Leadership hack 013 – balancing exploitation with exploration

Posted by Max on October 21, 2016 in Blog, effectiveness | 1 Comment

Success only lasts so long.  If you, or your company, are successful others will imitate, and competition will erode your advantage.  Therefore, to remain successful, you need to capitalise on your current success, and use then redeploy the resources from this success and invest them where they while hopefully generate future growth.

Exploitation is defined as ‘the action of making use of and benefiting from resources’, while exploration is ‘the action of exploring an unfamiliar area’ (Oxford Pocket English Dictionary).   James March highlights the role of knowledge (what he calls ‘know-how’) in his conceptual model or organisational learning (see below).  James suggests that innovation is the result of both gaining know-how (exploration) and using know-how (exploitation), but also that feedback is essential to identify emerging new possibilities and then having a control mechanism to grab these new opportunities.  Therefore, in business, you could define exploration as the search for new knowledge, new products and new business models, which would mean that exploration is making the most out of the ones you currently have.

BCG, the renown strategy consultancy, created the growth-share matrix (see below and here).  Where they offered similar advice, you must invest in your business units or products that are ‘question marks’ in the hope that you can grow market share to a point at which they become your ‘stars’.  BCG initially suggested that if your market share is sufficiently large, this allows you to maintain a cost advantage.  This cost advantage turns starts into cash cows and allows you to realise increase profit, which you can then invest in more ‘question marks’.   BCG’s recent revision of the Growth-Share Matrix (see  here), questions the role of market share and suggest that more companies are generative excess returns from their question marks, where other advantages such as brand and reputation, rather than markets share, drive value.

Determining how much to invest in your question marks and what question marks to invest in, is one of the most challenging problems facing many companies, but this is a greater problem for some industries.  Innovation is a more significant driver of value when competition is more fierce, and the market is more uncertain.  For example, innovation is more important in mobile telephone market, than in supplying water.  Therefore, it in highly competitive and uncertain market where you see the most resources devoted to research and development.

So how can you improve your ability to balance exploitation with exploration?  If we use the Growth-Share matrix as a framework, innovation advantage lies in maximising the returns from your stars, cash cows and question marks and divesting your dogs.  To do this, you must improve your ability to shift between the four quadrants.  Shifting efficiently and maximising revenue will require detailed analysis of your business units and products, as well as your market.  Using data analytics, and continuous reviews will allow you to make better asset allocations.