Measuring Knowledge Exploitation and Exploration

Measuring Knowledge Exploitation and Exploration: An Empirical Application in a Technological Development Center in Brazil

Silvio Popadiuk 1, Marcos Antonio Franklin 2 Patricia Gonçalvez Vidal 3, Lilian Aparecida Pasquini Miguel 4 y Vanderli Correia Prieto 5

Recibido: 28-01-2010 - Aprobado: 01-05-2010

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ABSTRACT:

This article presents a literature review on the concepts of exploration and exploitation of knowledge. From this review, it is showed that the concepts of exploration and exploitation can be analyzed through internal or external environments perspective, related to seven dimensions, namely: knowledge, innovation, strategy, costs, efficiency, competition, and partnership. From this theoretical conception, a closed and structured questionnaire was developed, that contained attributes related to the dimensions above. These attributes were assessed through a six-points Likert scale. This questionnaire was applied in a research and development institute of a major multinational firm in the telecommunication sector, in Brazil. The main purpose of this article is to assess the fit between what have been proposed in the literature on exploitation and exploration and what have been practiced in the corporate world. The results revealed two distinct groups of employees in this institute, regarding how these employees perceived their activities to be innovative. Regarding these two groups, there are significant differences regarding how these two groups evaluated the attributes related to the exploration and exploitation of knowledge.

Keyword: Exploration, Exploitation, Fit, Innovation, Brazil

Introduction

The process of decision making to invest resources in an organization has been the key issue for over decades of organizational studies (March and Simon, 1958; Cyert and March, 1963). Lately, one of the focuses of organizational theorists is to understand how to invest the organizational resources in a way to balance what March (1991) has called exploration of new knowledge and exploitation of available knowledge (Dosi and Marengo, 1997; Rothaermel, 2001). The organization may choose to invest in the refinement of an existing technology or on any other activity that is oriented toward increasing efficiency (Dosi and Marengo, 1997) or it may choose to invest in activities that search for novel processes or the discovery of new opportunities.

March (1991) argues that the organizations that engage in exploration to the exclusion of exploitation are likely to be penalized by the experimentation without gaining many of its benefits, whereas the organizations that engage in exploitation to the exclusion of exploration are likely to find themselves trapped in a suboptimal equilibrium. Companies thus face a trade-off between exploration and exploitation: If the company does not reach an appropriate equilibrium between the two ends of the continuum, the company may end up suffering from sub-optimization. In sum, firms face a trade-off between the creation of new capabilities (exploration) and the development of current capabilities (exploitation).

This article has the following research question: what is the fit between the theoretical considerations regarding exploration and exploitation and the activities being developed and used in a managerial setting? From this research question, this article has five purposes: to present a literature review of exploration and exploitation of knowledge; to characterize seven implicit dimensions regarding the theoretical concepts of exploration and exploitation of knowledge; to present an exploratory questionnaire using attributes of exploration and exploitation of knowledge; to apply this questionnaire in a pilot project inside a research and development institute of a major multinational firm in the telecommunication sector working in Brazil; and to elaborate analytical considerations regarding the fit or lack of fit regarding the theoretical context and the organizational context.

This article is structure as follows: next topic presents the strategies of exploitation and exploration of knowledge (March, 1991), summing up to the seven conceptual dimensions identified from this literature review. The second part introduces the methodology used to develop the scale as well as its tests; the third part describes the results. The final part, presents the discussion of the findings as well as the limitations of the study and the possible contributions both to practice and to the academia.

Literature review

Exploration and Exploitation

March (1991), in his seminal article, when looking from an organizational learning point of view, argues that there is a relationship between exploration and exploitation in the adaptive process in the organizations. Exploration refers to the actions and activities related to research, search, risk, experimentation, playing, flexibility, discovery, and innovation. Exploitation refers to refinement, choice, production, efficiency, selection, implementation and execution.

The essence of exploitation is the refinement and extension of the existing competencies, technologies, paradigms; a refinement that will lead to returns that are positive, near and predictable. While exploration is the experimentation of new alternatives, with returns that are far away on time, uncertain, and usually negative (March, 1991). March (1991) argues that the organizations make explicit or implicit choices for one or other, since the resources are scarce and the difficulties associated with the choices lead to complications in specifying the appropriated trade-offs.

