Eric Ries on how corporations can act like startups

We remember the conversation clearly, though it took place more than 20 years ago. He was sitting in his home office, a few miles from Palo Alto, California.

Across the table was one of our heroes, Jim March. An emeritus professor at Stanford University, March was regarded as one of the world’s preeminent organizational theorists. The topic that afternoon was his seminal article, “Exploration and Exploitation in Organizational Learning,” which had been published in 1991. In the piece, March laid bare the roots of one of the most perplexing challenges in business—how to wring the maximum value out of current assets and capabilities (exploiting) while simultaneously inventing the future (exploring).

The problem is that these activities are as different from one another as carpentry and painting, weightlifting and gymnastics, or, as our British friends would have it, chalk and cheese.

As the professor put it in his research paper: “The essence of exploitation is the refinement and extension of existing competencies, technologies, and paradigms. Its returns are positive, proximate, and predictable. The essence of exploration is experimentation with new alternatives. Its returns are uncertain, distant, and often negative.”

Gary’s question to the professor all those years ago was, “Can we ever hope to build organizations that are good at both explore and exploit? Must one always come at the expense of the other?” March peered out the window as he mulled the question, then quietly shook his head. “No,” he replied. “I don’t think that’s possible.”

He had good reason to be skeptical, and if he were alive today (he died in 2018), he would find little reason to reconsider his assessment. It’s still the insurgents, not the incumbents, that turn industries upside down, and try as one might, it’s hard to think of a large organization that’s as daring as it is disciplined, or as creative as it is cost-conscious.

Fortunately, not everyone has given up on the challenge of building organizations that are efficient and entrepreneurial. There are a few dogged souls (and we count ourselves among that number) who believe it is possible to turn either/or into both/and—and one of the most thoughtful is Eric Ries, the best-selling author of the The Lean Startup and founder of the Long-Term Stock Exchange.

Like us, Ries has spent a good part of his professional life trying to inject entrepreneurial DNA into established companies. As you’d expect of a serial entrepreneur, he’s an optimist, but not naive. He understands that the bureaucratic structures and processes found in most organizations are toxic to innovation.

In a recent interview, he shared with us: “Your average product manager often spends 50% of [their] time trying to defend a budget that’s already been assigned to the project. It’s just a complete waste of time.”

The problem goes deep, Ries notes. “In a traditional organization, everyone is paid to eliminate variations, [which] means eliminating new ideas,” he says. “You have a kind of status quo bias combined with incentives that reward defensive thinking over the pursuit of new opportunities. Then you add the disease of short-term thinking, and it’s a pretty toxic brew.”

Given this diagnosis, Eric agrees that Jim March was right—until a certain point. It is impossible to be both efficient and entrepreneurial in an organization that’s built on industrial-age management principles. “I don’t think it’s fair,” Ries says, “to expect that the top-down org structure that served Alfred Sloan at General Motors (Sloan was chairman of GM from 1939–1956), to be effective today. That’s asking a lot. We need to recognize the strengths of traditional management, and then expand the toolkit to encompass the things that harness and accelerate human creativity.”

Editor’s note: This article is part of the video and editorial series The New Human Movement, which aims to highlight bold thinkers and doers who are reimagining work and leadership.

Gary Hamel is a business thinker, author, and educator. He is on the faculty of the London Business School and author of the Harvard Business Review Press best-selling book Humanocracy: Creating Organizations as Amazing as the People Inside Them.

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