Exploitation versus Exploration: Getting the Mix Right

My dissertation examines in three essays how firms utilize exploitation and exploration strategies, independently and in combination, for competitive advantage. The first essay examines whether firms can gain competitive advantage by the simultaneous pursuit of exploitation and exploration (i.e., an ambidextrous strategy). Utilizing a cross-industry survey of marketing executives, I demonstrate that ambidextrous firms outpace non-ambidextrous ones across several performance dimensions. Importantly, implementation of an ambidextrous strategy at the marketing function level mediates the relationship between a firms ambidextrous strategy and its performance. Finally, differences in the mediating relationship between manufacturing and services firms are found.Essay two conceptualizes exploitation and exploration as capabilities. Drawing on longitudinal objective data from publicly-traded pharmaceutical companies, this study examines how firms maintain exploitation and exploration capabilities over time. Stochastic frontier estimation is used to create capability measures for exploitation and exploration for each firm in each period. The capabilities are then linked to historical and forward-looking performance, as measured by Return on Assets and Tobins q respectively. The results show that firms with stronger exploration capabilities have higher Tobins q values. Stronger exploitation capabilities, however, negatively affect Tobins q. In contrast, exploitation has a positive effect on historical performance while exploration has no effect. Surprisingly, firms that have stronger capabilities in both exploitation and exploration gain no significant performance advantage.Finally, given the difficulty of managing exploitation and exploration, the third essay investigates how firms can improve their focus on these strategies. Specifically, it examines customer divestment, or strategically terminating relationships. Research notes that most customers offer little or no value to a firm. This means that a firms investments in exploitation and exploration are potentially greatly misapplied. I use archival data to explore the prevalence of customer divestment across industries. I then investigate the customer divestment concept with managers and customers, yielding a broad framework of key relationships. Finally, an experiment is used to begin to empirically test key relationships. The results demonstrate that it is better for managers not to provide a warning prior to divestment as it creates more negative attitudes toward the firm.