Monday 27 January 2014


17. How to combine exploration and exploitation?

 The challenge is to combine the preservation of structures for exploitation with an allowance for deviations for the sake of experimentation. The difficulty of this depends on how systemic versus stand-alone the architecture for exploitation is (Langlois, 1998)[1].

When highly systemic, the system has many densely connected elements, with narrow tolerances in interfaces. Here, deviations in elements, for the sake of experimentation, would jeopardize the integrity of the system. An example is a refinery. Then, there is a high cost, while the promise of results is highly uncertain.

In stand-alone systems, by contrast, elements are highly autonomous in their exploitation. If, in addition, exploitation itself already requires highly differentiated products for different customers, there is more scope to combine exploitation and exploration. An example is a consultancy firm.

An intermediate case is that of a modular system, where elements are many and mutually connected but self-contained and replaceable, provided that they satisfy the constraints in the system.

In systemic arhitectures, there are several ways of dealing with the problem of combining exploration and exploitation.

Logically, one option is to separate them in time, focusing first on exploration, then on exploitation, and back again. That goes back to the old idea of some ‘life cycle’. Life cycles of products and technologies have shortened, and different products in a portfolio will be in different stages of their cycles. In case of products in the same stage of a cycle, it would require something like a pulsating organization, with alternating large and small cognitive distance, order and chaos. It is hard to do this other than by engaging and disengaging people with different skills and mentalities, which is problematic. And then, with such discontinuity of staff, how would novelty be rooted in experience with what went on before?

A second possibility is to separate them in place. One classic form is the one indicated earlier, in a split between production and development, with the problem of combining the two in one structure and culture. To make exploitation receptive to exploration, and to root exploration in exploitation, one may rotate staff between the two functions, and hire people who have the ability to cope with that.

It would help to engage generalists, i.e. people with a wide scope of knowledge and capability, and a large absorptive capacity, so that they can maintain understanding between them even under changing logics or frameworks, and can quickly shift between those.   

Another option is to specialize in one or the other, in different organizations, with a linkage between them in an alliance or other form of collaboration. But here also there would need to be some interchange or rotation of staff between the two, or versatile bounday spanners to mediate between the two.

There would also need to be investment in mutual understanding, cognitively and morally (concerning modes of conduct). Such investments are largely relation-specific, in the sense discussed in item 7, which would require a certain stability and duration of the relationship.

A classic example is that of small biotech firms that engage in the exploration of novel active substances, diagnostics or production technologies, whose results are hived over to large pharmaceutical companies with the stability, size and resources needed for exploitation, in carrying a new medicine through the lengthy process of regulatory approval, and large scale production, promotion and delivery in markets.

The need to engage in specific investments for mutual understanding and cooperation raises issues of dependence and power. In an asymmetric relationship between small firms for exploration and large firms for exploitation the smaller firm would have to beware of the risks of one-sided dependence. This may be, and often is, compensated by the small firm being uniquely capable in exploration, to provide countervailing power. I will expand on problems of collaboration in later items of this blog. 
 


[1] Langlois, R.N. 1998. ‘Personal capitalism as charismatic authority: The organi­zational economics of a Weberian concept’, Industrial and Corporate Change, 7/1, 195-214.
 

Sunday 19 January 2014


16. Exploration and exploitation

 In the innovation literature there is a well-known distinction between radical and incremental innovation, which is similar to the distinctions between disruptive or competence- destroying innovation and competence-saving innovation, and between exploration and exploitation. In the literature on learning there is a related distinction between second and first order learning. I consider all these distinctions to be synonymous, and here I choose the exploration/exploitation terminology, which was introduced by James March (1991)[1].

In exploitation, existing fundamental mental, technological, commercial and organizational frameworks, logics, architectures or competencies are preserved. It is aimed at improved efficiency, fine-tuning, or optimization. Learning is first order. In exploration, by contrast, the fundamental frameworks etc. are broken, lifted, or replaced. It is aimed at new functions, new ways to perform existing functions, new products and processes, new forms of organization, new roles, new designs, logics and architectures. Learning is second order.

In the past, whether the challenge lay in exploitation or exploration depended on the life cycle of the industry. In the initial phase of take-off the emphasis lies on exploration, where the focus lies on technical and commercial viability, and the struggle for a dominant design. Later, in the growth and stabilization, after the establishment of a dominant design, the emphasis lies on exploitation, and the focus shifts to efficient production and distribution, and competition on price.

The problem for organizations now is this. In present times they must achieve, simultaneously, some combination of exploitation, needed to survive in the short term, and exploration to survive in the long term, in what has been called (with a rather ugly term) ambidexterity (‘combining both hands’). However, combination of the two in one organization is difficult because they have different requirements. Exploitation requires stability of basic logics, architecture, linkages, focus, meanings, roles, competencies etc. while exploration requires that they be opened up or loosened for change. How can one combine the two? They entail different mentalities, cultures, and structures.

In the terminology of the preceding item in this blog, exploitation requires a relatively small cognitive distance, with shared ideas on priorities, positioning in markets, ways of doing things, skills, knowledge, technology, and ways of dealing with each other, while exploration requires more scope for variety, for cognitive distance, difference of view, novel meanings of established concepts. How can one combine order and chaos?

The problem is manifest in tensions between departments of production and departments of R&D and marketing. R&D and marketing people chide production management for conservatism and lack of appreciation for novel technical or commercial opportunities. Production people chide R&D and marketing for having no sense of how things are made.

An crucial complication is that the two need to be connected not only to carry on the operational process of innovation, with exploitation following upon exploration, but also vice versa, with exploration feeding upon the insights gained from exploitation.

