Exploratory Innovation, Exploitative Innovation, and Performance: Effects of Organizational Antecedents and Environmental Moderators

TL;DR: In this paper, the authors examined how environmental aspects (i.e., dynamism and competitiveness) moderate the effectiveness of exploratory and exploitative innovation and found that exploratory innovation is more effective in dynamic environments, whereas exploiting competitive environments is more beneficial to a unit's financial performance.

Abstract: Research on exploration and exploitation is burgeoning, yet our understanding of the antecedents and consequences of both activities remains rather unclear. We advance the growing body of literature by focusing on the apparent differences of exploration and exploitation and examining implications for using formal (i.e., centralization and formalization) and informal (i.e., connectedness) coordination mechanisms. This study further examines how environmental aspects (i.e., dynamism and competitiveness) moderate the effectiveness of exploratory and exploitative innovation. Results indicate that centralization negatively affects exploratory innovation, whereas formalization positively influences exploitative innovation. Interestingly, connectedness within units appears to be an important antecedent of both exploratory and exploitative innovation. Furthermore, our findings reveal that pursuing exploratory innovation is more effective in dynamic environments, whereas pursuing exploitative innovation is more beneficial to a unit's financial performance in more competitive environments. Through this richer explanation and empirical assessment, we contribute to a greater clarity and better understanding of how ambidextrous organizations coordinate the development of exploratory and exploitative innovation in organizational units and successfully respond to multiple environmental conditions.

Summary

Introduction

• Antecedents and consequences of both activities remains rather unclear.
• The Erasmus Research Institute of Management (ERIM) has supported this research 1 EXPLORATORY INNOVATION, EXPLOITATIVE INNOVATION, AND PERFORMANCE: EFFECTS OF ORGANIZATIONAL ANTECEDENTS AND ENVIRONMENTAL.
• Units pursuing exploitative innovation build upon existing knowledge and extend existing products and services for existing customers (Benner and Tushman 2003, p. 243).
• Focusing on organizational units, this study contributes to previous research through examining how formal and informal coordination mechanisms influence a unit’s exploratory and exploitative innovation.
• The authors conclude with a discussion of the results, implications, and issues for further research.

Organizational Antecedents of Exploratory and Exploitative Innovation

• Organizational units use various coordination mechanisms to link and integrate different parts of their unit (Tushman and O’Reilly 1996, Van de Ven 1986).
• Therefore, the authors examine two generic types of coordination mechanisms: (1) formal hierarchical structure and (2) informal social relations (cf. Ghoshal et al. 1994, Tsai 2002).
• Effective decision-making processes for pursuing exploitative innovation tend to be narrowly channeled and more centralized (Cardinal 2001).
• Through formalization units codify best practices so as to make them more efficient to exploit, easier to apply, and accelerate their implementation (Zander and Kogut 1995).
• Connectedness within organizational units, therefore, facilitates improving existing knowledge resources and increases a unit’s exploitative innovation.

The Moderating Role of External Environment on the Effectiveness of Exploratory and

• The impact of the external environment on innovativeness and performance has been widely acknowledged (e.g. Zahra 1996, Zahra and Bogner 1999).
• Regarding exploratory and exploitative innovations, previous literatures argued that environmental dynamism and competitiveness are likely to moderate the impact of both types of innovations on performance (Levinthal and March 1993, Lewin et al. 1999).
• Previous research not only reflects environmental dynamism through the amount of change, but also through the unpredictability of change (cf. Dess and Beard 1984).
• They create opportunities for above-normal return by targeting premium market segments (Levinthal and March 1993, Zahra and Bogner 1999) and creating new niches (Lumpkin and Dess 2001).
• Conversely, organizational units reacting to existing trends and demands through modifying or expanding current products, services, and markets (i.e. exploitative innovation) are likely to enhance their performance in competitive environments (Lumpkin and Dess 2001).

Setting and Data Collection

• The empirical research was conducted at a large European financial services firm.
• These changes have triggered incumbent financial services firms to pursue several exploratory and exploitative innovations, such as the introduction of ATM’s, Internet banking, and Mobile banking (Han et al. 1998, Pennings and Harianto 1992).
• Moreover, organizational units within branches operate in markets with varying levels of environmental dynamism and competitiveness – a condition required to observe units pursuing different innovative activities (Han et al. 1998).
• To test for nonresponse bias, the authors examined differences between respondents and nonrespondents for their final sample.
• This follow-up survey resulted in 79 responses from 56 organizational units, or 19.8 % of the organizational 11 units from the final sample, that were comparable in size, age, and prior performance to their final sample.

