SILVIO POPADIUKAddress: Rua da Consolação, 896, 7º. Sala 76, Prédio 29 - Consolação, São PauloSão Paulo - 01302-907 E-mail: spopadiuk@mackenzie.brTelephone: (5511)2114-8246Professor of Universidade Presbiteriana Mackenzie – São Paulo - Brazil.

PATRÍCIA G. VIDALAddress: Rua da Consolação, 896, 7º. Sala 76, Prédio 29 - Consolação, São PauloSão Paulo - 01302-907 E-mail: patrícia_g_vidal@yahoo.com.brTelephone: (5511)2114-8262Professor of Universidade Presbiteriana Mackenzie – São Paulo - Brazil.

MARCOS A. FRANKLIN Address: Rua da Consolação, 896, 7º. Sala 76, Prédio 29 - Consolação, São PauloSão Paulo - 01302-907 E-mail: franklin.marcos@gmail.com Telephone: (5511)2114-8262Professor of Universidade Presbiteriana Mackenzie – São Paulo - Brazil..

Measuring Knowledge Exploitation and Exploration:

An Empirical Application in a Technological Development Center in Brazil

ABSTRACT: This article presents a literature review on the concepts of exploration and

exploitation of knowledge. From this review, it is showed that the concepts of exploration and

exploitation can be analyzed through internal or external environments perspective, related to

seven dimensions, namely: knowledge, innovation, strategy, costs, efficiency, competition,

and partnership. From this theoretical conception, a closed and structured questionnaire was

developed, that contained attributes related to the dimensions above. These attributes were

assessed through a six-points Likert scale. This questionnaire was applied in a research and

development institute of a major multinational firm in the telecommunication sector, in

Brazil. The main purpose of this article is to assess the fit between what have been proposed

in the literature on exploitation and exploration and what have been practiced in the corporate

world. The results revealed two distinct groups of employees in this institute, regarding how

these employees perceived their activities to be innovative. Regarding these two groups, there

are significant differences regarding how these two groups evaluated the attributes related to

the exploration and exploitation of knowledge.

Keywords: Exploration, Exploitation, Fit, Innovation, Brazil

RESUMEN: Este artigo presenta una revisión de la literatura sobre los conceptos de

exploración y explotación del conocimiento. A partir de esta revisión son mostrados que

ambos conceptos son analizados de acuerdo con la perspectiva del ambiente interno y externo

de la organización, envolviendo siete dimensiones: el conocimiento, la innovación, la

estrategia, el costo, la eficiencia, la competición y las asociaciones. A partir de este marco

teórico, un cuestionario estructurado y cerrado fue desarrollado. Este cuestionario contiene los

atributos relacionados con estas dimensiones, medidos en una escala de tipo Likert con seis

puntos y fue aplicado en un instituto de investigación y desarrollo en el area de

telecomunicaciones en el Brasil. El objetivo principal fue determinar si hay una adecuación

entre lo que dice la literatura sobre los dos conceptos y lo que sucede realmente en la práctica.

Los resultados revelaron dos grupos distintos de empleados en el instituto, en su orientación a

la innovación. Fueron encontrados diferencias significativas entre estos dos grupos al

comparar sus opiniones con respecto a la exploración y explotación del conocimiento.

Palabras claves: Exploración, Exploitación, Ajuste, Innovación, Brasil

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INTRODUCTION

The process of decision making to invest resources in an organization has been the key

issue for over decades of organizational studies (March and Simon, 1958; Cyert and March,

1963). Lately, one of the focuses of organizational theorists is to understand how to invest the

organizational resources in a way to balance what March (1991) has called exploration of new

knowledge and exploitation of available knowledge (Dosi and Marengo, 1997; Rothaermel,

2001). The organization may choose to invest in the refinement of an existing technology or

on any other activity that is oriented toward increasing efficiency (Dosi and Marengo, 1997)

or it may choose to invest in activities that search for novel processes or the discovery of new

opportunities.

March (1991) argues that the organizations that engage in exploration to the exclusion

of exploitation are likely to be penalized by the experimentation without gaining many of its

benefits, whereas the organizations that engage in exploitation to the exclusion of exploration

are likely to find themselves trapped in a suboptimal equilibrium. Companies thus face a

trade-off between exploration and exploitation: If the company does not reach an appropriate

equilibrium between the two ends of the continuum, the company may end up suffering from

sub-optimization. In sum, firms face a trade-off between the creation of new capabilities

(exploration) and the development of current capabilities (exploitation).

This article has the following research question: what is the fit between the theoretical

considerations regarding exploration and exploitation and the activities being developed and

used in a managerial setting? From this research question, this article has five purposes: to

present a literature review of exploration and exploitation of knowledge; to characterize seven

implicit dimensions regarding the theoretical concepts of exploration and exploitation of

knowledge; to present an exploratory questionnaire using attributes of exploration and

exploitation of knowledge; to apply this questionnaire in a pilot project inside a research and

development institute of a major multinational firm in the telecommunication sector working

in Brazil; and to elaborate analytical considerations regarding the fit or lack of fit regarding

the theoretical context and the organizational context.

