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Back to the basics: reconciling the continuum and orthogonal conceptions of exploration and exploitation

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Abstract

Extant research is vertically divided on the question whether exploration and exploitation constitute two ends of a continuum or whether they are orthogonal activities. We suggest that both characterizations are admissible, albeit under different sets of assumptions. Using March’s iconic model, we demonstrate that the continuum conception concerns leveraging an organization’s internal knowledge heterogeneity where managers use their prior knowledge and experiences to formulate actions to attain the maximum possible extent of organizational knowledge at equilibrium. In contrast, the orthogonal conception mainly concerns assimilating heterogeneous knowledge from sources outside the organization through risky experimentation, leading to order-creation in systems operating in far-from-equilibrium conditions. We further demonstrate that the change in outcome obtained by switching from low to high rate of exploitation is larger—and therefore easier to detect—for the continuum conception. We speculate that many managers and researchers favor conceptualizing exploration–exploitation in the continuum sense, for this reason. Moreover, companies obtain far higher organizational knowledge by functioning in the orthogonal mode, than what is attainable by functioning in the continuum mode. Organizations should, therefore, strive to create conditions that foster cultivation of outside knowledge through autonomous actions of employees.

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Notes

  1. Nola (1988, p. 11) defines ontological relativism as “… the view that what exists, whether it is ordinary objects, facts, the entities postulated in science, etc., exists only relative to some relativizer, whether that be a person, theory or whatever.”

  2. The continuum conception is modeled as Fig. 2, p. 77, the curve “HETEROGENEOUS p1” in March (1991).

  3. The orthogonal conception figures in Fig. 4, p. 79 (pertaining to stable environment) and Fig. 5, p. 80, the curve p3 = 0.1 (pertaining to turbulent environment), in March’s paper.

  4. We note that, nothing prevents a company from opting to use both internal as well as external knowledge heterogeneity. In constructing this dimension, we follow March’s lead in (a) considering leveraging of internal knowledge heterogeneity as from his exposition for the (closed system) continuum conception (Fig. 2, p. 77), and (b) considering infusion of heterogeneous knowledge from outside the company as from his exposition of the (open system) orthogonal conception (Fig. 4, p. 79).

  5. In Sect. 3 of the Online Appendix, we provide baseline results of the simulation model equivalent to March’s key results on exploration and exploitation in the continuum and orthogonal conceptions.

  6. Connecting with industry’s standard-setting bodies and with University research, engaging external consultants and/or taking part in technological summits, conferences, and so forth are some avenues by organizational members obtain external knowledge.

  7. In Sect. 4 in the Online Appendix we show by further experiments that the main findings in our study remain unchanged if, instead of replacing p3 percent strings with random strings every period, we have a certain fraction (say one-fourth) of organizational members obtain new bit values for same (p3) percentage of beliefs.

  8. Thus, Propositions 1 and 2 are confirmed.

  9. Following March (1991) we use a two percent value for p4 to fashion a turbulent environment.

  10. Recall that the organizational code learns only from members (elites) who are more knowledgeable than itself.

  11. In March’s text, the label, turnover, to what is essentially a process for knowledge inflow from outside a system tends to divert attention from a key insight in March’s orthogonal conception of exploration and exploitation—that diversity is a source of continued order—reflecting prior work by Prigogine (1980) and Burgelman (1983). We choose to go by the implication of the actual modelling implementation of p3—enabling inflow of external knowledge into the company—avoiding the distraction that would otherwise crop up in failing to find a logical link between providing autonomy to employees and laying off employees.

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Acknowledgements

We express our heartfelt gratitude to Late Prof. James March for making this project possible. We thank Kasturika Chanda for assistance with the flow charts provided in the Online Appendix. All errors remain the authors’ sole responsibility.

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The research did not receive any specific funding from any source.

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Authors and Affiliations

  1. Indian Institute of Management Indore, C-101 Academic block, Rau-Pithampur Road, Prabandh Shikhar, Indore, Madhya Pradesh, 453556, India

    Sasanka Sekhar Chanda

  2. Anderson School of Management, University of California, Los Angeles, 110 Westwood Plaza, Box 951481, Los Angeles, CA, 90095-1481, USA

    Bill McKelvey

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  1. Sasanka Sekhar Chanda
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Correspondence to Sasanka Sekhar Chanda.

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Chanda, S.S., McKelvey, B. Back to the basics: reconciling the continuum and orthogonal conceptions of exploration and exploitation. Comput Math Organ Theory 26, 175–206 (2020). https://doi.org/10.1007/s10588-020-09311-y

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