Most portfolio problems aren't evaluation problems. They're allocation problems. You're over-concentrated in positions you'd never enter today, and under-invested in opportunities that would absorb freed capital.
Strategic exits become dramatically easier when you have clear alternative deployment. The question shifts from "should we exit?" (scary, loss-framed) to "is this the best use of these resources?" (analytical, gain-framed).
The Explore-Exploit Balance
Organisational theorist James March framed a fundamental allocation question: how much to invest in exploiting known opportunities versus exploring new ones?
- Exploitation: Extracting value from current positions—scaling what works
- Exploration: Investing in new opportunities—finding what might work better
If you explore too little, you keep following strategies that "used to work"—even as conditions change. If you explore too much, you never build the depth to capture value.
Most portfolios are over-exploited and under-explored.
The result: insufficient optionality when exit decisions arise.
Why Optionality Reduces Exit Friction
Exit decisions are hard partly because of uncertainty about what comes next. The question "should we exit this position?" is easier when you can immediately answer "and deploy into these alternatives."
Diversification helps you walk away because you know what you're walking toward. It converts exits from losses into reallocations.
Low optionality: "We should exit this position... but then what do we do with the capital/talent/attention?" The uncertainty creates paralysis.
High optionality: "We should reallocate from this position to these three qualified opportunities." The decision becomes about relative expected value, not whether to face the void.
Philips vs Sears
Philips invested in diversification—new products, new technologies, adjacent markets. When their core lighting business declined, they had places to reallocate. They could exit their historical core because they'd built alternatives.
Sears had similar opportunities but never built them. When their core retail model failed, they had nowhere to go. The exit was impossible because there was nothing to exit toward.
Optionality doesn't guarantee wisdom. It makes wisdom possible.
Goal Myopia
Goals can create myopia. When you're fixated on a specific target, you fail to explore adjacent opportunities. The famous "invisible gorilla" experiments demonstrate this: fixation literally prevents you from seeing what's obvious.
Stuckness isn't always lack of courage. Sometimes it's attentional capture. You're so focused on the current position that you can't see the alternatives.
"Your inability to exit may be an optionality problem, not a courage problem."
Building Optionality
Layer 1: Exploration Budget
Allocate a percentage of resources explicitly to exploration. Not leftover resources—dedicated resources. Exploration that depends on slack never happens; exploitation consumes everything available.
Rule of thumb: 10-20% of discretionary allocation should go to exploring new opportunities.
Layer 2: Adjacent Capability
Build capabilities that apply across multiple possible futures. Skills, relationships, infrastructure that retain value regardless of which specific opportunities materialise.
Layer 3: Warm Options
Maintain 2-3 opportunities in "ready" state—diligenced, sized, approved in principle. When exit decisions arise, you can execute quickly rather than starting from scratch.
The Portfolio Audit
Current Allocation
- What percentage of resources is locked in current positions?
- What's the opportunity cost of that concentration?
Alternative Deployment
- If you freed 20% of current resources, where would they go?
- Are those alternatives qualified and ready?
Exploration Investment
- What percentage is allocated to developing new options?
- Is that allocation protected or does it get raided when exploitation needs resources?
Option Readiness
- How many qualified alternatives exist if you needed to reallocate tomorrow?
- What would it take to have three ready options at any time?
Exit Toward, Not Away
The easiest way to stay trapped is exiting away from pain without exiting toward opportunity. You escape the negative but have no positive pull.
Optionality provides the positive pull. It converts "should we stop this?" into "should we redirect to that?" The first is a loss frame. The second is a gain frame. The psychology is entirely different.
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This article is for educational purposes and does not constitute business or investment advice. Strategic decisions should be made with appropriate professional counsel.