Organizational and experimentation activities (Cao et al., 2009). Consequently,

Organizational implications
of balancing exploration and exploitation across operational modes; organizational
inertia and synergies

 

Abstract

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We live in a
dynamic world, where everything is in a state of constant change. This does in
particular apply to the business environment, where firms’ products
consequently risk facing obsolescence. Hence, adaptiveness to change is vital
for corporate survival, where ambidexterity is key. In this context, I extend
the existing analysis of the benefits of ambidexterity across operational modes
by identifying implications of synergies and organizational inertia.  Thus, by contributing to the research on
ambidexterity, my findings may be of great value for both research and
practitioners, providing further insight into the challenges of a changing
business environment.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. Introduction

When a firm´s
activity rate of exploitation exceeds the equivalent of exploration, the firm
is facing the risk of being subject to obsolescence (Cao et al., 2009). Such
firms may experience short-term success from a state of higher degree of
exploitation, but in the long run, the state is unsustainable in the face of
significant market and technological change (Tushman and Anderson, 1986).

Conversely, when a firm´s activity rate of exploration exceeds the equivalent
of exploitation, the risk of failing increases due to costly search and experimentation
activities (Cao et al., 2009). Consequently, a balanced approach of pursuing
both exploration and exploitation is essential for performance (March, 1991). Stettner
and Lavie (2013) further elaborated the research and empirically proved that
balancing exploration and exploitation across operational modes is more
beneficial than within. However, any research on organizational challenges on
such an approach has not been conducted. I propose that inertial pressures and
disregarded synergy effects overall will mitigate the benefits of ambidexterity
across operational modes. Hence, I will extend Stettner and Lavie´s (2013) theory
by adding organizational factors, limiting the research to organizational
inertia and synergies. By contributing to the research of ambidexterity, further
insight will be given on activities that are critical for a firm´s sustainable
competitive advantage (March, 1991). 

            The paper is structured as follows.

Section 2 reviews the current literature on the topic of ambidexterity within
and across modes, organizational inertia and synergies. Section 3 explains the
development of my propositions. Section 4 discusses implications and concludes.

 

2. Literature Review

In the following,
I will focus on the existing theory of ambidexterity within and across
operational modes, as well as organizational inertial pressures. Furthermore, I
will cover relevant components of organizational synergy effects.

 

2.1 Current
Research on Ambidexterity Within Operational Modes

The aim of
ambidexterity is to overcome organizational inertia that threatens
organizational survival (Kollmann et al., 2009). This is done through
integrating seemingly opposing activities within an organization, with the aim
of preserving existing business activities while identifying new business
opportunities; balancing exploitation and exploration (March, 1991). March
(1991) argues that a balanced approach of pursuing the two activities is
essential for performance; an organization that engages in both exploration and
exploitation is expected to maintain productivity and innovation.

            However, in contrast, organizational
challenges have been identified when balancing exploration and exploitation via
internal organization (Benner and Tushman, 2003) and could potentially exist in
other operational modes as well. When balancing exploitation and exploration in
one mode, the organization simultaneously depends on both types of routines.

Hence, organizational tension, complexity and coordination challenges are
fostered, which could undermine performance (Benner and Tushman, 2003).  Furthermore, a firm that has chosen to
balance exploration and exploitation within one mode may misapply knowledge or
practices that are suitable for one activity when performing the other, thus
experiencing negative learning effects (O´Grady and Lane, 1996). Additionally,
a firm that balances exploration and exploitation within a particular mode forsakes
the benefits of specialization (Madhok, 1997). Thus, Stettner and Lavie (2013)
postulate that balancing exploitation and exploration within one mode of
operation will undermine firm performance relative to concentrating on either
exploration or exploitation in that mode. 

            In summary, ambidexterity is
essential for a business to survive a dynamic environment (March, 1991).

However, weaknesses of balancing exploitation and exploration within
operational modes have been identified, which fostered the development of
ambidexterity across modes, as discussed in the following section.

