B alancing exploration and exploitation is a critical challenge that is particularly difficult for smaller, nascent organizations that lack the resources, capabilities, and experience necessary to successfully implement ambidexterity. To better understand how small and medium-sized enterprises achieve ambidexterity, we develop theoretical arguments that link organizational performance to strategic combinations of exploration and exploitation in both product and market domains. We test the hypotheses with a longitudinal study in a dynamic industry that combines objective measures of competition, firm size, age, and revenue performance with self-reported measures of product and market exploration and exploitation. The empirical results offer new insights with respect to several tensions at the heart of the ambidexterity challenge: (1) pure strategies that combine product exploration with market exploration or product exploitation with market exploitation have complementary interaction effects on revenue, (2) cross-functional ambidexterity combining product exploitation with market exploration also exerts complementary interaction effects on revenue, (3) product ambidexterity has positive effects on revenue for older and larger—but not younger and smaller—firms, and (4) market ambidexterity has positive effects on revenue for larger—but not smaller, younger, or older—firms. Two ambidexterity paradoxes emerge: (1) larger, older firms have the resources, capabilities, and experience required to benefit from a product ambidexterity strategy, but larger, older firms are less likely to implement product ambidexterity; and (2) only larger firms have the resources and capabilities required to benefit from a market ambidexterity strategy, but developing and sustaining market ambidexterity is necessary to drive long-term growth.
There is growing consensus that organizational ambidexterity (i.e., simultaneous exploration of new capabilities and exploitation of current capabilities) is both critical to long-term success and difficult to achieve (He and Wong 2004, Lubatkin et al. 2006). Ambidexterity ensures long-term success by balancing the need to innovate and adapt to environmental changes while simultaneously refining and extending existing processes and technologies (March 1991). Despite intensive scholarly scrutiny, “the empirical evidence of the organizational ambidexterity–performance relationship remains limited and mixed” (Raisch and Birkinshaw 2008, p. 393).
Implementing ambidexterity is difficult because exploration and exploitation involve different organizational learning models (e.g., Argyris and Schön 1978, Benner and Tushman 2003, Eisenhardt and Martin 2000), require different and inconsistent organizational architectures and processes (Smith and Tushman 2005), and ultimately compete for resources, leading to tensions and trade-offs (March 1991, 2006). Given these organizational complexities, questions arise as to whether ambidextrous strategies are necessarily more successful than simpler strategies that focus either on exploration or on exploitation (Van Looy et al. 2005). The complexities of an ambidextrous strategy are particularly problematic for smaller firms (Ebben and Johnson 2005), prompting calls for additional research linking ambidexterity—especially in small firms—to strategic performance outcomes (Simsek et al. 2009).
We contribute to this conversation by examining when and how exploration, exploitation, and ambidexterity influence small and medium-sized enterprise (SME) performance. We distinguish between exploration and exploitation in product and market domains. As the two most basic business functions, product development and marketing represent distinct dimensions for exploration and exploitation (e.g., O’Reilly and Tushman 2008, Tushman and Smith 2002, Tushman et al. 2010). This perspective builds on research demonstrating the independence of product- and market-oriented learning (e.g., Voss and Voss 2008). Within the product domain, product exploration emphasizes developing new products, technologies, and product capabilities, and product exploitation emphasizes increasing returns from existing product capabilities. Within the marketing domain, market exploration emphasizes marketing programs that attract new customers, and market exploitation emphasizes marketing programs designed to retain and increase purchases from current customers.
