Professional Documents
Culture Documents
www.elsevier.com/locate/bushor
Mays Business School, Texas A&M University, College Station, TX 77843-4221, USA
KEYWORDS Abstract In todays fast-paced competitive environment, firms face the need to
Strategic be increasingly nimble and adaptive. While often able to establish a certain level
entrepreneurship; of performance based upon existing technologies, firms are equally as often to
Exploration; be left flat-footed in the face of emerging, novel technologies. We discuss
Exploitation; strategic entrepreneurship as the means through which firms simultaneously
Innovation; exploit their current competitive advantages while exploring for future opportu-
Competitive nities. Achieving a balance between exploration and exploitation consists of more
advantage than merely allocating resources evenly between the two processes. As discussed,
exploration and exploitation are operationally, structurally, and culturally distinct
processes.
D 2006 Kelley School of Business, Indiana University. All rights reserved.
1. Managing tension for competitive views if we were able to ask them to do so. For
advantage these tradition-rich manufacturers, a stream of
continuous value-creating innovations by global
Think of todays organizations. In your view, arent competitors (e.g., Toyota and Honda), increasing
most of them faced with the challenge of changing health-care costs, and the effects of escalating
frequently in order to meet the needs of those they energy prices combine to create extremely chal-
serve, such as customers, suppliers, and share- lenging conditions.
holders? Indeed, for many organizations, using their In addition to companies such as GM and Ford,
resources and skills to change in ways that will the challenge of continuous and dynamic change is
create value for stakeholders, and perhaps espe- affecting firms across multiple industries. This
cially customers, is becoming increasingly difficult. includes the computer storage industry, in which
Among other executives, those leading General flash memory innovations are radically changing
Motors (GM) and Ford would likely support these the nature of competition. The bwinnersQ and
blosersQ resulting from changes in this particular
* Corresponding author. industry remain unknown. Consider the situation
E-mail addresses: direland@mays.tamu.edu being created by SanDisk and an Intel-Micron joint
(R.D. Ireland)8 jwebb@mays.tamu.edu (J.W. Webb). venture, both of which are using novel technolog-
0007-6813/$ - see front matter D 2006 Kelley School of Business, Indiana University. All rights reserved.
doi:10.1016/j.bushor.2006.06.002
50 R.D. Ireland, J.W. Webb
ical capabilities as the foundation for competing in to effectively manage this tension is rapidly
this industry. By employing these strengths, the becoming a key differentiator between maintaining
new competitors are creating for customers value organizational success and facing dwindling perfor-
that seems to exceed that which is being generated mance over time. The Fortune 100 annual survey
by firms using less-novel technologies. Being able rankings indicate that most firms do, in fact, find it
to create a more attractive value proposition for difficult to sustain their performance over a
customers is making it quite difficult for some of considerable period of time. As evidence for this
the more traditional hard-drive manufacturers, assertion, consider the fact that only 26% of the 100
such as Maxtor and Iomega, to keep pace on the companies listed in Fortune s 1980 ranking
pathway to success in todays rapidly changing and remained on the list in 2001 (Cappelli & Hamori,
dynamic competitive environment. Similarly, pro- 2005).
visions associated with the Telecommunications Act Our paper proceeds as follows. First, we intro-
of 1996 redefined the nature of competition in the duce strategic entrepreneurship as a concept with
telecommunications industry, and appear to have the potential to influence the degree of success
provided wireless companies a long-term compet- todays organizations can achieve while engaging
itive advantage over wireline (i.e., landline) net- their rivals in competitive exchanges. We then drill
work competitors and pay-phone businesses. The deeper into strategic entrepreneurship by examin-
1996 Act lifted long-distance restrictions on wire- ing its two components: exploration and exploita-
less companies, greatly enhancing the value prop- tion. Explanations of differences in operational
osition these firms could choose to offer customers. activities, organizational structure, and organiza-
Although not a complete substitute for wireline tional culture that contribute to effective strategic
services, evidence suggests that consumers are at entrepreneurship are included as parts of these
least opting for wireless subscriptions instead of discussions.
adding a second or third wireline phone (Weaver,
2001).
