Decision Making: 3 Factors That Influence Business Innovation

A few weeks ago I attended TEDx Sydney watching a talk from Tom Griffiths. In his contribution, he is addressing the concept of the explore/ exploit tradeoff. In short, the tradeoff appears whenever you make a decision between exploring new information and exploiting information already gathered. For instance, when planning your next holiday you have to make a decision. Either choose a destination you have visited before. You already know to an extent what awaits you and what you will get out of it. Or, you might try and travel to a new destination. In doing so, you are faced with uncertainty. It’s not clear yet how much you are going to enjoy this new place. At the same time, the still unknown gain of a new experience might outweigh the certainty of revisiting a familiar location. This concept of having to choose between the known and the unknown applies to a wide range of aspects in your life. And so it does to running a business.

Depending on various factors entities spend more or fewer resources on exploring new information. To develop new products and services in the hope of reaching new customers and generating incremental growth. Or exploit their current, proven, and successful offers. Some companies such as Kodak and Nokia have failed because their focus was heavy on exploiting what made them so successful in the first place. Most car manufacturers are still exploiting combustion engines while there is a demand for cleaner alternatives. Tech companies are investing huge sums to fuel innovation and new services. What is the right balance of exploring the new vs. exploiting the known? I suggest, there are three main factors determining the degree of exploration.

1. The level of maturity

A start up is more likely to explore than an established business. Reason being that an established business is operating of an existing model. It is easier to make this model more efficient. A startup needs to explore ways to turn their ideas into profit. If you go on holidays for the first time any destination will be new. You have to explore as you don’t have any existing experience to exploit.

2. The level of risk tolerance

Certain company cultures invite their employees to be creative, to take risks and seek new opportunities. Well aware that the majority of initiatives are bound to fail, they emphasise the desire to progress through exploration. Other businesses might be more risk averse with a culture that champions process and standardisation. These traditional entities are more likely to exploit existing knowledge and expertise. Like the mindset of travellers. Some are more adventurous looking for unique thrills. While others prefer the comfort, safety and convenience of the known.

3. The external environment

Sometimes exploiting is not an option any longer. Evolving customer needs, a change in legislation or a new technology. All might force a company to shift their focus towards more exploration. If your favourite holiday destination is no longer accessible or your favourite hotel is fully booked you have no choice but to explore alternatives.

When it comes to the point of the right balance between exploiting vs. exploring each business will have a different answer. In the end, it all comes down to the simple challenge of delivering against your objectives. This might be achieved by developing new solutions or capitalizing on what’s existent. Sometimes it’s more effective strengthening what already works. Ask yourself, how many resources does your company invest in exploring? How much profit/ sales stem from recent launches and new activity? Is it worth the effort? What’s your view?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s