Professor of Entrepreneurship
A central theoretical problem in organizational evolution is how organizations acquire new capabilities. Organizational exploitation of current capabilities often reduces exploration of new capabilities, resulting in a short-term bias in organizational adaptation (March, 1991). In addition, problemistic search and slack search have different consequences for exploration and exploitation because exploration has greater risk and less routinization. Exploration and exploitation are also affected by organizational momentum (Kelly and Amburgey, 1991) and direct competition from exploitation to exploration (March, 1991). These propositions are tested using data on innovations in shipbuilding between 1972 and 2000.Exploration and exploitation are fundamental activities of organizations and other adaptive systems (March, 1991). Organizational exploration is search for new knowledge, use of unfamiliar technologies, and creation of products with unknown demand. Because these activities do not reliably and quickly produce revenue, exploration has uncertain and distant benefits. Exploitation is use and refinement of existing knowledge, technologies, and products, and has more certain and proximate benefits. Exploration and exploitation both draw resources, and thus resource constraints require organizations to make tradeoffs between them (Levinthal and March, 1993).Organizations appear to have difficulty making these tradeoffs. Exploration and exploitation rely on different organizational routines and capabilities (Lewin et al., 1999; Galunic and Eisenhardt, 2001; Benner and Tushman, 2003), so it is easier to specialize in one of them than to efficiently perform a mixture of both. In technology development, exploitation of existing stocks of knowledge appears to reduce the incentives for exploring new knowledge and possibly even the ability to do so (Levinthal and March, 1981; Tushman and Anderson, 1986; Leonard-Barton, 1995; Christensen and Bower, 1996). Despite the difficulties in combining exploration and exploitation, theory and empirical evidence suggests that too little of either exploration or exploitation reduces performance (Levinthal and March, 1993; Katila and Ahuja, 2002; Fagiolo and Dosi, 2003; He and Wong, 2004). This indicates a need to learn more about how organizations shift between exploration and exploitation.