Innovate or optimise? How to decide what your business needs now
Every business has to decide where its next pound of effort goes: making what already works better, or building what comes next. Most need both, but rarely in equal measure. Here is how to tell which you need now, and how to run both without one starving the other.
In short
Optimising means improving what you already do: lowering costs, raising quality, selling more of what customers already buy. Innovating means doing something new: a new product, a new market or a new way of making money. Both matter. The hard part is the balance, and the right balance changes as your market changes.
Most companies lean heavily towards the first. In PwC’s 2025 Global CEO Survey of 4,701 chief executives, on average only 7% of revenue over the previous five years had come from distinct new businesses. In the same survey, 42% of CEOs said their company would not be viable beyond ten years if it continued on its current path.
7%
of revenue over the previous five years came, on average, from distinct new businesses, in a survey of 4,701 chief executives.
PwC Global CEO Survey, 2025Two kinds of work
In 1991, the organisational theorist James March described two kinds of activity that every organisation has to balance. Exploitation, in his words, “includes such things as refinement, choice, production, efficiency, selection, implementation, execution”. Exploration “includes things captured by terms such as search, variation, risk taking, experimentation, play, flexibility, discovery, innovation”.
The two compete for the same people, money and attention, and they pay back on different clocks. In a later paper, Daniel Levinthal and March pointed out that the returns from exploitation tend to be more certain and to arrive sooner and closer to home than the returns from exploration. That is why, left to themselves, most organisations drift towards optimising. The pull of the short term is strong: in PwC’s 2026 survey, chief executives said they spend 47% of their time on issues with a horizon of less than a year, and 16% on decisions looking more than five years ahead.
Why doing only one fails
March was clear that both extremes are dangerous.
Adaptive systems that engage in exploration to the exclusion of exploitation are likely to find that they suffer the costs of experimentation without gaining many of its benefits.
James G. March, Exploration and exploitation in organizational learning, 1991
The opposite is just as risky. Those that only exploit, he wrote, “are likely to find themselves trapped in suboptimal stable equilibria”.
Levinthal and March gave the two dangers names. In the success trap, what works today attracts more and more investment, so what might work tomorrow gets less and less. In the failure trap, an organisation moves from one new idea to the next without staying with any of them long enough to build something durable. Two companies from the same industry show the difference.
Kodak: the success trap
Kodak did not miss digital photography. One of its engineers, Steven Sasson, built what the IEEE recognises as the first handheld digital camera in 1975, and in 2005 Kodak led the US digital camera market. What it could not do was build a business around digital that was anywhere near as profitable as film. In January 2012, Kodak filed for Chapter 11 bankruptcy protection.
Fujifilm: working on both
Fujifilm faced the same collapse in film. In 2000, according to Shigetaka Komori, its long-serving chief executive, photographic products made up 60% of its sales and two-thirds of its profit. It kept and restructured its imaging business while moving its chemical and materials know-how into new markets, including healthcare and advanced materials, and in 2007 it launched a skincare line, Astalift. In the year to March 2024, healthcare alone brought in about a third of the group’s revenue.
Signals that tell you which you need now
There is no formula, but there are reliable signs.
Lean towards optimising when
- demand is steady and customers still choose you for the same reasons;
- margins are under pressure from costs you can control;
- quality, speed or service problems are costing you customers;
- you have a clear lead, and the bigger risk is wasting it.
Lean towards innovating when
- growth in your core market has slowed, and price is becoming the main way to win;
- customers are starting to solve the problem a different way;
- a new technology or regulation is changing what customers expect;
- most of your revenue depends on one product, one customer or one market.
Most businesses will recognise signals from both lists. That is the point: the question is rarely which one, but how much of each.
How to run both at once
1. Decide the split deliberately
Make the balance an explicit decision rather than the result of whoever argues hardest. In a widely cited 2012 Harvard Business Review article, Bansi Nagji and Geoff Tuff of Monitor Group reported that outperforming firms in the industrial, technology and consumer goods sectors typically allocated about 70% of their innovation resources to core offerings, 20% to adjacent efforts and 10% to transformational initiatives. The returns, they found, tended to run the other way, with about 70% coming from the transformational work.
An innovation portfolio: one observed average
- Core: improving what you sell today
- Adjacent: new to you, close to your core
- Transformational: new markets or business models
Treat those numbers as a reference point, not a target. They come from the consultancy’s own research rather than a peer-reviewed study, and the authors themselves stress that “the ideal balance will differ from industry to industry and company to company”.