The examples we offer, covering several firms 2. Introducing strategic
and the different industries in which they operate, entrepreneurship
suggest a few things about competition in todays
complex, increasingly globalized business environ- As some of our earlier comments suggest, strategic
ment. Not surprisingly, the challenging nature of entrepreneurship (SE) is a term used to capture
competing in a global environment creates several firms efforts to simultaneously exploit todays
tension-filled questions for firms: In what markets competitive advantages while exploring for the
should we compete? Should we offer standardized innovations that will be the foundation for tomor-
products across all markets or should we modify our rows competitive advantages. The SE concept, as
products for local preferences? How much risk are we are describing it, is somewhat new for academ-
we willing to accept to compete in markets with ics and business practitioners; however, the con-
which we are not deeply familiar? What kinds of cept is important in that effective SE practices
skills should we develop in order to become more result in a firm being able to form a balance
innovative? The issues raised by these questions between opportunity-seeking (i.e., exploration)
have the potential to create tensions in todays and advantage-seeking (i.e., exploitation) behav-
firms. iors (Ireland, Hitt, & Sirmon, 2003).
All of these tensions (and certainly others) are Based on both academic literature and experi-
important and demand careful consideration by ences being witnessed in a growing number of
those interested in organizational success. What is companies committed to practicing SE, we believe
of interest to us, though, is a particular type of that effective SE helps a firm position itself such
tension that the need to rapidly change creates for that it is capable of properly responding to the
firms; specifically, the need for a firm to learn how types of significant environmental changes that
to simultaneously exploit today that which it does face many of todays organizations. Beyond this,
well relative to rivals, while also exploring to and importantly so, effective SE helps the firm
determine what it needs to do to be successful in develop relatively sustainable competitive advan-
the future. This is the tension we consider in this tages. In addition to being valuable and rare,
article. In essence, this tension is between doing sustainable advantages are also difficult for com-
what is necessary to exploit todays competitive petitors to fully understand, and difficult to imitate
advantages and exploring today for innovations as a result of that lack of understanding (Barney,
that can be the foundation for the firms future 1991). As this initial discussion of SE suggests,
competitive advantages. We think that the ability continuous innovation is at the core of what firms
Strategic entrepreneurship: Creating competitive advantage through streams of innovation 51
are able to achieve as a result of balancing exploration to exploitation (and from exploitation
exploitation and exploration. to exploration, as well), poses significant chal-
lenges. Additional discussions of SE and its compo-
2.1. The challenge of strategic nents, which are presented in the next section,
entrepreneurship demonstrate this complexity.
In spite of its benefits, firms find balancing 2.2. An expanded view of strategic
exploration and exploitation to be difficult. There entrepreneurship
are several reasons for this. First, although explo-
ration contributes to strategic flexibility (a skill Defining the terms strategy and entrepreneurship
through which the firm is able to acquire and is a useful first step in becoming more familiar with
subsequently use information to appropriately strategic entrepreneurship. In Fig. 1, we present
respond to change), the outcomes of investments some of the individual attributes of strategy,
made in the firms exploratory capabilities are entrepreneurship, and SE.
uncertain. Because some stakeholders (e.g., sup- As suggested in Fig. 1, strategy is concerned
pliers) often are uncertainty avoiders, exploratory with the firms long-term development (Ghema-
actions may lack appeal, due to their experimental wat, 2002). A firms long-term development
nature and the lack of certainty that positive includes a number of elements, such as decisions
outcomes will accrue from them. Employees (an- regarding scope, how resources are to be acquired
other stakeholder group), too, may at least initially and managed, and intended sources of competitive
find exploratory actions to be difficult and perhaps advantage, among others (Hofer & Schendel, 1978).
undesirable. The reason for this is that exploration The attributes listed in Fig. 1 suggest that, in the
typically calls for employees to use novel routines most general sense, entrepreneurship is concerned
to complete their work instead of continuing to use with actions taken to create newness (Ireland et
the patterns of organizational action with which
they are familiar and likely comfortable. In gener-
al, those working in companies prefer the known to
the unknown. (We can all probably think of
individuals for whom this is the case.) Jointly,
these factors create a situation in which, in most
firms, exploitation, which takes place by exercising
familiar organizational routines, is preferred at the
expense of exploration, which takes place by
exercising unfamiliar routines (March, 1991). Some
organizational observers label this a condition in
which exploitation tends to drive out exploration.
The fragility of the process used to transition
from exploration to exploitation is a second reason
companies find developing an appropriate balance
between the two types of actions to be difficult.
