THE CORPORATE BURIAL grounds are filled with tombstones that read, “We should have acted sooner.” Once-great companies have found their final resting places in this expansive graveyard of slow-movers and has-beens. These companies failed because they were unable to adapt to changing conditions and yielded to capitalism’s unapologetic survival of the fittest. The statistics are startling. As of 2017, only sixty of the companies on the Fortune 500 list in 1955 survive. A comprehensive study of twenty-five thousand publicly traded companies over a span from 1950 to 2009 shows that the half-life of companies is approximately ten years—meaning half of all companies disappear within ten years of their birth.1
The warning signs of faltering institutional health are clear. Empty desks, budget cuts, secretive closed-door meetings, accelerating departures of star employees and layoffs, reductions in perks, declining revenues, eroding margins, increasing receivables, and negative cash flows. Short-term manipulations of earnings (legal but uncharacteristic maneuvers that stretch accounting standards to the breaking point), ill-advised acquisitions, voided investments in product development and brand-building, or expedient cost-cutting may artificially prolong life, but these are perfunctory fixes that hide deeper financial scars. Like a decaying property, these superficialities keep the place livable in the short run but fail to make it stylish and more valuable over time. Indeed, a comprehensive survey of CEOs and CFOs revealed that over three-fourths of respondents admitted to foregoing some investments in long-term value creation to massage short-term earnings.2
Companies are not so much built to last as they are bound to fail—sooner or later. Even those companies that we think of as immune to adversity, such as Amazon, will someday face off against other carnivorous retailers. Even the world’s oldest continuous organization, Japanese temple maker Kongo Kumi, recently came to an end after a 1,428-year run when their assets were sold to Takamatsu Corporation.3 Apparently, the need for temples is not what it used to be, and the company was hobbled by a natural attrition in demand.
Not every organizational death is avoidable. In fact, it is unrealistic to think that a company will live forever without the need to undergo periodic regenerations in which a company becomes something different from what it once was. For example, Nokia moved from paper producer on the banks of the Nokianvirta River to technology company, and Abercrombie and Fitch morphed from a high-end gun store for the social elite to the apparel retailer we know today. These second lives, however, may not be what some companies want and, consequently, they might prefer death to an alien transformation.
Nevertheless, corporations do not have to linger indefinitely on the edge of life or die prematurely. Corporations can be constructed so that they are more durable and able to resist early decline. The preservation of life depends on having the navigational judgment and skill of leaders who prepare their companies for what lies ahead by peering into the future and charting a course accordingly. As it happens, however, when the future arrives, many companies cannot meet the demands that new markets and consumer tastes require. Why didn’t these companies do more sooner? Why, despite what seems so clear in hindsight, did these organizations stick to a course that led to their eventual demise?
A significant portion of the answer lies in factors that divert corporate attention away from considerations about the future to a focus on short-term interests. According to McKinsey’s Corporate Horizon Index, short-termism is growing more severe. The Index, based on more than five hundred mid- to large-cap companies, shows companies increasingly adopting short-term perspectives.4 This trend is counterproductive. McKinsey finds that companies with long- versus short-term outlooks perform better on financial metrics such as revenues and earnings growth. One key to these companies’ success is their greater expenditures on research and development (R&D). Companies with longer-term perspectives spend more than twice as much on R&D than companies with short-term perspectives, and they maintain, or even increase, these budgets during economic downturns. A recent study showed that this investment matters. Compared with companies that reduced R&D spending to produce favorable short-term earnings reports, companies that sustained their investments showed a 3–4 percent increase in patents and patent citations and a 36 percent increase in innovation efficiency (patents per R&D expenditure) over a three-year period.5
When we were kids, you could order a mirrored contraption of cardboard that allowed you to stealthily peak around corners to see what otherwise might go undetected. Who knows who or what was awaiting around the corner: a little sister perhaps? The clever tool allowed its users to act on what was in front of them as well as to anticipate things unseen with the naked eye. The spy lived in two worlds; the here and now and the one around the corner—a combination that ensured present and future safety and offered peace of mind.
Companies that are able to efficiently execute in the present while simultaneously preparing themselves for possible futures are called ambidextrous organizations.6 The here-and-now executional or exploitative aspect of ambidexterity concerns the use of current knowledge and capabilities to refine and improve on operations, products, and services. The goals of exploitation are to increase efficiencies by wringing out excess costs and creating incremental value from existing organizational offerings. The future-oriented exploratory aspect of ambidexterity concerns the search, discovery, and development of new products and services. The goals are to satisfy emerging markets through select advancements in new technologies, designs, and processes. Like our yesteryear sleuthing, organizations must continue to extract profits from continuing operations while foreseeing and reacting to what lies around the corner. To be an adept [Wall] street performer, a company must be able to juggle more than one ball.
By way of analogy, consider the honeybee (Apis mellifera) colony. When honeybees locate a fruitful nectar-filled patch of flowers, they could maximize their current returns by directing their entire foraging workforce to that spot for harvesting. But they don’t. Evolution has favored a different behavioral solution with one hundred million years of success speaking for itself. A portion of the foragers exploit the current, generous field of flowers while another group of foragers explore other fields, near and far, for the next new thing. Thus, when the current patch begins to run dry, other luscious patches will have been found and advertised as ready for the taking.