This article is structure as follows: next topic presents the strategies of exploitation

and exploration of knowledge (March, 1991), summing up to the seven conceptual

dimensions identified from this literature review. The second part introduces the

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methodology used to develop the scale as well as its tests; the third part describes the

results. The final part, presents the discussion of the findings as well as the limitations of the

study and the possible contributions both to practice and to the academia.

LITERATURE REVIEW

Exploration and Exploitation

March (1991), in his seminal article, when looking from an organizational learning

point of view, argues that there is a relationship between exploration and exploitation in the

adaptive process in the organizations. Exploration refers to the actions and activities related

to research, search, risk, experimentation, playing, flexibility, discovery, and innovation.

Exploitation refers to refinement, choice, production, efficiency, selection, implementation

and execution.

The essence of exploitation is the refinement and extension of the existing

competencies, technologies, paradigms; a refinement that will lead to returns that are positive,

near and predictable. While exploration is the experimentation of new alternatives, with

returns that are far away on time, uncertain, and usually negative (March, 1991). March

(1991) argues that the organizations make explicit or implicit choices for one or other, since

the resources are scarce and the difficulties associated with the choices lead to complications

in specifying the appropriated trade-offs.

The adaptable systems related to exploration which are excluded from the exploitation

allegedly suffer from the costs related to the experimentation, without obtaining most of its

benefits. Inversely, the systems that are related to the exploitation which are excluded from

exploration are in a stable sub-optimal equilibrium (March, 1991). The organization choice

for the exploration or exploitation resides, according to March (1991), on the rational search

theory. March (1991), cited Radner and Rothschild (1975) and Hey (1982), to explain that

there are several possibilities to invest, which one characterized by the likelihood of

distributing unknown. As time passes, new information about these distributions is

accumulated, but the choices should be done among investing more in new alternatives and

improve the future returns, or to improve the present returns.

March (1991) points out that the studies on organizational learning direct the choice

between exploration and exploitation regarding the search for new technologies or the

refinement of existing technologies. The alterations in the environment are also pointed out

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since these changes need the generation of new alternatives to the survival of the firm. Due to

the environmental turbulence, organizational diversity and competitive advantage, the

evolutionary dominance of one organizational practice is sensitive to the relation between the

variation related to the exploration reflected by the practice and by the change rate in the

environment.

The learning process is reinforced, either positively or negatively, as a result of the

path chosen by the organizations, consequently the choice between two alternatives is path

dependent (March, 1991). To March (1991), the organizations accumulate experience in its

norms, routines and forms at the individual and organizational level.

Teece, Pisano and Shuen (1997) also argue that the future position the organization

may reach is a function of its current position, a position that suffers influence of the path

chosen before, and the path ahead of it. This is due to the investment made a priori as well as

the routine repertory. Teece et al. (1997) also posit that learning is a process of attempts,

returns and evaluation. This way, the path dependency is amplified when there are conditions

to the increase of returns related to the adoption of a technology. The products and the

technologies are more attractive as they are adopted, characterized as a demand phenomenon.

The increase in returns can have different sources, as network externalities, the

presence of complementary assets, and the infra-structure support, learning by doing and scale

economies of production and distribution. Since there are several sources to increase returns,

the anterior position of the firm may affect the capacity to exploit increasing returns.

The trade-off between exploration and exploitation occurs simultaneously and involve

conflicts at short and long run, and it also has gains to individual and collective learning. To

Gilsing (2002), there is a social construction of knowledge related to the choice between

exploration and exploitation: the resulting learning is formed by new ideas, changes in beliefs,

new and adapted institutions, change in the design of the structure of the networks and the

adaptation of coordinating mechanisms.

Gilsing (2002) posit that when there is innovation, there is a rupture of the routine,

there is a discontinuity that shows the beginning of a new base of knowledge that is totally

tacit. In a sectorial system, the tacit nature of knowledge pushes the participants to

approximate in a way to obtain a reduction in the cognitive distance, through the near

interaction. There is a surge of varieties of ideas, prototypes, and demos. This variety is

specially formed from the results in the learning processes and it consists of new knowledge

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highly tacit, and very specific to a limited number of firms. The environment, in phase of

exploration, is characterized by low selection through the coordinating mechanisms, like the

social norms and reputation; also there is a large variety and learning results that affect mainly

the new base of knowledge (Gilsing, 2002). As a consequence, firms start to focus on the fit

between demand needs and new markets for the new knowledge base. Also, the competition

increases once the new knowledge base is already extensive to allow the development of

several types of designs through several networks of exploration, creating competition among

them. The demand and the combination of social and technical norms reinforce directly the

activities of search and, by doing it, create limits to the new knowledge base. The results from

the learning, such as new ideas and knowledge, should be adjusted to the emerging selective

environment. A process of stability begins when a dominant design is chosen and there is the

elimination of competing designs (Utterback, 1994). As a result, the learning focuses the

change from exploration to exploitation. The competition intensifies and, usually, creates an

incentive to focus on cost reduction. From this moment, the technical norms and formal

procedures lead the firms to the search for the “scale effects” (Gilsing, 2002), i.e., the

economic search for exploiting economy of scale gains.