 

2.2 Current
Research on Ambidexterity Across Operational Modes

Through extending
the domain separation approach, Stettner and Lavie (2013) provide insights into
the benefits of exploring in one mode while exploiting in another. A firm can,
through exploring in one mode and exploiting in another, enjoy the
complementary benefits of exploration and exploitation, and hence improve
productivity while preserving adaptability (Stettner and Lavie, 2013).  More specifically, by balancing exploration
and exploitation across modes, the firm is able to separately pursue these
activities, while mitigating negative transfer and the tension between
conflicting routines. Haleblian and Finkelstein (1999) contribute to the
support of ambidexterity across modes, as they argue that a firm can maintain
consistency, control, productivity and stability in peculiar modes, and hence
improve the efficiency of exploitation. Moreover, through balancing exploitation
and exploration across modes, a firm is able to develop specialized resources,
streamline capabilities, and improve organizational processes in each mode
(Stettner and Lavie, 2013).

            In summary, ambidexterity across operational modes makes the firm
better off in comparison to ambidexterity within modes, where benefits equal
mitigated negative transfer and tension between conflicting routines, as well
as improved productivity. (Stettner and Lavie, 2013). However, no research on
organizational challenges of ambidexterity across modes has, to the best of my
knowledge, been conducted. Thus, my goal is to elaborate on the implications of
organizational inertia and synergy effects in this regard.

 

2.3 Current
Research on Organizational Inertia

Organizational
change research has identified two major, competing, forces. Firstly, a
changing environment continuously challenges an organization´s strategy and
structure, where poor performance is a major driver of organizational change
due to environmental dynamics. Secondly, routines and established patterns of
thinking and acting, may lead to organizational inertia, which contributes to
resistance to change  (Shimizu and Hitt,
2005). The sources of organizational inertia are comprised of different theories
of barriers to change, including organizational routines, bounded rationality,
complementarities, conformity and social and political structures (Grant, 2016).  When inertia is present, environmental change
is faster than the speed of change in the core features of an organization
(Hannan and Freeman, 1984). Previous research has found evidence that the
likelihood for organizational change varies with the age of the organization;
the older the company, the lower the probability of change (Hannan and Freeman,
1984). Furthermore, support for positive correlation between resistance to
change and size has been found (Hannan and Freeman, 1984).

            In summary, organizational inertia
is the major barrier to change (Shimizu and Hitt, 2005), and consists of
several theories of impedimental causes. Furthermore, a positive correlation
between organizational inertia and the size and age of an organization has been
identified.

 

2.4 Current
Research on Organizational Synergy Effects

The most common
forms of business synergies can be split in to six major categories, including
shared know-how, coordinated strategies, combined business creation, vertical
integration, pooled negotiation power and shared tangible resources (Goold and
Campbell, 1998). Whereas the synergy forms of vertical integration, shared
tangible resources, pooled negotiating power and coordinated strategies relate
to more tangible synergies, such as improved production efficiency, shared
know-how and combined business creation are intangible synergies (Goold and
Campbell, 1998). 

            Shared know-how is one of the most
important forms, which relates to the common tendency by companies to emphasize
leverage of core competencies and sharing best practices; value can be created
simply by exposing one unit to another, which possesses different capabilities,
including knowledge (Goold and Campbell, 1998; Zi-Lin He and Poh Kam Wong,
2004).  

            In summary, out of the various
synergy forms, shared know-how is one of the most important for companies in
general, where value is created by exposing one unit to another (Goold and
Campbell, 1998).

 

3. Development of Research Proposals

In order to
increase the understanding of organizational implications of ambidexterity
across operational modes, I am elaborating on the effects of organizational
inertia, focusing on three of the major components, which I have identified as
the most influencing: organizational routines, bounded rationality and
complementarities. Furthermore, I am also elaborating on the implications of
synergy effects.  

 

3.1
Implications of Organizational Routines

Core capabilities
are defined as factors that differentiate a company strategically. At any given
point in the history of a corporation, core capabilities are developing, and
the corporation´s existence is subject to the ability of successfully managing
that development (Lucas and Goh, 2009). Several theories are underlining the
strategic importance of core capabilities, where Rumelt (1974) researched that
of nine diversification strategies, the two based on an existing resource base
in the firm outperformed the other strategies. Additionally, Mitchell´s (1989)
observation that industry-specific capabilities increased the likelihood a firm
could exploit a new technology within that industry, supports the work of
Rumelt. However, institutionalized capabilities could lead to “incumbent
inertia” as a result of a dynamic surrounding environment, which reduces the
capacity to change (Leonard-Barton, 1992; Lucas and Goh, 2009).  Furthermore, Leonard-Barton (1992) states
that core capabilities potentially could become so rigid that a response to
change is impossible. Past innovative activities play a role in future
innovation by providing a firm with a knowledge base that allows it to absorb
technological competence from external sources (Cohen and Levinthal, 1990;
Levitt and March, 1988). Moreover, an organization that lacks exploration in
one period may be excluded from areas of future exploratory activity as it is
lacking a relevant knowledge base (Cohen and Levinthal, 1990).