Measurement and Validation of Constructs

• This study used existing scales from the literature, however, appropriate scales for exploratory and exploitative innovation were not available.
• It would be useful to measure both types of innovation using complementary measurements and relate these to their measurements.the authors.
• All in all, their study highlights various theoretical and managerial implications through providing new insights into levers for increasing levels of exploratory and exploitative innovations.

Figures

FIGURE 3 THE MODERATING EFFECT OF ENVIRONMENTAL COMPETITIVENESS

FIGURE 1 THE MODERATING EFFECT OF ENVIRONMENTAL DYNAMISM

FIGURE 2 THE MODERATING EFFECT OF ENVIRONMENTAL DYNAMISM

TABLE 2 Results of Hierarchical Regression Analyses: Effects on

TABLE 1 Means, Standard Deviations, and Correlationsa

Full text

Exploratory Innovation, Exploitative Innovation, and
Performance: Effects of Organizational Antecedents
and Environmental Moderators
Justin J.P. Jansen, Frans A.J. Van den Bosch
and Henk W. Volberda
ERIM REPORT SERIES RESEARCH IN MANAGEMENT
ERIM Report Series reference number ERS-2006-038-STR
Publication July 2006
Number of pages 32
Persistent paper URL
Email address corresponding author jjansen@rsm.nl
Address Erasmus Research Institute of Management (ERIM)
RSM Erasmus University / Erasmus School of Economics
Erasmus Universiteit Rotterdam
P.O.Box 1738
3000 DR Rotterdam, The Netherlands
Phone: + 31 10 408 1182
Fax: + 31 10 408 9640
Email: info@erim.eur.nl
Internet:
www.erim.eur.nl
Bibliographic data and classifications of all the ERIM reports are also available on the ERIM website:
www.erim.eur.nl

ERASMUS RESEARCH INSTITUTE OF MANAGEMENT
REPORT SERIES
RESEARCH IN MANAGEMENT
ABSTRACT AND KEYWORDS
Abstract
Research on exploration and exploitation is burgeoning, yet our understanding of the
antecedents and consequences of both activities remains rather unclear. We advance the
growing body of literature by focusing on the apparent differences of exploration and exploitation
and examining implications for using formal (i.e. centralization and formalization) and informal
(i.e. connectedness) coordination mechanisms. This study further examines how environmental
aspects (i.e. dynamism and competitiveness) moderate the effectiveness of exploratory and
exploitative innovation. Results indicate that centralization negatively affects exploratory
innovation while formalization positively influences exploitative innovation. Interestingly,
connectedness within units appears to be an important antecedent of both exploratory and
exploitative innovation. Furthermore, our findings reveal that pursuing exploratory innovation is
more effective in dynamic environments whereas pursuing exploitative innovation is more
beneficial to a unit’s financial performance in more competitive environments. Through this richer
explanation and empirical assessment, we contribute to a greater clarity and better
understanding of how ambidextrous organizations coordinate the development of exploratory
and exploitative innovation in organizational units and successfully respond to multiple
environmental conditions.
Free Keywords
Exploratory and Exploitative Innovation, Coordination Mechanisms, Environment, Performance
Availability
The ERIM Report Series is distributed through the following platforms:
Academic Repository at Erasmus University (DEAR),
DEAR ERIM Series Portal
Social Science Research Network (SSRN), SSRN ERIM Series Webpage
Research Papers in Economics (REPEC), REPEC ERIM Series Webpage
Classifications
The electronic versions of the papers in the ERIM report Series contain bibliographic metadata
by the following classification systems:
Library of Congress Classification, (LCC)
LCC Webpage
Journal of Economic Literature, (JEL), JEL Webpage
ACM Computing Classification System CCS Webpage
Inspec Classification scheme (ICS), ICS Webpage

