Taming the Antagonistic Forces of Exploration and Exploitation

Abstract

The challenge of adjusting exploration and exploitation is usually portrayed as finding and maintaining a balance between two antagonistic forces. This challenge is rarely contrasted with the idea of sequencing exploration and exploitation as two distinctive stages of search. Building on prior work on the NK analysis in organizational studies, the present paper develops a modeling structure to address this important gap in our knowledge. We model exploration as a wider search among alternatives, and exploitation as the refinement of a chosen alternative. Our model allows consideration of both a set balance and a dynamic adjustment of exploration and exploitation within a single stage of search. The results reported here firmly establish that a two stage search is superior to a fixed balance of exploration and exploitation. This conclusion is quite robust. A dynamic adjustment version of our model puts fewer cognitive demands on decision makers, yet reaps significant gains by mimicking the two-stage search process. Overall, we suggest how the antagonistic forces of exploration and exploitation can be tamed.

Keywords: Exploration, exploitation, search, organizational adaptation, strategic organization design

JEL Classification: C61, D21, D83