Indeed, operational, structural, and cultural
changes must take place for a firm to transition
from exploring for new opportunities (as well as
new ways to take advantage of them) to exploiting
current competitive advantages as the source of
todays competitive success. Thus, when transi-
tioning, the firm moves from a concentration on
diversity with the intent of creating newness (i.e.,
seeking new opportunities, new market space, and
new advantages) to a concentration on successfully
using current skills and routines as the source of
todays advantages.
In short, although SE has great promise as a
contributor to sustainable competitive advantages,
the complexity of the individual sets of actions, as Figure 1 Strategic entrepreneurship: A value-creating
well as the actions taken to transition from intersection between strategy and entrepreneurship.
52 R.D. Ireland, J.W. Webb
al., 2003). We can extend this a bit to note that innovations are the source of effectiveness as a
newness results from actions framed around efforts result of satisfying market expectations, while
to create new organizational units, to establish new process and structural innovations are the founda-
organizations, or to renew existing organizations tion for efficiency as the firm wisely uses its
(Sharma & Chrisman, 1999). As these descriptions resources. Although new products highlight to the
suggest, strategy and entrepreneurship are prod- world a firms innovativeness and prestige, some
ucts of an array of decisions made about various scholars suggest that process and administrative
issues and phenomena (Miller & Ireland, 2005). innovations provide firms with greater competitive
SE results from combining attributes of strategy advantage than product innovations. The reason for
and entrepreneurship. Here, the firm combines this is that process and administrative innovations
exploration-oriented attributes with exploitation- are hidden within the firm. Consequently, it is more
oriented attributes to develop consistent streams difficult for competitors to reverse engineer and
of innovation and to remain technologically ahead imitate these innovations, as is often easily and
of competitors. Thus, SE is concerned with actions quickly achieved with product innovations.
the firm intends to take to exploit the innovations As an example, Philip Morris held a competitive
that result from its efforts to continuously explore advantage over its competitors for a number of
for innovation-based opportunities (i.e., new or- years because of its bexpandedQ tobacco process,
ganizational forms, new products, new processes, which signified a radical innovation in cigarette
etc.). An ability to anticipate and then properly manufacturing. The firm discovered that when
respond to environmental change is one of the tobacco was allowed to soak in liquid carbon
important outcomes of effective SE. Indeed, dioxide and then passed through a stream of hot
through SE, the firm intends to rely on innovation air, it would expand and pop, much like popcorn. By
and its exploitation as the source of sustainable employing this technique, Philip Morris was able to
competitive advantages and effective responses to fill the same amount of cigarettes with less
continuous environmental changes. Effective SE tobacco, greatly enhancing its productivity and,
practices find firms realizing that adapting to subsequently, its profitability. To the naked eye,
change requires an array of newness in the form cigarettes filled with expanded tobacco and those
of innovations. In fact, research suggests that filled with regular tobacco are indistinguishable.
between 30% and 50% of both a firms sales and its Furthermore, the process through which Philip
profits originate from products commercialized in Morris expands tobacco remains safely housed
the previous 5 years (Griffin, 1997; Hauser, Tellis, behind the walls of its manufacturing facilities,
& Griffin, 2005). These percentages have remained hidden from those who may wish to imitate such
fairly stable over the past decade, highlighting the value-creating activities. This process innovation
necessity to create consistent streams of innova- provided great value to Philip Morris, but the
tion to maintain organizational success. companys success was already founded on its
The stream of newness created through SE Marlboro brand of cigarettes. Therefore, in the
results from a balance of actions taken to explore case of SE, we take the position that sustainable
and exploit. Importantly, this balance positions a competitive advantage results from a combination
firm to take advantage of existing and future of product, process, and administrative innova-
opportunities. Exploitation maintains and hopefully tions, as firms cannot gain value from low-quality
enhances current levels of performance by incre- or outdated products, even when utilizing highly
mentally extending the firms established knowl- efficient processes.
edge base. In doing so, exploitation also supports
the firms exploration efforts. Exploration occurs as
the firm integrates diverse knowledge with existing 3. Differentiating exploration and
knowledge stocks. Absorbing new knowledge to exploitation
which the firm gains access while exploring
becomes the foundation for future exploitation In the following sections, we discuss in greater
actions. detail the processes of exploration and exploita-
Effective SE leads to a combination of both tion. To do this, we describe the operational,
effectiveness and efficiency-oriented forms of structural, and cultural characteristics enabling
newness, and is the source of sustainable compet- efficient and effective SE. As we will explain, firms
itive advantages. New products, new processes can undertake effective SE practices by separating
used to produce products, and new ways to the exploration and exploitation activities, and
structure a firm to facilitate innovation are all supporting each with distinct operational, struc-
examples of newness that SE can produce. Product tural, and cultural mechanisms.
