Exploration vs. Exploitation: What’s the Right Balance for a Business?

The success of any complex system, from ant colonies to beehives to businesses, depends on striking a balance between exploiting known resources and exploring for new resources. Spend all your time eating food you already have, and you risk starvation when you run out. But spend too much time exploring for more food, and you’re wasting energy you don’t need to waste.

Scientists have shown that foraging honeybees will find virtually any viable new food source within about two kilometers of their hive with great efficiency, regardless of the current nectar resources available. And when a honeybee finds a good nectar source, it returns to the hive to tell the other bees how far the nectar is, its direction from the hive (in relation to the sun), and the quantity of nectar it discovered. All this is communicated in a “waggle dance” the bee performs in front of the other bees:

All biological systems require balancing the time and energy spent on exploitation against the time and energy spent on exploration. Virtually any complex adaptive system must strike this balance correctly just to be able to persist – that is, to live, or to survive – while trying to adapt to one change after another in its environment.

The exploration-exploitation trade-off has important lessons for businesses, too. Consider, for instance, how most firms record and report their profits today. When a business is exploiting its known sources of income, it is living in the short term. But long-term success requires exploration as well. And one of the biggest current problems afflicting most businesses is financial short-termism. The way businesses are organized, and top executives rewarded, predisposes most of them to excel at exploiting rather than exploring, always opting for short-term earnings at the expense of long-term shareholder value. 

Organizations of all kinds (and not just businesses) tend to be more persistent and to survive longer when they are open to new information and able to adapt to new ideas, while at the same time being unified by a common purpose or an anchoring set of beliefs. As I wrote about in a previous post, this is why a purpose-driven company is likely to have a longer-running and more profitable business than a company that has no purpose – because it is the unifying nature of a “sense of purpose” that allows a company to adapt more easily to new ideas about how to achieve that purpose.

So the balance between exploitation and exploration can also be thought of as a metaphor for the balance between innovation and operation at a business. Innovation requires creativity and new thinking, and exploring the world for additional possibilities. Running an efficient business operation, by contrast, requires attention to detail, avoidance of errors, and cost control. It’s easy to see why innovation conflicts with running a flawless operation, if for no other reason than the fact that the more errors you avoid, the fewer innovations you’re likely to discover by happy accident.

And in the fast-paced world of online marketing, an increasingly useful approach to choosing the right tactic or strategy is known as the “multi-armed bandit problem,” a statistical task that involves figuring out what kind of actions are likely to generate the highest returns over time. Think of a gambler at a casino who can choose to play many different slot machines (also known as “one-armed bandits”). Each machine has its own odds of paying off, unknown to the gambler. How should the gambler decide which machines to play? The more he plays, the more he learns about each machine’s odds of paying off, but rather than simply betting over and over with the machines that have won in the past (a pure exploitation strategy), his long-term success depends on investing some funds to play new machines, to find those that might pay even higher returns.

Statistically, the multi-armed bandit problem is exactly what an online marketer faces when trying to evaluate different offers for different types of prospects and customers across a wide range of possibilities. Solving such problems requires experimentation at scale, and sophisticated analytics offerings, from companies such as Amplero, Boomtrain, and Optimove, are required.

Exploration. Exploitation. Both functions are essential to a business’s survival. But they only work well when they are employed simultaneously, despite all the conflicts that are produced.

So, in addition to its rising importance as a tactical analytics problem, striking the right balance between exploration and exploitation may be the single most important strategic task any company’s management can undertake.