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Journal of Business Accounting and Finance Perspectives

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Journal of Business Accounting and Finance Perspectives is no longer published on JAMS (the publishing platform provided by MDPI) as of 10.07.2021. The articles published until that date are archived at jbafp.archive.jams.pub by courtesy of JAMS.

J_Bus_Account_Financ_Perspect 2020, 3(1), 8; doi:10.26870/jbafp.2020.03.008

Article
Understanding Firm Growth and Revival through Ambidexterity: An Accounting and Organizational Perspective
Michael T. Lee 1,* and Nicholas V. Gaudioso, Jr. 2
1
SKEMA Business School, 920 Main Campus Drive, Raleigh, NC 27606, USA
2
Deloitte Tax LLP, 1111 Bagby Street, Houston, TX 77002, USA
*
Corresponding author: michael.lee@skema.com; Tel.: +1-919-535-5710
How to cite: Michael T. Lee, Nicholas V. Gaudioso Jr. Understanding Firm Growth and Revival through Ambidexterity: An Accounting and Organizational Perspective. J. Bus. Account. Financ. Perspect., 2020, 3(1): 8; doi:10.26870/jbafp.2020.03.008.
Received: 27 August 2019 / Accepted: 12 February 2020 / Published: 14 February 2020

Abstract

:
Young firms and established firms have a tendency to emphasize one type of organizational learning to their detriment. This reduces organizational ambidexterity and makes them susceptible to failure. This study explores how two high-tech manufacturing firms use cost information from an accounting system to balance exploitation and exploration learning for ambidexterity. A successful growth firm and a revival firm are examined since both of these business life-cycle stages focus on a strategy of aggressive building. The evidence shows that the use of cost information to balance learning and achieve ambidexterity is different between a growth firm and revival firm. The use of cost information for exploitation and exploration is undertaken by taking each firm’s learning pre-disposition, pivoting organizational culture, and utilizing a functional structure to realize contextual and structural ambidexterity. This study provides preliminary models for future research on accounting and the organizational elements for achieving organizational ambidexterity.
Keywords:
activity-based costing; ambidexterity; exploitation; exploration; variable costing

Introduction

High-performing businesses are known to possess organizational ambidexterity (Gibson and Birkinshaw, 2004). This is the art of exploiting existing business assets for short-term efficiency gains and operational effectiveness, while at the same time, exploring ways to reinvent products and services that can keep pace with the changing business environment in the long-term (Lavie et al., 2010; Gibson and Birkinshaw, 2004). Many businesses miss the opportunity to be ambidextrous, and this makes them susceptible to failure. The problem is that these businesses do not understand that they have to balance two types of organizational learning; exploitation, and exploration (Mom et al., 2007; March, 1991). Even if they do, firms find it difficult to balance the two types of organizational learning simultaneously.
Traditionally, ambidexterity is sought solely through organizational structure and culture (Simsek et al., 2009). Yet, this study uncovers that accounting information is another key element. According to Huber (1991, p. 89), an organization learns if its individuals and business units acquire knowledge that is recognized as useful for the organization. Central to organizational knowledge in businesses is the accounting system that records the revenues, costs, and operational statistics of conducting business activities (Ouchi, 1979). Despite its unassuming characteristics, accurate cost information is vital for businesses to maintain efficient operations, compete on pricing, and innovate for the future (Cooper and Kaplan, 1988). While the cost accounting literature on the performance effects of cost accounting systems suggests that organizational members use and learn from cost information, the evidence of effects on business performance is inconclusive (e.g., Maiga and Jacobs, 2008; Al-Omiri and Drury, 2007; Pizzini, 2006; Armstrong, 2002; Ittner et al., 2002; Kennedy and Affleck-Graves, 2001). It is suspected that the inconclusive findings may be due to the emphasis on using cost information for either exploitation or exploration learning, rather than for balancing both types of learning.
Firms find that cost information can be used for exploitation and exploration learning. For example, common uses of cost accounting information include calculating production costs, analyzing costs to exploit operational efficiencies, and/or promoting creativity and innovation for new products and services. However, in order to balance exploitation and exploration learning, organizational elements that involve specific types of organizational culture and organizational structure are required.
This study explores how firms can use cost information to balance exploitation and exploration learning for ambidexterity. Since this perspective is somewhat unexplored in the cost accounting literature, this research sets out to uncover the circumstances surrounding how cost information is used to balance exploitation and exploration learning. Prior literature shows that organizational culture and organizational structure influences the content and presentation of cost information (Chenhall, 2003). Therefore, this study recognizes the impact of culture and structure on the use of cost information for balanced learning and ambidexterity.
Specifically, this study contributes to the inconclusive cost accounting research on the performance effects of using cost information in two ways. First, this study examines how two fundamental types of cost information, variable costing (VC) and activity-based costing (ABC) information, are used for exploitation and exploration learning respectively, to achieve ambidexterity. Second, this study examines the roles of culture and structure in understanding the dynamics behind using cost information for balanced learning and ambidexterity.
Furthermore, this investigation provides preliminary research models for academics to refine the understanding of using cost information and organizational elements for balancing learning and ambidexterity. The evidence also provides the management of growing firms and reviving firms with suggestions of how cost information can be used for exploitation or exploration learning to achieve ambidexterity with the assistance of specific types of organizational culture and organizational structure.