            Summing
up the previous section, my first proposition is:

 

(1) Only focusing on exploitation in one mode during a given period
could impede the ability to implement exploratory activities in that mode at a
later stage.

 

3.2 Implications
of Bounded Rationality

Bounded
rationality can be defined as the limited ability of human beings to adapt
optimally, or even satisfactorily, to complex environments (Simon, 1991). These
cognitive limitations are highly applicable on organizations, as all organizational
learning takes place inside individual human heads; through the learning of its
existing members, or by adding new members who possess specific knowledge that
the organization did dot previously have (Simon, 1991).  However, what an individual learns, and hence
indirectly what the organization learns, is highly dependent on the existing
knowledge among the members of the organization. Thus, a highly vital component
of organizational learning is internal learning; transmission of information
in-between members of the organization (Simon, 1991).

            An important aspect of the
organizational learning process is the effect of constraints, especially in
terms of exploratory activities; the learning related to a new product must be
widely distributed throughout the organization. I.e. a large amount of members
of the organization need to learn new things, including overcoming motivation
obstacles and crossing cognitive barriers (Simon, 1991). Moreover, bounded
rationality is reinforcing the concept of limited search. Basic search has a
smaller amount of certain outcomes, longer time horizons, and more diluted effects
than product development (March, 1991). Accordingly, the search for new
products has a smaller amount of certain outcomes, longer time horizons, and
more diluted effects than development of existing ones (March, 1991). Due to
these differences, individuals tend to limit search to areas close to their
existing activities, resulting in preferences for exploitation of existing
knowledge over exploration for new opportunities (March, 1991).  

            Summing up the previous section, my
second proposition is:    

 

(2) Ambidexterity across operational modes benefits explorative
activities, mitigating inertial pressures caused by bounded rationality.

 

3.3 Implications
of Complementarities

In order to
understand the performance of a company, the company should be seen as a system
of interconnected choices, where choices are done with respect to polices and
organizational structure, activities, capabilities, and resources (Siggelkow,
2001). Miller and Friesen (1982) further elaborated on the view of an
organization as a system, and empirically found that a large amount of changes
over a short period of time led to more favorable firm performance, than
gradual incremental approaches. Romanelli and Tushman (1985) extended this view
by proposing that organizations tend to evolve trough a process of punctuated
equilibrium; firms develop through incremental changes during the major parts
of their lifetime, yet temporarily undergo relatively rapid and fundamental
transformations (Gersick, 1991). 

            Moreover, an internal fit among
choices may result in a competitive advantage as it makes imitation more
difficult for rivalry firms (Rivkin, 2000).

However, such a
tightly coupled organization may have difficulty adapting to changes in the
environment, as a tight fit among the activities obliges the organization to
modify a large amount of choices simultaneously (Levintal, 1997).  On the other hand, the incentive of adjusting
each choice due to external change increases in correlation with the degree of
tight fit, as each choice influence the payoff of many other choices
(Siggelkow, 2001). Additionally, a tight fit may result in a higher
sensitiveness to environmental change (Weick, 1976). Environmental change is
quickly identified in a tightly coupled organization, as one change is felt in
multiple areas in the firm (Siggelkow, 2001).

            Summing up the previous
section, my second proposition is:

 

(3) When balancing exploitation and exploration across modes, sensitiveness
to environmental change decreases. 

 

3.4
Implications of synergy effects

As implied by
Stettner and Lavie (2013), exploration and exploitation are fundamentally
different logics that create tensions. However, several theorists challenge the
idea of fundamental competition between the two activities. Gupta et al. (2006)
indicate that exploration and exploitation may ally in complementary domains
that do not necessarily compete for the same resources. Moreover, Zi-Lin He and
Poh Kam Wong (2004) highlight the synergy effects of integrating the two
activities. Consistent with mentioned theorists, Cao et al. (2009) argue that
explorative and exploitative activities can in fact be supportive of one
another and help leverage the effects of the other for several reasons.

