Balancing Explore & Exploit
Should you explore new opportunities or exploit existing opportunities?
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We’ve talked before about how to think about your strategy as a series of Bets. If you make more bets you are taking more risk, and if you make fewer bets you are relying on the existing business to be enough for growth. How many bets you make is one of the most important strategic decisions you make each year.
That decision is hard since it changes as your business grows. Let’s think about the lifecycle of a business in terms of the balance between exploring (making new bets) and exploiting (improving the existing business).
When a new business starts, 100% of its time is focused on exploring as there is no existing business to exploit.
Then, after it finds Product/Market Fit, 100% of its time is focused on exploiting it as it needs to get the engine firing as fast as possible.
Later, this balance becomes less clear. Spending 100% on exploiting only makes sense if your initial business can scale indefinitely, but that rarely is the case. Almost always you need to explore to find growth opportunities (new markets, new geographies, new products). But you can’t spend 100% of your time on exploring as you need the existing business to continue!
If you wanted to be safe, you might spend relatively little time on explore:
But if you want (or need) to take risks because your business is struggling, you might spend a lot of time on explore:
Hopefully those risks pay off and you find more momentum in the business! When that happens the pendulum might swing back the other way:
And the process might repeat! This kind of oscillation between explore and exploit happens many times in the life of a business. It’s not a mark of failure if it happens to you, it’s just a normal part of the journey.
The bigger your company is, the more bets you might be able to make with 10% of your time. As a result, the pendulum swings less severely as you get bigger because you can do more exploring with less of your time. It’s rare to see a Fortune 500 company focus more than a few percent of their time on exploration but they can fit a lot of exploration into that small slice!
Still, the shift between explore and exploit is stressful for all leaders. Explore has the hope of better performance in the future, while exploit promises results today. Knowing when to shift back and forth requires experience, thought and faith.
The good news is that you don’t have to be perfect. Companies make mistakes in their explore/exploit balance all the time, and they recover. You can too! So, worry less about whether you get the balance right and more about revisiting it on a regular basis.
While you might not know the perfect decision now, you can correct your mistakes quickly enough that it won’t matter.
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Good post. The graphics bring it to life.