The adaptable systems related to exploration which are excluded from the exploitation allegedly suffer from the costs related to the experimentation, without obtaining most of its benefits. Inversely, the systems that are related to the exploitation which are excluded from exploration are in a stable sub-optimal equilibrium (March, 1991). The organization choice for the exploration or exploitation resides, according to March (1991), on the rational search theory.

March (1991), cited Radner and Rothschild (1975) and Hey (1982), to explain that there are several possibilities to invest, which one characterized by the likelihood of distributing unknown. As time passes, new information about these distributions is accumulated, but the choices should be done among investing more in new alternatives and improve the future returns, or to improve the present returns. March (1991) points out that the studies on organizational learning direct the choice between exploration and exploitation regarding the search for new technologies or the refinement of existing technologies. The alterations in the environment are also pointed out since these changes need the generation of new alternatives to the survival of the firm. Due to the environmental turbulence, organizational diversity and competitive advantage, the evolutionary dominance of one organizational practice is sensitive to the relation between the variation related to the exploration reflected by the practice and by the change rate in the environment.

The learning process is reinforced, either positively or negatively, as a result of the path chosen by the organizations, consequently the choice between two alternatives is path dependent (March, 1991). To March (1991), the organizations accumulate experience in its norms, routines and forms at the individual and organizational level.

Teece, Pisano and Shuen (1997) also argue that the future position the organization may reach is a function of its current position, a position that suffers influence of the path chosen before, and the path ahead of it. This is due to the investment made a priori as well as the routine repertory. Teece et al. (1997) also posit that learning is a process of attempts, returns and evaluation. This way, the path dependency is amplified when there are conditions to the increase of returns related to the adoption of a technology. The products and the technologies are more attractive as they are adopted, characterized as a demand phenomenon.

The increase in returns can have different sources, as network externalities, the presence of complementary assets, and the infra-structure support, learning by doing and scale economies of production and distribution. Since there are several sources to increase returns, the anterior position of the firm may affect the capacity to exploit increasing returns.

The trade-off between exploration and exploitation occurs simultaneously and involve conflicts at short and long run, and it also has gains to individual and collective learning. To Gilsing (2002), there is a social construction of knowledge related to the choice between exploration and exploitation: the resulting learning is formed by new ideas, changes in beliefs, new and adapted institutions, change in the design of the structure of the networks and the adaptation of coordinating mechanisms.

Gilsing (2002) posit that when there is innovation, there is a rupture of the routine, there is a discontinuity that shows the beginning of a new base of knowledge that is totally tacit. In a sectorial system, the tacit nature of knowledge pushes the participants to approximate in a way to obtain a reduction in the cognitive distance, through the near interaction. There is a surge of varieties of ideas, prototypes, and demos. This variety is specially formed from the results in the learning processes and it consists of new knowledge highly tacit, and very specific to a limited number of firms. The environment, in phase of exploration, is characterized by low selection through the coordinating mechanisms, like the social norms and reputation; also there is a large variety and learning results that affect mainly the new base of knowledge (Gilsing, 2002). As a consequence, firms start to focus on the fit between demand needs and new markets for the new knowledge base. Also, the competition increases once the new knowledge base is already extensive to allow the development of several types of designs through several networks of exploration, creating competition among them. The demand and the combination of social and technical norms reinforce directly the activities of search and, by doing it, create limits to the new knowledge base. The results from the learning, such as new ideas and knowledge, should be adjusted to the emerging selective environment. A process of stability begins when a dominant design is chosen and there is the elimination of competing designs (Utterback, 1994). As a result, the learning focuses the change from exploration to exploitation. The competition intensifies and, usually, creates an incentive to focus on cost reduction. From this moment, the technical norms and formal procedures lead the firms to the search for the “scale effects” (Gilsing, 2002), i.e., the economic search for exploiting economy of scale gains.

Li, Schoenmakers and Vanhaverbeke (2006) evaluated the trade-off between exploration and exploitation from the learning experiences, and observed that, in a context of Schumpeterian competition, the returns would be diluted through imitation and destructive innovation. Li et al. (2006) argue that exploration and exploitation are activities related to the search of knowledge. In a context where a given performance goal must be reached, the firms need to find solutions to reach the goal. On the other hand, if the current performance is better than the expected one, so the organization enter in a calm path, and it encourage the search for activities that are not justifiable in terms of expected returns (Li et al., 2006). Lundvall (1999) points as a good plan to firms that want to increase learning to combine indoor activities that are dissimilar and complementary.

