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The Best Strategy to Achieve True Innovation

John Boudreau

Professor, USC Marshall School of Business

In your organization, does innovation mean finding new ways to exploit what you already do well, or exploring arenas where you're unfamiliar and will make mistakes? Or both?

If you simply tell your employees and leaders that you want them to "innovate," then even the most motivated and intelligent employees might steer their efforts in the wrong direction. For example, consider the difference between two pivotal innovative contributions employees could pursue in the car industry: making existing cars safer and more attractive for human drivers (exploiting the present), versus making cars that don't need drivers at all (exploring the new).

"Exploiting" offers immediate and familiar payoffs, but can trap an organization in improving what will one day be obsolete. "Exploring" offers potentially disruptive high payoffs, but can produce chaos and gut-wrenching short-term losses.

HR leaders have the opportunity to help companies get beyond the generic idea of "innovation," and be clearer about how innovation is pivotal to strategic success, and how different innovator behaviors support different innovation types.

The "Ambidextrous" Organization

In a Harvard Business Review article in the early 2000s, Charles O'Reilly and Michael Tushman described the conundrum of an organization that tries to be both exploitative and explorative: "ambidextrous" organizations. An ambidextrous organization is one that "requires executives to explore new opportunities even as they work diligently to exploit existing capabilities"—not an easy feat, as the authors highlight.

The authors review showed that ambidexterity can improve organizational performance, but only if exploratory and exploitative innovation are well balanced. How can you balance these two efforts? The authors suggested separating exploratory innovation departments from those doing exploitative innovation, but making sure that senior executives in all departments communicate about their efforts.

For HR leaders, this is an important lesson not only when it comes to organizational design, but also when it comes to talking about employee purpose. You must help employees clearly understand whether their job is explorative or exploitative, and help senior executives in their pivotal role of communicating between team units.

Taking a Cue from Biology

The Santa Fe Institute suggests parallels between innovation and biology: Darwin's Theory of Evolution describes how biological systems evolve, and offers insights about how organizational innovations emerge and survive, too.

Consider how a natural ecosystem must evolve differently between the two contrasting strategies shown below, where the vertical axis is the payoff, and the horizontal axis is evolutionary innovations.

The left-hand diagram has one peak, so organisms can evolve to the highest level by incrementally improving their current state (exploitation). The right-hand diagram is a balance of both: It has a high peak, but with many lower peaks and valleys between. Reaching the highest peak requires exploration — innovations that reduce the payoff from the current state, but place them on the path to the highest peak — balanced with exploitation to improve along that path.

Applied to organizational innovations, this suggests that exploiting only works if there is one best solution related to existing best practices (the left-hand diagram). However, balanced exploration and exploitation are needed when the highest-payoff solution requires progress through lower-payoff innovations in the valleys.

Why a Balance Is Best

2016 paper in Nature by Daniel Barkoczi and Mirta Galesic tried to simulate how innovators can balance "exploration" and "exploitation" in innovation. They found that it was both less productive to over-emphasize exploration (i.e., tap lots of ideas and pursue the most popular) or to over-emphasize exploitation (i.e., tap a few ideas and pursue only a clear incremental payoff), compared to balancing both.

HR leaders, this suggests how you can better support your innovators. You can clarify the vital difference between exploratory and exploitative innovation, but you can also help innovators navigate paradoxes. Like an evolving ecosystem, reaching the highest peak of innovation may require counter-intuitive practices like seeking out fewer ideas and pursuing the lower payoff (but popular) ones.

Photo: Twenty20

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