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.

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