Exploration and Exploitation in Early Stage Ventures and SMEs: Volume 14

Despite a growing body of research on exploration and exploitation, scholars have tended to study the phenomena from a narrow perspective mostly within larger, well-established organizations. However, it is still far from obvious how top management within small-to-medium sized enterprises (SMEs) are to address the liability of newness and seek access to resources and capabilities relevant for the pursuit of exploration and exploitation. Resource sourcing and allocation decisions are particularly critical in SMEs and must be aligned with the firm’s fundamental strategic intent and growth model. For example, organizations following a stage model by first developing a domestic market and then expanding globally will require different bundles of resources and capabilities than organizations that are designed to conquer the global arena. Indeed, management systems will likely need to adapt across the firm life cycle such that it can fulfill an explorative function in the earlier stages and an exploitative function in later ones. Hence, early-stage ventures have to master the resource reallocation process which is contingent on their access to capital. Across the firm life cycle, venture capitalists can tap into the growth potential of early-stage ventures is a key factor behind their successful short-term innovative performance as well as long-term survival.

Scholars of ambidexterity focus on the need for strategic leaders to explore and exploit opportunities synergistically. Yet it remains unclear how such dynamic capabilities develop. Addressing this question, this chapter investigates the role of social cognitive self-regulation in fostering ambidexterity as a dynamic capability among entrepreneurs. Results of a mixed method, multiple case study of founder managers suggest that complex patterns of self-regulation are associated with ambidextrous thinking and decision making among entrepreneurs, often in combination with strong values and a sense of emotional engagement. I propose a new model of these processes and discuss its implications.

This research expands the scope of the exploitation/exploration literature which has generally embraced a firm-level perspective by showing the theoretical and practical relevance of this framework for the study of entrepreneurial behaviour from an individual-level perspective. The study exemplifies specific instances where explorative or exploitative aspects of behaviour are likely to be manifested as a response to specific types of shocks that precede and impact the decision to quit and start one’s own business. Different types of shocks or entrepreneurial events displace the individual from the inertia of existing behaviour and pave the way for the consideration of a new set of opportunities; a new set of opportunities where entrepreneurial initiatives are perceived to be both feasible and desirable (exploitation–exploitation). Drawing upon 80 semi-structured and longitudinal interviews with entrepreneurs who quitted their ‘salaried job’ in order to start their own business, the study: (a) provides an inventory of events/shocks found to precipitate the interviewees’ decision to quit, and (b) links the various types of shocks with the prospective explorative and/or exploitative entrepreneurial initiatives. In this respect, the dynamics that underlie the effects of shocks on entrepreneurial behaviour are illustrated, while blurriness and interrelatedness of exploitative and explorative aspects of entrepreneurial behaviour are exemplified. Such a detailed list of shocks may serve as reference tool for both prospective entrepreneurs who wish to make an entrepreneurial shift in their career, as well as managers who wish to be proactive in avoiding or encouraging entrepreneurial employee turnover.

There is arguably a balance between exploration and exploitation within a commercial organization which leads to sustainable growth and value creation. Exploratory activities are associated with search, innovation, risk-taking and experimentation. Activities, such as selection, implementation and execution are considered exploitative in nature. We show that the governance structures and mechanisms that are typically employed in venture capital-backed companies ensure an optimum balance between the exploratory behavior of entrepreneurs and the exploratory focus of venture capitalists. New players in the venture capital cycle, such as crowdfunding platforms and corporate venture capital units, often fail to understand the importance of the interaction and interrelation between the apparently opposing exploratory and exploitative activities. However, collaborative venture capital models that are currently emerging appear to restore the necessary equilibrium in the “new” venture capital cycle.

Low labor costs and market access are no longer competitive differentiators; increasingly companies are looking to design and develop new products and services as a crucial source of competitive advantage. As the pressure to innovate increases, so does the tension between shorter-term exploitative development and longer-term exploratory innovation activities. We explore this tension using interview data from software SMEs and venture capitalist firms who invest in technology-driven companies. Findings indicate that, despite firm’s having established solid innovation plans, short-term exploitative demands crowd out their longer-term exploration innovation during the development phase. Agency and resource dependence theories are used to start to explore some of the reasons for this shift. Implications and suggestions for future research are discussed.

Despite the theoretical assumption that balancing exploration and exploitation is important for long-term performance and survival, previous studies have provided few insights into these relationships because they have focused mainly on the short-term financial performance of organizations. In addition, balancing exploration and exploitation is a critical challenge for small- and medium-sized enterprises (SMEs) that lack the resources, capabilities, and experience necessary to achieving ambidexterity. In this regards, this study empirically explores the relationship between the exploration–exploitation balance and SMEs’ longevity in order to address two important questions from the ambidexterity perspective: (1) How does the balance between exploration and exploitation influence organizational survival? (2) How is the appropriate balance between exploration and exploitation influenced by an organization’s internal and external contexts?

An analysis of 1981–2012 data from the Korean SMEs in IT industry reveals an inverted U-shaped curvilinear relationship between the extent of exploratory innovation and organizational longevity, providing support for the ambidexterity perspective. We further examine the moderating effects of financial slack and environmental dynamism on the relationship between exploratory innovation and organizational longevity. The results indicate that financial slack moderated the exploration–longevity relationship and call for a contingency approach for a better understanding of performance implications of the exploration–exploitation balance.

