Wednesday, April 18, 2018

The future of explore and exploit

In my last two posts I examined the origin of explore and exploit, and where it has taken us so far in the innovation space.  In this post I want to explore why everything we believe about explore and exploit from a strategic and business model perspective is increasingly wrong, and what innovators and strategists need to do now in order to compete effectively in the future.

In the first two posts I've made the case that the relative investments in explore and exploit and the way we think about them have been shaped by our historical experiences and this has also colored how we structure our strategies and business models today.  The Spanish exploration and ultimate exploitation of South America proved a good model - an inexpensive exploration mostly outsourced to third parties led to a massively profitable exploitation for centuries.  Over time the players changed but the model didn't.  Eccentric innovators and inventors took the place of nautical explorers and massive corporations seeking outsized market share or outright monopoly replaced governments, but for the most part the model remained the same:  occasional, half-hearted exploration, typically outsourced to someone else, and a strategic business model built on long term profit generation through exploitation.

This version of explore and exploit has been successful for centuries, and has become embedded in the way most businesses compete.  But it needs to change, and change quickly.

Why this model must change

As I think has been clear over the last two posts, there are massive structural changes in both the explore phase and the exploit phase. 

In the explore phase, we can see these changes afoot:
  • Today almost anyone, anywhere can explore
  • The costs of exploration have fallen dramatically
  • The advent of the internet has opened up information and access to millions of more potential explorers
  • Advances in education mean that far more people are more capable of exploring
In short, there are far more people doing far more exploration than ever before.  Intellectual property rights are stronger, but market shifts and consumer sentiment change fast enough that few companies can really lock in consumers.  No one has a monopoly on exploration, and when you consider the breadth of exploration underway, from research institutes to universities to private inventors to corporations and beyond, there's a lot of exploration underway.

When exploration was limited to a small handful of individuals or companies, a single discovery could mean large rewards over a long time frame.  Today, a single discovery leads to hundreds of  'fast followers' who seek to provide alternatives and substitutes, chipping away at the new discovery almost as quickly as it is discovered.  Also, as more new opportunities are discovered and publicized, any one new discovery seems inconsequential since so many are underway.  I liken this to the wonder we all had in the Apollo program, when it was years between launches, and the almost ho-hum response when the shuttle went up on a regular basis.

Exploration is easier now, but perhaps even more important, as customer demands and expectations accelerate.  Getting there first isn't necessarily as important as understanding the total opportunity and building broad offerings that lock in a lot of value quickly.

In the exploit phase, we can see these changes afoot:

 Meanwhile, exploitation is changing as well.  In the same way that skills have proliferated in the explore phase, design, development, manufacturing and distribution skills have exploded around the globe, to the extent that many companies no longer actually make the products that they sell.  Apple outsourced its manufacturing to Foxconn, making Apple essentially a design and marketing organization.  As large corporations chased cheap manufacturing costs, many countries and regions gained manufacturing and distribution chops.  That means that almost anyone, anywhere can rapidly introduce new products or services that compete with your idea.

It's no secret that product lifecycles are shrinking.  In a recent conference I heard a speaker lament that the product development cycle for his products was longer than the lifecycle of the product on the shelf!  This isn't limited to products, by the way.  Corporate lifecycles are shrinking rapidly as well.  Increasingly corporations have a half life and can quickly grow stale and fade away unless they are able to re-invent themselves.  This means that corporations need to rethink their exploitation capabilities, and speed up product development, product renewal and the introduction of new products.  They must be more confident about cannibalizing their own products before a competitor steals the show.

There are other contributing factors as well

Finally there's a geographic context to this as well.  For the last four or five centuries most of the really large organizations have been based either in Western Europe or the US.  As these regions grow older and the economies slow down, new emerging economies will be the places that take on more of the explore and exploit activity, and their market needs and demands may be different. How much different will the exploration and exploitation of Chinese, Indian and African firms be, both in terms of customer needs and markets as well as exploitation of discoveries?  As other markets rise and become more vital, will innovators in the US and Europe be able to command the market share they've become accustomed to when the bulk of the market shifts to other locales?

Why exploration is more important than exploitation

For centuries exploitation was more important than exploration.  One good discovery could mean a century or more of exploitation.  The full weight of governments and then corporations was thrown behind exploitation of a single country or technology.  Companies like GE rose on the back of a single discovery or patent.  Now, however, when anyone, anywhere can do good exploration and exploitation, the focus must change.  Good exploration becomes even more important, and increasingly I think corporations will place more of their investments in exploration - to find new opportunities, discover new needs, find new markets - and place less emphasis on exploitation, because they can outsource that function.