The evolutionary engine of the hive is designed to produce consistent, uninterrupted income flows of nectar. The bees could bring in more nectar at any given time, but then they would risk not knowing where to harvest next when prevailing revenues decline and, therefore, having to make do without a critical resource for a while. And, honeybees do not have much time to do without. Three to five days is the long term for them. Insufficient inflows for any longer than that would put the hive at risk.
In business, short term and long term vary by industry and culture. Time spans are culturally and situationally dependent. A technology company in the throes of persistent change and upheaval will have a different long-term outlook than a commodity manufacturer. Similarly, Eastern cultures tend to have longer-term outlooks than Western cultures and eschew publicizing short-term results in public forums that would give a false narrative of their true long-term intentions. Instead, Eastern-based companies prefer to describe their earnings as “sustainable results” to characterize their orientation toward consistency and durability.7
Consistent, continuous growth promoted by a combination of exploitation and exploration is a more desirable organizational outcome than widely oscillating income streams brought about by boom-and-bust cycles in which companies opportunistically succumb to the near term at the expense of the long term. We saw these unfortunate results when consulting to banks and mortgage companies immediately before the implosion of financial services during the 2008 recession in the United States. The housing bubble combined with low interest rates seduced banks into making interest-only subprime loans either for their own portfolios or to sell to hedge funds and others who, in turn, packaged and sold derivative bundles of problematic mortgages to investment companies and individuals. The abundance in this financial chain was predicated on the ability of homeowners to make their payments. When the housing bubble burst and interest rates rose, many mortgage holders were unable to repay their loans. Making risky loans was never a stated goal of most banks. Rather, banks yielded to the tempting diversion to make fast cash by offering interest-only loans secured against the seemingly ever-increasing rise in home prices. Consequently, bank failures ballooned during the recession and its aftermath with too many companies focused on the short term, an oft-cited root cause. If not for government largesse, the U.S. financial system may have collapsed. The mortgage crisis represents a high-profile case of excessive profit-taking but many other less obvious examples exist. For example, the U.S. auto industry’s late foray into the manufacture of small fuel-efficient vehicles likely was due to a prolonged enchantment with the sale of higher margin trucks and sport utility vehicles. The industry delayed the inevitable and a favorable future market position in preference of short-term earnings.8
Companies experience economic troubles when the mix between exploitation and exploration is awry. Typically, the fault lies in too much corporate exploitation and not enough exploration, although in counter instances, companies may experience farsightedness or hyperopia (versus myopia), as well. The Apple Newton, for example, was a futuristic flop: a tool ahead of its time.9 It was a personal digital assistant of the approximate dimensions of today’s iPad mini. The Newton operated with a writing stylus; however, handwriting recognition programs of that period were imperfect. Additionally, processors at the time could not accommodate the graphical displays that were desired. We now know that the idea was good except for the fact that the technologies of the period could not adequately support Steve Jobs’s vision. Changing World Technologies, a biofuel company, had a similar experience. The avant-garde company converted waste to short-chain hydrocarbons that it sold to electric utilities for power. Initial production costs were too high to compete commercially, however, and they declared bankruptcy after four years of operations. Today, many companies occupy that same space because the production methods have become increasingly accommodating to price sensitivities.10
Block chains, cryptocurrencies, big data, artificial intelligence, and machine learning can make one starry-eyed about the future. The surreal possibilities of a wandering imagination, however, can tip an organization’s lean too far forward. Thus, companies can be swept up by the siren call of fortune, and neglect life-sustaining nourishment: an error as large as hedonistically living in the moment. Therefore, the unenviable task of business is to care for short- and long-term needs while also tending to countless other temporal cycles, such as inventory turns, product life spans, and infrastructure upgrades.
Unfortunately, a priori guidance is not available on the correct mix between exploitation and exploration, although institutional investors have made it abundantly clear that myopic companies that focus on short-term profits to the exclusion of other stakeholders and the longer-term interests of the company are not desirable investment targets. Overall, the appropriate blend is driven by leadership and is highly dependent on leaders’ sensitivities to the environment and personal insights. The relative importance of near- or far-term elements may vacillate like a ship tacking into the wind based on several factors. For example, the importance of each element partially depends on the industry and speed of innovation within it, as well as the phase of the company within its life cycle. For example, start-ups naturally will be exploration-centric and mature companies will be exploitation-centric.
