann, 2018). This is why it is widely agreed upon that entrepreneurial culture is a prerequisite for successfully building radical/disruptive innovation capabilities, as confirmed by the results of this study. The findings extend this knowledge further, pointing to foster entrepreneurial culture and mindset within the whole organization, starting with senior management as another enhancing tool toward achieving effective IA.

Anxiety about losing market position, business, revenue, shares or simply control prevents decision-makers putting “startup-like” liberties into place to enable fast scaling and prepare the organization for self-disruption. Falling back into conservative habits and reducing the degree of freedom naturally reduces the autonomy and speed of radical innovation units, cf. (Choi et al., 2018). This study points out that the entrepreneurial mindset characteristics of taking risks and courageously making decisions among uncertainty counter these anxieties. Senior leadership and managers with an entrepreneurial mindset will more likely apply courageous decision-making and have the will to renew long-established regulations to give more autonomy to their employees, and for example, equip the radical innovation units with startup-like liberties. The findings furthermore confirm the idea that entrepreneurial cultures tend to have higher identification, motivation and stronger (team) spirit, generally resulting in higher performance (Porck et al., 2019).

5.3 Ambidextrous leadership

This study additionally contributes specific findings to the field of ambidextrous leadership with practical implications, as called for by Pertusa-Ortega et al. (2020). Along with the necessary entrepreneurial mindset mentioned in Section 5.2, to lead an organization with two different speeds and a high variety of cultures, processes and mindsets, effective ambidextrous leaders need to communicate and explain a lot more while controlling less. In terms of content, a balanced level of attention and appreciation between both the incremental innovation and the radical innovation business units is suggested as a means to reduce tension and potential conflicts. Agile leadership methods on all hierarchical levels also appear to foster effective IA and entrepreneurial behavior. Agile values put into practice, i.e. less leading but more coaching, empowerment and trust, are the key ingredients of ambidextrous leadership.

A multitude of beneficial spillover effects toward the core business organization were observed in this study: increased innovation and business performance in general, including learning and best practice transfers and improved talent acquisition and higher diversity. In one case, IA strategy was even observed as an enabler of larger cultural change.

The initial targets of responding to disruptive innovation via anticipation, creating new businesses and enhancing learning and improvement were achieved through successfully implementing an effective IA strategy. Although managing several challenges is an ongoing process, anxiety prevents established organizations from exploiting the full potential of radical and disruptive innovation capabilities and fully leveraging the unfair advantages established firms have.

5.4 Practical implications

The practical implications of this research are akin to a guiding framework for the strategic implementation of effective innovation ambidexterity within established firms. Through the utilization of the effective IA process model (Figure 3), senior strategic and executive managers of established firms are equipped with a practical toolkit to:

1. Cultivate capabilities for radical/disruptive innovation,

2. Harness advantageous spillover effects that benefit the core business organization and

3. Address the inherent challenges associated with this concept, thereby proactively responding to disruption by anticipation, enhancing firm performance and ensuring the firm's long-term viability.

The core of this framework is a practical toolset of managerial recommendations (Table 2) to build radical/disruptive innovation capabilities, utilize spillovers into the core organization and manage the challenges faced when conducting effective IA in established firms.

The following managerial recommendations can be drawn: (R1) segmentize into small organizational units and (R2) grant internal startups significant autonomy. These two recommendations are interrelated. The systems theory underscores how a ND organizational structure (Simon, 2002; Simon and Ando, 1961) can effectively handle such complexity. The establishment of smaller, relatively independent units, such as organizationally-aligned micro-institutions (Van Dijk et al., 2011) and the substantial autonomy granted to internal startups within this ND organizational structure, play pivotal roles in both effectively managing complexity and nurturing radical innovation (Patanakul et al., 2012). From a leadership perspective, an ND organizational structure facilitates oversight of inputs and outputs of these units, essentially operating as an investor, while bestowing complete autonomy upon the internal processes of these units and individuals.

Moreover, the allocation of significant autonomy to these internal startup units represents a pathway to (R3) foster an entrepreneurial culture and mindset, thereby enhancing unit effectiveness (Nielsen et al., 2019; Porck et al., 2019). An entrepreneurial culture and mindset not only serve as a prerequisite for cultivating radical/disruptive innovation capabilities within these internal startups but also amplify the positive spillover effects and bolster the overall performance of ambidextrous organizations. Moreover, this mindset is likely instrumental in mitigating anxiety among ambidextrous leaders. These leaders are advised to embrace entrepreneurial mindset traits, such as risk-taking and bold decision-making, instead of reverting to conservative practices that may curtail the initially granted autonomy and impede the speed of these internal startups.

Ambidextrous leaders are encouraged to (R4) communicate and explain more and control less. Establishing routine town hall meetings, coupled with the utilization of participatory digital communication tools and IT infrastructure that fosters direct communication across hierarchical levels, represents systematic avenues for addressing this aspect. Implementing agile leadership methods across all hierarchical levels emerges as conducive to nurturing the necessary autonomy within radical/disruptive innovation units, as well as fostering an entrepreneurial mindset among employees. This approach entails a shift away from stringent control toward a focus on (R5) coaching, empowerment and trust. Notably, the ND organization structure already aligns with these principles by abstaining from direct control over internal unit operations, while maintaining oversight of inputs and outputs. This practically translates into the management of budgets and selecting customer-centric key performance indicators (KPIs), essentially adopting an investor role.

5.5 Limitations and future research

Some limitations of this study need to be acknowledged, which can serve as a basis for future research. Regarding the sample selection, this study was conducted in Germany. Even if its sample examined only well-established international companies, it might be affected by regional and cultural specifics, and therefore, cannot be generalized outside of this context. It would be interesting to broaden this work to international research, allowing a comparison of different leadership styles and cultural backgrounds. In terms of robustness, longitudinal studies are encouraged that would frame the process dynamics of IA as an effective response strategy to disruption.

This study advocates ND organizational structure as highly effective in ambidextrous organizations. Quantitative research to address effective IA in established firms, such as O'Connor and Danneels (2022), could help understand what specifically are the most effective structures for ambidextrous organizations in relation to size and other organizational characteristics. Future research could also dive deeper into comparing different leadership methods (Berraies and Zine El Abidine, 2019; Valeri, 2023) with the values of agile leadership (Parker et al., 2015) and evaluating whether correlations with IA are observed in general.