In Medio Stat Virtus

ChangeLogic030714-0632
by Andres Echeverry

In Sizing Exploratory Efforts, Virtue Stands in the Middle

Business leaders often identify the need to pursue an ambidextrous strategy when they realize that their tried and proven success formula is becoming either obsolete or a barrier to capture exciting new opportunities. Leaders rationally understand the need for organizations to excel at both the execution of current core operations and the exploration and development of new growth businesses. This exploration often requires the chartering of explore teams that are given greater organizational freedoms to push into new business models than those typically afforded to core product innovation and R&D functions. As the exploratory efforts are being shaped, our clients ask a common recurring question: “How large a budget and team should we assign?”

Organizations determine that they need a significant number (whatever that may be) in terms of budget and people to signal the importance of the new effort and to break from a past when they typically under-resourced entrepreneurial or exploratory activities. Overly conservative and profitability-focused core businesses inevitably constrain resources to high-uncertainty exploratory efforts that are years from having a direct P&L impact. Unfortunately, many organizations that invest heavily in R&D and innovation activities for their core markets and technologies feel the pressure to signal “importance” by the size of the investment relative to other innovation endeavors. We need to challenge this assumption.

While relieving the resource constraint is an important priority, lifting the constraint does not require large and explicit resource assignments that activate alternative organizational antibodies. Significant resource shifts from powerful core functions often become a source of tension with the new explore efforts before they start the first project. Moreover, once underway, the pressure to pursue size leads to quickly ballooning initiatives that risk poor execution. Over-resourcing often leads explore teams to ignore the benefits of resourceful small-scale experimentation; moreover, it also leads to exploratory efforts that are over-extended into diverging arenas that are too far away from the organization’s strategic fit. Perhaps most worrisome, over-resourcing allows organizations to pursue exploratory efforts without making the difficult choices on where they should be playing in the first place. The combination of poor execution, large scale, and high visibility can quickly undermine the credibility of the new exploratory efforts. The natural friction between these activities and the traditional core units does the rest, and a once promising renewal effort is slowly cast off into oblivion.

In order for exploratory units to succeed, leadership must simultaneously signal importance, promote support, and build credibility in the new exploratory efforts. What we often find is that our clients can achieve this by internalizing three principles:

  1. Signal support through communication, expectations, and affording scarce resources.

At the start, leaders should signal the importance of the exploratory effort through continuous communication of an ambitious and inspiring vision. This vision should include both the current core businesses and the direction of the exploratory efforts. It should be backed by giving visibility and leadership support to the exploratory initiatives. Senior executive time and support is the scarcest resource that an organization can assign, but it’s worth it for senior leaders to make time for these initiatives. These actions go a long way to promoting a supportive environment while keeping the attention away from staff and budget concerns. Business leaders should allow the exploratory unit sufficient budget to identify and prepare worthy proposals, and challenge it to deliver initiatives that have evident merit.

  1. Learn to do it – fail and iterate inexpensively by focusing relentlessly on a few opportunities with early win-potential

Stable and long-running organizations have deep benches of experienced operational executives. However, developing new business ventures requires a different set of skills from running an established one. Any organization that embarks on the exploratory process to develop new business models is likely to face an experience curve. Under these conditions, they should start by targeting a relatively small portfolio of three to five strategic initiatives with large and early success potential. Our experience suggests that many of these are usually “hanging in the hallways,”–improperly managed or resourced projects that have already been suggested or tried unsuccessfully. They also usually pass the “I’ll-be-darned-if-we-can’t-do-this” test and, with the right context and a rigorous iterative validation process, they yield the early wins the organization needs to gain confidence in its exploratory unit.

  1. Scale according to pipeline and resource availability

Resolute leadership and exploratory capability aside, the ramp-up of the exploratory efforts needs to be a direct response to its investment opportunities: How promising are the market arenas the firm can target over the next three years? Are the resources we need to succeed in them available? While the only way to answer these questions is by carrying out the exploratory work, senior leaders need to recognize that external constraints could play a significant role in the ramp-up.

The effects of these constraints are evident in the evolution of the venture capital industry. A recent study of the state of the venture capital industry shows that the flow of investment-grade startups has plateaued at 1,500 to 2,000 per year over the past decade or so. This is despite the fact that VC firms have historically clustered around strong growth sectors such as software, biotech, electronics, and telecommunications. Moreover, the evolution of start-up ecosystems has favored talent hubs that provide new business ventures with ample selection and diversity of highly specialized individuals required for the new ventures to succeed. The steady state reached by the VC industry is a reflection of the industry and technology constraints that limit growth, while its strong hub nature is a reflection of the resource constraints.

A shared understanding of these three principles allows organizations to move into the actual work of exploring with the right mindset. It forces the organization to delay the inevitable resource tensions for a moment when it will be better equipped to make the right allocation decisions. It also keeps the explore efforts under the right mix of tensions, support, and freedoms to promote their future success.

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