Theory

Organizational learning in young firms and established firms 

Firms have a tendency to emphasize either exploitation or exploration learning to their detriment. Young firms are often engaged in exploration learning, which is characterized by an emphasis on search, discovery, experimentation, risk-taking, and innovation (Lee and Cobia, 2013; March, 1991). Young firms also have a limited customer base and lack resources because they need to make the necessary investments in establishing organizational roles and structuring value chain relationships. Statistics show that the success rate of young firms is relatively low, with a quarter of such firms failing after the first year, and more than half ceasing to exist after five years (http://www.statisticbrain.com/startup-failure-by-industry/). Ignoring continuous operational improvement and the associated efficiency gains make these businesses vulnerable to failure in the short-term.
Established firms are not immune. These mature businesses may be established, but some are in various stages of decline. Established firms become dependent on existing knowledge, experiences, proven routines, and skills to respond in a consistent and accountable manner to challenges in the business environment (Hannan and Freeman, 1984). They become efficient and effective in leveraging their accumulated experience and established ties to vendors and customers. Consequently, established firms engage in exploitation learning, which is characterized by efficiency, production, refinement, and implementation (Lavie et al., 2010; March, 1991). Unfortunately, the emphasis on exploitation learning makes established firms susceptible to failure as they struggle to innovate and create new products and services for the changing business environment in the long-term.

Cost Information as an Enabler of Ambidexterity 

Cost information is contained in a cost accounting system. Cost accounting systems include but are not limited to job costing systems, variable costing systems, activity-based costing systems, and process costing systems. Cost information allows firms to calculate production cost, analyze costs, quantify loss, and monitor work efficiency (Lepadatu, 2011). Firms learn from cost information. This learning, both exploitation and exploration, contributes to the organizational and financial control over operations, processes, and decision-making.
Organizational ambidexterity is a concept touted by management scholars as the foundation for business performance in both the short- and long-term (Lavie et al., 2010). The route to ambidexterity is engaging and balancing exploitation and exploration learning (Gibson and Birkinshaw, 2004). Pursuing ambidexterity is challenging because of the inherent conflicts between exploitation and exploration learning (Mom et al., 2007). Nevertheless, prior research identified that exploitation and exploration learning can be balanced through organizational context (i.e., contextual ambidexterity) and organizational separation (i.e., structural ambidexterity) (Simsek et al., 2009).
Simultaneous exploitation and exploration that is balanced through organizational context is known as contextual ambidexterity. It is the behavioral capacity to simultaneously demonstrate alignment and adaptability across an entire business unit (Gibson and Birkinshaw, 2004). Firm leaders are expected to create a supportive business unit context that is designed to enable and encourage all individuals to best divide their time between exploitation and exploration (Simsek et al., 2009).
Ambidexterity can also be achieved by developing structural mechanisms to cope with the competing demands of exploitation and exploration learning (Gibson and Birkinshaw, 2004). This is known as structural ambidexterity and it involves spatial separation or partitions at the business unit level to allow the trade-offs between exploitation and exploration to be addressed simultaneously (Lavie et al., 2010). The separate units pursue either exploitation or exploration, and each unit is configured according to its task environment’s specific requirements (Simsek et al., 2009).

