Exploration, exploitation, and variability: Competition for primacy revisited

Abstract

This study examines how exploration and exploitation contribute to variability in organizational performance and how this variability influences competitions for primacy, i.e. contexts in which the ability to generate exceptionally high levels of performance is a key success factor. The results of simulation analyses conducted using the NK model, the mutual learning model, and the multiarmed bandit model all show that while exploration introduces more internal variability in organizations, exploitation tends to increase the variability in performance between different organizations. Variability and uniqueness in relation to one's competitors, brought about by a single-minded focus on exploitation, is found to be advantageous in a race to finish first. In contrast, in contexts where avoiding especially low performance is the key consideration, exploration is found to be relatively more beneficial. These results suggest a need for a more nuanced understanding of the relationships between exploration, exploitation, and organizational risk taking.

Exploration and exploitation in crisis environment: Implications for level and variability of firm performance

“…Thus far, the literature has provided a lot of understanding of the individual and joint effects of exploration and exploitation on firm performance (Jansen et al, 2006;Marino et al, 2015;Posen & Levinthal, 2012;Uotila, Maula, Keil, & Zahra, 2009). However, our study also involves the investigation of the variability of firm performance, which is an important but overlooked outcome of exploration and exploitation strategies (for exceptions, see Parida et al, 2016;Uotila, 2017). We argue that understanding both the level and variability of firm performance is very relevant from both scholarly and managerial perspectives.…”

“…Exploration and exploitation are viewed as the two key forms of organizational adaptation to their environments to achieve a strategic fit (Lavie et al, 2010;March, 1991). Exploration allows the firm to create completely new opportunities, knowledge, and competencies, whereas exploitation focuses on the utilization of its existing opportunities, knowledge, and competencies (Abebe & Angriawan, 2014;Uotila, 2017). A fundamental question in the exploration-exploitation literature concerns the impact of these strategies on organizational performance.…”

“…They claim that the performance variance is very problematic for entrepreneurial firms in the conditions of highly dynamic environments and suggest that firms "should carefully consider how much they explore to be as different as possible and how much they exploit to be as effective as possible" (p. 1147). The second study, based on the three canonical simulation modeling approaches (Uotila, 2017), finds that although exploration provides more variability in terms of its immediate performance effects within the organization, exploitation is generally associated with an increase in performance variability between different organizations.…”

“…This leads to the conjecture that-at least in the short-term-pursuing the exploration strategy is likely to affect the level (mean) of firm performance negatively. Moreover, the inherently uncertain nature of exploration activity should increase the variability of firm performance (Uotila, 2017). This insight dates to the study of March (1991) that sparked the exploration/exploitation literature, where the former strategy was explicitly linked to "variation" (along with risk-taking, experimentation, and discovery-all leading to an increase in variance, yet unlikely to result in short-term performance improvements).…”

“…First, we supplement the current knowledge of how exploration and exploitation affect the overall level of firm performance with a nuanced understanding of the impact of these approaches on the variability of firm performance. This step represents a substantial departure from the existing approaches that concentrate on the "mean" impacts only [with the only exception being the simulation study of Uotila (2017) and the variance-focusing article by Parida et al (2016)]. Understanding both the level (conditional mean) and variability (residual deviation from the conditional mean) provides a better understanding of what outcomes can be expected from exploration and exploitation strategies.…”