Broader Reach, More Innovation

Title: Accountability and Control as Catalysts for Strategic Exploration and Exploitation: Field Study Results (PDF)
Authors: Robert Simons (Harvard University)
Publisher: Harvard Business School, Working Paper No. 10-051
Date Published: January 2010  

Many companies face a common challenge: How to exploit their current resources and market position to remain profitable while exploring new products, opportunities, and ways of creating value for their customers. The problem is, these goals are seemingly in conflict. Exploitation demands efficiency and the seamless execution of long-established operations, whereas exploration requires the abandonment of routines in favor of fresh ideas. But this paper finds that successful companies will almost always find a way to explore.

The author uses data from more than 100 field studies on organizations — from the military to soft-drink companies — to better understand how companies tilt the balance toward either exploitation or exploration. He found that companies can prioritize either of these two objectives by changing the span of control (the resources available to a manager) or the span of accountability (the parameters by which the manager is evaluated) of key personnel. In 70 percent of the organizations studied, managers were asked to meet performance benchmarks beyond the reach of resources they controlled. This was not an accident. The author discovered that companies used this imbalance to encourage managers to develop innovative strategies. For example, when senior executives at an investment bank wanted to boost innovation, they made group heads accountable for bringing in their own business, choosing how to distribute resources, and deciding when to cut costs to maximize profitability. Previously, the group heads had been accountable for only narrow performance measures related to transaction volume. This change, of course, forced them to innovate to reach these new standards.

In a separate case, top executives at a technology startup wanted tighter control over operations and wanted staff to have less freedom to innovate, so they chose to reel in the entrepreneurial culture to reduce costs and increase operational efficiency. They accomplished this by limiting managers’ areas of responsibility and establishing strictly defined roles with clear performance standards. Previously, the entire staff had focused on company-wide initiatives like market share growth and technology development.

Bottom Line: By increasing the span of responsibility of managers beyond what they directly control, companies can encourage creative problem solving, new ideas, and better collaboration between groups.