Managing Business Ambidexterity: A Simulation.

Abstract

Firms with more levels of decision-making hierarchies achieve in average poorer results but have lower overall risks. This is the consequence of poor managerial assessments, where errors of the first and second order reduce the firm’s performance. Despite the negative effect of hierarchies, they reduce the risk of incurring expensive failures. However, the above effect does not hold for scenarios based on setting the minimizing-risk level; under this condition, organizations with hierarchies do worse – both in handling risks and achieving high profits – compared to risk-minimizing organizations without hierarchical assessment. Thus, in a firm with high-ability and knowledgeable risk-reducing employees, imperfect management assessments with errors of the first and second or-der simply increase the total risks.
Ambidextrous behaviour with knowledge spillover effects (compared to scenarios without knowledge spillover effects) causes higher average profits as well as higher corporate risks. The reason for this is that an increase in the variety of exploitative and explorative tasks available, means the firm has a wider choice regarding diversifying risks.
Interestingly, hierarchies do not cause high trade-offs between risk-reduction and profit-reduction: The relative decrease in returns caused by additional hierarchies is not very pronounced when compared to risk-reduction caused by additional hierarchical levels.

Keywords: choosing innovation, decision making, business ambidexterity, computer simulation

JEL Classification: O32, O33, R12, R58, L53