Exploration-Exploitation Redirecting the discussion

Frido Smulders PhD Strategic Product Design

Faculty of Industrial Design Engineering Delft University of Technology

Presented at 16th IPDMC, EIASM June 2010, Murcia

2011’s host of 17th IPDMC

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Transition NPD-Manufacturing

“… many things have been too complicated to the people and knowledge of the people … it [the new product] was not balanced … […] I think it was … we were aiming too high…”

Agent from manufacturing department when he addressed the transition from NPD to Manufacturing!

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This paper aims to illustrate that …

… the Exploration-Exploitation literature is in need of a new perspective

… companies seem not to care about the exploration-exploitation distinction in the way discussed by academics

… all exploration is in need of some sort of exploitation, sooner or later!

… exploitation is sequentially depended from exploration

… the literature doesn’t address the transition from exploration to exploitation

… the perspective created could redirecting the discussion.3

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Set up presentation

• Brief overview of literature • Cases to illustrate sequential dependency • Research that aimed to describe the

transition– Approach– Results

• Elaboration of results• Management implications• Future research

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Exploration - Exploitation (March 1991)

• Exploration– Renewing product portfolio, new

products/services – Search, experimenting, creativity,

innovation, risk taking

• Exploitation:– Creating process reliability & product quality– Refining, incremental improvements,

efficiency

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Exploration-Exploitation literature.1

It all starts with March (1991)Adaptation by exploration and/or by exploitation• Adaptation by slow or fast learning• Knowledge equilibria

An interesting perspective triggering many other scholars to research it. Many new and additional perspectives are introduced.

However, literature seems still to be incomplete, contradictory and ambiguous (Gupta, Smith & Shalley, 2006)

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Exploration-Exploitation literature.2

Some perspectives and issues:• Ambidexterity, Tushman & O’Reilly 1996• Balancing (De Weerd Nederhof 2010, Corso & Pelligrini 2007)• Explorative & exploitative innovations (Benner & Tushman

2002, He & Wong 2004)• Orthogonal or continuum (Gupta et al. 2006)• Balancing requires full dexterity (Corso & Pelligrini 2007)• H2 transform from explorative company to exploitative

company (Holmqvist 2004)• Balancing on higher levels, across comp. in network (Gupta

et al. 2006)

No attention for transfer of ideas from one process to next

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Exploration-Exploitation literature.3

Recently Farjoun (2010) introduced an interesting perspective:

• He distinguishes between mechanisms and outcomes• He transfers exploration into its derivative change and

exploitation into stability • Stability and change both could be seen as outcomes and

mechanisms– Stability as mechanism could lead to stability ánd change– Change as mechanism could lead to change ánd stability

• He questions causality between org arrangements and resulting outcomes

• He makes these two interdependent and potentially compatible• Here I will go beyond that and make exploration and

exploitation sequentially dependable

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Concluding on literature:• Lots of perspectives• Lots of ambiguous issues & definitions• March (1991) mentions: “adaptive systems that engage in exploration

at the exclusion of exploitation are likely to find that they suffer the costs of experimentation without gaining many of its benefits”

• Transitional perspective lacks• Sequential perspective

What is it that companies worry about? Getting return from investment!

Transition from Exploration to Exploitation falls in

between the cracks!

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Some examples: Design agency

• Design agency, e.g. Ideo– Operational process is to be seen as: “Search, variation, risk

taking, experimentation, flexibility, discovery, innovation” – Leads to new ideas for clients– From Ideo’s perspective this is within “existing

competencies, technologies and paradigms” (March) => exploitative adaptation

• Observation:– Operational process is exploitation of existing competencies

however with exploratory character– What will exploration look like for design agencies? Meta-

exploration …?

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Some examples: Shipbuilding

• Shipbuilding, e.g. IHC Yard Gusto– Specialized in design, engineering and construction of unique offshore

crafts (Drill ships, pipelay vessels, dredgers, crane vessels, etc. – Design part of operational process is to be seen as exploratory: “Search,

variation, risk taking, experimentation, flexibility, discovery, innovation” – Construction part is exploitative within “existing competencies,

technologies and paradigms”– Yard closed in late 70s => Gusto Engineering part of SBM Offshore– Change in business model: selling designs rather then vessels– Increased amount of proprietary designs

• Observation: – Operational process was cut at transition from exploratory character to

exploitative character– New business model with extended exploitative elements, selling

proprietary designs– Different form of exploratory adaptation: developing new designs

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Some examples: R&D lab

• Exploratory R&D lab to exploitative R&D, e.g. Centro Ricerche Fiat (CRF)– Exploratory adaptation in service of FIAT Group, no exploitation needed– CRF’s main business: “Search, variation, risk taking, experimentation,

flexibility, discovery, innovation” => exploration– CRF strategy in 90’s: less depended on income FIAT => turn CRF into

profit centre– Exploitative organization needed to be build– Additional org structures, new roles/functions, new image– Slogan: Competitiveness for Customers at Competitive Prices (CCCP)

• Observation: – One can not competitively sell results of exploratory adaptation– Exploratory operational process of CRF was in need of exploitative ‘tail’

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Concluding on examples• Stability as process could lead to change as outcome (Farjoun

2010)

• The character of process is not the indicator for kind of adaptation

• March mentions: revenues of exploration are distant in time • Exploratory adaptation needs exploitative adaptation sooner

or later!• Transitional perspective needed

=> Exploitative adaptation seen as sequentially dependent on exploratory adaptation!