Our study responds to calls for research examining different intraorganizational domains and multiple levels of analysis (Lavie et al. 2010, Raisch and Birkinshaw 2008). We conceptualize and measure exploration and exploitation at the functional level, but our theory focuses on how strategic combinations within and across functions affect organizational performance. As shown in Figure 1, the functional-level strategic emphases combine into organizational-level strategic vectors (Abernathy and Clark 1985, Burgelman 2002). A pure exploration strategy explores new product capabilities and new customer markets, and a pure exploitation strategy exploits current product capabilities and current customer markets. Firms can achieve strategic ambidexterity by combining exploration and exploitation across or within functional domains. The crossfunctional combinations exhibit ambidexterity across product and market domains to (1) exploit current product capabilities with the goal of attracting new customer markets, which corresponds to a market development growth strategy, or (2) explore new product capabilities that target current customers, corresponding to a product development growth strategy (Ansoff 1965). Within functional domains, product ambidexterity simultaneously explores new product capabilities and exploits current product capabilities, whereas market ambidexterity simultaneously explores new customer markets and exploits current customers.
We propose that revenue performance depends on whether strategic emphases complement one another, producing a positive interaction, or conflict with one another, creating tensions and trade-offs. Tensions and trade-offs escalate when SMEs attempt to implement product or market ambidexterity, which are executed within a single functional domain. Larger, mature orga- nizations likely have the resources, capabilities, and experience that are necessary to successfully implement within-function ambidexterity, whereas smaller, nascent organizations may lack the requisite resources, capabil- ities, and experience to reap the benefits. This focus on organizational characteristics that enable—or inhibit— the successful implementation of strategic ambidexterity uncovers boundary conditions for the ambidexterity– performance relationship. The implication is that the pursuit of ambidexterity can actually attenuate perfor- mance if firms lack the necessary resources, capabilities, and experience.
We test our hypotheses using three years of data for SMEs in the nonprofit professional theater indus- try, a dynamic, rapid-cycle industry that amplifies organizational learning effects associated with explo- ration, exploitation, and ambidexterity (Levinthal and March 1993, March 1991). The empirical results pro- vide compelling support for the proposed contingency effects. Firms realized positive, complementary effects when they pursued pure exploitation or pure exploration strategies. The cross-functional combination of product exploitation and market exploration also exerted com- plementary effects on revenue performance. Because product and market ambidexterity occur within a single business function, they lead to tensions and trade-offs. Firm size and age positively moderated the relation- ship between product ambidexterity and revenue perfor- mance and between market ambidexterity and revenue performance. Post hoc analyses also point to two inter- esting paradoxes: (1) larger, mature firms benefit most from product ambidexterity but are less likely to imple- ment product ambidexterity, whereas smaller, nascent firms are more likely to implement product ambidex- terity but performance actually suffers as a result; and (2) only larger firms have the resources and capabilities required to benefit from a market ambidexterity strategy, but developing and sustaining market ambidexterity capabilities—especially market exploration—is neces- sary to drive long-term growth. The implication is that firms may grow older but not larger if they fail to develop market ambidexterity as a core competency.
In the following section, we develop hypotheses that link combinations of product and market exploration and exploitation to revenue performance. We then describe our research program, which features SMEs competing in a single artistic industry. The study combines longitudi- nal measures of competition, firm size, age, and revenue performance with self-reported measures of product and market exploration and exploitation. We conclude with a discussion of the implications and insights generated by the theory and empirical results.
Exploration and Exploitation in Product and Market Domains
We focus on SMEs to generate a fine-grained exam- ination of exploitation and exploration in product and market domains. Exploitation emphasizes the refinement and incremental extension of existing product and mar- ket capabilities. Because product and market character- istics are dynamic, ongoing exploitation of current prod- uct markets features incremental learning, continuous improvement of product features, and enhanced satisfac- tion for current customers (Tushman and Smith 2002). Exploration focuses on developing new product or mar- ket capabilities. Product exploration can lead to archi- tectural innovations that change linkages between sub- systems or discontinuous innovations that change the product’s core subsystem (Tushman et al. 2010). Mar- ket exploration targets new customers outside of the cur- rently served market. New customers may represent an emerging market or an existing but nontargeted market— for example, a new geographic market or a broadening of the target market to include additional sociodemographic (e.g., retirees versus yuppies) market segments.