Behavioural economist and winner of the 2017 Nobel Prize for economics, Richard Thaler argues that significant change can be achieved through effecting small shifts referred to as ‘nudges’. Most notably associated with advocating subtle changes in policy to drive long-term interests, Thaler’s work has shown that apparently simple changes can have dramatic effects on how people save, donate blood or are incentivised to buy fruit over chocolates at check-out counters. As human beings, we’re more comfortable experiencing gradual changes that don’t overly disrupt our worlds. So small shifts like moving an opt-in clause to an opt-out clause or rearranging the shelf whether virtually or in the real world, can have far-reaching effects, especially when they are implemented at scale. Discovery’s Vitality scheme is a potent local example of how small rewards and nudges can shift behaviour with large-scale effects on individual health (not to mention Discovery’s bottom line).
On the other side of the spectrum, words like exponential and radical are used to describe change that dramatically shifts the nature of industries. The term ‘creative destruction’, coined by economist Joseph Schumpeter in the 1940s is increasingly back in vogue as the majority of industries grapple with the looming impact of artificial intelligence, the Internet of things and platform economies, and brace themselves for large-scale shifts.
So what’s a leader to do? Lean towards the Thaler perspective that favours identifying leverage points in the business by looking for small changes in things like productivity, margins and risk management without destabilising the ship? Or tear the business apart in pursuit of radically new business models that follow hot on the heels of the innovations we’ve witnessed including Uber, Airbnb and Amazon.
For me, the heart of reconciling Thaler and Schumpeter lies in ethical and skilful navigation of what some academics refer to as ‘the exploration-exploitation dilemma’. James March published a paperback in the early 1990s where he highlighted the need for organisations to balance the exploration of new possibilities with the exploitation of old certainties. The term “exploitation” is not used in a pejorative or negative sense here. It really refers to implementing ongoing shifts to optimally extract the benefits from an innovation such as a business model, a process or a product that has been developed.
As is the case with so many apparent paradoxes, the answer for most businesses has to be “and” or “both” exploration and exploitation. I say most rather than all because if you’re starting out fresh, the tilt has been towards the radical exploration end of the spectrum. The recipe for success here is likely to lie at the confluence of a need and a technologically enabled solution. These are the business innovations that we desperately need to nurture and grow in our continent, and if they can not only solve customer problems but social ones as well, so much the better.
As businesses are increasingly affected by global winds of social, political and technological change, managing these shifts lies at the heart of effective leadership. Whilst no business can argue the need to adapt, the question is how fast and dramatically should one move?
But what of the argument that new start-ups can effectively shift to exploitation? Organisations like Uber have learned that scaling the model and building the organisational cultures and systems to support the innovation takes a different sort of leadership to the maverick start-up mentality that is required at the very beginning. The success of these organisations must move beyond the wonders of the business idea into effective and ethical management.
There are few leaders who can successfully oscillate between exploration and exploitation. The founder of Amazon, Jeff Bezos has shown adeptness over a long period at not only moving down an exploration-exploitation funnel, but at re-inventing Amazon’s business model on numerous occasions. For the rest of us, building multifaceted business ecosystems that vary in their emphasis on exploration and exploitation is key. Established businesses that are able to embrace innovation and entrepreneurial talent in their ecosystems without needing to own developments wholescale are most likely to succeed. There’s a strong case to be made that it’s easier for an existing business to partner with new start-ups than it is for them to develop radical innovations from scratch. Consider the significant revenue that Apple has derived from its partnership with app developers. Making that work calls for sharing both the risks and the spoils. It’s not something that established corporates are particularly good at. But that’s a subject for a whole new day.