            Through repeated use of existing
knowledge and resources, management can become better aware of where they
reside within the firm, and improve the understanding of the functionality of
existing knowledge and resources  (Cao et
al., 2009). Hence, a high degree of exploitative activities may have a positive
impact on the efficiency of explorative activities, such as developing
resources that support new products and markets (Cao et al., 2009). As an
example, Burgelman (2004) explains how Intel´s existing competencies and
engineering knowledge related to its established memory chip business, in
combination with being up to date with the market trends, enabled the
management to identify and seize an early and sustainable advantage in the
micro-processor industry (Cao et al., 2009).

            Analogously, a high degree of
exploitative activities may affect explorative activities positively (Cao et
al., 2009).  Successful exploration is
one technical domain or product may enhance exploitative efforts in a
complementary domain (Cao et al., 2009).

            Summing up the previous section, my
third proposition is:

Proposition 4: Not combining exploration and exploitation
in operational modes may result in disregarded synergy effects, including more
efficient explorative and exploitative processes, which affects the firm´s
potential performance negatively.

 

4. Discussion and Conclusion

The majority of prior
research on ambidexterity has elaborated on the effects of balancing
exploitation and exploration within operational modes. Stettner and Lavie (2013)
contributed to this literature by offering insights into the benefits of
balancing exploitation and exploration across modes. Their findings reveal that
the standardized way of balancing exploitation and exploration within modes is
less beneficial than across (Stettner and Lavie, 2013). However, the study is
subject to a few limitations, including the identification of organizational implications
when firms attempt to balance exploitation and exploration across operational
modes. Thus, I contribute to the research on ambidexterity through examining
the implications of organizational inertial pressures and synergy effects when
balancing exploitation and exploration across modes.  

            My
findings of the implications of organizational inertia reveal that a sole focus
on exploitation in one mode during a given period could impede the ability to
implement exploratory activities in the same mode at a later stage. This
inertial pressure is ascribed to reliance on the theory that past exploratory
activities affect the equivalents in the future by providing a firm with a
knowledge base that allows it to absorb technological competence from external
sources (Cohen and Levinthal, 1990; Levitt and March, 1988). Thus, an
organization that lacks exploration in one period may be excluded from areas of
future exploratory activity as it lacks a relevant knowledge base. (Cohen and
Levinthal, 1990)

Moreover,
balancing across operational modes is beneficial in terms of explorative
activities as such ambidexterity structure mitigates inertial pressures caused
by bounded rationality. I ascribe this finding to the theories of limited
search and organizational learning, which both underline bounded rationality as
a barrier to change (March, 1991; Simon, 1991)

 When balancing exploitation and exploration
across modes, specialization has a positive impact on adaptiveness to change,
and mitigates inertia caused by a complex configuration of complementarities,
as in line with the proposition by Stettner and Lavie (2014). However, the
sensitiveness to change is potentially negatively affected, as a tight fit may
result in a higher sensitiveness to environmental change (Weick, 1976).

In terms of
synergies, my findings reveal that an ambidexterity structure across modes may
result in disregarded synergy effects, as exploration may leverage the effect
of exploitation, and vice versa (Cao, Gedajlovic and Zhang, 2009). 

            These findings may be of relevance for companies by making them
alert on organizational implications of a cross-mode ambidexterity approach,
when contemplating on how to pursue ambidexterity when facing the risk of obsolescence. However, the results are only
theoretical and require theoretical testing to prove validity. While this paper
aimed to advance the understanding of organizational implications of
ambidexterity across operational modes, there are other factors worth to
consider in this regard. Future research may attempt to identify the
implications of other inertial pressures, such as social and political
structures, or conformity. It can also try identifying other types of
organizational implications, or organizational implications in particular
operational modes.

            In conclusion, ambidexterity across
operational modes may generate both positive and negative impact on firm
performance, considering organizational implications. In terms of
organizational inertia, potential negative impacts are reduced ability of
implementing exploratory activities at a later stage and decreased
sensitiveness to environmental changes. In contrast, inertial pressure caused by
bounded rationality may decrease, in comparison to ambidexterity within modes.

In terms of synergies, potential positive synergy effects may be discarded by
balancing exploration and exploitation across modes. While this paper
contributes with new insights to the literature of ambidexterity, future
research is necessary to validate the results and identify further
organizational implications of balancing exploration and exploitation across
modes.