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:
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.
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
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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