Before a manager devises a company’s corporate strategy, he or she goes through a process we refer to as the “triangle of corporate strategy” (Fig.1). According to this model, business strategy is the result of three complex, interacting processes. In the first process, managers analyze the company’s health and develop a mental or theoretical picture of the cause-and-effect relationships between the company’s behavior and its impact on the business environment.
Armed with this information, they set out to elaborate an appropriate strategy. The company then executes this strategy, and chooses to focus on exploitative development (i.e., dynamic continuation) or to explore other strategies that favor an opportunistic combination of exploitative and explorative elements (i.e., the dynamic of change). These decisions will play a huge role in determining both the pace of the company’s evolution and its organizational structure.
Strategic leaders face a paradoxical situation in which they must reconcile two conflicting approaches: one focused on promoting systemic, organized action and the other on innovation. To achieve order and consistency, it is first necessary to create detailed plans, stable structures and control systems that will detect deviations. Responsibilities must be assigned in a clear, systematic fashion. Meanwhile, innovation requires flexibility, greater tolerance of mistakes and a general willingness to promote creative activity over rigid financial control.
Exploitation versus exploration
Once the strategy has been defined, the company can begin to determine its direction, which can be divided into two broad categories: exploitation and exploration. The conceptual distinction between exploration and exploitation is used widely in management studies as an analytical formula for tackling issues related to continuity and change.
Exploitation involves creating reliable systems and methods based on experience. It calls for a strict approach focused on promoting perfectionism, efficiency, selection and execution. It is associated with structures that depend on highly bureaucratic mechanisms and routines that promote stability. This strategy offers more constant results over a shorter period of time than exploration.
On the other hand, exploration produces a broader range of experiences. Companies that adopt this approach choose to experiment, innovate and take risks. In general, this strategy is associated with organic structures and loosely linked systems that facilitate changes to the original plan. This strategy generates more diverse experiences and results, and is therefore the riskier option. Companies that opt for exploration can achieve success or failure, and profits are obtained in the long term.
The key: equilibrium
At this stage, we must ask the question: Should managers give priority to discipline and exploitation or to innovation and exploration? The key is to achieve an appropriate balance between the two strategies. This will be essential for the company’s survival, particularly in the current unstable environment.
To gauge which strategy works best in each case, we have conducted research that involves a series of simulations – based on the agents – of a range of corporate strategies. These simulations are based on Kauffman’s NK model and enable us to model the strategies of exploitation and exploration anchored on two variables: the level of complexity of the company’s business environment and the quality of the management’s strategies.
The research, which was recently published in European Management Review, indicates that strategies based on disciplined exploitation work better when they are framed within a high-quality, comprehensive strategic plan, and when the prevailing business environment is favorable.
However, if the environment is more complex and there is a limited understanding of the alternatives available to the company, opportunistic strategies that favor a more explorative approach - in line with the paradigm of interrupted equilibrium - produce better results.
In other words, the exploitative (or disciplined) approach works better in companies with a well thought-out strategy operating in a fairly benign environment. In a more challenging or complex environment, where executives are plagued by uncertainty regarding their strategic options, exploration (or an opportunistic approach) is more effective.
In summary, the research reveals that the results of exploitation strategies depend on the prevailing trading environment. The quality of the company’s initial corporate strategy also plays a role. In more turbulent times, when it is harder to develop a solid strategic plan – particularly in complex organizations – it can be extremely risky for managers to stick to a pre-determined strategy.
However, in a benign environment, disciplined companies with an intimate knowledge of their sector’s current business environment tend to outperform rivals that follow a more opportunistic strategy.
Loose, self-organized cooperation
Finally, the study shows that self-organization is an effective way of resolving tensions between the two conflicting approaches. The key issue for any business leader is to implement a set of activities that are flexible yet fit in with the company’s general organizational structure.
When companies seek competitive advantage, loose, self-organized cooperation between the various departments works far better than initiatives that impose a rigid, hierarchical form of cooperation. A system of structures and processes that foster the self-organized independence of a company’s divisions enables companies to economize on operational interdependence without constraining their ability to develop synergies. All of this can be achieved by encouraging cooperation and sharing knowledge between different divisions.
According to this concept of corporate strategy, business leaders should ideally limit themselves to establishing and communicating a small number of simple rules to set the operational parameters for their subordinates. They should also create a number of organizational mechanisms to foster interaction between divisions.
Organizations can foster self-organization through a variety of mechanisms. For example, companies like Google, Amgen and 3M share a company policy that encourages their workers to dedicate 20 percent of their time (known as “bootleg time”) to initiatives that interest them, regardless of whether they are directly related to their “day job”.
For example, this system allows a scientist to carry out research, even if the company does not consider it a priority. Likewise, an engineer could dedicate time and energy to exploring a collaborative relationship with other departments with whom he or she would normally have only limited contact.
Some other examples of structural mechanisms and processes that encourage collaborative relationships include: developing systems that disseminate information (such as the Internet); encouraging managers to formulate strategy for another department; increasing the mobility of management between departments; and creating an environment in which managers from diverse areas meet in informal settings (e.g., through in-company training programs).
In short, rather than looking to impose collaborative arrangements from the top down, companies should seek to create environments that enable departments and divisions to interact and develop their own opportunities to generate synergies.
All of this brings to mind some words of advice that Michael Porter offered strategic leaders over 10 years ago, namely, to resist “the constant pressures to make concessions, to accept trade-offs and to try to prosper simply by imitating your rivals.” This is wonderful advice for companies operating in a stable business environment and following a disciplined strategy (Fig. 2). However, Porter’s advice may well prove inappropriate for a company in an uncertain environment, in which a more opportunistic strategy would bring greater success.
