Navigating Innovation and the Board’s Balancing Act

Defining Innovation and the Role of AI

AI has a significant role to play in innovation, expanding the realms of possibility and sparking imagination to inspire new ideas and concepts. It enables novel forms of value creation for consumers and introduces new ways for businesses to capture and realise tangible outcomes. However, AI itself is not innovation. It is a powerful enabler that must be central to any organisation’s future strategy, but true innovation goes far beyond this. It lies in the capacity, capabilities and routines of an organisation to consistently deliver new forms of value over time.

Defining innovation is complex and subjective, with interpretations varying significantly. Still, leaders need a shared, overarching view of what innovation means to them, tailored to their organisational context. A common perspective within a firm will serve as a cornerstone for a coherent strategy and approach to embedding innovation across a business, enabling leaders to assess the value, determine required investment, and align teams around a unified direction. The definition of innovation should encompass both short-term value, achieved through operational enhancements and efficiencies that boost revenue and reduce costs, and long-term value, generated through the pursuit of new revenue streams, business models, and ecosystems to drive future growth and sustainability.

The Exploit-Explore Dilemma

A robust innovation strategy must account for both dimensions of value: delivering impact today whilst building the foundations for tomorrow. This dynamic is known as the exploit-explore dilemma and captures the challenge organisations face in balancing two competing priorities. On one side lies the imperative to exploit existing capabilities to generate short-term value and boost the bottom line. On the other lies the need to explore new opportunities with the potential to create long-term value and new revenue streams.

The challenge here is not just one of allocating limited resources, it is the fact that the objectives of these two strategies are often contradictory. By their very nature, exploratory activities are designed to challenge the status quo, disrupt established business models, and reimagine ways of working, directly opposing the goals of exploitation activities, which focus on reinforcing and optimising existing systems. Striking the right balance becomes especially challenging during periods of success and strong performance, as leaders hesitate to risk breaking what is already working well. However, to ensure sustainable growth and the future relevance of the business, it is essential for organisations to effectively and intentionally navigate this tension between exploiting their current capabilities and exploring new possibilities.

Historically, many organisations achieved success by concentrating on an exploit-focused strategy to strengthen value creation and protect market share. This approach worked well when industries were stable, boundaries were clear, and barriers to entry were high, allowing incumbents to build and sustain leadership positions in the market. However, that environment has shifted dramatically. Rapid technological advances, evolving ecosystems, and the rise of new business models and competitors have reshaped market dynamics, challenging incumbents and eroding the effectiveness of a purely exploit focused strategy.

The competition between traditional retail chains and Amazon exemplifies this dilemma. Predominantly brick-and-mortar retailers like Wilko and Toys "R" Us have historically focused on exploitative activities, optimising existing physical stores and relying on established brand loyalty. Ultimately these businesses failed to adapt to growing consumer demands and expectations around online shopping, leading to their eventual downfall. In contrast, Amazon has consistently embraced the exploration of new business models, prioritised e-commerce capabilities, invested in technology to enable personalised product recommendations, and diversified into industries like cloud computing and streaming services. This relentless focus on innovation has enabled Amazon to disrupt and dominate the online retail sector. More recently, Amazon has announced the closure of its Amazon Fresh and Amazon Go stores, demonstrating its continued willingness to experiment with new models and pivot away from initiatives that do not meet expectations or achieve sustainable success.

Stewarding Innovation from the Boardroom

An organisation’s exploit-explore balance is a critical strategic discussion to be held at the most senior levels of a firm. It shapes the organisation’s tone, clarifies its long-term vision, guides medium-term strategic priorities, and informs short-term operational decisions. The board’s role in setting and stewarding this balance is pivotal.

Here are three strategies that can assist senior leadership in achieving an effective equilibrium between exploitation and exploration initiatives.

1. Foster diversity of thought within the board

Promoting diversity at the senior-most levels of an organisation is essential to driving innovation and fresh perspectives. Diversity in generation, industry experience, and background enables boards to move beyond a traditional focus on exploitation models and embrace more exploratory approaches.

One effective method is implementing next-generation board reverse mentoring programmes. These initiatives pair board members with selected individuals from across the organisation who bring distinct perspectives, ideas, and insights. By fostering partnerships with individuals who differ significantly from their board counterparts, organisations can cultivate fresh ideas and broaden strategic thinking. Some organisations have adopted year-long board reverse mentoring programmes, yielding significant benefits such as enhanced board awareness, improved strategic decision-making, and greater employee engagement and satisfaction.

Another approach focuses on more regular reviews of board skills and capabilities to ensure alignment with an organisation’s evolving needs. These reviews help identify gaps in expertise required to prioritise exploratory processes, spot emerging opportunities, and drive future growth and value creation. In some cases, this may necessitate more proactive and deliberate turnover of board members to maintain a dynamic and forward-thinking composition. For boards where turnover has traditionally been slow or limited, such measures can be instrumental in ensuring the board remains equipped to navigate both present and future challenges effectively.

2. Ensure continuous, hands-on learning

The pace and pervasiveness of technological advancements and the emergence of new business models and ecosystems demand a dynamic and immersive approach to upskilling. Traditionally, boards have relied on external experts to provide independent updates on new concepts or technologies during regular meetings. However, this approach is no longer sufficient. To truly grasp the potential of new technologies and ecosystems, senior leaders must take a more active role, engaging directly with these innovations, observing them in action, and dedicating hands-on time within the business to understand current operations and envision future possibilities.

Similarly, innovation cannot be treated as a one-off, static initiative, nor outsourced to an external function or team. For innovation to drive meaningful impact, organisations must build and embed innovation routines and practices deep within their core. Incremental innovation, while often understated, can lead to transformational outcomes. By gradually shifting operational routines and fostering a culture of continuous improvement, organisations can position themselves to seize future opportunities and generate sustained value. This approach not only ensures adaptability but also enables sustainable, seismic change over time.

3. Promote challenge and debate

When a new concept or approach is met with unanimous agreement from the outset, it is unlikely to foster genuine transformation and significant value. Transformational change is inherently challenging and emotional. That’s why it is vital for boards to cultivate an environment where constructive challenge and robust debate are not just permitted but actively encouraged. Constructive debate uncovers hidden risks, exposes unintended consequences, and compels the board to rigorously test new ideas across a range of scenarios.

To facilitate this dynamic, some boards have implemented a rotating role of "dissenter." This individual is tasked with proactively questioning assumptions, challenging consensus and groupthink, and raising provocative viewpoints. They play the devil’s advocate to rigorously evaluate new concepts and strategies. This proactive approach strengthens decision-making, sharpens strategic thinking, and ultimately unites the board around decisions that are both well-tested and resilient.

In Summary

In an environment defined by rapid change and uncertainty, boards must take an active role in shaping how their organisations balance the demands of today with the opportunities of tomorrow. By fostering diversity of thought, embracing hands-on learning, and encouraging healthy debate, boards can position their organisations to navigate the exploit-explore dilemma with agility and confidence. Ultimately, it is this deliberate stewardship that will enable organisations to unlock sustained innovation and long-term value.