Li, Schoenmakers and Vanhaverbeke (2006) evaluated the trade-off between

exploration and exploitation from the learning experiences, and observed that, in a context of

Schumpeterian competition, the returns would be diluted through imitation and destructive

innovation. Li et al. (2006) argue that exploration and exploitation are activities related to the

search of knowledge. In a context where a given performance goal must be reached, the firms

need to find solutions to reach the goal. On the other hand, if the current performance is better

than the expected one, so the organization enter in a calm path, and it encourage the search for

activities that are not justifiable in terms of expected returns (Li et al., 2006).

Lundvall (1999) points as a good plan to firms that want to increase learning to

combine indoor activities that are dissimilar and complementary. Lundvall (1999) argues that

if a firm tries to create a disequilibrium between what it can do and what it is required from it

to accomplish its task are good way to stimulate the learning as well as to increase the set of

competencies of the firm. There are three categories related to the basic functions of the firm:

(1) allocate scarce resource, (2) exploit sub-utilized resources when entering new activities

and (3) speed up the learning and the creation of new competencies (Lundval, 1999, p. 12).

The firm will reallocate its resources if there is an alteration of the price of factors. It will

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exploit the un-utilized resources and will use its existing knowledge base in connection to the

introduction of new products. Its success will depend upon the construction of new

competencies.

The learning reasons are divided between exploration and exploitation. Exploration is

directly connected to the tacit knowledge that is assumed to be a pre-condition to the

development and acquisition of new knowledge. Learning in exploitation is related to the

explicit knowledge that can be applied to refinement or improvement of current knowledge

(Karlson, 2005).

Li et al. (2006) posit that the activities related to the knowledge search have several

dimensions one of them is the timing. Timing Exploitation is the creation of new knowledge

through the search of recent knowledge and timing exploration is the creation of new

knowledge through the search of knowledge far away in time. Considering the limited

rationality and the path dependency, individuals tend to search for alternatives that are related

to their current knowledge, and valuable choices are lost in time. Also, the choice that has

been made was done in lie of complementary assets that were not available at that moment.

Another dimension is the geographic or institutional (Li et al., 2006) which is related

to having the resources in common available at the same geographic area. This proximity

facilitates the transfer of knowledge which in an exploration phase is highly tacit and can be

transfer more easily through interactions and practices.

Li et al. (2006) also consider that the activities involved in exploration and

exploitation are important to the process of innovation. They point out that the process of

innovation involves stages of search of knowledge, knowledge recombination, finding an

innovative solution and its commercialization (Li et al., 2006, p. 11). The authors argue that

starting from an application of one technology until its expansion, problems may accumulate

in the process of differentiation of this technology and the exchange of relevant practices up

to the point where efficiency and returns diminish considerably, At this point, there is no

possibility to generate additions or modifications. This is the necessary incentive to search for

new structures or to generate the Schumpterian creative destruction.

Teece et al. (1997) advances the notion of competitive advantage through the

exploration of possibilities that are external and specific to the firm, as well as the

development of new opportunities (Penrose, 1959; Teece, 1986; Wernerfelt,1984), by

developing and explaining the term dynamic capabilities, to strategic manage the capability of

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adapting, integrating, reconfiguring abilities, resources and functional competencies to the

environment, specially since the business environment is always changing. Also, the dynamic

capabilities are complemented by the path dependency, i.e., the firms in several points of their

trajectories make choices that are irreversible, investing in one competency in lieu of another

competency. These choices will determine not only the choices presented today but also in the

future. The capability that the firm has should be compatible with the user needs, unique and

difficult to be replicated. Teece et al. (1997) complements stating that the firm´s current

capability could be the base of the diversification to new markets as well as new products.

However, these dynamic capabilities can be obtained only through the internal development

of such a capability.

A valuable consideration to the exploration and exploitation discussion is that the core

competency and capacity of the firm are involved in the organizational processes. These

processes are molded by the firm´s assets (internally or in the market), and through the

evolutionary path that the firm has adopted (Teece et al., 1997). Gilsing (2002) has also

considered the characteristics of the co-evolutionary path, describing it by the search to

predict which variables in the system answer to changes in other variables in the system or

changes in the system itself.

Masini, Zollo and Wassenhove (2004) argues that the strategic decision between

product differentiation and cost leadership lead to a trade-off between exploration and

exploitation, since if the organization decides to compete on the differentiation, the

organization will worry about its products being copied or imitated. Therefore, the costs

associated with this strategy will be higher. Following the logic, the organization that

competes on cost leadership is not worried about the risk of having its product being copied or

imitated.

Adner (1999) argues that the tension between exploration and exploitation is not

axiomatic, i.e., the exploration of new technologies does not prevent their exploitation in the

market. The firms could influence the investment in activities in the market to speed up the

process of exploration through the process of exploitation by focusing on the needs

heterogeneity as well as the sources of retro-feeding in the market. Adner (1999) posits that

the technological development can happen inside the boundaries of the firm and can be

structured to influence the market opportunities. The idea here is to demonstrate the

possibility that technology development and its commercialization can guide themselves

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mutually. When dealing with emerging technologies, the firms can exploit the market

diversity by allowing the target market to co-evolve with the state of its technology.