Recognizing the role of organizational culture 

Recent empirical research suggests that exploitation and exploration can be undertaken simultaneously when supported by numerous contingencies at various levels of analysis including leadership (Simsek et al., 2009; Auh and Menguc, 2005), organizational culture and team-based structure (Bierly and Daly, 2007), management control (Gupta et al., 2006), organization size and environmental munificence (Cao et al., 2009), and strategy and innovation intensity (He and Wong, 2004).
Organizational culture is an overarching contingency that supports the balance of exploitation and exploration through organizational context (Lavie et al., 2010; Bierly and Daly, 2007). Culture is a concept that encompasses leadership and management control (Quinn and Rohrbaugh, 1983). Cultural values are often used to encourage individuals to be creative as well as to pay attention to detail so that innovation does not undermine quality and efficiency (Miron et al., 2004).
Quinn and Rohrbaugh (1983) discovered that cultural values, assumptions, and interpretations cluster together via multi-dimensional scaling in two general psychological archetypes. The framework specifies culture in terms of two competing values: the dilemma over flexible and control values. A flexible culture places a great deal of emphasis on flexibility, planning, readiness, growth, cohesion, morale, and human resource development. A control culture focuses on the role of information management in goal setting, productivity, efficiency, communication, and stability. A firm will exhibit either a dominant flexible or control culture rather than being exclusively flexible or control (Henri, 2006).
Therefore, this study recognizes the importance of cultural influences and examines their impact on balancing exploitation and exploration learning for achieving contextual ambidexterity. In this setting, culture, which is characterized by a model of flexibility and/or control (Quinn and Rohrbaugh, 1983), can influence the effectiveness of balancing exploitation and exploration learning for contextual ambidexterity.

Recognizing the Role of Organizational Structure 

According to Benner and Tushman (2003), structural ambidexterity is demonstrated when multiple tightly functioning business units are themselves loosely coupled with each other. Within business units, the tasks, individuals, and organizational arrangements are consistent, but across business units, tasks, individuals, and organizational arrangements are inconsistent and loosely coupled. Exploitation units are generally larger and more centralized with tight processes (Benner and Tushman, 2003). They engage in reducing variability, tightly coordinating with process management and maximizing efficiency and control (Benner and Tushman, 2003). Exploration units tend to be small and decentralized with loose processes to enable risk-taking and experimentation (Lavie et al., 2010).
There is evidence in extant research that organizational structure influences the efficiency of work, the motivation of individuals, and information flows (e.g., Chenhall, 2003). Structural mechanisms include the formal specification of different roles or tasks for groups to ensure that the activities of the firm are carried out through centralization, standardization, formalization, and configuration (Pugh et al., 1969). Therefore, certain types of organizational structures may have an impact on the effectiveness of balancing exploitation and exploration learning for structural ambidexterity.
Simons (2000) suggests that organizations should be structured to facilitate workflows and focus attention. Therefore, business units are defined around groups of people and resources engaged in a similar work process or function, and groups of people and resources focused on a specific market or division. When new firms emerge, they are often quite small and employees usually work across all aspects of the business. As the firm grows and employees are hired, this approach becomes inefficient. Some employees will become better at certain tasks than others, and efficiency and productivity gains can be made by specialization. Consequently, employees can focus attention and expertise on a single activity and avoid the high costs that are often associated with switching back and forth between different tasks. For example, research and development can be separated from production. These business units are known as functional work units and take advantage of specialization and economies of scale. Market-focused business units are usually clustered by product, customer, geography, or combinations of clusters in order to maximize responsiveness to customers and competitors. These business units can deploy resources rapidly and respond to changing threats and opportunities, especially if there is functional separation within the business units.

