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