Practical considerations also play a part in what a company can, or should, devote to exploitation and exploration, and what it cannot or should not. The banks that dramatically increased the volumes of their mortgages before the crisis in 2008 were not able to underwrite loans with the same rigor as before because of volume increases and staffing shortages. In other words, the junk mortgages that required greater review, received less. If the objective was robust exploitation, banks should have correspondingly augmented their staffs and training. Similarly, we were working with a non-profit broadcaster that decided to order and purchase an impressive array of new programming—outsourced exploration, if you will. They did not have the marketing power or distribution channels, however, to fully take advantage of their purchase. That is, they could not exploit the opportunity to the extent that another, better endowed company might have. Regardless of whether companies wish to escalate exploitation or exploration, they have to analyze their current capabilities to ensure alignment with their strategies (see box 3.1).11
Box 3.1 How Ability Informs the Strategy
Admiral Horatio Nelson’s historic victory at Trafalgar against the combined French and Spanish fleets of Napoleon is largely attributed to his unorthodox strategy based on the select advantages of his outnumbered navy. With dedicated career officers and better trained crews, more navigable ships, and canons that could repeat fire every thirty seconds (versus the larger but less facile canons of the French and Spanish that took five minutes to reload), Nelson concluded that he could win the battle through close engagement and the boarding of enemy ships. Rather than engage Napoleon’s fleet as navel protocol recommended—parallel lines of combatants firing cannons at one another broadside—he approached the French and Spanish ships in two columns, perpendicular to their position. (Navy manuals cautioned against this approach since oncoming ships are vulnerable to enemy canons with limited ability to return fire). Nelson split the enemy fleet into thirds before turning his ships to engage the lower two-thirds of Napoleon’s fleet. Before the upper third of Napoleon’s navy could turn and return to the battle, Nelson had already won.
Despite the evident need to plan ahead, a warning that children learn from reading The Three Little Pigs, we often do not. In fact, 67 percent of the three pigs did not. Preparing for the future is effortful and costly. The future also is uncertain. Because of the very good chance that a wolf never will come along and huff and puff, the temptation to make do with expedient solutions is high. Making difficult changes of uncertain necessity can seem painful and of dubious importance.
As companies become more complex and efficient, the rewards of repetition and the costs of change become more pronounced. The easy influx of current revenues drives out exploration. When the costs and benefits of new developments are assessed against the same standards used for existing products and services, commercialization of new ideas never measures up. Consequently, new initiatives do not receive the internal support needed for development. Exploration and new product developments will be perceived as intrusions when evaluated against efficiently generated results from well-rehearsed operations. The rational conclusion will be to keep doing what the company is best at doing: leveraging its core competencies to the hilt.
Geoffrey Moore attributes the failings at AT&T, DEC, Kodak, Polaroid, Silicon Graphics, Sun, Wang, Xerox, and others to their reluctance to enthusiastically act on ideas for new products. Great ideas languished on the drawing board or as underfunded high-tech hobbies.12 These companies subsequently were unable to compete with organizations with less history and greater entrepreneurial conviction. As Tushman and O’Reilly state in their seminal article on ambidexterity, these short- and long-term trade-offs often are forcefully debated inside companies.13 The changing world does not entirely pass by these companies unnoticed. As the authors note, RCA was actively involved in transistor technologies that they understood could supplant their leading position as manufacturer of vacuum tubes and replace the innards of many of the electronic devices of the period. RCA’s aspirations, however, were foiled by competitors such as Robert Noyce and Gordon Moore’s newly formed Intel, which established research facilities that were more attuned to the commercial needs of their customers and that set up operations with a greater applied focus than, say, RCA.
Companies that are locked into the status quo and fail to deviate too far afield from precedent—whether products or procedures—repeat activities because they have been rewarded for engaging in them in the past. As a result, many companies continue what is profitable and refrain from actions that divert time, attention, and resources away from the sacred cows that generate the cash. Newer companies that are unhitched from historical baggage and significant changeover costs do not face these considerations. Thus, they can move more swiftly into lush emerging markets and displace reigning incumbents.
Executives must contend with plenty of pushes toward the short term. The short term is clear and salient. The short term is undertaken with greater certainty of outcomes. The short-term can be very rewarding. The short term provides executives with the continuing authority to lead by demonstrating their effectiveness in producing results. Furthermore corporate stasis is aided by distortions, or biases, in thinking such as the failure to see and understand the significance of new facts. For example, Smith Corona, the one-time typewriter manufacturer (see box 3.2), discounted the rise of personal computers, citing their expense and excess of features beyond their primary use as word processors.14 A few insiders recognized the threat; however, leadership autocratically directed the company toward a word processing future in which the beloved typewriter would continue to play a central role. We can imagine that a person who has devoted their life to a company and cohesive suite of products would be reluctant to change from the familiar to the unfamiliar in which they had little expertise.
Box 3.2
The Downfall of Smith Corona
The first “writing machine” was invented in 1868 by a journalist, Christopher Latham Scholes, and produced and distributed under the Remington name. The Smith Brothers were participants in the early history of the typewriter and in 1903 formed a company singly devoted to manufacturing typewriters. This company later (in 1926) merged with the Corona Typewriter Company to become LC Smith & Corona. The first typewriters were mechanical and required a heavy press of letters to fling individual keys onto a ribbon strip to imprint its unique letter onto a sheet of paper. Because adjacent keys often stuck together with fast typists, common combinations of letters were separated to prevent that from occurring (thus, the birth of the QWERTY keyboard versus a keyboard that, say, is alphabetized).