Strategic entrepreneurship: Creating competitive advantage through streams of innovation 53
3.1. Exploration: Benefiting from diverse Corning uses alliances for exploration purposes.
investments In general, Cornings heritage is based on its own
internal knowledge of glass and ceramics. None-
Identifying ways to position a firm in one or more theless, the company has successfully leveraged
market spaces to deal with environmental change is knowledge acquired from alliance partners with its
a key outcome sought through exploration. Explor- own knowledge about glass and ceramics to gener-
ations success depends on the firms ability to ate new technologies to create new products.
acquire new, diverse knowledge and subsequently Cornings alliances include major collaborative
integrate it with existing knowledge. In other relationships with the likes of Dow Chemical,
words, exploration represents a learning process Samsung, and Mitsubishi. A web of smaller alli-
in which the firm attempts to significantly broaden ances, which broadens the knowledge base tapped
and deepen its total stock of knowledge. Knowl- by Corning and its partners, rests within these
edge breadth is achieved by seeking diverse relationships. Using these relationships for explo-
knowledge from external sources to add to internal ration purposes has contributed to identifying
knowledge. Knowledge depth is achieved as the opportunities and developing various products,
firm seeks to increase its store of both internal and including some for the automotive industry (e.g.,
external knowledge in focal areas. selective catalytic reduction substrates for emis-
As an operational choice, mergers and acquis- sion systems), the television and computer indus-
itions are a path firms use to increase their tries (e.g., liquid crystal glass displays), and the
knowledge diversity. Although controversial, this construction industry (e.g., insulation products).
path remains favored by a number of companies. Corporate venture capital programs represent a
Recently, for example, Cisco Systems acquired way of operating that firms use in order to mimic
Scientific-Atlanta, a provider of television set-top independent venture capital funds. Firms provide
boxes, video distribution networks, and video funding and expertise to a broad number of
system integration. By adding Scientific-Atlantas ventures; in return, they may become aware of
knowledge of video systems and networks to its attractive opportunities before their competitors.
existing knowledge about data and voice networks, Having a bfirst-mover advantageQ in terms of
Cisco intends to leverage its newly-formed knowl- identifying one or more attractive opportunities
edge base to establish expertise in video internet can subsequently lead to exploitation actions that
protocol networks. Ciscos interest in leveraging get launched before those of competitors.
knowledge this way centers on the ability to take A number of firms across a broad array of
advantage of the expected integration of tele- industries, including Intel, Reuters, Bertelsmann,
visions with the capabilities of personal computers. and UPS, have established corporate venture
In short, acquiring Scientific-Atlanta demonstrates capital programs (Garvin, 2002). These operational
Ciscos recognition of a changing environment (i.e., initiatives are yielding mixed results. For example,
the further integration of Internet and television Intel reaped over $4 billion from its venture
technologies), as well as the initial steps the firm is capital investments in the 1990s before losing
taking to bundle diverse knowledge with its own $632 million in 2001 alone. Of course, proponents
internal expertise as the foundation for exploring of corporate venture capital programs assert that
opportunities that it hopes to be able to exploit the strategic objectives outweigh potential finan-
because of changes in technologies. cial losses. Despite the setbacks it has endured,
In general, recent corporate actions suggest that Intel has continued its program, investing over
increases in the rate and complexity of environ- $130 million in 2004 in approximately 110 ven-
mental changes find firms seeking more efficient tures, spanning mobile Internet products, digital
operational means of exploration (compared to home applications, enterprise hardware and soft-
mergers and acquisitions). Strategic alliances and ware, and numerous other emerging technologies
corporate venture capital programs are examples (Intel, 2006). Although Intels 2004 portfolio
of means of operating that firms believe are investment represents a sizeable amount of mon-
efficient exploration paths. Contributing to the ey, it is still dwarfed by the previously-mentioned,
perceived efficiency is the fact that alliances and multi-billion dollar joint venture with Micron
corporate venture capital programs allow a firm to Technology and the billions of dollars the company
share, with one or more companies, the risks and spends annually on internal R&D. Nonetheless, as
uncertainty associated with exploration invest- our discussion illustrates, corporate venture cap-
ments. Using these means enables a firm to stretch ital programs can serve as an efficient means
its constrained internal resources across a broad, through which to invest across a broad range of
diverse scope of opportunities. opportunities.