Prietula and Weingart (2005) used the terms exploration and exploitation in describing

models of negotiation. Exploration reflects a more risky and uncertainty component of the

joint search of two negotiators, where they try to define, refine, and align their knowledge to

establish a common base between them. This way, the authors define exploration as a process

with wide supply of potential samples. In one hand, they suggest that exploitation is an

activity much more coordinated, that emerge from the common base of knowledge which is

created when the two parts converge to an understanding of what is the possible solution for

the negotiation.

Ahuja e Katila (2002) used the concepts of exploration and exploitation in terms of the

search in the level of deepness that the knowledge is re-used as well as in terms of the scope

of the search, place where the knowledge is searched (near or far). The level of deepness is

defined as the level that the search for knowledge reviews the knowledge already existent in

the firm, i.e., a characteristic of exploitation of knowledge. The scope of the search is the level

that new knowledge is explored and it is what characterizes the exploration of new

knowledge. The firms can vary the levels of use and re-use of existing knowledge, as well as

they can vary the exploration of new knowledge. Ahuja e Katila (2002) argue that the idea of

exploitation can be conceptualized in different levels or deepness of search, since the firms

can be differentiated not only in the extension of exploring new resources, but also in the

extension that they improve their current resources. While the exploration research has a key

role in the creation of knowledge as it leads to completely new solutions, exploitation research

has the role of combining existing solutions in the generation of new combinations.

Garcia and Nair (2005), consider the terms exploration as a synonym of the traditional

research where the result will be innovations, particularly radical and totally new innovations,

where the risk is higher and the return is uncertain. Meanwhile, exploitation is related to the

development of activities where the firm focuses on the improvement of existing processes,

existing products and on the cost efficiency. Exploitation would be related to the development

of incremental innovation, with lower risk and less variation (Popadiuk and Choo, 2006;

Popadiuk, 2007).

The strategic alliance as a form to explore and exploit knowledge has been the focus

of some researchers. Im and Rai (2008) have examined the logistic industry in the United

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States to determine how the knowledge sharing activities in “long-term interorganizational

relationships (IORs)” (p. 1281) is related to the relationship performance gains. Their work

shows that the sharing is enabled by “ambidextrous management of the relationship” (p.

1281). Holmqvist (2004) used the collaboration between a software company and its partners

in new product development projects to understand the effect of experiential learning

processes of exploitation and exploration within and between organizations. Rothaermel and

Deeds (2004) show that the type of alliance will influence the format and the timing to use the

exploration and the exploitation strategies. Table 1 summarizes the characteristics of

exploration and exploitation found in the literature.

Table 1: Characteristics of exploration and exploitation of knowledge

Author Exploration ExploitationMarch (1991)

Research, search, game, risk, flexibility, discovery, radical innovation, experimenting with new alternatives with uncertainty returns, search for new technology.

Refining, choice, production, efficiency, selection, implementation, execution, extension of current competencies, technologies; with positive, predictable returns, incremental innovation.

Gilsing (2002)

Few choices for coordination mechanisms, such as social procedures and reputation; large variety of knowledge base. Learning and knowledge adjusted accordingly to the emerging environment.

Stability when the dominant design is established. Learning focus is on what is already known. Intensive competition, formal procedures and economy of scale

Li et al. (2006)

Development of new knowledge through the search of knowledge remote in time.

Development of new knowledge through the search of recent knowledge.

Karlson (2005)

Tacit knowledge, with the assumption that tacit knowledge is necessary to develop and acquire new knowledge.

Explicit knowledge that can be applied to refine or improve existing knowledge.

Masini et al. (2004)

A strategy that firm will choose if it is threaten by the possible copy or imitation of its products. High cost of development.

Firms that had chosen to follow a cost leadership strategy, not worried about being copied. Low cost of production.

Prietula; Weingart (2005)

Speculation and uncertainty in terms of defining, refining and alignment of a common knowledge base.

The common knowledge base is already established.

Source: Elaborated by the authors based on literature review.

Exploration and Exploitation Dimensions

From the literature review, it can be identified that, in the study of the exploration and

exploitation strategies, there are at least two perspectives: one related to the internal

environment, and another related to the external environment. Regarding the internal

environment, the focus is on the organization´s capabilities and, therefore, on the efficient and

the effective use of its resources. This is a function of the fit between organizational activities

10

and the organization´s strategic planning. The organizational efficiency and effectiveness are

always related, in high and low levels of intensity, translated by the management of the

organizational knowledge, its control mechanisms, its norms and procedures, as well as its

routines (Nelson and Winter, 1982). From the external environment perspective, the search

for a favorable competitive position means a constant monitoring of competition and a

consistent partnership with several players in the external environment.

From the internal perspective, it has been identified at least five dimensions: (1) the

strategic orientation; (2) the organizational knowledge; (3) the organizational efficiency; (3)

the costs of the organizational activities; and (3) the result of the organizational knowledge

application, i.e., the incremental or radical innovation.

