Understanding a new concept can sometimes best be done by analyzing it through an older lens. Our last Thursday Theory Tips piece touched on the potential impact that creating new markets can bring to a nation’s development, and Efosa Ojomo’s latest piece demystifies the process of market creation. This piece will use the older, potentially more familiar, concept of exploration vs. exploitation to better understand what activities in the three phases of market creation might look like. If you comprehend these activities then you’re one step closer to creating the next successful market.
Exploration vs. exploitation
During the process of innovation, there are two categories of activities: exploration of new possibilities and exploitation of old certainties.
Exploration activities can involve search, testing, and experimentation of new ideas or models. Exploration often requires a flexible organization structure, and is often associated with emerging businesses and technologies.
On the other hand, exploitation activities involve improving and refining, production, efficiency, and implementation. Exploitation often requires mechanistic structures and tightly-controlled systems, and is often associated with stable markets and technologies.
It’s widely accepted that for an organization or project to be and remain successful in the long run, there needs to be a balanced investment of time and resources between exploration and exploitation activities.
So, what do these activities look like in the successful creation of a market?
Exploration and exploitation in the market-creation process
Market creation follows a fairly predictable pattern of discovery, distribution, and sometimes, democratization. Within each of these phases there should exist both exploration and exploitation activities.
First, in the discovery phase, exploration activities may look like research, experimentation, and pilots. Exploitation activities may include improving and refining the research and pilots to develop a more efficient product or service.
For example, in the US’ creation of the electricity market, Thomas Edison first received a patent for an “electric lamp.” Following his successful invention, he initially worked with J.P. Morgan and just a few privileged customers to bring electricity into their New York City homes. It was after this successful small-scale experiment that J.P. Morgan would become Edison’s main financier and help him create General Electric to open Pearl Street Station, the first central power plant in Manhattan.
Next, in the distribution phase, exploration activities may look like the development of a mechanism to enable widespread adoption of the discovery, and exploitation activities would then be mass production, mass distribution, and mass consumption.
In the US’ electricity market, the distribution phase partially consisted of the development of the power grid. It was Samuel Insull, who originally worked for Edison, who set out to build Chicago Edison to enable the widespread adoption of electricity. Insull achieved “economies of scale” by consolidating the mom-and-pop electricity providers and disabling small generators in favor of larger, more efficient units manufactured by General Electric. He also found that the more customers he had, the more efficiently he could run his generators, and the cheaper it was to provide power. As Insull’s business grew, he found better ways of providing electricity to more people and enabled mass production, distribution, and consumption.
Finally, in the democratization phase, when a government, nonprofit, or international agency deems a discovery important enough that everyone should have access to it, exploration activities might look like developing a highly-regulated solution, and exploitation would be the delivery of this solution.
In the US, the federal government took a more prominent role in the democratization of electricity after the Great Depression brought on the collapse of Insull’s indebted companies. In 1936, the federal government passed The Rural Electrification Act, which provided federal loans to companies for the installation of electrical distribution systems to serve isolated rural areas of the country. This wasn’t only about democratizing access to electricity, but also about creating jobs greatly needed during hard economic times. Unfortunately, the government found that it was too expensive to provide loans to the companies, so it shifted its approach to giving loans to farmer co-ops that would build the electricity infrastructure they needed themselves. Regardless, this was still a regulated solution to democratizing electricity and the initiative proved successful with farm electricity access increasing 70% in 15 years.
Today, we rarely think of how the electricity market in the US was created; however, in this breakdown, it’s clear that to successfully create the market, there was a balance of exploration and exploitation activities at all phases of the process. This same structure can be adopted and adapted for the creation of the next successful market.