Method

Empirical studies on the performance effects of cost accounting systems generally adopt survey approaches. These studies use theory to develop hypotheses and test associations among the variables of interest in the data to see whether the hypotheses are supported. The drawback with this approach is that the assessment of the effects among the variables is dependent on model specification, and this requires strong theory and deep substantive knowledge. Since this study is interested in understanding the circumstances surrounding how cost information is used for learning and ambidexterity, and current research at the information level of analysis is sparse, there is an opportunity to investigate this surprising gap in a fundamental research topic.
The goal of case study research is to provide a rich and thorough understanding of relevant phenomena. It includes many aspects of the context within which the phenomenon of interest occurs (Bennis and O’Toole, 2005; Ahrens and Dent, 1998). Case research brings rich descriptions of practice; rich data sets, useful stories, and examples into the public domain (Yin, 2003). Case researchers usually examine multiple forms of evidence for triangulation and validation including observations of employee actions and interactions, interview data, memoranda, internal company records, and archival data (Yin, 2003). Given the interest in investigating how firms use cost information to achieve ambidexterity, two ambidextrous, and high-performing firms are chosen for this case study.
Prior research shows that firms will change their information-processing and decision-making sophistication over progressively more complex stages of the life-cycle (Moores and Yuen, 2001). The amount and focus of cost information used by decision makers varies at each life-cycle stage since the selection and presentation of information will increase from birth to growth, relax at maturity, and increase at revival before decreasing during decline (Moores and Yuen, 2001).
Firms in the growth and revival stages focus on a strategy of aggressive building. They require the maximum use of information for multiple solutions and must have timely information because of uncertainty in the environment. The need for both aggressive building and multiple solutions in the growth and revival stages requires both exploitation and exploration learning to ensure ongoing success. For these firms, managers can use cost information for exploitation and exploration learning in pursuit of ambidexterity. This study selects two participants: a successful growth firm (GF) and a successful revival firm (RF).
To maintain the anonymity of the case study firms, actual firm names and specific dates are not used. Yin’s (2003) and Eisenhardt’s (1989) case study methods were employed. This procedure involved collecting, analyzing, and interpreting observations (Yin, 2003; Nachmias and Nachmias, 1992). To ensure the reliability of explanations, a semi-structured protocol was used for the flexible conduct of the case study. The protocol was followed, and after an initial introduction to the firms, the investigation continued with relatively unstructured interviews. Interviewees were allowed to explore issues that they believed were important within accounting systems, culture, and structure. Interviews were recorded and transcribed. In addition to the interviews, there were also informal follow-up conversations involving more contact. The researchers were present at all interviews to enhance data reliability, maintain continuity with contacts and build confidence in the evidence (Pettigrew, 1988). Supplemental data included relevant email correspondence, internal documentation covering financial statements, cost budgets, performance measures, mission statements, publicly-available information from the firms’ websites, other promotional material, and evidence from other media. The researchers directly observed the facilities, manufacturing process, and work environment to help understand the culture and structure of work. Subsequently, the data was arranged chronologically before identifying common themes, unique insights, and areas of disagreement.

Evidence

Growth Firm 

Growth firm (GF) is a successful young firm. This business was formed to create and sell an innovative controller and soil moisture-triggering sensor for irrigation management. Since the EPA (Environmental Protection Agency) estimates that half of the domestic water used on landscapes is wasted, conservation-focused irrigation is a priority for the industry. GF’s managers include business professionals, salespeople, and engineers from the high-tech and agricultural industries. The firm develops and manufactures smart controllers, two-wire protocols and devices, and patented soil moisture sensors for an efficient watering solution. GF currently employs some 30 employees. With strong yearly sales growth, GF finds that it can no longer monitor product line profitability to evaluate sales representatives. Our case study of GF shows that the successful young firm turned to exploiting cost information about five years ago. The use of cost information for exploitation learning allowed GF to balance their existing emphasis on exploration learning.
GF implemented a costing system to perform variable costing (VC) for contribution margin information about five years ago. This information is useful for understanding the cost of their product lines and the performance of their salespeople and distributors. Their financial reporting system had some planning functionality, but was primarily developed to produce income statements, balance sheets, and statements of cash flow in accordance with the United States generally accepted accounting principles (U.S. GAAP).
Between 2014 and 20161, GF demonstrated high performance with approximately 25.6% average annual return on assets (ROA)2. This compares to an average of 5.5% for the five publicly-listed firms in the irrigation industry (with a range of −22.2% to 23.1%) according to Osiris, a Burea Van Duk (BVD) database. GF’s 25.6% ROA is also compared with 17 other firms that manufacture controllers3. Because these firms are mostly research and development firms, the controller industry has an average of −39.8% return (with a minimum of −417.0% and a maximum of 32.6% return).
The elements and process used by GF to achieve organizational ambidexterity are summarized in Figure 1. The three phases (discovery, pivoting, and realization) in the process are described in the following sections.

The Exploitation Gap and VC Information 

We met with the chief executive officer (CEO) and his upper management team from the production, engineering, and marketing and sales departments. The CEO immediately wanted to discuss how the company developed through innovation and creativity as the cornerstones of the organization. Our conversation covered a variety of subjects from product costs (i.e., manufactured and out-sourced), labor costs (i.e., administrative to upper management), supply chain advantages, and retail opportunities (i.e., local and national markets). We then asked the group in-depth questions regarding GF’s inspiring performance and the development of the costing system and the use of its information.
The CEO praised the skills and talent of GF’s employees for innovation, and then expressed that the lack of effective cost information up to about five years ago had been a growing concern. GF had not been able to scrutinize the inefficiencies in day-to-day manufacturing and production to make timely operational improvements, and GF has to remain competitive over the short-term as well as in the long-term. This sentiment is summarized by the CEO by way of his example using the forecast and planning process more than five years ago:
“Essentially, we had a huge Excel spreadsheet that we copied data in from the previous years’ operating costs and sales forecast forward. It provided high-level targets, but didn’t give us operating costs by product lines, salespeople or distributors. We just had buckets of overall operating cost items such as controllers, wires, protocols, power, equipment depreciation, leases etc. How can we get more granular so we know what our product lines are costing, by commercial job, or by salesperson, or by one of our distributors? This is when we decided on focusing on contribution margins by product lines.”
At the time, the CEO was convinced that VC information would answer the firm’s questions. The CEO and his managers developed and introduced VC to complement the exploration learning that was already prevalent in the business. The goal of VC information is the transfer of knowledge of fundamental cost information among departments to exploit communication, understanding, and learning.