EXPLORATORY INNOVATION, EXPLOITATIVE INNOVATION, AND PERFORMANCE:
E
FFECTS OF ORGANIZATIONAL ANTECEDENTS AND ENVIRONMENTAL
MODERATORS
J
USTIN J.P. JANSEN*
F
RANS A.J. VAN DEN BOSCH
H
ENK W. VOLBERDA
Department of Strategic Management and Business Environment
RSM Erasmus University
Erasmus University Rotterdam
P.O. Box 1738
3000 DR Rotterdam, The Netherlands
Tel: +31 (0)10 408 97 82
Fax: +31 (0)10 408 90 13
E-mail:
jjansen@rsm.nl
www.strategyaterasmus.nl
www.erasmusinnovatiemonitor.nl/
Final version April 24, 2006
Accepted for Publication in
Management Science
* We would like to thank the departmental editor, John Boudreau, the associate editor, and two
anonymous reviewers of Management Science for their valuable comments. Moreover, suggestions
from Dania Dialdin, Ernst Verwaal, Raymond van Wijk, and Ed Zajac were helpful for improving
earlier versions of this manuscript. We thank Ad Druijts for enabling data collection at the financial
services firm. The Erasmus Research Institute of Management (ERIM) has supported this research
1

E
XPLORATORY INNOVATION, EXPLOITATIVE INNOVATION, AND PERFORMANCE:
E
FFECTS OF ORGANIZATIONAL ANTECEDENTS AND ENVIRONMENTAL MODERATORS
A
BSTRACT
Research on exploration and exploitation is burgeoning, yet our understanding of the antecedents and
consequences of both activities remains rather unclear. We advance the growing body of literature by
focusing on the apparent differences of exploration and exploitation and examining implications for
using formal (i.e. centralization and formalization) and informal (i.e. connectedness) coordination
mechanisms. This study further examines how environmental aspects (i.e. dynamism and
competitiveness) moderate the effectiveness of exploratory and exploitative innovation. Results indicate
that centralization negatively affects exploratory innovation while formalization positively influences
exploitative innovation. Interestingly, connectedness within units appears to be an important antecedent
of both exploratory and exploitative innovation. Furthermore, our findings reveal that pursuing
exploratory innovation is more effective in dynamic environments whereas pursuing exploitative
innovation is more beneficial to a unit’s financial performance in more competitive environments.
Through this richer explanation and empirical assessment, we contribute to a greater clarity and better
understanding of how ambidextrous organizations coordinate the development of exploratory and
exploitative innovation in organizational units and successfully respond to multiple environmental
conditions.
2

As competition intensifies and the pace of change accelerates, firms need to renew themselves by
both exploiting existing competencies and exploring new ones (Floyd and Lane 2000). The notion of
exploration and exploitation (March 1991) has emerged as an underlying theme in research on
organizational learning and strategy (Levinthal and March 1993, Vera and Crossan 2004), innovation
(Danneels 2002, Lee et al. 2003, Rothaermel and Deeds 2004), and entrepreneurship (Shane and
Venkataraman 2000). Various literatures have argued that organizations need to become ambidextrous
(Gibson and Birkinshaw 2004, He and Wong 2004) and develop exploratory and exploitative
innovation simultaneously in different organizational units (e.g. Benner and Tushman 2003, Tushman
and O’Reilly 1996). Units that engage in exploratory innovation pursue new knowledge and develop
new products and services for emerging customers or markets. Units pursuing exploitative innovation
build upon existing knowledge and extend existing products and services for existing customers
(Benner and Tushman 2003, p. 243). While the importance of pursuing both types of innovation has
often been highlighted, much more remains to be understood how ambidextrous organizations
coordinate the development of exploratory and exploitative innovation in organizational units.
First, there is little systematic evidence whether units adopt different coordination mechanisms to
develop exploratory and exploitative innovation. Although previous research has asserted that
organizational antecedents differentially influence exploratory and exploitative innovation (e.g. Benner
and Tushman 2003, Hill and Rothaermel 2003), empirical studies examining such relationships with
radical and incremental types of innovation produced mixed results (Cardinal 2001, Damanpour 1991,
Ettlie et al. 1984, Dewar and Dutton 1986). Thus, it appears that the central tenet of units using diverse
coordination mechanisms for exploratory and exploitative innovation remains unproven. The mixed
findings may stem from the fact that previous studies have used the firm or business unit as unit of
analysis, ignoring the fact that ambidextrous organizations might differentiate coordination mechanisms
at the organizational unit-level. Moreover, prior research has tended to focus on formal hierarchical
structure, thereby ignoring the increasing importance of informal social relations in coordinating the
development of exploratory and exploitative innovation (Subramaniam and Youndt 2005). Cardinal
(2001), for instance, argued that in addition to formal controls, informal social relations determine the
extent to which exploratory and exploitative innovation can be developed. Yet, the impact of formal
3

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