In this regard Apple may be the closest model to the successful competitor in the future - doing more with discovery and design and marketing, to find opportunities, address them quickly and build a powerful brand - and outsourcing so much of everything else.  Their model I think lacks true exploration without Jobs and risks relying too much on the past mystique and the power of the brand, but if they can recapture more exploration and marry it with the their brand and powerful exploitation partners, they will be the model that other firms seek to follow.

What this means for businesses

If this suggestion is true, it means that the strategic nature of the firm and its business model must change.  For centuries businesses have been successful with limited exploration, limited R&D, while placing tremendous investments in product development, fulfillment and marketing.  If the change I've described is truly underway, those investments and the way a company makes money and profit will need to change, to reflect a much larger and continuous investment in exploration, and perhaps less investment or even outsourcing exploitation.  This changes the business model, the revenue model, the distribution of skills in an organization and shifts power away from manufacturing, distribution and finance to design, innovation and research, organizations that are more qualitative, harder to measure and evaluate and far more variable.

These factors suggest that the very factors that have been so helpful in the growth of corporations - defined processes, careful financial analysis, risk avoidance, long term exploitation of IP and so on are no longer as valuable, while other skills and capabilities that have been considered less reliable become far more important.  This is true, by the way, for companies that rely on high technology and build physical products as much as it is true for companies that are purely services driven.  Creativity and insights and exploration are required to create new solutions in any type of company.  Demand for skills in design, insight, research, creativity, exploration and experimentation will only continue to grow, and these aren't skills we teach in high schools and universities. 
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posted by Jeffrey Phillips at 11:15 AM 0 comments

Monday, April 16, 2018

Exploring and Exploiting for Innovation (part 2)

If you are following along, I'm writing a series of posts about the opportunities and challenges with the way we think about and implement the concepts behind explore and exploit.  In my first post I wrote a short introduction to the topic.  In that post I looked at the history of exploring and exploiting, which I'll suggest comes from the conquest of the new world by the Spaniards, when Columbus and others explored, and the Spanish government exploited the opportunity for centuries.

Skipping ahead through history

If we fast forward from Columbus to say Edison or Alexander Graham Bell, we can see that the explorers were still relatively few, eccentric outsiders who were scientists or people bent on geographic or scientific discovery.  In the late 1800s and early 1900s there were even competitions between explorers.  There was the "race" to the poles.  Teams from several countries raced through blinding snow and ice to get to the North and South pole first.  As we've seen before these explorers were exceptional people, iconoclasts, outsiders, driven to win.  What becomes a bit different in this time frame is that multiple governments were exploring the same locations simultaneously.  They were in fact "racing" each other to get there first.  Exploration became more intense and was seen as a competition for limited resources.

Similarly, Edison was racing other inventors, as was Alexander Graham Bell, who filed for his patent only a day before his competitor.  We can see from these examples that the number of explorers and the simultaneous exploration in the same fields was increasing as was the nature of competition.  While the amount of exploration was increasing, however, the nature of the explorers remained much the same:  eccentrics, outsiders, often poorly resourced and intrinsically motivated.

Exploitation was changing too

During this time the concept of exploitation was changing as well.  Bell and Edison were famous inventors but were also very focused in patenting and protecting their work.  They and others went on to found large corporations that attempted to build monopolies or very strong competitive positions to allow them to exploit their discoveries and extract value.  The business of exploitation was shifting from governments to businesses, from a king's or pope's edict to the ability to scale a business, protect intellectual property and extract a lot of value from the idea.

While who was managing the exploitation was changing, the nature and time frame of exploitation stayed relatively the same.  GE, Ford and other large companies of the era expected to reap benefits from a relatively small IP portfolio for decades.  They had learned this lesson from history and from the firms in the "gilded age" - Standard Oil and the railroads.

But change in  the explore phase  was increasing.

By the 1950s and 1960s, a dramatic shift was underway.  The world had been through the ravages of the Second World War and rebuilding was underway, while the Cold war funded a significant amount of new research.  The GI bill in the United States sent millions of ex-soldiers to college, and because of the Soviet threat many went into technical, science and engineering fields which created a renaissance in many fields.  In a very short period of time there was a rapid increase in exploration, research and development, first in the US, then in Europe and Japan.  The rate, pace and depth of exploration increased, but still mostly directed by government or corporations.

The Internet changes everything

But perhaps the most interesting change that will subvert the old models was the advent and widespread distribution of the Internet.  On this platform, information, content and education are widely distributed, making exploration far more simple, and allowing people to create new businesses and explore new business models far more quickly.  More people in more locations with more access to information means far more exploration, in far less time.

Additionally, the Internet also creates markets and channels for goods, services and ideas, which means new products, alternatives and substitutes come to market far more quickly and can be evaluated by a larger customer group more rapidly than ever before.  This factor has significant impact on the historical thinking about the time frame and nature of exploitation.