From the external perspective, two dimensions emerged: (1) the competitive

monitoring and (2) the relationship with the external environment associated with the

partnership/alliances. Table 2 presents a set of attributes related to each dimension, taken from

the literature review.

Table 2: Attributes associated to the dimensions of the exploration and exploitation strategies

Internal EnvironmentOrganizational Knowledge New Idea generation; search and use of new sources of knowledge; learning intensity; staff empowerment;

knowledge sharing; social interaction; search for innovation; use of existing innovation; individual knowledge valorization; use of tacit knowledge, use of existing knowledge in database and documents

Organizational Efficiency Creation of detailed routines; centralization level of decisions made; internal communication processes;

organizational control mechanisms; level of formalization; efficiency concerns; focus on economies of scale; refinement of products and processes, flexibility.

Strategic Orientation Strategic vision towards short or long term; path dependence, period of using the same standard for

products and processes; perspective on environmental uncertainties; concerns about organizational reputation.

Costs associated to R&D Risk aversion, concerns regarding R&D costs; focus on costs Innovation Focus on new products and processes, improvement of products and processes; products and processes

diversification, development of prototypes, search for radical innovations; products and processes discontinuity

FOCUS ON EXTERNAL ENVIRONMENTCompetition Competitors with similar characteristics, new entryPartnership Amplitude of external network; alliance creation; interaction with partners; partner´s dependency level;

intensity for the partnership contract

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These dimensions will follow a pattern, according to the literature review. One of the

major purposes of this article is to understand the fit between the theoretical considerations

and what is happening in a real company. Table 3 shows the hypothesis made accordingly to

the patterns that the dimensions should follow regarding exploration and exploitation

strategies.

Table 3: Hypothesis regarding the Dimensions

Dimensions HypothesesEXPLORATION EXPLOITATION

Knowledge High level of focus on the use of new knowledge

Lower level of focus on the use of new knowledge

Innovation High level of focus on search for innovations

level of focus on search for innovations

Strategy Long term strategy Short term strategyEfficiency Lower level of focus on efficiency High level of focus on efficiencyCompetition Low levels of competition High levels of competitionCost Lower level of focus on production cost High level of focus on production costPartnership Creation of Partnership Amplification of partnership

THE R&D INSTITUTE

The Research and Development Institute (RDI), subject of this study, is a spin out

originated from the separation of this institute from a multinational company in the year 2000.

The RDI is located in the North Region of Brazil, with representation in two other locations in

Brazil. During the conduction of this research project, the only client of this RDI was the

multinational headquarter, that develops activities related to the telecommunications with

global reach. At the time of the study (January to November, 2007), the RDI was divided into

five departments: operations and logistics, software development, mechanics; solutions; and

administrative support. There are 120 employees working in these five departments,

throughout the locations as well as in other sites of the major client, the multinational

company. Most of these employees have college degrees, are male (80%) and have less than

thirty years, 50% percent of these employees have been working in this institute for the past

three years (since its inception).

The Brazilian legislation provided fiscal benefits to companies conducting R&D

activities in the North region of Brazil. Furthermore, the multinational company also

committed a large investment in the development of this institute, a fact revealing a strong 12

dependency of this institute. Moreover, all the projects developed inside the institute have the

multinational company as the final client.

METHOD

The research presented here is part of a major research effort to understand how the

organizations use the knowledge strategies of exploitation and exploration to increase the

organizational learning and the development of innovations. The complete research was

designed as a qualitative and quantitative research. A structured questionnaire with open

questions as well as a questionnaire with closed questions, were developed, pre-tested with

two managers from different companies, and rewritten according to their comments. The

present article presents the results from the questionnaire with closed questions that was

developed for the respondents to analyze 46 attributes regarding the knowledge strategies of

exploration and exploitation, using a six-point Likert scale. The Likert scale had the two

extreme, lower and higher with different adjectives that best described the strategic

orientation towards exploiting knowledge versus exploring knowledge. The content validity

was identified through the extraction of the attributes from the literature review.

The data, presented here, were obtained during a trip to the RDI in the North Region

of Brazil. In this trip, five researchers spent a week visiting this institute with the purpose of

understanding how this institute used the knowledge strategies of exploration and

exploitation, as well as to examine the context of this institute in terms of its culture,

structure, processes and information technology. The data presented here refer to a survey

passed by the communication department to all employees that were in that site during that

week. Seventy employees answered the survey, a number that correspond to 90% of the

employees located at that site. There were several people traveling for business and vacation,

but the communication department could not report the right amount of people available at

that time.

To examine the hypotheses presented in Table 3, regarding the pattern expected for the

exploration and exploitation strategies dimensions, we first conducted a factor analysis. To

categorize the groups in the sample, we then conducted a cluster analysis. These analyses

were done using SPSS version 13. After doing the cluster analysis, a categorical regression

with optimal scaling (Meulman and Heiser, 1999) was performed to determine the factors

more important to determine the innovative behavior.

