One of the most controversial decisions that CEOs and their management teams need to take, is the decision of exploring new opportunities or focusing on what they do best and do it even better. Both decisions are risky!
And now with the disruption in global markets due to COVID-19 pandemic; the need of those decisions is becoming forceful. It is the question of holding on, doing what we know, hoping things will be better or exploring new ways of doing business, new products, services, employees, and the way we run it.
Why is it so hard for the top management to accept ideas and to follow new ways of doing business, why do they prefer staying in the comfort zone? Continue reading the article.
In a paper published by James G. March, titled “Exploration and Exploitation in Organizational Learning”, He considers the relation between the exploration of new possibilities and the exploitation of old certainties in organizational learning. It examines some complications in allocating resources between the two, particularly those introduced by the distribution of costs and benefits across time and space, and the effects of ecological interaction.
James Gardner March (January 15, 1928 – September 27, 2018) was an American sociologist. A professor at Stanford University in the Stanford raduate School of Business and Stanford Graduate School of Education, he is best known for his research on organizations. He originated organizational decision-making model known as the Garbage Can Model.
In his paper, he mentioned the example of a very well-known Swedish company called “Facet” where it has a remarkably interesting story.
This company used to manufacture the best mechanical calculators in the world
and perceived as the best in the market back then, However, a new Japanese company started arising in the market, they manufactured electronic calculators. What Facet did was absolutely nothing, they just kept on doing what they do best, “the mechanical calculators”, not minding much about the evolution in electronics brewing in the globe. They only did some enhancements. However, in 6 months period, Facet’s revenue dropped drastically, and the company entirely collapses. Sarcastically, Facet’s engineers started buying the small, accurate and very affordable electronic calculators to determine the accuracy of the mechanical ones.
Another famous example is Nokia, in 1998 it was the market leader in the telecommunications business in the world.
The Finnish company was a tycoon in the market that they used to contribute to 30% of Finland’s total taxes.
But we all know how that story goes; they started to drop by the year 2007 with the rise of the iPhone and by the year 2012, Samsung snatched the title for being the number one mobile phone manufacturer in the world.
By the year 2014, Nokia’s mobile phone business was sold to Microsoft. Nokia fell into the same trap.
There is a happy ending to Nokia’s example here as they bounced back and focused on selling the high-end networking gear and selling several software to various telecom and internet companies which actually made an exceptional profit.
Kodak were scared to innovate in the time the digital photography evolution, which let them to file for bankruptcy in 2012.
So apparently “exploiting” is not a very good option, let us take a look at the other side of the coin; “Exploration.”
but the board of directors instructed the engineers to share them with Apple technicians. So, their inventions were not taken advantage of for Xerox’s benefit, these concepts were then adopted by Apple and Microsoft who turned into the two dominating businesses in computing, whereas Xerox were left behind in comparison.
Exploration is about coming up with something new, it is about search, research, discovery, invention, and innovations. We all know that the risks are high with exploration because we do not know the answers just yet. While Exploitation is the exactly the opposite, it is taking the knowledge that we have, and doing what we do best to make things better. it is making good products better, faster, cheaper, easier…etc. Exploitation is not risky… on the short term. However, it is very risky in the long term.
Little children tend to explore all day, however as we get older, we explore less because we have more knowledge to exploit on, taking all our experiences into doing what we are really good at. Same thing goes with companies, they become less innovative as they become more competent.
CEO’s often ask these questions: How can I both run and re-invent my company, Or How can I transform before I am forced to?
Looking at the charts we will find that only 2% of the companies are able to balance both exploration and exploitation. But when they do, the payoffs are wonderful. There are many great examples of such companies, like Nestle; creating Nespresso, LEGO; doing animated movies, Toyota creating Hybrids, Netflix could have been satisfied with the earlier generations of distribution, but they kept on ahead of time in creating new opportunities, and many more examples.
The balance is exceedingly difficult; because there are so many traps that keep us where we are: standing still. I will shed the light on two of these traps.
Is The perpetual search trap, the excessive exploration where we discover something, but we do not have the patience or persistence to make it actually
work, then go and find something new and the same goes on and on and we get stuck into that vicious circle. Oncosearch is a perfect example to that.
Which Facet -mentioned in the first example- fell into; they kept making what they loved doing so much that they would not change. That happens when we know something so well, it is difficult for us to change. Bill gates once said: “Success is a lousy teacher; it seduces smart people into thinking they can’t lose”.
The perpetual search trap, the excessive exploration where we discover something, but we do not have the patience or persistence to make it actually work, then go and find something new and the same goes on and on and we get stuck into that vicious circle. Oncosearch is a perfect example to that.
In the spotlight of both traps and mentioned examples above it is only fair to say that there are a few lessons we need to learn to avoid these traps:
Both options are risky, but the highest risk is in the status Quo … I am going to leave you with a question for you to answer; “When was the last time that you discovered something new?”
Pinnacle business transformation services help you get over the dilemma, with our experts in business transformation, business modeling, strategies, marketing, funding and more we will be able to provide you with risk avert solution that keep you in the game.
References:
-https://www.jstor.org/stable/2634940?seq=1
-https://www.youtube.com/watch?v=XVXmYD0UPRQ&t=0s
–https://www.e-careers.com/connected/10-businesses-that-failed-to-adapt
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