Long-term firm survival in changing environmental conditions requires firms to balance competing organizational learning perspectives of exploration or exploitation (March, 1991). Organizational learning is a process that involves converting a firm’s past experiences into knowledge, which can be then be leveraged to make intelligent changes that can affect the firm’s performance. Firms with an orientation for exploration tend to emphasize the creation of new ideas, and pursuit of novelty, such as entering new product-market domains or services. Firms with an orientation for exploitation tend to focus on refining existing products, services and technology (He & Wong, 2004). Most firms do both to some degree, and firms face a challenge in balancing between exploitation focused on seeking current revenue streams that can sustain the firm in the short-term, and exploration focused on seeking future revenue streams that can sustain the firm in the long-term when the environment is no longer the same as today. Exploration spends resources on activities that have a high chance of failure, or circumstances without a clear return on the investment. However, only considering exploitation risks being the best, but last buggy whip manufacturer. The challenge of balancing exploration and exploitation is compounded, because firms develop different competencies for either orientation (Jansen et al., 2009) that influence investment decisions, or what becomes a priority. Again, an exclusive focus on either mode of learning can be detrimental. For example, pure exploitation can contribute to product obsolescence, when the environment changes, and simply pursuing exploration can lead to a cascade of experiments that do not leverage existing knowledge (Weeks & Galunic, 2003).
A recognized way to balance demands for exploration and exploitation is by leveraging organizational structure within an organization. Specifically, organizations can retain some earnings to ensure that they have excess cash and have additional employees than are currently needed. Just like having considerable excess ‘cash’ in your checking account at the bank, it can seem wasteful, but having these resources available can allow for ‘slack’ when adapting to change or when new opportunities emerge (Bentley & Kehoe, 2019). Slack can also facilitate a firm being able to balance the competing orientations for exploration and exploitation.
This relates to managers of different business functions (e.g., finance, human resources, marketing, R&D, manufacturing, etc.) having different perspectives that influence how they interpret information (Dearborn & Simon, 1958; Sorenson, 1999). For example, product development functions might have tendency to emphasize exploration and accounting functions might emphasize exploitation. As a result, it is important to have managers from different functional departments working towards a similar strategy. For example, not having all functions represented in a firm’s decision-making is associated with organizational decline (D’Aveni, 1989) that can result from an overemphasis on one function. For example, one of the reasons behind General Electric’s recent troubles was an over emphasis on finance (Colvin, 2018). Meanwhile, even though Apple has outsourced manufacturing, Lenovo (sells PCs) views retaining manufacturing and other functions as a source of its success (Chao, 2012). This reflects research suggesting that cross-functional teams facilitate innovation by allowing knowledge exchange (Carmeli & Gittel, 2009; Kessler & Chakrabarti, 1996). At a personal level, career progression as a manager may depend on having experience in multiple business functions, as it provides a more comprehensive view of a business (Calori, Johnson & Sarnin, 1994).
Bentley, F. S., Kehoe, R. R. 2019. Give Them Some Slack—They’re Trying to Change! The Benefits of Excess Cash, Excess Employees, and Increased Human Capital in the Strategic Change Context. Academy of Management Journal. https://doi.org/10.5465/amj.2018.0272 (Links to an external site.)
Calori, R., Johnson, G, Sarnin, P. 1994. CEOs’ cognitive maps and the scope of the organization, Strategic Management Journal, 15: 437-457.
Carmeli, A., Gittell, J. H. 2009. High‐quality relationships, psychological safety, and learning from failures in work organizations. Journal of Organizational Behavior, 30(6), 709-729.
Chao, L. 2012. As Rivals Outsource, Lenovo Keeps Production In-House. Wall Street Journal: 9 July: https://search.proquest.com/docview/1024021619/5AB149885BC542DDPQ/86?accountid=4840 (Links to an external site.)
Colvin, G. 2018. What the Hell Happened at GE? Fortune: https://fortune.com/longform/ge-decline-what-the-hell-happened/ (Links to an external site.)
D’Aveni, R. 1989. The aftermath of organizational decline: A longitudinal study of the strategic and managerial characteristics of declining firms, Academy of Management Journal, 32: 577-605.
Dearborn, D., Simon, H. 1958. Selective perception: A note on the departmental identification of executives, Sociometry, 21(2): 140-144.
He, Z. L., Wong, P. K. 200). Exploration vs. exploitation: An empirical test of the ambidexterity hypothesis. Organization science, 15(4): 481-494.