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Factor Analysis:

The exploratory factor analysis started with the 46 original attributes in the scale, the

first factor extraction, using the principal component model with varimax rotation, revealed

the existence of 17 factors, and some factors had only one attribute. With the help of a matrix

of correlation of these 46 attributes, we were able to discard the attributes that were not

adding to the model. A new factor analysis allowed to the improvement of the model and the

exclusion of other attributes that were not helping explain the model. With 25 attributes, we

run the factor analysis again, and this analysis presented a KMS of 0.811, presenting a good

fit of the sample, and the Bartlett´s test of sphericity was considered significant at the 0.0%

level. Seven factors were extracted from the analysis of 25 attributes that explained 70.9% of

the variance of the model. The eigenvalues and explained variance, as well as the factor

loadings are presented in Table 4.

The RDI was structured in four departments with activities totally distinct, as well as a

support department, we expected to find a large variation regarding the evaluation of the

attributes shown in this survey. For this reason, we checked the dimension related to

innovation, to see if there was significant difference in the groups. The option to examine the

innovation dimension is explained by the fact that, in an R&D institute, the focus is on the

search for innovation, either radical or incremental. To analyze the difference in groups, we

used cluster analysis and identified two separated groups of employees in this institute. The

first group was formed by 36 individuals. These individuals had the higher evaluation for the

four attributes related to innovation, and, therefore, were classified as the Higher Innovators.

The second group, Low Innovators, formed by 34 individuals, had the lower score for the

innovation dimension.

Table 5 shows the statistics related to the factor analyses, the Cronbach´s alpha (its

values are in parentheses), as well as the mean scores for each attribute evaluated, according

to the dimension resulting from the factor analysis, as well as the cluster analysis of high and

low innovators. The factor loadings are presented in the first column, associated with the

mean scores for each attribute, considering the whole sample.

For each attribute, but three (competition, cost, and partnership), the Mann-Whitney U

non-parametric test tended to be significant at the 1% level. This test compares two

independent samples for distributions that do not meet the normality assumption. What this

test revealed was that there were two groups of employees working at the RDI with total

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different view regarding the attributes investigated here. For the high innovator group the

means tended to be close to the upper limit in the scale, i.e. positioning more favorably in

agreeing with the attribute. For the dimensions knowledge, innovation and strategy, the

tendency revealed that this group evaluated the RDI with an orientation tending more to the

exploration of knowledge. However, the same group evaluated the dimensions efficiency,

competition, cost and partnership with high values, i.e. the same group evaluated the RDI as

tending to exploitation in these dimensions.

Table 5 presents the means associated to the seven dimensions, according to the two

groups identified in this research. Table 5 also presents the significant correlations for the

dimensions (significance level of 5% or lower). The top of the Table 5 presents the

correlations for the High Innovator group, and lower part presents the correlations related to

the Low Innovator group. Table 5 also presents the means for the dimensions for both groups:

the Low Innovator (in the final column) and the High Innovator (in the line that reads means).

The values for test of Mann-Whitney U for two independent samples are presented in the final

line of Table 5. All the dimensions are significantly different, at 5% level of significance, but

two of them: the dimensions of competition and of partnership. These two dimensions being

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Table 4 – Statistics for the Attributes associated to the dimensions

Loadings Means Level of innovation Significance Mann -Whitney UHigh Low

Factor 1 – Knowledge dimension (0.875)Volume of new ideas generation (Low – High) 0.619 3.50 4.28 2.68 0.000Use o new sources of knowledge (Low – High) 0.780 4.03 4.39 3.65 0.013Learning intensity (Low- High) 0.491 4.27 4.89 3.62 0.000Form of capaciting the team (Sporadic – Continuous) 0.784 4.06 4.36 3.74 0.008People development intensity (Low – High) 0.520 3.96 4.28 3.62 0.010There is a constant knowledge sharing (Disagree – Agree) 0.453 3.59 4.14 3.00 0.000Social interaction is part of organizational culture (Disagree – Agree) 0.420 3.61 4.00 3.18 0.006Individual knowledge appreciation (Low – High) 0.673 3.77 4.22 3.27 0.002Factor 2 – Efficiency dimension (0.780)Degree of existing knowledge utilization (Low – High) 0.576 3.99 4.44 3.50 0.000Importance level of efficiency (Low - High) 0.794 4.39 4.78 3.97 0.008Concerns about economy of scale (Low – High) 0.663 3.67 4.17 3.15 0.000Level of knowledge exploitation (Minimum – Maximum) 0.331 3.62 4.16 3.03 0.000Factor 3 - Innovation dimension (0.814)Focus on products and process totally new (Low – High) 0.572 4.53 2.82 0.000Products improvement (Sporadic – Continuous) 0.747 4.75 3.18 0.000Diversity of generating product or processes (Low – High) 0.583 4.14 3.14 0.000Prototype development (Sporadic – Continuous) 0.774 4.22 2.53 0.000Factor 4 – Strategy dimension (0.713)Information technology orientation (Weak – Strong) 0.841 4.36 3.79 0.022Strategic view focused on (Present – Future) 0.525 4.47 3.39 0.001Time horizon for the organizational strategy (Short time – Long time) 0.528 4.11 3.12 0.000Factor 5 – Competition dimension (0.766)Emerging competitors with similar characteristics (Limited – Intense) 0.832 3.69 3.38 0.391Competitor´s activities with similar characteristics (Reduced – Intense) 0.819 3.83 3.12 0.018Factor 6 – Cost dimension (0.764)Preoccupation with R&D cost (Low – High) 0.875 4.39 3.72 0.036Cost focus (Low – High) 0.855 4.50 3.94 0.124Factor 7 – Partnership dimensionAlliances forming (Situational – Durable) 0.585 3.64 3.32 0.318The intensity level of the partnership contracts (Low – High) 0.787 3.64 3.03 0.025

