Tuesday, July 6, 2010

100-Years of Exploration and Exploitation

Your firm has been in business close to 100-years. You have probably selected one of two paths during your 100-year journey - - you may have taken different routes at different stages during the history and development of your organization. The first path was down the route of exploration. It was a route marked by the search for new knowledge - - the organization was tuned toward moving across the knowledge stages of the development funnel from mystery to heuristic and heuristic to algorithm.

The second route is the pathway dominated by exploitation. Your primary goal is the maximization of payoff from existing knowledge - - basically the honing and refining of an existing heuristic or algorithm. Both exploration and exploitation are critical to the success of an organization and both have the potential to produce enormous value. In many respects the issues are balance, timing, and structure of the industry in which you compete. The major problem is that most organizations choose to focus on one activity, either exploration or exploitation, to the exclusion of the other and to their own detriment.

If all you care about is exploration - - you will not make it to the 100-year marker. The returns needed to fund further exploration will not be generated. You go bust after your one innovative thought. Look at the track record of start-ups - - exploration alone is an unstable business model. But on the other hand, after your one moment of exploration you engage in the steady exploitation model, while never returning to exploration - - you will not make the 100-year marker either. You might outlast the start-ups - - but existing solely on the exploitation model will lead to exhaustion. You can’t exploit the same widget, idea or relationship forever.

The exploration versus exploitation balance is also industry dependent. Apple probably has the best balance of any firm. Is McDonald’s focus on exploration or exploitation - - more exploitation since they run their fast-food algorithm over and over. The typical law firm - - exploitation, running the legal-services heuristic over and over.

Most organizations don’t blend the two forces well very - - too little exploration versus exploitation where the administration of business comes to dominate the invention of business. Too systematically honing and refining versus dynamically moving. Too much analysis and reasoning versus experimentation. Too short-term versus long-term. Too much focus on risk reduction and predictability versus embracing uncertainty and the potential for higher rewards.

What you end up with is exhaustion and obsolescence in a world in which management was so busy running its algorithm that it failed to grasp what customers want and never went on the offensive - - deploying savings and redirected personnel toward consideration of entirely new mysteries - - restarting the organization down the exploration path. They forgot T.S. Eliot - - “The end of all exploring will be to arrive where we started and to know the place for the first time.” We get too comfortable with the administration of business - - too comfortable with history and analytical thinking. The future becomes the big unknown - - where the average manager has been trained and rewarded to look to the past for a proof before making the big decision. Each Sunday these average manager worships at the “Church of Reliability” - - where the “Book of Management” stresses the need to only exploit existing knowledge with a goal of not driving out innovation but rather to protect the organization against the randomness of intuitive thinking.

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