Explore/Exploit: 10 Years on
Ten years ago, I co-authored an article on how firms need to balance exploiting the core business with exploring new markets. We aspired then that the article would have an impact. I am proud to say it was recently named the most cited article of the past 10 years in the Academy of Management Annals.
Now, as we face a challenging economic climate, I am anxious to see whether these ideas have an impact on business leaders. It would be easy to postpone investing in the future to secure a more comfortable present. However, history teaches us that disruptions strike incumbents when they are at their weakest. This means that it has never been more vital to master the dynamics of explore/exploit, which we at Change Logic also call ambidexterity, as it is today. Here are six principles for how you can do that.
1. Work with emotion as much as process
There is a belief that using the right innovation tools and methods can make a company ‘invincible’. After a lifetime of research, I can tell you the opposite is true. No amount of lean startup and business model canvas discipline can substitute for a lack of emotion. An ambition to explore needs to light a fire in the imagination of the team.
One great example is the technology firm Nvidia. It moved from making silicon chips for gaming to building a software-led ecosystem that powers today’s Artificial Intelligence revolution. It has transformed itself from a niche player in the PC market to a prime mover in autonomous vehicles, blockchain, and deep computing. Its CEO challenged his team to ‘find problems that matter to the world that nobody else can solve.’ He mobilized their passion, not their spreadsheets.
2. Separate explore and exploit organizationally
You need to organizationally separate explore and exploit in order to keep the latter from killing the former. One successful example of such separation was done at UNIQA, a subsidiary of Austria’s largest insurance company. In 2018, UNIQA created Cherrisk, a digital startup that is disrupting the insurance business by building an online community for risk sharing. Although UNIQA and Cherrisk share the same location, the startup is otherwise kept entirely separate from the mothership. This allows Cherrisk to challenge the fundamental economics of the industry without being destroyed by corporate bureaucracy.
3. Disrupt your thinking, outside-in
Our recent survey of more than 150 companies reveals that many firms collect new ideas from customers and employees. While this approach is instrumental in identifying what needs immediate improvement, it can also bias firms towards incremental innovation. The most successful corporate disruptors not only look to their employees and customers for input, they go beyond these sources of insight by employing techniques like Design Thinking and Open Innovation and by engaging startups to generate ideas that challenge the status quo.
4. Incubate rapidly and with discipline
Although the process of ideation gets all the attention, alone, it creates no value. Even the best ideas need to be validated through a process of incubation that tests the idea’s viability, or customers’ willingness to pay for it.
Decisions about which ideas should be scaled up and which should be killed, require a disciplined approach. At Corning Glass, business ideas are screened using three criteria: Does the new idea align to a keystone of the business? Can it can generate $500M annually? Is it difficult to mimic and manufacture? At Amazon, new business ideas follow an incubation process called PR FAQ that enables rapid idea review and assessment. Approved ideas are incubated by a ‘two pizza team,’ with their funding managed independently from the core business.
5. Show a capacity to act at the senior level
The job of setting an ambitious goal falls on the shoulders of the senior team. Senior leaders must initiate and support high-stakes and high-tension conversations about the performance of an emerging business. They should also master the art of allocating resources to the most promising ideas and kill those that are not supported by data from market experiments.
Every case of failure in building an ambidextrous organization has at its root a senior team that did not speak openly about the future, which dramatically weakens the organization’s capability to act.
6. Scale with a plan
Scaling is the most important part of the innovation process. This is when you convert a validated idea into a meaningful revenue stream. A useful case study of successful scaling is that of LexisNexis Risk Solutions (LN Risk), a subsidiary of LexisNexis. LN Risk started as a small venture that was kept separate from the rest of the LexisNexis business. The independent unit focused on aggregating public records information for use by law enforcement and insurance companies. Having realized early on the value of big data analysis, LN Risk has successfully grown its business through internal developments and bold acquisitions. Today, it is a multi-billion-dollar business (equal in size to its parent company) that is vital to the US insurance and health care industries.
Looking into the next 10 years, I can see that the explore/exploit paradigm will become just as foundational to how businesses manage as Porter’s 5 Forces or the Boston Consulting Matrix. However, this will only happen if we understand that explore/exploit is rooted as much in passion and emotion as it is in strategy.