Table 5 – Spearman´s rho coefficients and summated scale means for dimensions

Variables Means (High innovators)

Means (Low innovators)

Mann-Whitney U significance

1 2 3 4 5 6 7

1 - Knowledge 4.31 3.28 0.000

2 - Efficiency 4.32 3.47 0.000 0.506**0.630***

3 - Innovation 4.41 2.92 0.000 0.2140.462**

0.597***0.363*

4 - Strategy 4.31 3.44 0.000 0.356*0.557***

0,319†0.540***

0,1370.423†

5 - Competition 3.76 3.26 0.060 0,0720,137

0,1570,287

0,295†-0,120

6 – Cost 4.44 4.44 0.037 0,2090,113

0,0690,232

0,140-0,53

-0,1560,151

0,1270,163

7 -Partnership 3.64 3.18 0.060 0.481**0.403*

0.685***0.401*

0.560***0.191

0.2840.415*

0.2040.350*

0.049-0.049

Note: The correlation for the low innovators group (N=34) is in light gray, while the correlations for the high innovators group (N=36) is in bold.

† p < .10. *p < .05. **p < .01. ***p < .001.

not different makes sense if we think about the competition for the whole institute as well as

the partnership with the major client (the multinational company) as well as with the major

universities.

Regression with Optimal Scaling (CATREG)

As the previous results revealed that almost all attributes and the mean values for the

dimensions are statistically significantly different between the two groups, two regressions for

categorical data were performed, using the optimal scaling model from the SPSS, version 13.

Regression with optimal scaling is also known by the acronym CATREG, for categorical

regression with optimal scaling. Categorical variables serve to separate groups of cases, and

the technique estimates separate sets of parameters for each group. The estimates coefficients

reflect how changes in the predictor affect the response. Prediction of the response is possible

for any combination of predictor values (Meulman and Heiser, 1999). The purpose of this

procedure was to determine if the dimensions that explained the innovation dimension were

the same for both groups. Since the focus of this research project is an R&D institute that

serves a multinational company, we can argue that such type of institute focuses on

developing innovation, and that the innovation depends on all the activities that the institute

performs. Therefore, we can say that the innovation has the following relationship with the

different dimensions: Innovation = F (knowledge, efficiency, strategy, competition, cost,

partnership)

Table 6 presents the results for the two regression equations using the optimal scaling

model (Meulman and Heiser, 1999). For the High Innovator group, the dimensions that are

the most important to explain innovation are the knowledge (=.503; p-value<0.01) and costs

(=-.465; p-value<0.001), this equation explain 64% of the variance (R2=.64, Adj. R2 =.399).

The coefficient for knowledge is positive, indicating that more focus on knowledge will

increase the innovation, while the coefficient for cost is negative, indicating an inverse

relationship: more focus on cost, less innovation. For the Low Innovator group, the

dimensions that are the most important to explain innovation are efficiency (=.324; p-

value<0.05), competition (=.618; p-value<0.00), and cost (=.317; p-value<0.05), this

equation explain 74.5% of the variance (R2=.745, Adj. R2 =.56).

Table 6 - Categorical Regression with optimal scaling

High Innovator Low InnovatorKnowledge 0.503*** (0.153) -0.042 (0.125)Efficiency 0.226 (0.142) 0.324** (0.145)Strategy 0.201 (0.163) -0.244* (0.132)Competition 0.097 (0.138) 0.618*** (0.131)Cost -0.465*** (0.151) 0.317** (0.124)Partnership -0.25* (0.133) 0.012 (0.135)N 36 34R² 0.64 0.745Adjusted R² 0.399 0.56F 2.661 4.04***

Note: standard error in parentheses

*** p < .01 **p < .05 *p < .10

These results show that there is a substantial difference between the two groups

regarding the innovation dimension in the RDI. Moreover, the two regression results are very

consistent to the theory. It seems natural that the group that is more innovative would be more

focused on knowledge than in cost. In the other hand, the less innovative group could also be

considering efficiency, competition and cost to be restricting innovation.

March (1991) and his followers (Cheng and Van de Ven, 1996; He and Wong, 2004;

Popadiuk and Choo, 2006; Popadiuk, 2007) argue that exploration is related to new sources of

knowledge, generation of new ideas, intense learning processes and organizational

empowerment, sharing and valorization of individual and collective knowledge, as well as a

high level of social interaction. This tendency towards valorization of knowledge should lead

to search for totally new products and processes, product diversification, experimentation

with new products and development of prototypes. Following these stream of thought, it

seems that an organization that focus on exploration will also have a long-term strategic

planning as well as a vision towards the future.

