• In hindsight, we can see that they focused on winning a game that was soon to be irrelevant.

• In the words of chief content officer Ted Sarandos, Netflix wants “to become HBO faster than HBO can become Netflix.”

• The short answer, which we elaborate on in the rest of the book, is that they had ambidextrous leaders who were able and willing to exploit existing assets and capabilities in mature businesses and, when needed, reconfigure these to develop new strengths. We’re talking about Netflix’s ability to invest in video streaming and rent DVDs by mail; IBM’s capacity to sell large mainframe computers (the z-series server) and do strategy consulting; Cisco’s success in selling routers and switches to large corporations and developing its high-end videoconferencing product, TelePresence. This is the positive side of the story we tell.

• How can we both exploit existing assets and capabilities by getting more efficient and provide for sufficient exploration so that we are not rendered irrelevant by changes in markets and technologies?

• He says that when confronted with these seemingly minor threats, “rational managers rarely build a cogent case for entering small, poorly defined, low-end markets that offer only lower profitability.”

• In contrast, our research and consulting experience suggest that a strong separation between the past and the future can undermine the success of the new unit, too often leaving it dead in the water.

• But what is needed is a more sophisticated separation that also includes targeted integration, strong senior management support for the new business, and an overarching organizational identity.

• Finally, innovation can also occur through seemingly minor improvements in which existing technologies or components are integrated to dramatically improve the performance of existing products or services.23 These so-called architectural innovations, while not based on significant technological advances, often disrupt existing offerings. These are largely what Christensen was referring to as “disruptive.”24 These typically begin by offering a cheaper alternative to a small segment of the original customer set and initially are not viewed as a threat to the incumbents because they appeal only to the low-end users where margins are already small.

• Basically, exploitation is about getting better and better at doing business as usual. Over time, if firms are successful, they become more knowledgeable about their customers and more efficient at meeting their needs.

• We begin in Chapter 2 by showing how the demands of competing in a mature business (exploitation) require a different set of skills and organizational alignment from those needed to compete in new businesses and technologies (exploration). More challenging, we show how success at the exploitation game can actually undermine managers’ ability to explore; we call this the success syndrome.

• Management is ensuring that the trains run on time; leadership is about ensuring that they are headed to the right destination. Management is about execution; leadership is about strategy and change. Most scholars and practitioners acknowledge that both are necessary for organizations to succeed over time.

• When the market is changing rapidly, the alignment needed to succeed is one that is best able to experiment and adapt quickly.

• The result? By 2010, customers were buying from competitors like SuccessFactors, NetSuite, Salesforce.com, and Microsoft Dynamics—and SAP had only 1,000 customers, not the 10,000 they forecasted. The company had generated not the $1 billion projected but only $35 million in revenue. In February 2010, co-CEO Apotheker was fired, in part for his failure to make ByD successful. On October 20, 2013, SAP announced that it would discontinue its support of ByD with an estimated loss of 3 billion euro.4 The big successful business had killed the smaller one.

• In 1994, Jeff Bezos incorporated Amazon.com and billed it as “The Earth’s Largest Bookstore.” In July the following year, the site went live. By 1996, Amazon had $16 million in sales, while its dominant competitors, Barnes and Noble and Borders Books, had roughly $2 billion in revenue each.

• Bezos’s philosophy, which is still true today, has always been that Amazon doesn’t make money when it sells things; it makes money when it helps customers make purchasing decisions. This philosophy led to Innovation #2: providing reviews of the books. The reviews were initially written by in-house editors, but soon by customers themselves.

• Bezos ruthlessly emphasized improvements that would enhance the customer experience and articulated these in the values that defined the company: customer obsession, strict frugality (no one flies business class), a bias for action, ownership, no politics (never take credit for another’s ideas), and a fact-based adversarial style (no PowerPoints allowed—only six-page narratives describing proposals and ideas). His strategy emphasized decisions based on the long-term prospects of boosting free cash flow and growing market share rather than on short-term profitability, claiming, “Percentage margins are not something we seek to optimize. We want to maximize the absolute-dollar free cash flow per share. . . . Free cash flow is something investors can spend. They can’t spend percentage margins.

• For $79 per month,

• At Amazon, “2-pizza teams”—groups that are small enough to be fed with two pizzas—have their own software developers, businesspeople, design staff, and so on. “I think that kind of decentralization is important for innovation because your hands are closer to the knobs of what you’re trying to build.”

• When John Doerr of Kleiner Perkins, an Amazon board member, learned of this effort, he wasn’t happy, seeing this as a distraction. But Bezos ignored him, believing that Amazon had a natural cost advantage in this trillion-dollar market.

• Amazon has built a culture that is “purposeful Darwinism,” emphasizing an obsession with the customer, a bias for action and constant experimentation, frugality, direct feedback, and the continuous measurement of results.

• “If you’re long-term oriented, customer interests and shareholder interests are aligned. In the short-term, that’s not always the case. . . . And a long-term approach is essential for invention, because you’re going to have a lot of failures along the way. . . . If we had always needed to see significant financial results in two or three years, then some of the most meaningful things we’ve done would never have been started—like Kindle, Amazon Web Services, Amazon Prime.”

• In explaining Amazon’s strategy, Bezos notes that although many companies claim to be customer oriented, most are not. The reason, he explained is that “companies get skill-focused. When they think about extending their business into some new area, the first question they ask is ‘why should we do that—we don’t have skills in that area.’ That puts a finite lifetime on a company because the world changes, and what used to be cutting-edge skills have turned into something your customers may not need anymore. A much more stable strategy is to start with ‘What do my customers need?’ Then do an inventory of the gaps in your skills.”

• “We’ve tried to reduce the costs of doing experiments so that we can do more of them. If you can increase the number of experiments you try from a hundred to a thousand, you dramatically increase the number of innovations you produce.”

• Fourth, when pursuing exploratory innovation, Amazon typically uses an ambidextrous organizational form with exploratory activities done in small, often geographically separate units. This decentralized approach strives to push decisions down to those accountable for results such that leadership is key at multiple levels. Bezos has argued that the need for increased communication is a sign of dysfunction because it means that people aren’t working in an organic way. This structural separation permits a level of focus and intensity that is hard to achieve when exploration and exploitation are done within a cross-functional team, and yet keeping these teams as divisions of the core company gives them access to the resources that make up Amazon’s special sauce.

• “Slow, steady progress can erode any challenge over time. . . . I don’t have all the ideas. That isn’t my job. My job is to build a culture of innovation.”

• It is not the strongest of the species that survive, nor the most intelligent, but the one that is most responsive to change. CHARLES DARWIN

• In 1972, 1 percent of the U.S. GDP was accounted for by Sears, and more than half the households in the country had a Sears credit card. Within any three-month period, two out of every three Americans shopped at a Sears store. The company had almost 900 big stores and 2,600 smaller ones. A single share of original Sears stock was worth $20,000, and many long-term employees retired as millionaires. In 1972, the chairman of Sears at the time, Gordon Metcalf, commissioned the building of the 108-story Sears Tower in Chicago, at the time the world’s largest building. A decade later, Sears was in danger of failing, and the building was referred to by dispirited Sears employees as “Metcalf’s last erection.”

• The ability of a company to be ambidextrous—to compete in the old business of exploitation (with catalogue sales) as well as the new business of exploration (with freestanding stores)—is what permits an organization to survive in the face of change.

• “Lampert is focused solely on driving costs down while doing little to drive up sales.”

• It’s easy for academics and consultants, armed with the benefit of hindsight, to proclaim definitively why something happened.