Smith Corona was an inventive “ink on paper” company throughout their storied history. They were first to offer a portable typewriter, electric-powered carriage return, removable ribbon cartridge, and electronic dictionary. The company’s mainstays were light, user-friendly typewriters for personal (versus office) use and, as late as 1980, Smith Corona sold half of all typewriters in the world. Their typewriters were mainly distributed by the small office supply stores found on Main Streets of America and elsewhere. The company successfully morphed with consumer trends moving from mechanical, to electric (use of an electric motor to push keys forward), to electronic typewriters (incorporation of computer components for storage, formatting, editing and the like). To produce the electronic typewriter, Smith Corona established a research arm and hired a cadre of electrical engineers to complement the many mechanical engineers already employed at the company. The company spent about 12 percent of its revenues on building its research capabilities to compete in this new arena. Smith Corona subsequently extended the electronic typewriter to create a Personal Word Processor (PWP) that was essentially a computer with purely word processing capabilities. However, its software was proprietary and hard-coded. Some integration with computer components outside the Smith Corona family of products was introduced, but businesses outside of typing/word-processing gear never contributed significantly to the company’s overall revenues.
Smith Corona powered into the 1970s and 1980s as a major conglomerate having purchased Glidden Company (paints and chemicals), Durkee Foods, Proctor Silex (appliances), and Allied Paper. These were later sold as Smith Corona’s fortunes declined. For the most, Smith Corona waved off threats from the personal computer, considering it an expensive substitute to the product features that their typewriters and word processors provided. They believed that consumers would view the personal computer as an unnecessarily costly purchase. Smith Corona had an abbreviated co-branded partnership in 1991 with ACER, the Taiwanese computer startup, that wished to gain access to the American market through Smith Corona. However, neither party gained much from the relationship. Smith Corona’s traditional distribution network was being gutted by big box office stores (there were nineteen super-stores in 1988 and eight hundred by 1993) and were of limited value to ACER. And, Smith Corona never participated in the manufacture of computers and, therefore, did not learn anything new that might have been helpful to them. Instead, Smith Corona reconfirmed their belief in the power of type and offered a suite of collateral materials built around their core offerings, such as dot matrix printers, laminators, and fax machines (much of this production was outsourced). With its strategy fixed, Smith Corona closed its R&D function in the early 1980s and integrated what remained of R&D with manufacturing.
Meanwhile, revenues began their precipitous decline in the early 1990s and went into freefall as Windows was introduced to make word processing and other applications on the computer easier, hardware costs declined, the availability of software blossomed, and internet connectivity became a staple in American households. Smith Corona filed for Chapter 11 bankruptcy in 1995. It emerged with renewed energy toward its historical core markets and was liquidated in 2000–2001.
If the profitability associated with the tried and true enjoined the short term, then we might formally describe the plight of Smith Corona as victim to a competency trap. Competency traps are illustrated through the following simplified parable.15, Helen must choose between fulfilling an important task in one of two ways. The task is recurring, and she has routinely used Method 1 to attain results. Helen is a highly proficient whiz kid at the method and has always gotten good outcomes using it. She is not nearly as familiar with Method 2, but articles on its application and the accounts of others suggest it is by far the superior method. She tries it out a couple of times the best she can and after a couple of time-consuming tries that produce mediocre results, reverts to the method she is really good at: Method 1. Helen stays with this method even though a superior alternative exists. Had Helen been willing to absorb short-term costs while she learned how to use the new system, her longer-term outcomes would be vastly improved today. In the meantime, Helen can live comfortably with her choice because she never will realize the potential of Method 2, having abandoned it early during a trial period. She concluded that the efficiency of Method 1 was too great to give up and the results too alluring to sacrifice for the unrealized promise of Method 2. Note, however, that Helen’s dilemma only exists because she is competent with Method 1. A person who is equally unfamiliar with both methods would select Method 2, where the learning curve is comparable to Method 1 but the outcomes are greater. Like the little boy in the Emperor’s New Clothes, it is the inexperienced who only are able to see the truth.16
Sunk costs, too, may have contributed to Smith Corona’s reluctance to change. Sunk costs are the tendency of people to continue an endeavor following an investment of time, energy, and money: past investments compel a future course.17 Variously described as throwing good money after bad or as having too much invested to quit, economists note that rational decision makers should consider past expenditures as bygones and make new assessments based on current, alternative options.
Sunk costs occur when an initial allotment of resources entraps companies into losing courses of action. For example, a banker may make a commercial loan to a faltering, speculative real estate development, only to loan more money in an attempt to salvage the original investment. We surmise that Smith Corona’s heavy investment in a word processing future by hiring leading electrical engineers and starting an R&D facility that was focused on integrating computer technologies into a bundle of personal word processing products hardened their position and made a switchover into personal computing less probable. In fact, it was not until 1991–1992 that Smith Corona attempted any foray into personal computing, but it was a lackluster assault and far too little, much too late.
