March’s (1991) Exploitation and Exploration

Uncertainty and Organisational Adaptation

As technology advances, the global market is gradually integrated, and at the same time, the level of uncertainty experienced by companies facing rapid technological and market changes has increased. A rapidly changing environment is recognized as a negative factor that hinders the prediction of results from strategic actions (Courtney, Kirkland, and Viguerie, 1997), and at the same time, an appropriate level of uncertainty is recognized as a positive factor as it means a potential opportunity (Courtney, Kirkland, and Viguerie, 1997; Song and Montoya-Weiss, 2001; Teece, Pisano, and Shuen, 1997; Luo, 2003; Stieglitz, Knudsen, and Becker, 2016). In response to this duality of uncertainty, not only managers but also researchers in the field of organizational learning have been discussing the utilization of global companies, exploration capabilities, or organizational adaptation plans as a way to buffer the negative effects of uncertainty and turn the positive effects into opportunities (Raisch and Birkinshaw, 2008; O'Reilly III and Tushman, 2008; Raisch et al., 2009; Stieglitz, Knudsen, and Becker, 2016).

Exploitation and Exploration Activities of Foreign Subsidiaries

In terms of knowledge management as a response strategy to uncertainty, overseas subsidiaries of global companies transfer knowledge from the head office by transforming it to suit the local market environment and utilizing it (exploitation), while at the same time transferring the knowledge acquired locally to the head office. Exploration activities that transfer knowledge are pursued at the same time. From the viewpoint of resource dependency theory, which insists organizations actively cope with the environment, global companies need technological innovation and organizational innovation that can continuously secure competitive advantages in order to turn ambidextrous effects of uncertainty into their own opportunities (Christensen, 1997; Hill and Rothaermel, 2003; Raisch et al., 2009; Noruzy et al., 2013). From this point of view, the expansion of exploitation and exploration capabilities and the establishment of a two-sided organization in order to actively respond to uncertainties that bring transaction costs to global companies are recognized as strategies to build a company's structured core competencies.

Foreign subsidiaries compete with companies in the local market by exploiting the knowledge transferred from the head office, while at the same time acquired knowledge, social capital, and capabilities as the results of their additional exploration activities are transferred to the head office. In terms of internationalization, foreign subsidiaries essentially utilize the technology possessed by the head office, but at the same time, as ‘centers of excellence’ (Frost, Birkinshaw and Ensign, 2002), they carry out reverse knowledge transfer activities leading overseas local learning.

Such sequential two-way activities of foreign subsidiaries can be understood as the two-sided strategy of March’s (1991).

Such sequential two-way activities of foreign subsidiaries can be understood as the two-sided strategy of March’s (1991), which insisted on simultaneous efforts of exploitation and exploration. In other words, March (1991) stated that since the performance of exploitation activities is short-term, exploration activities, which are efforts in terms of long-term outcomes, are required at the same time. In fact, the necessity of March's (1991) paradigm on simultaneous innovation strategy has been verified through empirical analysis by many researchers. Representatively, Mudambi and Swift (2014) analyzed that the simultaneous performing of exploitative and exploratory R&D contributes to improving the corporate performance.

References

Christenson, C. (1997) The Innovator’s Dilemma. Boston, USA, Harvard Business School Press.

Courtney, H., Kirkland, J. and Viguerie, P. (1997) ‘Strategy under Uncertainty’, Harvard Business Review, 75(6), pp. 67-79.

Frost, T. S., Birkinshaw, J. M. and Ensign, P. C. (2002) ‘Centers of Excellence in Multinational Corporations’, Strategic Management Journal, 23(11), pp. 997-1018.

Hill, C. W. and Rothaermel, F. T. (2003) ‘The Performance of Incumbent Firms in the Face of Radical Technological Innovation’, Academy of Management Review, 28(2), pp. 257-274.

Luo, Y. (2003) ‘Market-seeking MNEs in an Emerging Market: How Parent-subsidiary Links Shape Overseas Success’, Journal of International Business Studies, 34(3), pp. 290-309.

March, J. G. (1991) ‘Exploration and Exploitation in Organizational Learning’, Organization Science, 2(1), pp. 71-87.

Mudambi, R. and Swift, T. (2014) ‘Knowing When to Leap: Transitioning between Exploitative and Explorative R&D,” Strategic Management Journal, 35(1), pp. 126-145.

Noruzy, A., Dalfard, V. M., Azhdari, B., Nazari-Shirkouhi, S. and Rezazadeh, A. (2013) ‘Relations between Transformational Leadership, Organizational Learning, Knowledge Management, Organizational Innovation, and Organizational Performance: an Empirical Investigation of Manufacturing Firms’, International Journal of Advanced Manufacturing Technology, 64(5), pp. 1073-1085.

O’Reilly Ⅲ, C. A. and Tushman, M. L. (2008) ‘Ambidexterity as a Dynamic Capability: Resolving the Innovator’s Dilemma’, Research in Organizational Behavior, 28, pp. 185-206.

Raisch, S. and Birkinshaw, J. (2008) ‘Organizational Ambidexterity: Antecedents, Outcomes, and Moderators’, Journal of Management, 34(3), pp. 375-409.

Raisch, S., Birkinshaw, J., Probst, G. and Tushman, M. L. (2009) ‘Organizational Ambidexterity: Balancing Exploitation and Exploration for Sustained Performance’, Organization Science, 20(4), pp. 685-695.

Song, M. and Montoya-Weiss, M. M. (2001) ‘The Effect of Perceived Technological Uncertainty on Japanese New Product Development’, Academy of Management Journal, 44(1), pp. 61-80.

Stieglitz, N., Knudsen, T. and Becker, M. C. (2016) ‘Adaptation and Inertia in Dynamic Environments,” Strategic Management Journal, 37(9), pp. 1854-1864.

Teece, D. J., Pisano, G. and Shuen, A. (1997) ‘Dynamic Capabilities and Strategic Management’, Strategic Management Journal, 18(7), pp. 509-533.