54 R.D. Ireland, J.W. Webb
More comprehensively, our consideration of potential to reduce the amount of financial and
Cornings and Intels actions demonstrates that a human capital that is inappropriately used or
key purpose of exploration is creating new streams bwasted.Q However, standardization and formaliza-
of knowledge as the source of radically different tion should not be used to the point that they stifle
technologies and, subsequently, of new products the creativity of individuals to whom authority to
and sources of competitive advantage. Because of explore has been decentralized. Thus, freedom
the need to invest across a broad range of should exist to creatively explore, but within the
opportunities and the uncertainty regarding the context of guidelines about when to further pursue
success of many exploration investments, benefits a particular opportunity or not. Firms are able to
accrue to firms capable of efficiently handling the gain efficiency, without forfeiting effective explo-
demands of different operational choices (mergers ration, by standardizing and formalizing decision
and acquisitions, alliances, and venture capital rules and by not targeting the behaviors that occur
programs) as exploration investments. between decisions. In essence, this creates an
Exploration and exploitation demand different environment of options. In such an environment,
behaviorsbehaviors that are facilitated by a firms control exploration actions by pre-deter-
firms structure and culture. Indeed, the struc- mined specifications of uncertainty, risk, and cost,
tural and cultural mechanisms required to sup- yet allow ventures to experiment freely between
port exploration differ from those needed to decision milestones. Efficiently making these types
support exploitation. of decisions is important in that, as noted above,
The degree of centralization of authority, the only a very small number of opportunities will be
standardization of procedures, and the formaliza- judged appropriate for exploitation.
tion of processes are three structural mechanisms Organizational culture (i.e., the set of values
an organization uses to support exploration and and beliefs that are shared throughout a firm
exploitation. Centralization of authority refers to (Ireland, Hoskisson, & Hitt, 2006)) supports a
the amount of autonomy individuals have to make companys structural characteristics. Unsatisfied
decisions regarding the use of organizational with GEs performance in exploration, CEO Jeffrey
resources. Standardization of procedures refers to Immelt acquired British bioscience/diagnostics
the extent to which behaviors are routinized within company Amersham. Previously, GEs success res-
the firm. The formalization of processes concerns ted upon successfully exploiting knowledge gained
the degree to which the firm has prepared codified through acquisitions. Immelt believed that as the
and written instructions about how procedures are company grew continuously larger, relying on
to be followed. acquisitions as the primary means of exploring
Organizational structures characterized by would not yield the levels of success the firm
decentralized authority, semi-standardized proce- sought. Therefore, Immelt used the Amersham
dures, and semi-formalized processes support ex- transaction to spur changes in GEs culture and
ploration. Decentralization authority patterns yield increase the firms exploration. Unlike prior
a large number of occasions throughout a firm for acquisitions in which GE replaced target company
knowledge to be meaningfully acquired and pro- executives, Immelt placed Amershams CEO in
cessed (Siggelkow & Levinthal, 2003). The surfacing charge of GEs existing healthcare unit. Further-
of multiple nodes of people working together to more, Immelt invested over $100 million in R&D
acquire and integrate knowledge increases the both domestically and internationally (Brady &
likelihood of identifying several opportunities in Capell, 2004). It is hoped that these radical
the external environment. This is important in that decisions will underscore Immelts intentions to
examining a larger number of possibilities is the promote the risk-taking behaviors of a successful
path to finding a few true opportunities. exploration culture.
Decentralization of authority enhances the po- As our discussion suggests, exploration is a long-
tential effectiveness of a firms exploration behav- term, uncertain process. Pharmaceutical compa-
iors in that it makes it possible for the firm to nies attempts to develop new drugs clearly
examine a relatively large number of potentially demonstrate this. Even after spending years to
attractive market-related opportunities. In con- develop a new drug, these companies are required
trast, semi-standardization and semi-formalization to obtain regulatory approval through multiple
contribute to the firms efforts to efficiently use stages of testing. (The requirements pharmaceuti-
resources when exploring. More specifically, stan- cal companies must satisfy vary by country.) On
dardizing and formalizing some of the decision rules average, 812 years elapse from the time an
used for guiding the exploration for opportunities opportunity is identified to when the medicinal
creates routines of knowledge search that have the product is successfully positioned in the market
Strategic entrepreneurship: Creating competitive advantage through streams of innovation 55
space for exploitation purposes (Biomedical Indus- current competitive advantages to address new
try Advisory Group, 2005). Furthermore, only one in market demands. Consider digital cameras in the
five to ten thousand opportunities pursued by photography industry as an example of how this
pharmaceutical firms actually survives this entire works. When introduced, digital cameras were a
process (Pfizer, 2006). Although the numbers are radical innovation relative to the use of film.