Exploitation Learning and Organizational Culture 

Prior to the VC information, GF was characterized by a highly flexible team-based culture. GF’s birth stage exhibits the typical culture of a start-up with flexibility and the informal, proactive, and sometimes chaotic approach to establishing market share and prominence in the irrigation industry. The CEO explained:
“The founders of GF were very charismatic and driven. They worked proactively with hand-picked operational people, and placed a lot of emphasis on morale and skills development. Early GF goals were specific and short-term including getting as many commercial customers as possible, developing workable solutions for commercial customers, and maintaining a high quality of production and customer installation. The founders and operational personnel were a small team that worked and communicated with each other informally. Since each commercial customer needed different product solutions, the small team worked flexibly with each other, exchanging frequent discussions, and solving customer issues as a group.”
Then, the managers from marketing and sales showed us VC information from recent years that revealed how margins on domestic customer sales exceeded commercial sales. The managers spoke of how commercial customers use their market power in price negotiations. This creates long lead-times for commercial customer sales. Market power, price negotiations, and longer lead-times reduce commercial sales margins. Consequently, the managers made it a key priority to focus on domestic customer sales in recent years. A manager then described the sales and profit improvement process:
“We set targets, and the performance of each product line, sales person, and distributor is evaluated regularly. With sales and VC information, the managers and their employees can focus on targets that were not met and discuss ways in which to make improvements [in sales and operational performance].”
To our surprise, GF’s managers continued on to talk about how this routine affected the firm’s culture. According to the managers, the use of VC information pivoted the flexible team-based culture toward one that exhibits more control characteristics. The managers explained that there was an increase in organizational control experienced by all employees as management and other personnel across all functions of the business faced mandatory requirements to record detailed sales transactions by product, sales and marketing labor-time by product, manufacturing labor-time by department, and to identify machine-hours and cycle-time by department, product line, salesperson, and distributor.
The CEO then added that, as GF’s customer base grew, the firm’s initial team grew quickly in an attempt to meet the firm’s increased production, sales, and service requirements. GF’s management had to find consistency in production quality, the customer sales process, service, and installation performance for its manufacturers, salespeople, and distributors. To monitor and control these activities, GF developed sets of non-financial performance measures for production quality, customer sales and service levels, and installation performance. Managers remembered how the use of these performance measures increased learning, but also created an atmosphere of increased control. The managers explained that employees in production and sales and customer support are measured on these goals, and that corrective action is taken when employees do not meet goals. They explained that the management team also revises its goals regularly for continuous improvement:
“We developed upper and lower targets for much of our production processes. We want to detect if we are doing things badly, but we also want to know if we are doing things well. We know that some of the workers do not like our approach, but it is the only way to detect and correct things. We regularly revise our targets to improve sales and operating efficiencies.”
We observed that this goal setting and corrective action approach to operating processes and financial performance using VC information represents exploitation learning. The goal setting and corrective actions pivoted GF’s still dominant flexible team-based culture into one with noticeably more control. This evidence suggests that the use of VC information for exploitation, along with the existing exploration learning, demonstrates contextual ambidexterity in GF and required a culture with more control to realize contextual ambidexterity.