In any case, sunk costs by which prior investment choices influence subsequent decisions may get a robust assist by the way we mentally bucket information. Nobel prize–winning economist Richard Thaler attributes the logical failings in sunk cost scenarios to faulty mental accounting.18 Costs become losses when we are unable to get the return expected from our investment. For example, the purchase of a ticket to a sporting event (a cost) becomes a loss if you try, but for some unforeseen reason, fail to make it to the event. As soon as you close the mental book on a cost without due compensation, you lose. Therefore, people either keep the books open by investing more in the enterprise or dissociate with what they have done before (i.e., open a new set of books). For example, imagine you are going to attend a theatrical performance with general (no reserved) seating. The ticket costs $20. At the theater, you realize that you lost your ticket. Do you buy another? In contrast, suppose you intend to purchase your ticket on the theater’s premises but when retrieving cash from your pocket you realize that you somehow lost $20. Do you buy the theater ticket? “No” is the frequent answer to the first question and “yes” is the answer frequently given to the second. In the first instance, a mental connection is made between what was spent and the prospect of having to spend more. The perceived cost of a $20 seat is $40. In the second instance, the purchase of a ticket and the loss of the money are conceived as separate events. Now consider buying an expensive ticket to a football game and, on the day of the game, there is a blizzard. Do you go? Most people say “yes” because driving in a blizzard doesn’t nullify the expense of the ticket: they are put in separate mental accounts. Or, equivalently, you spend good money to go to a Broadway musical that turns out to be dreadful. Do you leave at intermission? Probably not because you would lose your investment. You go, or stay, because you want to get a return on your investment, even if it means doing something you would prefer not to do. But, these decisions should not matter because the money already has been spent regardless of what you do.19 At the organizational level, the results are akin to the Abilene paradox in which a group ends up doing what no individual prefers often because the origins of agreement and plausible alternatives have not been appropriately vetted.20
Interestingly, because many animals are susceptible to sunk costs, some theorists have speculated that there must be some natural advantage.21 One general explanation is that we assess future rewards by the amount of effort and expense already expended. Because it is difficult to predict actual future payoffs, past investments are used as proxies.22 The larger the investment, the larger the expected reward. A second explanation concerns the minimization of waste (waste not want not). Because the minimization of waste is crucial to survival, sunk costs may involve an inclination to use up everything one has expended before doing anything else.23 A third explanation for the survival advantage of sunk costs, which only applies to humans, is that sunk costs help us to honor future obligations. You pay for tickets to attend events in advance to assure your future self will follow through.24
One proven way to combat sunk costs is to present decision makers with alternatives so the choice space changes from “go” or “no go” to “continue this” or “change to that.” This is a dissociative strategy. The choice between options forces people to consider allocations of resources anew based on the prospects of each option from that moment in time forward.25
In general, however, we have a propensity to choose current (or near-term) options over longer-term options even when the more immediate choice delivers a smaller reward. Sunk costs are nursed along by other biases, such as the status quo, existence, and omission biases. These implicit cognitive biases nudge people into believing that doing nothing is better than doing something. Collectively, these biases instill in people an inflated preference for the current state because present actions are viewed as more attractive and desirable, and less costly and effortful to execute (principle of conservation of energy). Doing nothing also moderates culpability should something go wrong. For example, studies have shown that people associate greater wrongdoing with acts of commission versus omission. Mock panels of jurors award higher damages to plaintiffs if the harms result from acts of commission versus omission—even though the actual harms are the same.26
Many of the decisions executives face explicitly involve temporal trade-offs, of the kind we encounter every day when, for example, deciding whether we should spend the money we have or put it aside to compound into a bigger stash of cash at a future date. This type of dilemma belongs to a class of decisions involving delay discounting in which smaller immediate rewards are preferable to larger delayed rewards.
Again, however, the deck is stacked in favor of exploit, or the short term. Think of it as figure and ground. When looking at buildings, the one in front of you is really big and the one in the distance is small (although, in actuality, it may be larger).27 The issue, then, is knowing how to make the building in front of you look smaller and the one in the distance look bigger. Given our inclination to take the proverbial bird in the hand even when twice as many birds are in the bush, what are some ways we might intercede to give the future a fighting chance?
When considering alternatives in discounting dilemmas, the chief decision parameters are as follows:
• The relative size of the outcomes (and discount rate)
• The time delay between outcomes
• The probabilities of obtaining the outcomes
For future initiatives to have a chance of being preferred over present ones, the future alternatives must have certain properties. Relatively speaking, they must be big, temporally close, and probable. If an option is between accepting $10 today versus a guaranteed $50 payment tomorrow, most people would wait the day for the larger payment. As a future benefit grows, the discount rate becomes less steep meaning that future options progressively hold onto more of their value as their size increases. (This is called the magnitude effect; this effect holds for rewards that are likely versus unlikely.28)
Frequently, organizations default to present activities and serendipitous opportunities because they have not expressed longer-term aspirations or envisioned a meaningful future. As in life, without a persuasive long-term goal, life becomes a series of short-term events. The long term simply is a series of transactions strung together. Therefore, one way to make future options larger and more appealing is through vivid, imaginative constructions of future states. In the vernacular of business, the future can become more captivating through an alluring vision. This vision is a periodically refreshed articulation of the essential, broad-brush features of a future state and not of particulars writ large, for example, to become a billion dollar company.29 Vivid depictions of future states reliably orient people to desirable ends. These abstract, brief, credible, challenging, and clear statements provide aspirational, growth-related images of the future based on a process that Jonathan Swift described as the art of seeing things (in the visible world) that are invisible. Appropriately conveyed, these images have the power to orient and motivate employees, and to fuel venture growth.30
Prospection (i.e., envisioning a future state), or mental time travel, is a common technique that helps people to achieve longer-term goals and, conversely, reduces the inclination to act on impulse.31 In addition to making the future more salient and seductive, realistic mental imagery of the future also speeds up time. As you know from personal experiences, time has a malleable quality. It goes faster when you are older than when you are younger and when you return from a first trip to an unfamiliar location than when you went. Therefore, having time move faster brings a desirable result temporally nearer: as does affixing a certain date and having intermediate milestones that let people know that they are getting closer to the goal. For example, people are more likely to persist toward a specific date of, say, July 1, 2116, versus an equivalent timespan for goal completion of four score and seven years from now without being sidetracked by temptations.32 This is because the latter expresses a goal by how long you will have to wait (and time will drag); the former expresses expected goal attainment according to when an outcome will occur and the value it will have at that time. The same information is communicated in different ways to different effect.
