Navigating common strategy traps

The trade-off between exploiting existing businesses and exploring new opportunities is a constant challenge

With the business environment increasingly getting complex, characterised by the emergence of new consumers, employees, technologies, competition and policies, the choice between optimising existing businesses versus exploiting new opportunities is a common conundrum. Improvements in existing businesses can create value in the immediate term where as new opportunities typically yield results only at a later date. Resources are limited and, hence, allocating them between existing versus new opportunities is a constant challenge. BCG Strategy Institute has identified ten traps that plague companies as they balance this choice. In this article, we explain these traps and tools to navigate them.

Backyard exploration versus combing the ocean

The first step toward solving the exploitation versus exploration conundrum is to be clear about where to look.

• Backyard exploration trap- focusing exclusively on existing opportunities: Consider this example: When the US auto majors in the 1980s and 1990s were busy sweating existing automobile platforms, Toyota launched Prius - now the world's top-selling hybrid electric vehicle. The tendency to focus all resources on existing opportunities is symptomatic of this trap. To steer clear, companies need to create a culture of curiosity. Employees need to be encouraged to explore new vistas in the existing business as well as explore the adjacent spaces- a T-shaped exploration. Further, companies need to collaborate with partners for continuous innovation. This allows companies to continuously scan new ideas with a measured up-front commitment of organisational resources.
• Combing the ocean trap- attempting too many experiments superficially: During the mid-1990s in the US and Europe, 'do-a-bit-of-everything' conglomerates suffered a conglomerate discount and underwent deconstruction. Typically companies stuck in this trap show extreme conglomeration tendencies - nothing is out of scope and incremental return on innovation is not well articulated. To avoid this trap, companies need a clear vision linked to their unique sources of advantage. For example, Google redefined its vision from 'creating the best search engine' to 'knowing everything'. Further, companies need a disciplined portfolio management approach to classify existing and new opportunities into scale-up, manage-for-cash, turnaround and exit categories. Three portfolio lenses need to be deployed - strategic attractiveness, economic attractiveness and parenting attractiveness.

Trapped in the past versus perpetual search. It is critical to calibrate the right balance for allocating resources between 'explore' and 'exploit' opportunities.

• Trapped in the past trap - regressing to seemingly tried-and-tested ideas that worked in an old context, in the face of new uncertainty: Over the last decade, pharmaceutical companies are finding it prohibitively costly to create blockbuster drugs. Some have responded by doubling-down on disease categories where they had previous success. However, their continued struggle with success begs the question whether only mining deeper in areas of past success is prudent. Companies in this trap, kill new ideas and talent because of internal inertia. It requires true leadership to navigate this fatal trap. The leadership needs to personally develop tolerance to diversity and invest in promising ideas, technologies and talent.
• Perpetual search trap - excessive focus on exploring new ideas with low emphasis on commercialisation. Companies fall in this trap when they link incentives to merely the intellectual exercise. For example, Xerox's PARC lab created some pioneering intellectual property. But Microsoft and Apple value by commercialising the same ideas while Xerox merely created demo-versions. Commercialisation needs to be rewarded and not mere ideation. In a dynamic environment, agile commercialisation approaches are best suited where a 'minimum viable product' is defined in quick iterative cycles and exposed to market in a matter of weeks.

Misjudged harshness versus underleveraged resources. The question of resource allocation is moot without an understanding of available resources and future requirements.

• Misjudged harshness trap - Underestimating resources required to be resilient in a harsh environment. PanAm was a pioneering airline in terms of its operating model and was very profitable. It used jet planes across 86 continents and operated a heterogeneous fleet with decentralised infrastructure. During the oil crisis of 1970s, the hidden costs of their model namely, heavy overheads and operating costs, were exposed. Their resources drained faster than they could restructure, resulting in bankruptcy. To navigate this trap, companies need to stress test their business model through scenarios analysis. A scenario is a version of the future that is uncertain but has high potential impact.
• Underleveraged resources trap - missing out on opportunities by under-leveraging available resources. Apple had cash reserves of $147 billion in 2013. However it ranked 46th on R&D spend. Today Apple does not seem to have game-changing projects in the pipeline like Google-X. There are two approaches to navigate this trap. One approach is a company-in-company model where a ring-fenced child-company is created with the mandate to build completely breakthrough and at times attacker businesses. The other approach is an organisational solution where run-the-business and change-the-business teams are created. Change-the-business teams are mandated to launch interventions to transform existing businesses and build new ones.

Drop in the ocean versus risking the ship. It is critical to ensure that resources deployed against each opportunity are commensurate with investment needs.

• Drop in the ocean trap - underestimating long-term resource requirements to fully capture an opportunity. When DHL entered the US freight market, in 2003, it took on large incumbents UPS and FedEx. To beat them, DHL needed to invest heavily to build scale. While DHL's investment at $10 billion was sizeable in absolute terms, it was inadequate resulting in its eventual exit from the business in 2008. Companies caught in this trap display a gap between ambition and commitment. This gap is attributable to intellectual indiscipline in the form of poorly written business cases, which miss the big picture and make an opportunity appear achievable with unrealistically low investments. Equally important is overcoming the mindset challenge where management develops cold-feet just before major investment milestones.
• Risking the ship trap: Staying the course when an opportunity ceases to be attractive. To get back in the game, Windows and Blackberry singularly placed their bets on replicating iOS and Android's ecosystem. However, their combined market share just managed to reach 5 per cent. Companies caught in this trap display a 'silver bullet' mindset where one big bet is expected to restore competitive advantage. Instead companies need to develop 'adaptive advantage'. This comprises five capabilities: (i) signal advantage: sense and amplify the right signals, (ii) experimentation advantage: economically conduct large number of experiments, (iii) organisation advantage: structurally expose organisational entities and market reality, (iv) system advantage: source ideas from the ecosystem and (v) eco-social advantage: align opportunities with social and ecological context.

Fixed itinerary versus forgetful wanderer. If exploration rates exceed or lag the rate of change in environment, companies can miss opportunities or burn resources on fads.

• Fixed itinerary trap: a static approach towards resource allocation. Kodak's digital camera debacle is well-known. However, in 1957 itself, a Kodak engineer had built the first digital camera prototype. Yet, even in the 1990s when cell phones with built-in digital cameras started hurting Kodak, it did not allocate resources adequately to ensure survival.
• Forgetful wanderer trap - falling for the latest trend while ignoring past lessons. During the dot-com bubble, investors destroyed $5 trillion of value by following a fad. Companies that avoid this trap maintain a repository of past exploration attempts. Inputs from this repository are fed into future explorations to inform resource allocation decisions.

Ashish Iyer
Partner & Director, leader, BCG's Strategy Practice, Asia Pacific

Yashraj Erande
Partner & Director, leader BCG's Strategy Practice, India