Let’s have look at a well known transition: NPD-Manufacturing

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Additional motivations• What is innovation? The process of the outcome?

– Innovation is seen from perspective of observer– Innovativeness is situational

• Actors engaged in innovation don’t mention the verb ‘innovating’– They engineer, the calculate, they experiment, they iterate, etc. – Are they submerged in what innovation is …– Investigate the practice (Brown & Duguid 2001)

• Solo-innovators seem to have less problems– They get the idea, they design, they engineer, they produce and they

use– In the process they experiment, they test, they iterate – Division of labor …! Adam Smith 1776– Many functions, many thought worlds => it is a social “process of

negotiation among disciplines” Bucciarelli 1988

=> What is the transition telling us on innovating and innovation?

Strategy

Purchasing

Product Management

Manufacturing ‘X’ Manufacturing ‘X’ + ∂

Sales

time

Transition NPD-Manufacturing

NPD processes

Exploration

Exploitation

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Foci NPD literature• Rational-analytic perspective is dominant

– Steps and phases– Tools and methods for development

• Program of requirements• CAD-CAM

– Bringing downstream info upstream• DFX theories• Explicit information exchange

• Structural perspective, integrated NPD• Multi ‘X’ teams• Parallel development (CE, IPD)

• Time-to-market or diffusion studies– No transition studies

Transition from exploration to exploitation was never taken.

Socio-interactive perspective is not there!

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Research approach Grounded Theory

(Glaser & Strauss 1967, Glaser 1978, 1992, 2002) • Under-researched area • Discovering new theories based on empirical data• Integrated research process of collecting &

analyzing data: Theoretical Sampling• Ongoing sampling until ‘theoretical saturation’

– Saturation means that theory sufficiently explains recorded behavior

– New conceptual categories or insights at any stage of process

– Written document: pause in “never ending process of generating theory”

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Schematic representation of analyzing process

Empirical data

Conceptual categories

Properties of categories

Theoretical framework

Critical incidents

Integration of categories

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Research process: 3 stages • Scanning

– Identification of symptomatic situations related to main concern of actors

– Three companies: 65 actors– 6 preliminary theoretical categories

• Focusing – Zooming in on actors on both sides of interface – 2 companies, 4 projects, 14 actors– 265 pages of transcripts – Total 37 theoretical categories

• Integrating– Inductive leap– Integrating categories => socio-interactive concept of

transition

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Exploitative state: Socio-interactive perspective

= Volume production• New knowledge developed

• Explicit knowledge of drawings transformed into – Machine settings, moulds, plant layout, etc.– Assembly & testing procedures, routines

• Interdependent routine behavior of production people– “multi-actor, interlocking reciprocally-triggered

sequences of action” (Cohen & Bacdayan 1994, p. 554)

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New construct: noetic system

Noetic system (nous (gr) = mind) is network of complementary individually held mental models

• Mental models are deeply held internal images of how the world around us works (Senge 1990)

• Mental models represent person’s view on world including explicit and implicit understandings and cover knowledge structures and activity patterns (Kim 1993)

• Noetic system becomes a noetic template if pattern of routine actions is tightly interlocked.

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Noetic template: complementary mental models

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Routines are noetic systems in action

Organizational routinesOrganizational routinesOrganizational routines

Explicit,Implicit,

TacitKnowledge

&behavior

Noetic system

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Explorative activities

Exploitative activities

Product ConceptStage

Product & ProcessDevelopment Stage

Pre-production &0-series Stage

Production Ramp-up Stage

ConceptualNoetic Template

ActionableNoetic Template

ImplantableNoetic Template

PerformingNoetic Template

Exploration-Exploitation Transition

Actor Interactions

Free Exploration Focused Exploration Bounded Exploration Extinctive Exploration

Concepting Exploitation Detailing Exploitation Testing Exploitation Implementing Exploitation

Maturing Noetic Template

Transition: absorptive capacity(Cohen & Levinthal 1990; Zahra & George 2002)

• Equals ‘elasticity’ of noetic system– Learning process ≈ Kolb (1984)– New knowledge, skills, attitudes in social setting

• ∂ old/new too large => absorptive capacity insufficient No transition No relation with existing knowledge New noetic system required

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Transition: innovativeness

• Level of innovation is ambiguous– 3M Post-it Notes, Innovation? Who’s perspective?– Transition process was difficult– iPad? Innovative?

• Learning – assimilating & accommodating individual and collective mental system

Innovare (Latin) to bring something new to existing situation

Innovating becomes: Individual learning in a collective and social setting that aims to develop new or adjusted noetic systems.

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Transition: integrating two ontologies

• Ratio-analytic ontology: content dynamics– Development of ‘tangible’ dimension– Machine settings, production & assembly line – Development of the new product

• Socio-interactive ontology: socio dynamics– Development of social dimension – Routines, collaborations, behavior, embedded

knowledge– Development of noetic system (flip-side of the product)

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Summarizing• Bridging from exploration to exploitation brings us inside the

innovation process with two dimensions:– Ratio-analytic, content dynamics– Socio-interactive, socio dynamics

• Innovating (innovare) is conscious and unconscious socially based learning until new/adjusted performing noetic system is realized

• Noetic systems cover knowledge structures and organizational routines that are embedded in individual mental models

• Innovativeness influences content induced socio dynamic learning

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Thank you!