Another reason that goals with distant, unspecified end dates are unlikely to get enacted is because, in addition to being too far away, they may seem improbable to fulfill. Embarking on an initiative with an indefinite terminal date, for example, may not seem doable. It would require an enormous amount of self-control and strategic discipline to go on without apparent end. Even with the special appeal of an ideal, time-bound goal, companies have to provide people with periodic markers or reminders that the future is achievable and worth striving for.33 Leaders connote do-ability by being steadfast—as opposed to rigid and unyielding—in their pursuit. Leaders who repeatedly make and unmake goals or who otherwise appear uninterested in a goal’s fulfillment convey a lack of personal conviction that sabotages the belief that any expressed aspiration will be met.
Similarly, leaders must plant signposts to maintain a workforce’s healthy focus on the future or risk losing their attention to more immediate and satisfying endeavors. People who choose a future outcome still must find a way to get there without being hijacked by more immediate and appealing rewards. For example, many of the children in Mischel et al.’s famous delay-of-gratification tests (i.e., the “marshmallow” experiments) who selected the larger delayed option of goodies—as opposed to smaller immediate ones—ultimately gave in to the immediate reward during a waiting period.34 The children chose the larger delayed option but ended up, mid-way, settling for the smaller reward. Much of the children’s internal anguish concerned their inability to keep their eye on the longer-term prize and away from proximal enticements. The same misdirected attention occurs in organizations when an espoused long-term plan is derailed by, say, a bag of goodies in the form of exercisable stock options. For example, researchers have found that executives make smaller investments in future initiatives when attractive near-term incentives preempt long-term interests in favor of results that will heighten and deliver immediate rewards.35 We can imagine that as Smith Corona’s worldview seemingly was confirmed by consumers in the late 1980s, all internal signs pointed to fervent exploitation; in fact, Smith Corona never again ventured outside its primary product categories and markets until its failed attempt to partner with ACER. By then, however, Smith Corona stood on the precipice requiring only a gentle push from the budding computer industry to send it headlong over the edge into permanent decline.36
Although some studies have shown that joint decision-making moderates impulsivity and orients decision makers toward longer-term interests, research is scant on the roles and responsibilities of those who make exploit-explore decisions.37 For example, it is interesting who regulates exploitation and exploration within the honeybee hive. Briefly, when forager bees return to the hive, they off-load their nectar to bees that are waiting near the hive entrance. These bees-in-waiting are called receiver bees. They take the nectar from the foragers and store it in the comb as honey. If it takes a forager a long time to locate a receiver, the forager realizes that the colony is taking in more nectar than it can currently accommodate. The forager, then, performs a dance (tremble dance) to recruit more receiver bees. They enlist the help of other bees doing other chores, thereby increasing exploitation. Conversely, if a forager upon returning to the hive immediately finds a receiver bee, she (all foragers are female) knows that the colony is bringing in too little nectar and that a greater foraging force is required. In this instance, the forager performs the famous waggle dance to call idle foragers into the field. The colony increases exploration.
The foragers, and not the receiver bees, regulate hive operations through their communications. The bees that give the orders are the ones who have the best perspective on what is occurring in the outside world, the quality of the nectar, specific dangers that await in the field, such as predators, and what the needs of the hive-organization are. The hive is adhering to the monastic (Benedictine) principle of the subsidiarity that states those closest to a problem should make the decision on how to solve it.38 Hypothetically, if the staffing decisions were left to receivers, they might be reluctant to upregulate the use of foragers for exploration because the added costs entailed by the expanded exploratory force would blow the budget. We can envision a company not wishing to invest in a costly pursuit that may not yield substantive returns—particularly when everything seems to be going fine the way they are. That, of course, assumes what the bees do not: that a regular supply of nectar will continue to flow and that an efficient match between receivers and foragers will persist.