Exploitation Learning and Organizational Structure 

In our interviews with the managers for production and sales and customer support, we learned that GF began with an informal structure featuring two informal responsibility centers: production and sales. The founders and their personnel were loosely tagged either as a production person or a salesperson. The employees worked mainly in cross-functional teams:
“… employees are expected to be multi-skilled and work across production and sales and customer support. In theory, two main responsibility centers exist, but in reality, responsibility lines are really blurred. We keep our roles and responsibilities flexible.”
As production and sales grew, GF hired more employees for each responsibility center. To cope with the increasing number of employees, a change in sales priority from commercial to domestic customers, and mandatory recording of sales, labor, and other manufacturing information for VC, GF pivoted once again by calling for a change in firm structure:
“We focused on commercial product lines initially, and the production department looked after production as well as ongoing product research, development and engineering. When we discovered greater interest in the domestic product line, it was even more important that our business distinguish between production and engineering to fulfill the selling and servicing respectively of our commercial and domestic products lines. This led to the splitting of the production department into separate production and engineering departments.”
While the production department continued to be responsible for manufacturing products for customers, the engineering department took over the innovation activities that were previously undertaken in the production department. The role of the engineering department is to provide expertise to improve the production department manufacturing process through research and development, and to support the sales and customer support department based on feedback relating to technical issues, product defects, and product installation. Driven by VC information, the separation of production and the unification of innovation activities improved efficiencies and utilization of firm knowledge respectively. It allowed the departments to eliminate the costs of duplicated learning among employees dispersed across the production and engineering departments.
The change in organizational structure at GF is evidence of structural ambidexterity because GF created the engineering department as a new functional business unit for research and development, and exploration learning, separate from the production department which exploits defect-free products by way of monitoring and correcting poor process quality. Furthermore, the realization of structural ambidexterity is observed when GF conducts its sales and customer support through a separate department that attends to the needs of customers and monitors customer service quality, and forwards both creative ideas and product-defective customer feedback to the engineering department (exploration learning) and production department (exploitation learning) to address respectively.

Revival Firm 

Revival firm (RF) is a successful established firm. RF is a developer and manufacturer of innovative, customized user interface systems for avionics, industrial, and medical devices. RF was founded about 25 years ago with three employees designing and manufacturing travel keyboards and user interface assemblies for customers who would self-brand their products. In the past decade, RF decided to become proactive and lead its market with research and development into new designs, fabrication methods, and other manufacturing techniques. The firm employs some 80 personnel with sales, technology, engineering, and fabrication skills. However, the firm was experiencing slowing revenue growth and rising costs. RF’s accounting system was developed by their accounting personnel for U.S. GAAP and tax reporting. However, RF’s management understands the value of accounting information from a strategic and decision-making perspective. The firm turned to activity-based costing (ABC) information about six years ago to help reduce the cost and increase the quality of its products to enhance its competitive position.
Between 2014 and 20164, RF demonstrated high performance. RF’s average annual operating margin stands at approximately 43%. There are eight other publicly-listed firms in the user-interface industry (many of which are research and development firms) with an average annual operating margin of −130.2% (minimum −387.7% and maximum 7.8%).
The elements and process used by RF to achieve organizational ambidexterity are summarized in Figure 2. The three phases (discovery, pivoting, and realization) in the process are described in the following sections.

The Exploration Gap and Product-Level Cost Information 

Our initial conversation with RF’s chief financial officer (CFO), senior cost accountant, production manager, and assistant production manager focused on product costing, business strategy, and the overall accounting process, similar to the topics we covered with GF. The group provided us with important background information about the established, well-controlled process-driven culture in RF. RF’s culture has a history of precise processes and quality procedures that are tested and proven over some 25 years. Decisions are not made spontaneously; instead, they are analyzed by departments from accounting to engineering. It is at this point that the CFO explained RF’s decision to use ABC as a way to resolve the process innovation and cost issues with each new product development job.

ABC Information and Process Innovation 

RF adopted and implemented ABC about six years ago to help them understand how their processes and activities contributed to costs and add value to their business and for their customers. ABC is important to RF because each customized job is a unique new development that involves processes for distinctive design, development of prototypes, and manufacturing characteristics for production. According to the CFO:
“We needed to lower the costs of bidding for new clients which include the sales and marketing process, design process and new product development process. In addition, we wanted to reduce production costs after successfully winning new clients or filling an order for an existing client. Finally, we were determined to reignite sales, production, research and development, and engineering process innovation to continue as a market innovator rather than a follower. We are always in the process of trying to redefine ourselves as a company to continue to separate ourselves from competition. We need to keep our high values on process and production but we really need to innovate in such a way that we find new ways to do and maintain our business far more economically. Our culture and ABC have supported our endeavors.”
ABC was seen as a way to make their employees scrutinize RF’s processes and activities for each new product development. The information leads to discussions among managers and staff and results in process innovation (e.g., new fabrication techniques, new materials) in production with a goal to eliminate unnecessary process costs for every new product development job. The senior cost accountant stated:
“Our sales and marketing department cost each NPD [new product development] bid using materials, machine-hours, cycle-time, support-time and their own labor-hours as well as the materials, machine-hours, cycle-time, support-time and labor-hours from the production department. First, the sales and marketing and production departments analyzes the cost drivers and rates to understand how the drivers are used in designing a NPD prototype for a customer. They are able to gauge the costs of each NPD through the usage of each cost driver and the cost driver rates. Note that before an NPD, the two departments would jointly develop standards to measure actual usage against these standards. Second, the sales and marketing and production departments investigate the reasons behind any excess usage for both prototypes and production using ABC information. In cases of excess usage highlighted by ABC information, our personnel [sales and marketing and production personnel] determine if there is a need for wholesale process change and/or production changes that can reduce usage.”
These four departments (i.e., the sales and marketing, production, research and development, and engineering departments) are also aided by an independent innovation department whose sole purpose is to use ABC, relevant market- and customer-related information to explore new and revolutionary ways to conduct sales and marketing, production, research and development, and engineering. If there are alternatives that can support an innovative product with reduced processing time, cost, delivery, quality, speed, timeliness, coordination, and profitability, the four departments make the necessary changes.