Note that this is particularly salient from the perspective of philosophical pragmatism that I employ in this blog, according to which ideas arise from experience in practice.


[1] March, J. (1991). ‘Exploration and exploitation in organizational learning’, Organi­zation Science, 2/1, 101-123.
 

Sunday 12 January 2014


15. The value of difference

Differences in knowledge, perception, emotion, feeling, views, ethics and culture, which I have called cognitive distance, are bothersome, because they are a source of misunderstanding and prejudice and make collaboration difficult. On the other hand they are also interesting as a source of learning. The challenge is to find partners with optimal difference: sufficient to be able to tell or show each other something new but not so much that one cannot understand each other or cannot deal with each other.

Empirical (econometric) research (that I did with associates)[1] shows that such optimal difference yields economic advantage through improved performance in innovation. The ability to work together with people who think differently yields economic advantage. That yields hope for diversity and tolerance, because if those were economically disadvantageous they would hardly be viable.

The ability to collaborate has a cognitive component in the narrow meaning of intellectual understanding (absorptive capacity), and a cognitive component in the wider, also affective sense of ethics and morality, of views on good and bad. One should not only understand each other but also be able to collaborate.

As argued in the previous item in this blog, next to absorptive capacity the other side of the coin is communicative capacity, the capacity to help others absorb what one is doing or saying.

The higher one’s absorptive and communicative capacity, the greater the cognitive distance at which one can collaborate. This enables relationships at larger cognitive distance, offering a higher degree of learning and innovation. The positive effect of that has also been demonstrated in the empirical research indicated above.

However, the more one knows the more difficult it is to still find someone who can tell or show you something new and interesting. One must search at increasing cognitive distance to sill find something new.

One can also make use of go-betweens that help to bridge cognitive distance, preventing or eliminating misunderstandings, clarify views and habits, and eliminate suspicion.

To the extent that relationships last longer and are exclusive, i.e. closed off from relationships with other, more distant parties, cognitive distance will in due course decline. One becomes so familiar with each other that one begins to see, think and act in the same way. That is convenient, in fast and easy agreement, but it can also yield intellectual incest and lack of learning and renewal.

However, long lasting relationships can retain their cognitive vitality when parties also maintain relationships with different others that can feed the relationship with fresh ideas and perspectives.

In closely-knit communities, the advantage of strong local connections is that they enable close cooperation, with social control, reputation effects and mutual trust, but they can also lead to rigidity and stagnation. Isolated, cohesive groups are in danger of losing the impulse of novel ideas and experience, and to prevent that from happening bridges should be built to connect with other groups. And for that one must overcome the inclination to distrust outsiders.

An alternative for maintaining innovative vitality is turnover in the composition of the community: sufficient exit and entry to maintain variety.
 


[1] B. Nooteboom, W.P.M. van Haverbeke, G.M. Duijsters, V.A. Gilsing & A. v.d. Oord, Optimal cognitive
distance and absorptive capacity, Research Policy, 36 (2007): 1016-1034. 
 

Sunday 5 January 2014


14. Absorptive capacity

Absorptive capacity is the capacity to absorb knowledge from others. That is needed for firms to absorb innovations produced elsewhere. It is important for the diffusion of innovations. It is also important for collaboration.

To maintain absorptive capacity firms have to do research even if they do not themselves make direct use of the outcome for new products etc. That explains the otherwise puzzling phenomenon that firms continue to do research in areas that they have outsourced. They need it to judge the offer of suppliers.

Absorptive capacity is needed for collaboration, and collaboration is needed for innovation, as I will discuss in more detail later in this blog. In the preceding item on scripts I discussed how people construct their knowledge differently on the basis of thinking developed in different circumstances. This yields cognitive distance, and the ability to understand others is not self-evident.

The kind of knowledge one needs, for absorptive capacity, is not only substantive, in the narrow cognitive sense of knowing facts or understanding mechanisms, but also in the wider sense of understanding how people evaluate things, how they see things normatively. Are they oriented towards trust or mistrust, towards only the self or also towards others, do they value not only the instrumental value but also the intrinsic value of relationships, not only the short but also the long term, etc.

As a result, absorptive capacity is not only a matter of research but also of experience in collaboration with people who think and act differently.

The notion of absorptive capacity can be elucidated with the help of the notion of scripts, discussed in the preceding item in this blog. If understanding entails insertion of observations into mental scripts, then the relevant scripts must be available for absorption.

The coin of mutual understanding in collaboration also has another side: next to absorptive capacity also communicative capacity, the ability to help others to understand what one is doing or saying.

For this, one needs empathy: the ability to look at what one is doing from the perspective of the other. Also, it helps to employ fitting metaphors. A metaphor is seeing something in terms of something else: ‘Shall I compare thee to a summer’s day’ (Shakespeare). In this case: trying to picture what one does in terms of how the other thinks. In terms of scripts: Trying to fit what one does into the scripts that one thinks the other has.
 
How the other thinks is often not obvious, even to him/herself. Much knowledge is tacit: we can do more than we know. Much of our activity is routine. We may once have had explicit knowledge of how to do something, but it has developed into tacit routine.
 
Once I learned French grammar. I no longer know the rules but I recognize a correct sentence when I see one. Because I can drive a car by routine I can think of other things when I drive.
 
This is very practical, but it makes it difficult to tell someone else what I am doing, and how. Then tacit, implicit knowledge must first be made explicit. Helping another to do that is also a skill. Socrates was famous for it, in his dialogues, evoking tacit knowledge in ‘intellectual midwifery’.