The goal of foragers is to (1) keep nectar flows consistent, (2) keep operations efficient by keeping the time foragers are not in the field (i.e., because they have to wait for receivers) as short as possible, and (3) to make sure supplies of nectar continue. The bees achieve these ends for three notable reasons. First, they have an immutable, collective understanding of their evolutionary goal of survival.
Second, honeybees have an uncanny ability to acquire, transfer, and use new information. We would say that honeybee colonies have high absorptive capacity. Overall, absorptive capacity refers to an organization’s ability to acquire new information from the environment and to meld that information with current understandings—and either change its outlook on the marketplace altogether or modify its thinking on what and how it produces its goods or delivers its services.39 These learnings may launch new exploratory actions or be used to refine current methods or merchandise. In either case, absorptive capacity implies an ability to monetize what has been learned by altering approaches to the market based on information gleaned. Knowing how to reconfigure resources to address environmental changes substantially depends on how well the organization is able to sense and seize opportunities that are available by identifying, filtering, sharing, and evaluating information about trends, customers, and competitors, and intelligently using that information to protect the corporation’s assets.
Interestingly, although the idea of learning seems like a starkly intuitive precondition for adaptation, companies often choose other ways to protect their franchises: ways that dim the long-term prospects for success. Take Dunlop for example.40 Dunlop was once the premier tire producer in Great Britain and one of the largest companies in the world. Dunlop started as a maker of bicycle tires in 1889 and moved into the manufacture of automobile tires for the burgeoning motor car industry in 1900. While the brand name lives on, its European operations were purchased by Sumitomo in 1983.
As the principal tire maker in Great Britain, Dunlop thwarted foreign competition by urging the British government to impose high tariffs on tires (33.5 percent), leading a coalition to standardize prices, and arranging an exclusive arrangement with British carmaker British Leyland. When tariffs eventually were lifted, common pricing was judged to be anticompetitive, and Dunlop’s exclusive relationship with British Leyland dissolved following a worker strike at a major Dunlop facility, the company found itself vulnerable to the new world order.
Dunlop discovered that they were late to adopt radial tire technology—which they had dismissed as a gimmick—and to update aging plants. Although radials had many advantages for durability, fuel economy, and safety, the first steel radials pioneered by Michelin were expensive and had breakaway problems. Those problems, however, were resolved through new suspension designs on cars and the advent of fabric radials. Once radial design had been improved, Michelin was quick to seize 20 percent of the British market. Dunlop’s factories also were well behind international manufacturing best practices. Indeed, after Sumitomo purchased Dunlop and modernized the factories, output increased 40 percent with 30 percent fewer people. Creating barriers certainly is one way to defend against competition, but these defenses come and go and poorly prepare organizations for the harsh eventualities of global business when that strategy eventually fails. Protectionism is a loser’s game.
Third, the ambidextrous hive is made possible by the colony’s ability to rapidly transform itself through slack resources. For the colony, these slack resources take the form of cross-trained bees that can switch between job roles and a pool of inactive foragers that can be called into service when needed. The most basic and fungible form of slack in organizations is financial in the form of credit and cash.41 The more money that is available for exploratory investments, the less often the company will have to interrupt existing operations by taking resources from it to underwrite exploration. This creates a paradox. The best time for a company to increase exploration is while financial results remain strong and before it has an evident need. (See box 3.3 for an Estonian folktale on preparing for the future.42) If the company waits until its revenues are declining and the changes it must make become glaringly obvious, the window of opportunity for change may have already passed. As the window begins to close, so does the organization’s ability to make investments in the future without cannibalizing income streams and assuming greater risks. Companies that wait too long to act will have limited chips to place on a limited number of bets, whereas companies with more financial slack will be better able to diversify exploratory trials in the hope that a few gambits will pay off.
Box 3.3
An Estonian Folktale and Tulving’s Spoon Test
A young girl dreams about going to a birthday party in which her favorite dessert, chocolate pudding, will be served. Except, the rules of the party state that only children with spoons can have the dessert and the girl doesn’t have one. Therefore, she must watch as others consume the delicious pudding. The next night, determined not to be disappointed again should she experience a similar episode, she brings a spoon to bed with her and puts it under her pillow. The girl has just passed the spoon test. The “spoon test” refers to a cognitive ability to project oneself into the future and to be duly prepared, even though the need for the spoon at the current time or in the current place is not evident: the child does not need and will not use the spoon in her bed.
Would you pass the spoon test? Maybe. But a lot of our preparations for the future are based on our current needs and that, as we have seen, may produce poor or delayed choices (like shopping when you are hungry). To pass what is analogous to the spoon test, a person has to dissociate with current needs, and project oneself to a future time and place based on a past experience.
Source: Wilkins C, Clayton N. Reflections on the spoon test. Neuropsychologia 2019; 134: 107221.
Studies of Smith Corona indicate that the company had available financial resources in the 1980s for exploratory efforts but used their spare cash during that period to exploit their ink-on-paper capabilities. The first half of the 1980s were financially difficult as Smith Corona awaited the return on their investment in the electronic typewriter. Their new products indeed caught on, and Smith Corona witnessed significant gains during the late 1980s, culminating in an all-time high in revenues in 1989. They would declare bankruptcy six years later.