Lundvall (1999) argues that if a firm tries to create a disequilibrium between what it can do and what it is required from it to accomplish its task are good way to stimulate the learning as well as to increase the set of competencies of the firm. There are three categories related to the basic functions of the firm: (1) allocate scarce resource, (2) exploit sub-utilized resources when entering new activities and (3) speed up the learning and the creation of new competencies (Lundval, 1999, p. 12). The firm will reallocate its resources if there is an alteration of the price of factors. It will exploit the un-utilized resources and will use its existing knowledge base in connection to the introduction of new products. Its success will depend upon the construction of new competencies.

The learning reasons are divided between exploration and exploitation. Exploration is directly connected to the tacit knowledge that is assumed to be a pre-condition to the development and acquisition of new knowledge. Learning in exploitation is related to the explicit knowledge that can be applied to refinement or improvement of current knowledge (Karlson, 2005).

Li et al. (2006) posit that the activities related to the knowledge search have several dimensions one of them is the timing. Timing Exploitation is the creation of new knowledge through the search of recent knowledge and timing exploration is the creation of new knowledge through the search of knowledge far away in time. Considering the limited rationality and the path dependency, individuals tend to search for alternatives that are related to their current knowledge, and valuable choices are lost in time. Also, the choice that has been made was done in lie of complementary assets that were not available at that moment.

Another dimension is the geographic or institutional (Li et al., 2006) which is related to having the resources in common available at the same geographic area. This proximity facilitates the transfer of knowledge which in an exploration phase is highly tacit and can be transfer more easily through interactions and practices.

Li et al. (2006) also consider that the activities involved in exploration and exploitation are important to the process of innovation. They point out that the process of innovation involves stages of search of knowledge, knowledge recombination, finding an innovative solution and its commercialization (Li et al., 2006, p. 11). The authors argue that starting from an application of one technology until its expansion, problems may accumulate in the process of differentiation of this technology and the exchange of relevant practices up to the point where efficiency and returns diminish considerably, At this point, there is no possibility to generate additions or modifications. This is the necessary incentive to search for new structures or to generate the Schumpterian creative destruction.

Teece et al. (1997) advances the notion of competitive advantage through the exploration of possibilities that are external and specific to the firm, as well as the development of new opportunities (Penrose, 1959; Teece, 1986; Wernerfelt,1984), by developing and explaining the term dynamic capabilities, to strategic manage the capability of adapting, integrating, reconfiguring abilities, resources and functional competencies to the environment, specially since the business environment is always changing. Also, the dynamic capabilities are complemented by the path dependency, i.e., the firms in several points of their trajectories make choices that are irreversible, investing in one competency in lieu of another competency. These choices will determine not only the choices presented today but also in the future. The capability that the firm has should be compatible with the user needs, unique and difficult to be replicated. Teece et al. (1997) complements stating that the firm´s current capability could be the base of the diversification to new markets as well as new products. However, these dynamic capabilities can be obtained only through the internal development of such a capability.

A valuable consideration to the exploration and exploitation discussion is that the core competency and capacity of the firm are involved in the organizational processes. These processes are molded by the firm´s assets (internally or in the market), and through the evolutionary path that the firm has adopted (Teece et al., 1997). Gilsing (2002) has also considered the characteristics of the co-evolutionary path, describing it by the search to predict which variables in the system answer to changes in other variables in the system or changes in the system itself.

Masini, Zollo and Wassenhove (2004) argues that the strategic decision between product differentiation and cost leadership lead to a trade-off between exploration and exploitation, since if the organization decides to compete on the differentiation, the organization will worry about its products being copied or imitated. Therefore, the costs associated with this strategy will be higher. Following the logic, the organization that competes on cost leadership is not worried about the risk of having its product being copied or imitated.