Exploration Learning and Organizational Culture 

Our description of RF’s use of ABC information suggests contextual ambidexterity since the information is used for making corrections to the new product development process, as well as encouraging RF’s departments to explore avenues for process innovation. To support exploration learning, RF’s managers encourage their departments to focus and accept process innovation by pivoting culture away from an emphasis on operational goal setting, measurement, evaluation, and correction towards more teamwork, employee development, and the processes of exploration, discovery, and creative design. The CFO explained:
“We put together a cross-functional team comprised of sales and marketing, engineering, and fabrication (a production department) people to develop a new touch pad for a client. This team encouraged process innovation ideas initially through meetings, then as everyone got to know each other, there was more talk and ideas. The team members used ABC information to come up with a new design. This helped our company develop a team culture. This culture encourages greater lateral thinking in our designs, processes, and production.”
Where there are knowledge gaps in the teams, RF’s managers allow team members to seek further education and training internally through teamwork with other departments, and/or externally from outside specialists. RF is also able to fill in knowledge gaps by consulting customers. Their customers would have interactions with competitors, and teams are often encouraged to develop working relations with their customers to solicit, capture, and analyze competitor innovations with an aim to at least match or exceed them.
This evidence suggests the use of ABC information for exploration supplements the use of ABC information for exploitation to realize contextual ambidexterity. This was accomplished through the re-kindling of a team-based culture in the sales and marketing, research and development, engineering, and production departments.

Exploration Learning and Organizational Structure 

On many occasions during our interviews, the CFO and sales director would discuss their proud creation of a new innovation department at RF. The teams rallied to have RF create a separate and independent innovation department solely for the purpose of exploring and discovering process innovation, new production techniques, and revolutionary new products. The CFO explained:
“We staff the innovation department with select personnel from four departments [sales and marketing, research and development, engineering, and production] to partake in process innovation and keep a lid on our cost issues as its exclusive agenda. This team does not necessarily have the advanced skills for coming up with the process innovation, new production techniques, or revolutionary product development. They have the curiosity to research and evaluate new manufacturing techniques and product developments. The results of that research can be used to guide future training activities to obtain essential skills to innovate and produce revolutionary products. In other words, the innovation department puts out feelers and alerts all our other departments to relevant techniques and product developments. Also, the people in this department must engage with the cross-functional teams to explore the potential of early product, manufacturing, and technology adoption.”
Because of the innovation department and its exclusive exploration activities separate from mostly exploitation activities in sales and marketing, engineering, and production departments, we observed evidence of structural ambidexterity at RF.

Preliminary Models

It is reassuring that growing firms that emphasize exploration learning and reviving firms that emphasize exploitation learning can continue their success by balancing their existing emphasis on learning with exploitation and exploration learning respectively with cost information, organizational culture, and organizational structure. The evidence has two important implications for growing and reviving firms. First, the use of cost information to balance learning and ambidexterity is different between growing firms and reviving firms. Second, the use of cost information for exploitation and exploration is undertaken in conjunction with each firm’s learning pre-disposition, pivoting organizational culture, and utilizing a functional structure to realize contextual and structural ambidexterity.
Using the case evidence for GF and RF, this study proposes the following preliminary models for contextual and structural ambidexterity. However, more empirical research is required to accurately understand how cost information and organizational elements are related to organizational ambidexterity. To motivate future research, researchers may use the preliminary models as a basis for applying other research methods and techniques to refine the accounting and organizational perspectives and gain further insights into the elements and process for pivoting and realizing organizational ambidexterity.