elevated in the pharmaceutical industry, statistics Following initial competitive reactions to the
weigh against success in exploration for a host of introduction of the innovative digital product,
companies competing in other industries beyond however, competitors have settled into a pattern
pharmaceuticals. In all industries, however, the link of competing primarily on the basis of incremental
between exploration and exploitation highlights innovations, including such minor changes as im-
the need for an organizational culture valuing proving the quality of the digital image (i.e.,
experimentation, the acceptance of uncertainty, megapixels) and lens speed.
and a tolerance of failure. In Table 1, we highlight Because incremental innovations represent mi-
the fundamental, organizational characteristics of nor extensions to established bases of knowledge,
successful exploration. how the firm efficiently and effectively processes
knowledge to exploit new market demands differs
3.2. Exploitation: Benefiting from focus substantially from exploration-related behaviors.
Two major variables, the heightened certainty
As previously noted, radical changes are occurring regarding market trends and the shorter duration
rapidly in many of todays competitive environ- between market introductions of successive inno-
ments. Despite this flux, firms that learn how to use vations, create the differences. Exploitation rests
SE as a means of dealing with these changes may on knowledge of a proven innovation (i.e., prod-
enjoy a reasonable amount of stability between uct, process, or administrative), making it possible
changes. During periods of relative calm or stabil- for firms to be aware of present needs and
ity, firms concentrate on incrementally extending demands. Companies that are able to meet these
their knowledge base as the source of exploiting market opportunities early with high-quality prod-
ucts and services enjoy competitive advantage by profits, Honda produced a larger Accord loaded
being able to gain market share and by forming with additional options, without raising the con-
entry barriers. sumers price (Choi & Krause, in press). Through
Through stages of exploration and subsequent successful exploitation, Honda has profitably in-
exploitation, individuals within the firm build an creased its share of the global automobile market.
intimate knowledge base of the product, process, Firms also complete mergers and acquisitions to
and administrative attributes supporting an inno- facilitate exploitation of chosen opportunities.
vation. These individuals are often the source of Although a less efficient means of acquiring exter-
valuable ideas to re-bundle resources and knowl- nal resources compared to alliances and corporate
edge to create incremental innovations. Much of venture programs, mergers and acquisitions do
Honda Motor Corporations success can be attrib- allow firms to avoid uncertainties regarding a
uted to empowering individuals to stimulate posi- partners behaviors and create the potential for
tive change. For example, the company permits its greater economies-of-scale and scope. Many firms
employees to join teams that explore ideas they in the banking industry merge or acquire to exploit
find interesting. Allowing such interactions has led new geographic markets for just these reasons. For
to numerous innovations throughout the firm, from example, Wachovia Corporation, already one of the
minor improvements in the type of rag used to wipe largest financial services providers in the nation,
down dashboards to more technologically complex recently acquired SouthTrust Corporation to ex-
innovations involving how hood and hood frames pand its geographical footprint in the southeastern
are stamped (Colman, 2002). United States, especially in the fast-growing Texas
Although firms can take advantage of internal market. Similar to exploration, merging or acquir-
resources and knowledge, they may also seek ing to exploit generates potential synergies by
external partnerships when engaged in exploita- integrating complementary capabilities. These
tion. When exploring, firms seek knowledge and efforts are not risk free, though, in that rapidly
resources primarily in order to increase diversity. In changing environmental conditions have the poten-
contrast, exploitation finds firms acquiring and tial to decrease the value of acquired knowledge
bundling complementary knowledge and resources and resources.
to extend their ability to leverage existing capa- Exploitation is characterized by structural and
bilities and competitive advantages. Firms may tap cultural mechanisms that allow the firm to focus on
into external knowledge and resources to achieve a core set of knowledge and capabilities. As we
several objectives, including those of increasing discuss, there are differences in the structural and
the breadth of their distribution channels and the cultural mechanisms firms use when exploiting
speed at which they introduce incremental innova- compared to when exploring.