On the other hand, in an organization more oriented towards exploitation, it can be

argued that the control mechanism should be more flexible (Burns and Stalker, 1961). The

level of efficiency, the economies of scale, the use of explicit knowledge, the use of

information technology, the costs of research and development should not be restrictive

influence in the search for innovation. Regarding competition, during the exploration phase of

an industry, the theory considers that there are few competitors with similar characteristics

which makes it more difficult to develop alliances with partners. At this phase, the

organization is still looking for specific partners to initiate its innovation generation process.

19

Therefore, the alliances tend to be sparse and the alliance contracts can be established with

less level of details regarding the technical and timing specifications.

One of the main purposes of this research project was to develop of a questionnaire

that could assess the type of strategic orientation towards exploration and exploitation of

knowledge (exploiter or explorer of knowledge). We started with 46 attributes, discarded 19

after the exploratory factor analysis. The final result of this factor analysis showed seven

factors, which are interpreted as the dimensions commented previously.

From the results, the theoretical considerations about exploration and exploitation

need to be bounded. What has been proposed by March (1991) and other researchers refers to

an attempt to create a general model about the implications associated with the exploration

and exploitation strategies and, probably, to specific business situations. The context of the

discussion about the exploration and exploitation strategies needs to be well defined and

explicit for one to argue that exploration involves more risks, more costs, emphasis on the

development of activities to create organizational knowledge as well as to develop

partnerships. Even in one organization, its departments may act in different manner regarding

the exploration and exploitation strategies. Due to its specificities, some departments due to

its activities need to be more explorer, as it should be the case for a P&D department, while

other departments need to be more exploiter, for example the production department.

Also, it is necessary that the discussion uses the two perspectives to analyze the

institute, the internal and external, considering the potential seven dimensions, as identified in

this study. Moreover, this delimitation contribute to make explicit which situations can be

characterized as present in an orientation towards explorer, exploiter, or, even, for a situation

of equilibrium as proposed by March (1991).

Regarding the RDI, object of our study, the theoretical considerations about

exploration and exploitation were not completely verified. For the High Innovator group, the

theoretical expectation related to exploration regarding the dimensions (Table 3) was not

confirmed for two dimensions: efficiency and costs. It was expected that in a situation of

exploration, the preoccupation with efficiency and costs would be relatively lower than in a

situation of exploitation. However, for both dimensions the contrary was true. This fact can be

explained by the context that the RDI is in, where it needs to provide its only client with the

lowest cost solution at the fastest time.

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For the Low Innovator group, there were also some diverse results comparing to what

was expected. For this case, it was expected that the efficiency dimension would have a

significant influence, the competition dimension would be more intense, and the emphasis on

cost would be higher, as well as the use of partnerships. However, the results showed that the

Low Innovator group had inversed orientation, which translate in a divergent view from the

theoretical considerations.

These divergent findings related to the current theory on exploration and exploitation

should not be taken as conclusive, and they can also be explained by some possibilities, some

of them related to the limitations of this research.

The first limitation refers to the conceptual model developed for this research. Since it

is a first attempt to assess exploration and exploitation, in the proposed format, i.e., to verify

the fit between theory and practice, the formulation of the attributes may have influenced the

results, probably due to lack of definition for the attribute, or they may not be exactly what we

were trying to measure. In this way, the respondents of this research may have had difficulties

in understanding some attributes.

A second limitation refers to the sample used here. Only one institute of research was

used in this assessment. Since the results presented here comes from this institute, which has a

very specific range of activities, basically one client, the multinational company that it spin-

out from; these results are not generalizable to other organizations.

Another limitation refers to the operationalization of the indicators to verify the model

´s hypotheses. Since it was not possible to gather data from a larger number of organizations

and, therefore, to classify them as High and Low Innovators, to analyze the tendencies of the

dimensions developed in this research, we assumed that there was two sets of employees in

the institute analyzed, according to their vision regarding innovation, assessed by the four

attributes of these dimension proposed in this research. In an ideal situation, it would also be

wise to have other attributes to measure innovation, for example, a measure of the number of

innovations developed in the year.

Future studies could be developed focusing on improving the set of attributes related

to exploration and exploitation, as well as the dimensions obtained in this experimental

model. The samples should contemplate organizations in different sectors of activities, aiming

to verify if the theoretical model can be generalized or if there are contingencies that need to

21

be specified accordingly to the idiosyncrasies inherent to the specific segments of each

organization.

From the academic perspective, the major contribution of this study is related to the

experimental model developed here, which offers elements to start a process of identifying if

the practices of exploration and exploitation are in line with what is expected in theory. From

the practitioner perspective, the model allows to diagnose the elements of the management

process as well as the process of organizational learning, the essence of exploration and

exploitation, given that it offers an ample set of attributes related to the internal and external

environment likely to be measure by the developed scale and, therefore, likely to be compared

over time, as the organization promote actions to change the course in order to fulfill its

strategic and operational objectives.

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