Adner (1999) argues that the tension between exploration and exploitation is not axiomatic, i.e., the exploration of new technologies does not prevent their exploitation in the market. The firms could influence the investment in activities in the market to speed up the process of exploration through the process of exploitation by focusing on the needs heterogeneity as well as the sources of retro-feeding in the market. Adner (1999) posits that the technological development can happen inside the boundaries of the firm and can be structured to influence the market opportunities. The idea here is to demonstrate the possibility that technology development and its commercialization can guide themselves mutually. When dealing with emerging technologies, the firms can exploit the market diversity by allowing the target market to co-evolve with the state of its technology.

Prietula and Weingart (2005) used the terms exploration and exploitation in describing models of negotiation. Exploration reflects a more risky and uncertainty component of the joint search of two negotiators, where they try to define, refine, and align their knowledge to establish a common base between them. This way, the authors define exploration as a process with wide supply of potential samples. In one hand, they suggest that exploitation is an activity much more coordinated, that emerge from the common base of knowledge which is created when the two parts converge to an understanding of what is the possible solution for the negotiation.

Ahuja e Katila (2002) used the concepts of exploration and exploitation in terms of the search in the level of deepness that the knowledge is re-used as well as in terms of the scope of the search, place where the knowledge is searched (near or far). The level of deepness is defined as the level that the search for knowledge reviews the knowledge already existent in the firm, i.e., a characteristic of exploitation of knowledge. The scope of the search is the level that new knowledge is explored and it is what characterizes the exploration of new knowledge. The firms can vary the levels of use and re-use of existing knowledge, as well as they can vary the exploration of new knowledge. Ahuja e Katila (2002) argue that the idea of exploitation can be conceptualized in different levels or deepness of search, since the firms can be differentiated not only in the extension of exploring new resources, but also in the extension that they improve their current resources. While the exploration research has a key role in the creation of knowledge as it leads to completely new solutions, exploitation research has the role of combining existing solutions in the generation of new combinations.

Garcia and Nair (2005), consider the terms exploration as a synonym of the traditional research where the result will be innovations, particularly radical and totally new innovations, where the risk is higher and the return is uncertain. Meanwhile, exploitation is related to the development of activities where the firm focuses on the improvement of existing processes, existing products and on the cost efficiency. Exploitation would be related to the development of incremental innovation, with lower risk and less variation (Popadiuk and Choo, 2006; Popadiuk, 2007).

The strategic alliance as a form to explore and exploit knowledge has been the focus of some researchers. Im and Rai (2008) have examined the logistic industry in the United States to determine how the knowledge sharing activities in “long-term interorganizational relationships (IORs)” (p. 1281) is related to the relationship performance gains. Their work shows that the sharing is enabled by “ambidextrous management of the relationship” (p. 1281). Holmqvist (2004) used the collaboration between a software company and its partners in new product development projects to understand the effect of experiential learning processes of exploitation and exploration within and between organizations. Rothaermel and Deeds (2004) show that the type of alliance will influence the format and the timing to use the exploration and the exploitation strategies. Table 1 summarizes the characteristics of exploration and exploitation found in the literature.

Table 1: Characteristics of exploration and exploitation of knowledge

Author	Exploration	Exploitation
March (1991)	Research, search, game, risk, flexibility, discovery, radical innovation, experimenting with new alternatives with uncertainty returns, search for new technology.	Refining, choice, production, efficiency, selection, implementation, execution, extension of current competencies, technologies; with positive, predictable returns, incremental innovation.
Gilsing (2002)	Few choices for coordination mechanisms, such as social procedures and reputation; large variety of knowledge base. Learning and knowledge adjusted accordingly to the emerging environment.	Stability when the dominant design is established. Learning focus is on what is already known. Intensive competition, formal procedures and economy of scale
Li et al. (2006)	Development of new knowledge through the search of knowledge remote in time.	Development of new knowledge through the search of recent knowledge.
Karlson (2005)	Tacit knowledge, with the assumption that tacit knowledge is necessary to develop and acquire new knowledge.	Explicit knowledge that can be applied to refine or improve existing knowledge.
Masini et al. (2004)	A strategy that firm will choose if it is threaten by the possible copy or imitation of its products. High cost of development.		Firms that had chosen to follow a cost leadership strategy, not worried about being copied. Low cost of production.
Prietula; Weingart (2005)	Speculation and uncertainty in terms of defining, refining and alignment of a common knowledge base.		The common knowledge base is already established.