But businesses still operate as if these changes haven't occurred

But most corporations cling to the past understanding of explore and exploit, where small teams of unusual suspects explore ideas and markets surreptitiously, in random, episodic activities, while exploitation teams anticipate long product cycle times and little competition.  Most businesses still think, plan, strategize and operate as if little to nothing has changed in the competitive environment, as if any business can afford to dabble occasionally in the explore phase and extract value over a long period of time in the exploit phase.  This simply isn't the case any more.

Business must become far better and invest more time and focus on exploration, in many fields and opportunities simultaneously.  They must also accelerate their product or service time to value, scaling a product or service quickly, gaining revenue and profits quickly and reworking or replacing a product quickly.  As anyone familiar with most of the product or service development processes in large organizations, that's nearly impossible.  A huge shift is underway and many companies have ignored the warning signals.  Research from a number of organizations shows that the lifecycle of companies on the S&P 500 list has dropped from close to 40 years in the 1950s to closer to 12 years today.  It's not just product cycles that are shrinking - it's corporate lifecycles that are shrinking as well.

In the next post we'll explore what the future holds for explore and exploit.  If you are good at reading between the lines, I think you'll understand where I think this is going.
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posted by Jeffrey Phillips at 6:03 AM 0 comments

Wednesday, April 11, 2018

Exploring and Exploiting for Innovation (part 1)

In so many ways it often feels like innovation is both wholly new, and ancient at the same time.  Tools that we use to innovate aren't new, in fact many are very old, but put to appropriate use they help us create miraculous new things.  Too often we distrust old tools or methods, thinking that newer tools or methods are more current, more viable, but fail to realize that some things are simply grounded in truth, no matter hold old they are.

Take, for example, the idea of exploring and exploiting.  These are the "yin and yang" of corporate America today.  But they aren't new.  Companies and even countries have been exploring and exploiting for centuries.  We extol the idea of the ambidextrous corporation as if this is new insight, when in reality being able to do both exploration and exploitation well has been a key success factor for decades if not centuries.  I think increasingly we are going to hear more and more about exploring and exploiting as a corporate philosophy.  This renewed focus at a strategic level is very valuable, but I'm concerned we're going to get it wrong.  There is a shift underway that will require corporations to rethink their explore/exploit intention and balance.  Over the next few blog posts I'll be describing why I think this is so.

But first a history lesson

As the guys in Monty Python would say, now for something completely different.  Let's look at the history of exploring and exploiting before we describe why it might change.  Human kind has understood the dichotomy of exploring and exploiting for centuries.  Let's take, for example, the exploration of the New World.  Major European powers were determined to find first new trade routes and then make claims on newly discovered territory in the western oceans.  These kings and queens weren't doing exploration for the public good, they hoped to find and conquer new lands to extend their holdings.  In other words, exploring led to the direct consequence of exploitation.

We can pause for a second to consider the aftermath and consequences of colonization and European exploitation of both Africa and South America, but that's for another post.  Many European countries saw opportunities to exploit the people, the minerals, the wealth of the lands they "discovered" and eventually conquered.

Perhaps none better than Spain, which propped up a relatively secondary power in Europe with lots of gold, silver, minerals and other valuables from Mexico and South America.  The cost of exploration was very low - a few ships, manned by explorers who often weren't even Spanish, a Papal Edict, a brief skirmish to defeat the locals and then 300 years of exploitation.

What lessons did we learn then?

Based on many of these early explore and exploit events in the past, we learned that exploration was something we could outsource - something that mercenaries or outsiders could do to push off the risk.  We learned that with a tiny investment in exploration we might hit the mother lode of wealth to exploit.  We learned that exploitation, when combined with national agreements, major edicts, some military power and a globe of unexplored lands would allow exploitation to go on uninterrupted for centuries.  We've learned these lessons about exploration and exploitation, and taken them to heart.  In many cases we've built operating models and business plans that incorporate much of this thinking.

Fast forward to today.  When companies talk about explore and exploit, they have some of these same characteristics in mind.  A short, low cost, low risk exploration phase that can probably be outsourced that may discover outsized opportunities that the company can exploit uninterrupted for years.  This thinking is rife with misunderstandings about the nature of both current exploration and exploitation.  It is based on old thinking and old competitive models  While it is absolutely correct to suggest that companies need to be good at both exploration and exploitation, the old models or philosophies don't reflect new competitive realities.

What are the new competitive realities and how should we rethink innovation strategies to align more closely to the new way of working?  That will be the subject of my next post, and an eventual white paper on this subject.  More to come shortly....
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posted by Jeffrey Phillips at 6:15 AM 0 comments