Exploration and exploitation comprise one of the most well-known constructs in management and organization studies. However, there are three gaps in the extant literature on this topic. First, these studies focus mainly on large organizations and neglect small and medium-sized enterprises (SMEs) and new ventures. Second, when adopting a longitudinal perspective, the research typically consists of cross-sectional studies that fail to capture evolution. Third, the research focuses more on the role of antecedents and mediators of strategies that pursue exploration and exploitation than on the practices that embody such goals. In this chapter, we address these three gaps and complement the previous literature with a study of the growth of an SME from start-up to sale over a 19-year period (1993–2011). We depict the evolution of exploration and exploitation over time through an analysis of management system practices that employs a longitudinal perspective. We analyze the different roles that management systems have played in various stages of the growth paths of the organization. We show that the role of management systems in shaping exploration and exploitation only loosely depends on the design of these systems. The same management systems can fulfill an explorative function in one stage and an exploitative function in another, depending on how such systems are used. Conversely, across stages, the role of management systems typically changes from exploration to exploitation.

This chapter investigates how small- and medium-sized enterprises and large firms decide the sourcing strategies to explore and exploit. This study adopts a qualitative methodology and reports on the insights derived from interviews with 35 companies and 2 experts. A series of propositions are derived, and these propositions are used to propose a height–distance view of exploration and exploitation. The implications for theory and managerial practice are presented in the concluding remarks.

Business literature reveals the importance of generating innovative products and services, but much of the innovation research has been conducted in large firms and not replicated in small firms. These firms are likely to have different perspectives on innovation, which means that they will probably behave differently to large firms. Our study aims to unpack how firms in Spatial Information perceive and engage in innovation as a part of their business operation.

To investigate these questions we conduct 20 in-depth interviews of top management team members in Spatial Information firms in Australia.

We find that small firms define innovation very broadly and measure innovation by its effect on productivity or market success. Innovation is seen as crucial to survival and success in a competitive environment. Most firms engage in product and/or service innovations, while some also mentioned marketing, process and organisational innovations. Most innovations were more exploitative rather than exploratory with only a few being radical innovations. Innovation barriers include time and money constraints, corporate culture and Government tendering practices. Our study sheds a light on our understanding of innovation in an under-researched sector; that is Spatial Information industry.

We link the exploration–exploitation framework of organizational learning to small- and medium-sized enterprises (SMEs) in a developing economy. SMEs in a developing economy generally lack abundant resources and capabilities because of an evolving set of industrial and environmental regulations. Studying two SMEs in China, we argue that their approaches to balancing exploration and exploitation depend on the development stages of the SMEs and their industrial and environmental contexts. In particular, we propose a four-stage framework that unfolds via initiation, innovation, transformation, and expansion. In this framework, SMEs balance exploration and exploitation by adopting temporal separation and organizational separation sequentially. We also find that SMEs may benefit from exploring a narrow scope of products and exploiting them in a wide market scope.

The global strategies of high-tech start-ups fall into two types. One is characteristic of knowledge-based firms; the other is characteristic of knowledge-intensive firms. We present two propositions related to timing of globalization and resource acquisition for each type and examine four case studies from the region around Cambridge University in the United Kingdom.

Knowledge-based start-ups target global markets from the very beginning, aiming at rapid market penetration. From the start they are highly globalized in acquiring core technology and financial and human resources.

In contrast, knowledge-intensive start-ups start in local markets and initially restrict acquisition of core technology and financial and human resources to those markets. Only at a later stage, when the local business is solidly established, do they gradually expand their businesses to global markets.

Since March (1991) presented his ideas on organizational learning, hundreds of empirical tests have been conducted on relationships among the activities of exploration, exploitation, ambidexterity, and firm performance. Despite continued interest in his ideas, there has not been a systematic assessment of extant research to reveal whether, and to what extent, these activities relate to firm performance. This study uses meta-analysis to take a next step by aggregating results of 117 studies from more than 21,000 firms. I find strong performance effects for exploration and exploitation, but contrary to received theory, I discover ambidexterity yields weaker effects than a focus on either exploration or exploitation. Thus, I leverage these findings to offer future research opportunities.

Networks and learning matter to small- and medium-sized enterprises (SMEs). Networks and learning are also further elaborations on the exploration–exploitation (EE) dilemma. Ambidexterity, that is, managing this apparent dilemma, can be difficult as a result of many constraints. One of these constraints is that of mutually exclusive network structures. Consequently, ambidexterity is the ability to change networks, depending on need using mixed data on four small companies formed as part of an undergraduate management class, I hypothesize how specific network properties of the advice-seeking relationship, including density, cohesion, centralization, and embeddedness, affect two outcomes. Specifically, early exploratory learning is proposed to be positively affected by less-dense networks that maintain cohesion without centralization and do not have relations embedded in other relations. In contrast, later exploitative learning should be associated with denser networks that also have higher cohesion, higher centralization, and greater embeddedness. The results provide some support for these hypotheses and suggest further research in two areas that will benefit SMEs. One, how do early networks affect learning mode? Two, how does the ability to rewire networks provide the relational infrastructure to shift from exploration to exploitation – that is, to be ambidextrous in the face of the exploration–exploitation tradeoff?