tions to customers. For example, Apple Computer Continuously acquiring and integrating diverse
has partnered with Hewlett-Packard (HP) to expand knowledge stocks is not critical when exploiting.
the global reach of its iPod digital music player and Indeed, the need for speed requires that the firm
its online music store. The alliance finds Apple focus on established knowledge. Because of this,
leveraging HPs established distribution channels the incremental nature of exploitation also mini-
and taking advantage of market opportunities in mizes the need for extensive cross-divisional com-
Asia. Thus, this alliance extends Apples distribu- munication (although, as noted from the Honda
tion capabilities as a means of solidifying the iPods example, some cross-functional cooperation can
position as the worlds top digital music player. spark valuable, incremental innovations).
With extensive distribution capabilities established A centralized structure takes advantage of each
through a cooperative relationship with another of these factors. Centralization defines a clear
firm, Apple is able to concentrate some of its locus of control, thereby overcoming ambiguity
resources on developing value-creating, incremen- concerning who has the authority to make deci-
tal innovations for the iPod. sions. This structural mechanism also makes it
Consider, again, the Honda Motor Corporation. possible for organizations to implement decisions
Although the company gains huge benefits from its quickly and efficiently by limiting the extent to
employees, as described above, it also forms which diverse perspectives are addressed. There-
alliances with some of its suppliers to identify fore, centralization deters the potential for inter-
opportunities for incremental improvements. nal conflict among separate divisions, divisions that
Through the 1990s, these collaborative efforts may have different perspectives regarding how to
rewarded Honda with a 25% reduction in the best exploit an opportunity.
manufacturing costs of the Honda Accord. Rather Highly-specialized and formalized routines also
than merely absorb these reduced costs in higher benefit a firms exploitation efforts. Although
Strategic entrepreneurship: Creating competitive advantage through streams of innovation 57
these mechanisms constrain creativity, exploita- ploration-oriented behaviors may still surface if
tions success rests more primarily on the proper the firm employs a cultural mindset that does not
use of fast, simple routines. Firms that attempt to complement these structural mechanisms. For
become a leader by honing numerous capabilities example, even when the appropriate structural
(as the sources of multiple competitive advantages) mechanisms are in place, individuals with a
often find themselves, due to a resulting lack of greater propensity for experimentation can side-
focus, lagging behind competitors that, due to their track the focus of decision makers. Such behaviors
concentrated efforts, precisely target customers slow down the exploitation process and introduce
needs. Formalization provides the authority indi- inefficiencies, both of which undermine the firms
vidual employees require as the foundation for ability to effectively exploit market opportunities.
making decisions in a timely manner. Consistent Therefore, firms must engender a culture in which
managerial support for the formalized procedures, greater certainty and a desire to focus on what is
in turn, solidifies the employee behaviors in known, as opposed to what could be, is supported.
standardized routines. Exploitations incremental nature also implies
Not surprisingly, exploitation is also culturally that the time between milestones is much shorter
distinct from exploration. The system of shared than is the case when exploring. Indeed, the
values supporting exploitation includes a need for formalization characterizing exploitation demands
greater certainty regarding tasks and outcomes, a specification of when and how outcomes should be
preference for meeting short-term goals, and a delivered. The constant presence of new objectives
commitment to focus on existing competencies can be stressful, especially given that competitors
and competitive advantages. Exploitation is based incremental innovations reduce the time available
on a heightened level of certainty regarding to a firm to achieve its specific objectives. Firms
market trends. In providing necessary focus, able to prevent this type of stress from reducing
centralization, standardization, and formalization their concentration on competitive advantages as
limit the extent to which experimental behaviors the source of exploitation outperform those inca-
may manifest in exploitation. Nevertheless, ex- pable of doing this. In Table 2, we highlight the
develop an appropriate balance between explora- Garvin, D. A. (2002). A note on corporate venturing and new
tion and exploitation actions. business creation. Harvard Business School (Note #9-302-091).
Ghemawat, P. (2002). Competition and business strategy in
In the final analysis, we anticipate successful historical perspective. Business History Review, 76(1), 37 74.
organizations as ones in which strategic entrepre- Griffin, A. (1997). PDMA research on new product development
neurship will be used to deal with the organizational practices: Updating trends and benchmarking best practices.
tension that surfaces as firms try to simultaneously Journal of Product Innovation Management, 14(6), 429 458.
Hauser, J., Tellis, G. J., & Griffin, A. (2005). Research on
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