Balancing Exploration and Exploitation for Growth!

Growth is the goal of any business enterprise. The more the merrier is the general tendency in regards with growth. Higher growth than the competition is certainly desirable. In this article, I would like to discuss the concept of growth and its underpinnings.

Growth refers to ‘increase’ in financial metrics such as revenue, profits, market share, market value etc. during a period of time as compared to a similar period in the past. It’s generally referred to in year on year or quarter on quarter terms.  A minimum growth is necessary to tackle inflation and more than that is necessary to add more economic value to the enterprise.

Growth comes from two broad routes- exploitation of the existing resources, know how and market positions (through scale expansion, leveraging adjacent opportunities, M&A in related complementary areas etc.) and exploration of new ideas and knowledge (continually working on devising completely new products or new markets or both through R&D, building new capabilities, transformation of the core offering etc.). (Please note that the term exploitation is not used in a negative sense but as an indicator of efficiency and effectiveness).

Each route works in specific situations. E.g. once a winning product or service is created, initial set of customers acquired and value proposition established, the exploitation route works very well. One also needs to start exploration to be prepared for a situation when the exploitation route starts giving diminishing returns.

Ideally, both routes should be balanced. I remember my dialogue with a very senior executive at Hewlett Packard (HP). HP has been a leader in the print and imaging business for decades, despite a very high level of competition. And they are able to retain the leadership position because they continually explore new product ideas (they have been pioneers in launching ink printers, laser printers, the all-in-one printers etc.) and exploit the idea before others catch up. By the time competition intensifies in a particular product domain, they move on to a new product idea. They aim at continuously remaining ahead on the growth curve. This has certainly reaped rich dividends for HP for decades now.

My idea of sharing this anecdote is to simply demonstrate a real life example of how exploration and exploitation are both necessary and they need to be balanced for a sustained business growth. Without exploitation, the ideas may remain only partially monetized and without exploration the danger is of becoming competitively irrelevant. Quite often, once the initial idea gets established, exploitation gets priority and exploration as a process is partially developed at best.

In a relentlessly changing situation of volatility, uncertainty, complexity and ambiguity (VUCA) as witnessed in the contemporary times, exploration deserves a special focus. With consumer tastes and competitive landscape changing fast, continuous exploration of new exploitable ideas is a must.

The problem with these two routes is that they require very different approaches to management; exploitation requires scale, efficiency, control whereas exploitation requires adhocism, risk taking and tentativity.

So, how does an organization create a balance between the two?

Organizations have to focus on both exploration and exploitation for growth. They need to create readiness on five interrelated aspects to be able create the balance-

1. New leadership orientation,

Leaders’ mind set need to accommodate both exploitation and exploration, more often than not it leans towards the former. It is short term, helps manage immediate expectations but can be limiting in the long term.

2. New strategic bases

Identifying the emerging strategic bases can guide exploration and the outcome of exploration can help create new strategic bases. They are interrelated and the efforts must be evaluated from the competitive perspective. New strategic bases can help make competition redundant (atleast for sometime till it catches up) and help garner higher premium.

3. New structures of implementation

Balancing exploration and exploitation requires new structures (processes and practices) aimed at achieving two goals. One, implement or operationalize the idea of exploration and two, integrate the outcome of the exploration into the mainstream so that it can be exploited commercially. Without the former, exploration remains merely an idea and without the later, its outcomes remain at the periphery of the organization.

4. Renewed culture

Being always ahead on the curve also requires a belief and a mindset among the organizational members. Without an appropriate culture, structures may simply not work.

5. Use of new (digital) technology

Information and communications technology, especially the range of new and contemporary digital technologies, can help balance exploitation (by making processes more efficient) and exploration (by supporting new structures and providing meaningful insights through business intelligence and data analytics).

Internally discuss, debate and identify your organization’s current reality on these five aspects for balancing exploitation and exploration as the routes to business growth.

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