Ambidexterity in a Growing Firm 

Figure 3 shows the preliminary model for balancing learning and achieving contextual and structural ambidexterity in GF. It begins with a discovery phase that involves understanding the pre-existing learning disposition of the firm. As a young firm, GF emphasizes exploration learning because of the prominence of experimentation, risk-taking, and innovation in much of its everyday activities.
In a pivoting phase, GF uses its cost information to address the learning gap with exploitation learning. As it focuses on a strategy of exploration learning and aggressive building, GF is also aware of the critical importance of continuous improvement and operational efficiency for short-term performance. Consequently, GF adopted VC information about five years ago for exploiting operational improvements. GF is characterized by a highly flexible team-based employee culture. In order for exploitation learning to be realized, GF introduced some formality and control to its highly flexible team-based employee culture. Formality and control are operationalized through routine target setting, target revision, performance measurement, and corrective action.
In a realization phase, the use of VC information for exploitation learning and control values in GF’s organizational culture are the elements in a process for GF to balance organizational learning and achieve contextual ambidexterity.
To realize structural ambidexterity, GF implemented the simultaneous use of VC information for exploration in its engineering department, and VC information for exploitation in its production department. GF created the engineering department as a new functional business unit for research and development separate from the production department, which exploits defect-free products by way of monitoring and correcting poor process quality. The use of VC information for exploitation learning and a functional structure are the elements in a process for GF to balance organizational learning and achieve structural ambidexterity.

Ambidexterity in a Reviving Firm 

Figure 4 shows the preliminary model for balancing learning and achieving contextual and structural ambidexterity in RF. RF discovered that it is in a revival phase of its life-cycle and emphasized exploitation learning. RF established itself some 25 years’ prior as the premier customized user interface system manufacturer. They were the “go-to” for prototypes and production versions of avionics, industrial, and medical devices. RF’s culture has a rich history of exploiting precise processes and procedures that are tested and proven over 25 years. However, diminishing quality in development processes and production procedures, rising costs, and a decreasing market share put RF in need of a revival up to about six years ago.
In a pivoting phase, RF adopted and implemented ABC as a way to encourage exploration and manufacturing process innovation and to address mounting cost issues with each new product development job. Consequently, RF uses ABC information to explore process innovation and cost reductions. In order for exploration learning to be realized, RF’s managers encourage its departments to accept process innovation by shifting its culture away from an emphasis on operational goal setting, measurement, evaluation, and correction toward more teamwork, employee development, and the processes of exploration, discovery, and creative design. The use of ABC information for exploration learning and flexible values in RF’s organizational culture are the elements in a process for RF to balance organizational learning and achieve contextual ambidexterity.
To realize structural ambidexterity, RF created a new separate and independent innovation department. The idea of the new functional department comes from cross-functional teams embracing the move towards a flexible team-based culture. The teams rallied to have RF create the innovation department solely for the purpose of exploring and discovering process innovation, new production techniques, and revolutionary new products. The use of ABC information for exploration and a functional structure are elements in a process for RF to balance organizational learning and achieve structural ambidexterity.

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1
This timeframe reflects the completion of the pivoting and realization phases and an opportunity to observe the initial effects on organizational performance through a financial returns analysis. Therefore, in an effort to achieve ceteris paribus for the comparable controller manufacturers’ returns, the analysis averages 2014–2016 annual data.
2
Comparability factors of geographical market, level of market, timeframe, product similarity (including commercialized versus research and development phase products) were considered to select the sample group of controller manufacturers.
3
This qualitative analysis provides additional support in aligning exogenous variables that have the potential to influence financial performance (e.g., general economic conditions, consumer demand, input prices). This enhances comparability between GF and the selected controller manufacturers providing ROA as a valid benchmark.
4
Refer to the previous footnote. The same qualitative analysis was applied in the selection of comparable user-interface companies. This analysis enhanced comparability between RF and the selected user interface companies, and as such the performance measure of ROA provides a valid benchmark for comparison.
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Figure 1. The elements and process for GF’s ambidexterity.
Figure 1. The elements and process for GF’s ambidexterity.
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Figure 2. The elements and process for RF’s ambidexterity.
Figure 2. The elements and process for RF’s ambidexterity.
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Figure 3. The process of balancing learning and achieving ambidexterity in a growing firm.
Figure 3. The process of balancing learning and achieving ambidexterity in a growing firm.
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Figure 4. The process of balancing learning and achieving ambidexterity in a revival firm.
Figure 4. The process of balancing learning and achieving ambidexterity in a revival firm.
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