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Optimal exploration and exploitation: the managerial intentionality perspective

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Abstract

Extant research has provided ambiguous answers to the question as to what constitutes an ideal balance between exploration and exploitation, in stable and turbulent environments. Much of the literature emphasizes controlling organizational actions by means of predictions based on historical knowledge. In our study, we investigate organizational outcomes when such predictions are not possible and managers intentionally focus their firm on either exploratory or exploitative innovation. Using March’s iconic computational simulation model, we find that multiple exploration–exploitation combinations lead to equivalent, maximum organizational knowledge, establishing a rational basis for managerial intentionality toward exploratory or exploitative innovation. We further find that onset of environmental turbulence impacts an organization focusing on exploratory innovation in a way that is different from the way an organization focusing on exploitative innovation is impacted. The former is enabled to carry out an increasing level of its core activity, exploration. The latter is required to dial down its core activity, exploitation. Our findings suggest a resolution to conflicting prescriptions regarding appropriate response to onset of environmental turbulence endemic in the literature.

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Notes

  1. This notion, in turn draws from Karl Marx’s seminal work, Das Kapital (Marx 1867, 1894).

  2. Note though, a firm can access heterogeneous external knowledge by a number of alternative mechanisms, for example, strategic alliances, tie-ups with university and research institutions, membership of industry and cross industry bodies and so forth. To stay with March’s terminology we continue to use the term turnover to stand for the entire range of possibilities. We thank two anonymous reviewers for drawing attention to the potential multiple connotations underlying the turnover construct.

  3. We consider learning from the organizational code as local search.

  4. We thank two anonymous reviewers for this suggestion.

  5. At our request, Prof. March made his code available to us. We translated the code from Basic to the scripting language of MATLAB. We found that this translation reproduces March’s results exactly. However, there were minor differences with our version of the code developed with solely the specifications of the (1991) paper, due to some additional assumptions in Prof. March’s coding logic. In the results we display, we have chosen to keep out those additional assumptions. Our principal results, embodied in the three propositions articulated in the previous section hold good regardless of whether we keep or do not keep those assumptions.

  6. We thank an anonymous reviewer for suggesting this experimental variation to us.

  7. We thank an anonymous reviewer for alerting us regarding this implication.

  8. These agents are somewhat ambiguously referred to as ‘investors’. They issue diktats in the name of shareholders, but they themselves are not the shareholders in many cases. Agents who call themselves investors often require that business firms go for profit maximization in every period. If a short term outcome indeed turns out to be favorable, these agents draw large bonuses. If a firm gets destroyed in repeated short termism, it does not directly matter to these agents, since it is their clients’ capital that is on the line (for instance pension funds, insurance funds), not theirs. These agents organize themselves as “too big to fail”. When asset value of funds tank owing to deleterious outcome of short termism, they merely request the government for bailout funds. Frequently, the government obliges, since it is uncomfortable regarding public disclosure of evaporation of pension and insurance fund money.

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Acknowledgments

The authors thank Bill Mckelvey, Phaneesh Puranam, Sendil Ethiraj, William Mitchell, P. Srikant, and the scholars and participants in the Strategic Management Society Research Workshop in IIM Calcutta in 2011 for valuable feedback, comments, clarifications and numerous improvement suggestions at various stages of development of our work. The authors thank the editor and three anonymous reviewers for very good inputs that helped make the paper better. The authors thank Jos Van Der Geest for assistance with MATLAB programming constructs. All errors remain the authors’ responsibility.

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  1. Strategic Management, Indian Institute of Management Indore, C-101 Academic Block, Prabandh Shikhar, Rau-Pithampur Road, Indore, MP, 453556, India

    Sasanka Sekhar Chanda

  2. Strategic Management, Indian Institute of Management Calcutta, Academic Block B, Diamond Harbour Road, Joka, Kolkata, West Bengal, 700104, India

    Sougata Ray

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Correspondence to Sasanka Sekhar Chanda.

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Chanda, S.S., Ray, S. Optimal exploration and exploitation: the managerial intentionality perspective. Comput Math Organ Theory 21, 247–273 (2015). https://doi.org/10.1007/s10588-015-9184-y

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