2. Give new work its own home
New ventures rarely survive inside a unit that is judged on this quarter’s efficiency. In a study of 35 attempts to launch breakthrough innovations, Charles O’Reilly and Michael Tushman found that more than 90% of the attempts that used an “ambidextrous” structure succeeded. These kept new, exploratory units separate from the established business, with tight links at senior level. Of the attempts run within the existing functional structure, only 25% succeeded. It was a small study, but the lesson is a practical one: protect new work, and connect it at the top.
90%+
of breakthrough attempts that used an ambidextrous structure succeeded, against 25% of those run within the existing functional structure.
O’Reilly and Tushman, 20043. Measure each on its own terms
Judge the core on margin, efficiency and customer retention. Judge new work first on learning: evidence that customers want it, then early revenue, then profit. Holding a six-month-old venture to the standards of a mature business is one of the quickest ways to kill it.
4. Fund new bets in stages
Start with small, cheap tests. Release more money as the evidence builds, and stop early when it does not. That way, failures stay small and successes get the support they need.
5. Revisit the balance every year
Markets move, and the right split moves with them. Set a date, at least once a year, to look again at where your effort is going and whether the signals have changed.
Start with an honest audit
Before deciding anything, answer three questions with real numbers. Where do your revenue and profit come from today, and how exposed are they? How much of your team’s time goes on improving the core, and how much on building something new? And what would have to happen for your core business to be smaller in five years’ time, and are you already seeing signs of it?
The businesses that get this right do not treat it as a one-off strategy exercise. They make the balance an explicit decision, review it regularly, and change it when the market tells them to.
Key takeaway: Optimising keeps you competitive today; innovating keeps you relevant tomorrow. Decide the balance on purpose, protect new work from the pressures of the core, and look at the split again every year.
Sources
- March, J. G. (1991). Exploration and exploitation in organizational learning. Organization Science 2(1), 71–87. https://doi.org/10.1287/orsc.2.1.71
- Levinthal, D. A. and March, J. G. (1993). The myopia of learning. Strategic Management Journal 14(S2), 95–112. https://doi.org/10.1002/smj.4250141009
- PwC (2025). 28th Annual Global CEO Survey (press release). https://www.pwc.com/gx/en/news-room/press-releases/2025/pwc-2025-global-ceo-survey.html
- PwC (2026). 29th Annual Global CEO Survey (press release). https://www.pwc.com/gx/en/news-room/press-releases/2026/pwc-2026-global-ceo-survey.html
- IEEE (2022). Milestone: Handheld Digital Camera, 1975. Engineering and Technology History Wiki. https://ethw.org/Milestones:Handheld_Digital_Camera%2C_1975
- NBC News / Associated Press (2006). Report on IDC figures for the 2005 US digital camera market. https://www.nbcnews.com/id/wbna11258928
- CNN Money (2012). Kodak files for bankruptcy. https://money.cnn.com/2012/01/19/news/companies/kodak_bankruptcy/
- Printing Impressions (2015). New book: Fujifilm CEO explains company’s dramatic transformation. https://www.piworld.com/article/new-book-fujifilm-ceo-explains-companys-dramatic-transformation/
- CosmeticsDesign-Asia (2015). A look at Fujifilm’s astaxanthin breakthrough in skin care. https://cosmeticsdesign-asia.com/Article/2015/05/06/A-look-at-Fujifilm-s-astaxanthin-breakthrough-in-skin-care
- Fujifilm (2024). Financial results for the fiscal year ended March 31, 2024. https://www.fujifilm.com/de/en/news/Fujifilm-Announces-Financial-Results-for-Fiscal-Year-Ended-March-31-2024
- Nagji, B. and Tuff, G. (2012). Managing your innovation portfolio. Harvard Business Review. https://hbr.org/2012/05/managing-your-innovation-portfolio
- O’Reilly, C. A. and Tushman, M. L. (2004). The ambidextrous organization. Harvard Business Review. https://hbr.org/2004/04/the-ambidextrous-organization
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Innovate or optimise? How to decide what your business needs now
Every business has to decide where its next pound of effort goes: making what already works better, or building what comes next. Most need both, but rarely in equal measure. Here is how to tell which you need now, and how to run both without one starving the other.