How to balance being innovative and being efficient
What happens to companies as they become more competent? When it comes to innovation inside large companies, the balance of power tips heavily toward improving their known and proven business model. They under-invest in the exploration of new value propositions and business models. More importantly, there’s a considerable lack of power when it comes to growth or transformative innovation.
Business leaders realize that the pace of competition has increased. To keep pace with this changing environment, leaders aspire to create nimble, flexible enterprises. Yet many recognize that their day-to-day reality is silos, sluggish processes and stalled innovation.
For companies to win in the next decade they need to focus on digital and addressing the cloud opportunities. The future is now - we need to connect it better. The companies that renew themselves and drive their own future are able to balance being innovative and being efficient. Driving what’s new and being better at what they do today!
The Legend of Apple and Xerox PARC
We discover something, but we don’t have the patience or the persistence to make it work. So instead of making it more efficient, we create something new. A famous example is, of course, Xerox 1. Xerox founded its Palo Alto Research Center (PARC) in 1970. In 1979, Steve Jobs asked Xerox to let him tour PARC, and in return he would allow Xerox to buy a hundred thousand shares of Apple for a million dollars.
Among other notable achievements, the PARC team had developed a prototype of their experimental Alto workstation. The Alto embodied a number of the most advanced ideas in computing, including graphical user interfaces, the mouse, bitmap displays, windows, icons, and local area networks. Legend has it that when Jobs was shown the working Alto prototype with all its innovative capabilities, he was very excited… and started jumping around the room, shouting: “Why aren’t you doing anything with this? This is the greatest thing. This is revolutionary!"
To achieve marketplace success, disruptive innovations need to be nurtured in the proper environment.
Jobs raced back to Apple and told his engineers to change the course of the personal computers under development and copy the Alto’s advanced capabilities he had just been shown at PARC. The result was the Lisa introduced by Apple in 1980.
Xerox was eventually able to embrace laser printers and make them a success in the marketplace because they nicely fit into a business they understood well - copiers, printing and document management. But, in the late 1970s Xerox was no longer in the computer business, having exited that market in 1975. This made it very difficult for the company to appreciate the business potential of the Alto and related computer technologies being developed at PARC.
Balancing exploration and exploitation
However adding DevOps and Cloud on all our problems is not a silver bullet. When you get on an airplane, hopefully soon, you want to hear that the pilot has gone through every conceivable checklist. You don’t want the pilot say “Guess what, we’re going to try an Agile take-off Today, I haven’t checked the fuel, don’t know if all the mechanical issues have been resolved, I’m not going to listen to some bureaucratic air-traffic controller, we’re going straight to the front of the line, we’re going to take off and it’s going to be thrilling, and if it’s not going to work this time we will try next time" an analogy by Darrell Rigby - The Agile Organization: Balancing Efficiency and Innovation 2.
Exploration is about coming up with what’s new. It’s about discovery, building new products and continuously searching for new innovations. We all know that exploration is risky. We don’t know the answers, we don’t know if we’re going to find them, and we know that the risks are high.
Exploitation is the opposite. Exploitation is taking the knowledge we have and making good, better. It’s about making good products faster and cheaper. We want to eliminate waste, develop stable and predictable processes. Minimize the risk of variation from critical operating standards. Exploitation is not risky - in the short term. But if we only exploit, it’s very risky in the long term.
Exploitation and Exploration are complementary, interdependent, mutually beneficial capabilities. If you think Innovation is risky, try stagnation. So if we take a long-term perspective, we explore. If we take a short-term perspective, we exploit it. Bureaucracies tend to overextend their strengths, creating dangerously unbalanced systems. Companies become, by nature, less innovative as they become more competent.
“The real solution to quality growth is figuring out the balance between two activities: exploration and exploitation. Both are necessary, but it can be too much of a good thing” - Knut Haanaes 3.
Is it possible to run a company and reinvent it at the same time? For business strategist Knut Haanaes, the ability to innovate after becoming successful is the mark of a great organization. He shares insights on how to strike a balance between perfecting what we already know and exploring totally new ideas using the following four lessons:
- Get ahead of the crisis
- Think in multiple time scales
- Invite challenge
- Be skeptical of success
I want to focus on the third point Invite challenge. I don’t think it’s possible for any of us to be able to balance exploration and exploitation by ourselves. I think it’s a team sport. I think the mark of a great company is being open to be challenged and the mark of a good corporate Board is to constructively challenge.
It’s not that growth initiatives don’t exist. There is a lot going on. Most companies run incubators and accelerators, but these initiatives are often “hidden away” and they are rarely positioned at the most strategic level. They often fail to get much attention from senior leadership. Leadership is more focused on the short-term, tangible results that come from sustainable and efficient innovation like cost-cutting programs or the replacement of old products and services with new ones.
It’s more important than ever for companies to focus on inventing the future, while managing the present. The ambition - to build a business that will thrive in a world of unpredictable and accelerating change.