EXPLORATION AND EXPLOITATION CLUSTERS IN THE INTERNET INDUSTRY

Koen Dittrich
Dept. Management of Technology and Innovation - Rotterdam Sc

Bob Kijkuit
Dept. Management of Technology and Innovation - Rotterdam School of Management

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     Last modified: May 12, 2004

Abstract
March (1991) defines two basic strategies for firms to acquire new knowledge, when adapting to a changing environment. These two strategies of organizational learning are referred to as exploration of new opportunities and ideas and exploitation of old certainties. Exploration can be associated to searching, flexibility and innovation, while exploitation refers to refinement, production and execution (March 1991: 71). Exploration concerns the development of new products, services and technologies on existing markets (Abernathy and Clark 1985; Ansoff 1957), the development of existing technologies for new markets (Schumpeter 1942; Hamel and Prahalad 1994) or the development of new technologies for new markets (Abernathy and Clark 1985), which implies taking the highest risk of all possible innovation strategies. Exploration goes beyond incremental innovation since often risks and development costs are higher and new capabilities need to be acquired (Burt 1992; Granovetter 1973; Khanna et al. 1998; Koza and Lewin 1998, March 1991). Exploration alliances typically do not involve joint equity relationships and can take the form of licensing and joint R&D (Koza and Lewin 1998: 257).

Exploitation concerns the development or extension of existing products, services and technologies for existing markets (Abernathy and Clark 1985; Ansoff 1957). Since existing resources can be used, innovation tends to be incremental and make use of existing capabilities (Kale et al. 2000; Koza and Lewin 1998; Krackhardt 1992; March 1991; Walker et al. 1997). Alliances characterized by exploitation often take the form of establishing a daughter company in which the parents have equity positions (Koza and Lewin 1998: 256). Hence, exploration can be initiating radical innovation, while exploitation will only lead to incremental innovation.

We propose that exploration requires diverse knowledge, whereas exploitation requires specialised knowledge. We intend to measure the diversity of knowledge along two related dimensions. The first dimension is the level of ‘industry’ diversity. Ties that span across industry boundaries can provide a company with unique knowledge. This knowledge is not available in ones’ own industry and facilitates exploration. On the other hand, ties within an industry will further enhance a company’s current expertise, which facilitates exploitation.

The second dimension is level of non-redundancy. To facilitate exploration, ties should not only span industry boundaries, but also be disconnected from each other. Thus, exploration will benefit from a combination of high industry diversity and high non-redundancy. Exploitation, on the other hand, will benefit from high interconnectedness within a cluster. Enhancing competence within the cluster leads to a competitive advantage over firms outside the cluster.

In order to investigate exploration and exploitation according to the two measures of diversity of knowledge a large sample of alliance agreements was investigated. This sample was taken from the ComputerSelect database containing publicly announced product development agreements for R&D on, and production of Internet applications or Internet network technologies. The sample covers 298 product development agreements between 314 distinct companies. We categorized the companies in the sample by their technical specialization using standard industry classification (SIC) codes, similarly to a study by Vonortas (2000).

We found six large clusters of exploration in which more than 10 companies with different SIC codes are tied together. The largest cluster is formed by 92 ties between companies with SIC codes 35 and 73. These 0-digit matches indicate exploration strategies between companies from the computer equipment manufacturing industry and software developers. Two other exploration clusters involving software developers are formed by respectively 36 ties with electronic equipment manufacturers, typically telecom equipment, (SIC 36) and 35 ties with telecomunnication service providers (SIC 48). Two other exploration clusters involving telecommunication service provides are formed by 19 ties with computer manufacturers (SIC 35) and 18 ties with telecom equipment manufacturers (SIC 36).

In our sample we also found three large exploitation clusters constituted by 10 or more ties. The largest of these exploitation clusters is formed by the 82 ties between software developers (SIC 73). Two other exploitation clusters are formed by 41 ties between telecom equipment manufacturers (SIC 36) and 23 ties between computer manufacturers (SIC 35). It is evident that both exploration and exploitation clusters occur most frequently between firms in closely related industries, namely computer manufacturing, telecom equipment manufacturing, telecom service provision and software development. Exploration clusters between firms from sectors that have fewer commonalities do not occur very often.


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