Managing the exploitation/exploration trade-off is difficult. Each set of abilities requires different and opposing operating structures. Exploration and exploitation are uncomfortable companions because the activities and capabilities required are dissimilar for the two. Exploitation involves implementation of overlearned practices that are mechanistic and routine. The creative press of exploration requires open, fluid, and flexible structures that allow people to play with new ideas and to formulate new offerings for different or emerging markets. Exploitation relies on stability and control to optimize profits. Exploration relies on autonomy, variation, and risk to optimize innovations. The two are imperfect cohabitants. The goal of the company is to reconcile an uncomfortable unity between competing forces.43
To moderate the inherent tensions between exploitation and exploration, the two functions often are housed in separate units.44 The dual structures are typified by exploratory workforces in R&D departments, and everyone else doing the work—the exploitative force. The advantage of this division of labor is that the exploratory force is removed from a daily regimen that might constrain creativity by imposing unnecessary requirements in the development process. The result of corporate intrusions into the exploratory process is the emergence of some of the worst products ever developed. The Pontiac Aztek, frequently cited as one of ugliest cars ever built, was a product of far-reaching input and assemblage by committees. As one pundit at the time put it, the car looks the way Montezuma’s revenge feels.45
In contrast, by isolating the R&D staff from the operating units, a danger exists that the group may lose sight of the true needs of consumers and will deliver products of marginal utility: strikingly brilliant ideas, yet with no market or immediate use, like a remarkably inventive Robinson Crusoe who has little relevance when he returns to society. To ensure that new products and services are responsive to customer needs and can be folded back into the organization for implementation, companies insert integration devices into the development process. At the micro-level, this function usually is fulfilled by a single individual who serves as a boundary spanner between developers and users, for example, a function fulfilled by business analysts in information technology departments. These intermediaries tie customers’ needs and requirements to new developments and technologies.
Integration is more complicated at the corporate level, but the idea is the same. For example, companies may establish cross-company oversight panels that monitor progress and add resources to initiatives with commercial promise but stay removed from daily decisions within the design process. In this way, the company can anticipate how new developments will be executed and what the associated costs will be as products and services unfold. A partial list of integrating devices is given in box 3.4.46
Box 3.4
Sample Methods of Integration across Units
1. Common central manager or governance committee
2. Staff with ambidextrous abilities
3. Common vision and values
4. Spatially co-locate departments
5. Cross-departmental assignments and liberal people-sharing practices
6. Independent integrator function
7. Common platforms, systems, and tools
8. Common goals and rewards
Large innovative advances often require structurally separate units. Drug development in pharmaceuticals, for example, necessitate an R&D function. The development process is long and expensive, and it must be handled through formal, intact structures. Not all exploratory actions, however, are large and lengthy. In these circumstances, companies may deploy more modest and less formal methods of exploration. Typically, these methods involve using the same people to do the exploiting and exploring. The effectiveness of these methods assumes that companies hire the right people who are curious, flexible, and interested explorers. One way to engage in exploitation and exploration with the same people is to carve out time for designated groups of employees to work, say, half-time on a particular problem. The advantage of this approach is that people with rich domain knowledge are asked to think about the next generation of products and services. SAS, for example, takes this approach when adding functionalities to its statistical and visualization software.
Some companies encourage innovations to percolate naturally. They produce the right culture and environment that permits independent thinking and grassroot ideas to arise from the ground up and diffuse throughout the organization.47 For example, engineering contractor Intuitive Research and Technology Corporation (INTUITIVE) instituted a Creative Incentive Program for new concepts. If the company likes an idea, they will dedicate funds to its development and split the proceeds with the inventors 50–50. Similarly, the investment advisory service The Motley Fool gives employees who have become proficient at their jobs the chance to start “passion projects.” These projects start small at the employee’s initiative and expand if interests, converts to the cause, and resources allow. Similarly, many companies have mechanisms for employees to submit ideas for improvements or new products and services. These ideas, then, are vetted by internal committees and promising ideas are examined further for potential development. Still other companies such as 3M famously provide employees with time for side projects: to experiment, develop new products, and create new technology platforms. 3M gives employees 15 percent of their time to work on whatever they like. The company has quite a lot to show for this freedom to pursue pet projects: from masking tape and Post-it notes to, more recently, a purifier that facilitates protein-based drug discovery.48 In total, company employees have developed more than fifty-five thousand products. Additionally, 3M awards peer-selected scientists and researchers six-figure grants to work on what “no sensible, conventional person in the company would give money.”49 They have another saying as well: “If you want to be comfortable with the future, you better be part of creating it.”50
In truth, these carve-out programs do not generalize. Giving a plethora of highly motivated, inquisitive, and socially oriented (toward the greater good) scientists time to reflect on pet projects is one thing; however, giving less qualified and motivated people the same option is another.51 This is the argument against the hope that one program can become the provider of all innovation. Rather, the cultural beacon should draw great ideas from anywhere and anyone, using a mixture of methods. A belief that the only people who can think creatively are the people in R&D is a tremendous waste of organizational talent, an unnecessary drain on morale, and a surefire way to diminish the organization’s capacity for invention.
