Monday, November 09, 2015

Exploitation and exploration go hand in hand

Exploiting and exploring are two terms my good friend Paul Hobcraft uses to delineate the activities most corporations SHOULD be conducting every day.  Exploiting existing models, processes, markets and frameworks to obtain all of the available revenue and profit possible.  This concept of exploiting existing models and existing reality is something that today's corporation is relatively good at doing, if not completely optimized to do.

Exploring is a completely different matter, because exploring requires looking outside or beyond existing markets, customers, needs and frameworks.  Exploring means ignoring or rejecting existing competencies and realities to discover some new opportunity, challenge or need, or introduce some completely new product, service or model.  This side of the equation is typically ignored, because it conflicts with optimal, efficient exploitation, when in fact it should simply precede it.

A brief history lesson

The idea of a marriage between exploration and exploitation is not new, in fact it is constantly repeated throughout history.  In the distant past people clamored to be explorers, to go where no one else had gone, to discover what no one else had discovered.  Of course most of those explorers where fascinated by discovering other lands, full of minerals (gold), people (slaves) or other quickly harvested and valuable goods.  In other words, most of the explorers weren't exploring merely for the sake of finding new lands.  They were intent on exploiting their discoveries.  They simply lived in a time when the connection between exploring and exploiting was more explicit, and in a time when the tools and capabilities to fully mine an existing model or reality weren't fully developed, or were limited by governments or religious institutions to only a select few.

Today, we live in an age where most of the "exploration" seems expensive and risky.  When we place exploration in the context of new lands or new worlds, we frequently talk about investigating harsh climates like Antarctica or off-world sites like the Moon or Mars.  A lot of the easily explored realms, at least where mineral rights or land rights are concerned, have been completed.  But what we haven't lost, but so often fail to use, is the exploration of the mind.  We can explore new opportunities, customer needs, technologies, markets and so much more without leaving home, and in those explorations discover completely new avenues to wealth and riches.  But the traditional exploration tools don't seem to translate, and increasingly we've become accustomed to improving exploitation capabilities instead of exploration capabilities.  That's because there's almost always a way to extract more cost from an existing process or model, and the risk is lower than attempting to discover a new solution.  We are experts at mining existing models, realities and frameworks for incremental gain, and that knowledge and experience has caused us to lose the desire and willingness to explore in even a marginal, half-hearted way.

NASA as an example

We used to be explorers.  Just over 50 years ago we entered the space race, fueled by the fear that the Soviets would beat us to the Moon.  We placed a man on the Moon and returned him safely, just 6 years after Kennedy made his demands.  We were moving into an exploration phase, discovering what was out there.  And suddenly it all came to a halt.  From a space perspective, the challenges to live on another planet, or even visit another planet, seemed too daunting, so we stopped exploring, and to some extent have even lost the capability to explore, relying on others to do it for us.  Space got too big, too expensive to explore, and instead we now simply seem to exploit the knowledge that we have, rather than dreaming big.

In the same way, thanks to cost cutting, outsourcing and financial engineering, we've managed to exploit existing business models, markets and customers for years, leaving the exploration to the companies on the fringe - the new, the discredited and the failing.  Increasingly, large firms like those in the pharmaceutical space will be marketing and commercialization engines, rather than exploration and discovery engines.  They cannot sustain the pipeline of blockbusters necessary to continue profits, so they'll acquire explorative firms and startup companies willing to explore.    This begs the question of whether size and inertia leads to less and less exploration, and more exploitation of existing models.  I'll leave that to other analysts, but I can say that larger firms struggle to innovate precisely because of their relationship, if not protection of, existing business models and markets.

These ideas of exploration and exploitation don't have to be mutually exclusive, and in fact for eons they were two sides of the same coin.  The Romans, the Huns, the Spaniards and many others explored and conquered new lands with the express intent of exploitation.  In those days the value was found in easily transferable wealth - gold, people, land - primarily tangible assets.  Today, exploration is about discovering opportunities, needs and ideas - primarily intangible assets - which conflicts with a vestigial history that values tangible assets over intangible assets that exists even today, when firms like Airbnb and Uber demonstrate that valuation is not necessarily based on physical, tangible assets but on ideas, networks and value propositions.

At a minimum, large corporations need to balance the investment, resources and funding for exploiting existing models and processes with the resources and focus on exploring new opportunities.  This will mean refocusing investments, building new skills, changing corporate culture and reward/compensation models, none of which will be easy to do.  But the alternative is a slow defensive death as other more explorative firms discover new opportunities that larger firms cannot match.  If efficiency is the best exploitation of an existing market or business model, then innovation is the best exploration of new models and realities, and both skills must be present in a vital competitive organization that hopes to grow.
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posted by Jeffrey Phillips at 8:23 AM


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