Finding the right balance between exploitation (incremental improvements) and exploration (innovation) is crucial for sustainable growth. Companies often fail due to an imbalance, like Faucet and OncoServe.
Exploration is riskier in the short-term but essential for long-term success, while exploitation is less risky in the short-term but can be risky long-term if companies only focus on it.
Lessons for balancing exploration and exploitation include: getting ahead of crises, considering both short-term and long-term perspectives, inviting diverse talent, and maintaining humility about past successes.
Meeting Notes:
The Importance of Balancing Exploration and Exploitation
Knut Haanaes states that there are two main reasons companies fail: 1. They only continue doing more of the same (exploitation) 2. They only focus on doing what's new (exploration)
The real solution for sustainable growth is finding the right balance between operation/exploitation and exploration.
Knut Haanaes provides examples of companies that failed due to an imbalance: - Faucet: Continued doing the same thing (making mechanical calculators) when electronic calculators emerged, leading to their downfall within 6 months. - OncoServe: A European biotech company that focused too much on exploration and innovation for perfecting their cancer diagnostic and treatment products, but became obsolete before making them commercially viable.
Defining Exploration vs. Exploitation
Exploration is about: - Coming up with what's new - Search and discovery - Creating new products and driving innovation - Changing frontiers
Exploitation is about: - Making existing products and processes better - Incremental improvements
Exploration is riskier in the short-term but essential for long-term success. Exploitation is less risky in the short-term but can be very risky in the long-term if companies only exploit and don't innovate.
The Difficulty of Balancing Exploration and Exploitation
Only about 2% of companies are able to effectively balance exploration and exploitation in parallel.
Traps that keep companies from achieving this balance: - Proactful trap: Abandoning innovative ideas before fully realizing them, like Xerox did. - Success trap: Becoming too comfortable with past successes, like Polaroid, blinding them to new opportunities.
Lessons for Balancing Exploration and Exploitation
Get ahead of the crisis: Continuously innovate to ensure future success, like Netflix does.
Sweep multiple timescales: Consider both short-term and long-term perspectives on the value of innovation. Innovation accounts for 70% of value over 10 years vs 30% in 1 year.
Invite diverse talent: Collaborate with diverse teams to balance exploration and exploitation perspectives. It takes a team effort.
Be skeptical of success: Maintain humility like Roman generals having a companion remind them "You're only human" during triumphs.