Earlier this year, I took a sabbatical at Stanford University in California. I believe every career professional needs to go back to the classroom from time to time, and this was my summer of learning about the latest thinking on leadership, strategy and innovation. I thought I will use today’s column to share two of the many lessons I learnt at the university’s beautiful campus in Palo Alto.
Exploration versus exploitation
My first lesson is about a classical dilemma in every organisation — should it focus on continuous improvement and do better and better at what it knows best, or should it move away from its existing base of knowledge into uncharted territory? The first is referred to as exploitation and the second as exploration.
For example, Google invests substantial resources in improving its search algorithm, reportedly over 500 times a year, in an ongoing effort to improve performance and keep competitors at bay. But they have also moved beyond search to maps, drones, self-driving cars and the Android operating system. General Mills has the option to expand its range of Cheerios from 15 flavours to 18 (exploitation) or to venture into launching a packaged egg sandwich product (exploration).
All successful organisations need to engage in varying degrees of exploration and exploitation, and the role of the leader is to find the optimal balance so as to allocate the right resources. The balance will depend on the strategic environment. Stable and competitive environments tend to favour exploitation — typically established firms are good at refining products and driving cost efficiencies. In turbulent environments and new markets, exploration makes more sense, and usually new players who can defy established norms are good at experimentation.
In the world of financial services, the big banks tend to be good at exploitation whereas the fintechs, without the baggage of legacy, tend to be good at exploration. But if banks do not explore outside their comfort zones, we miss out on discovering more profitable opportunities in a rapidly changing world. One recent example is Emirates NBD’s exploration with launching a new-age digital bank called Liv., built from scratch by a team of millennials. Going by the fact that Liv. is now the fastest growing bank in the UAE, this experiment is already bearing fruit.
Discovery beats planning
The second of my lessons concerns the concept of discovery as opposed to planning. Evidence shows that most winning strategies in the corporate world are not really contained in a three-year strategic plan, but rather can be attributed to a “discovery” the company made along the way. Examples abound. Facebook started as a social network application, and only when the number of users crossed a threshold did the idea materialise to make it a platform open to developers. Honda Motors planned to sell big motorcycles in the US and ended up discovering the market for small minibikes. Trader Joe’s, an American chain of neighbourhood grocery stores, originally started off as a specialty retailer selling cigarettes and ammunition. Many entrepreneurial firms discover a strategy far better than what the founders had envisioned.
In all these examples, we cannot pretend that the success was planned. Business school case studies do a good job of retrospective rationalisation, but we should be careful not to assume that all great businesses are built from a grand plan. However, it is also not about chance. Leadership is not about waiting to get lucky, it is about spotting the right opportunities and acting on them. Good leaders do not pretend to know the solution in advance. Instead they plan to discover, and as Intuit’s founder Scott Cook says, “savour the surprises”.
Banks are traditionally good at planning and do not like surprises. Most established banks have rolling three-year strategic plans and inflexible annual budgets. However, the more we see fintechs and techfins gulping away at the edges of our revenue pools by being razor-focused on customer journeys, the more we need to be prepared to discover and pounce on opportunities that are driven by customer needs that transcend banking. Banks that are open to exploration and discovery and can be nimble are better placed for future success.
Suvo Sarkar is the senior executive vice-president for Retail Banking and Wealth Management at Emirates NBD.