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79Principle · Group 9

Exploration and Exploitation

Organizational ambidexterity

“If you only exploit what you have, you lose the future, and if you only search for the new, you lose the present; good strategy deliberately keeps both in balance.”

Every organization has to do two things at once. It has to use and improve what already exists, and it has to search for and try out the new. Without exploitation, there is no income and no reliability today.

Group 9: Markets and OrganizationsT8 Uncertainty and Change
Go to the in-depth section ↓
A scale made of lines: on the left a circle of many teal dots, on the right a small gold cone of light pointing into a mist-blue space. Almost all the new dots fall into the circle until its dots fade; then some deliberately move to the cone of light, a line opens into the dark toward a new circle, and the scale settles.
In short

If you only exploit what you have, you lose the future, and if you only search for the new, you lose the present; good strategy deliberately keeps both in balance.

What it’s about: Every organization has to do two things at once. It has to use and improve what already exists, and it has to search for and try out the new. Without exploitation, there is no income and no reliability today. Without exploration, there will be nothing left to exploit tomorrow.

In depth

The principle in detail

Three steps through the principle: grasp it, place it, put it to work. Open each topic on its own.

The core messageCore statement and 3 clarifications
In essence

Exploitation and exploration are both necessary and stand in tension. Without a deliberate decision, the proven crowds out the new.

It does not say
That the new is always better. If you only search, you lose the present and the people who are carrying it today.
It does not say
That there is a right ratio. The balance cannot be calculated, and in very stable environments, long periods of exploitation can be the right choice.
It also says
Exploration needs good people and must be allowed to touch the assumptions of the core business, or it will have no effect.
The explanationHow the principle works and what matters

The two compete for the same resources, and the proven almost always wins. If you improve a proven offering, you see success soon and with certainty; if you explore something new, you wait a long time, and often nothing comes of it.

  • The more successful an organization is, the more strongly it is drawn to the proven.
  • This creates a competency trap: you keep getting better at something that is losing its importance.
  • The opposite exists too: constantly starting new things and finishing nothing.

In families, the same tension appears when children grow older and proven habits no longer work.

The question

What share of your resources flows into what is meant to carry you tomorrow, and who decides that deliberately?

The signs3 signs when you heed it · 3 when you overlook it
When you heed it
  • A fixed share of time, money and good people goes into new fields.
  • You don’t measure the new by the numbers of the old business.
  • What you learn while exploring also changes what already exists.
When you overlook it
  • The new runs on the side with leftover resources.
  • You start exploring only when the existing business is already shrinking.
  • Or you keep launching new things and leave the people who are carrying everything today to fend for themselves.
The backgroundFrom James G. March’s article “Exploration and Exploitation in Organizational Learning” (1991). · T8 Uncertainty and Change
  1. 1991
    OriginJames G. March

    Exploration and Exploitation in Organizational Learning

  2. 2016
    SupplementedCharles A. O’Reilly III and Michael L. Tushman

    Lead and Disrupt

  3. Tradition T8
    TraditionUncertainty and Change

    Pierre Wack, Nassim Nicholas Taleb, Leigh Van Valen, James G. March

    See the tradition on the Origin page
Read more: the full background

From James G. March’s article “Exploration and Exploitation in Organizational Learning” (1991). Supplemented by the ambidextrous organization as described by Charles A. O’Reilly III and Michael L. Tushman.

The research3 sources: 2 theories, 1 review · 1988–2016 · with limitations of the research
3 sources1988–2016 period2 theories1 review
Strength of evidence
  1. weak
  2. moderate
  3. strong

The model is influential and supported by case studies; a right balance cannot be derived from it.

  1. 1988
    Review
    Barbara Levitt and James G. March

    “Organizational Learning”: organizations that learn from experience can narrow themselves to the proven in a competency trap.

  2. 1991
    Theory
    James G. March

    “Exploration and Exploitation in Organizational Learning”: exploration and exploitation compete for scarce resources; simulations of the mutual adaptation of organization and members.

  3. 2016
    Theory
    Charles A. O’Reilly III and Michael L. Tushman

    “Lead and Disrupt”: the ambidextrous organization, which runs established and new businesses in separate units under shared leadership.

Where the research reaches its limits
  • How much exploration is right cannot be calculated; whether too much or too little was explored often becomes clear only in hindsight.
  • It is disputed whether both should happen in separate units or in the same minds; Cristina B. Gibson and Julian Birkinshaw describe the second form.
  • James G. March’s models are simulations.
  • They offer no measurements from companies showing that those who only exploit “lose the future.”
Read more: what research shows

In 1991, James G. March coined the pairing of exploration and exploitation. Exploration includes search, variation and experimentation; exploitation includes refinement, efficiency and execution. The two compete for scarce resources. In simple simulation models, he showed that fast learning and rapid adaptation to an organization’s rules do not always pay off: the organization learns only from those who deviate, and in a changing environment it needs new people in order to keep searching. As early as 1988, Barbara Levitt and James G. March had described the competency trap. Using the case of Polaroid, Mary Tripsas and Giovanni Gavetti showed that the balance fails not only because of the budget but also because of the beliefs of senior management.

The related principles12 Reserve · 73 Core Competence · 76 Disruption · 90 Red Queen Effect
ReserveCore Competence

To go deeper, see 12 Reserve (exploration needs resources that are not tied up in day-to-day business) and 73 Core Competence (good exploration builds on existing capabilities)

Disruption

76 Disruption shows what someone who only exploits overlooks

Red Queen Effect

90 Red Queen Effect adds: if you don’t keep learning new things, you fall behind, even if you don’t move

Read more: the full text

To go deeper, see 12 Reserve (exploration needs resources that are not tied up in day-to-day business) and 73 Core Competence (good exploration builds on existing capabilities); 76 Disruption shows what someone who only exploits overlooks. 90 Red Queen Effect adds: if you don’t keep learning new things, you fall behind, even if you don’t move.

The action steps5 things you can actually do

  1. Estimate what share of your time and budget goes into improvement and what share goes into the new, and write the numbers down.

  2. Decide deliberately what share goes into exploration, and protect it from day-to-day business.

  3. Give the new experienced people, not just those who happen to be available.

  4. Measure the new by its own standards: by what you have learned, not only by what it already brings in.

  5. Make sure that experience from the new flows back and is allowed to test the assumptions of your proven business.

The reflection questions3 questions for you or for a conversation
  1. How much of your time over the past four weeks went into something that will pay off only tomorrow?
  2. Who works on the new in your organization: the best people or those who happened to be available?
  3. Which assumption of your proven business was last questioned by someone from a new field?

Take your time with one question. Write down your answer – or talk it over with someone you trust.

To finish
The picture to rememberThe animation once more, with an explanation
  1. A scale made of lines: on the left a circle of many teal dots, on the right a small gold cone of light pointing into a mist-blue space
  2. Almost all the new dots fall into the circle until its dots fade
  3. Then some deliberately move to the cone of light, a line opens into the dark toward a new circle, and the scale settles
Strategy Check

What are you exploring this week?

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In context

Group 9: Markets and Organizations

Guiding question: How does an organization win in the long run?

Stage 3 of 5: Choose the path

Where the 92 principles come from: eight traditions of strategy, from classical war theory to dealing with uncertainty.

More about the origin

Background: WEGVISOR’s own selection from the strategy literature · More about the origin

Examples

The principle in practice

From the different spheres of society.

Business

Shigetaka Komori, Fujifilm and the Principle of Exploration and Exploitation

Around 2000, Fujifilm makes most of its money from photographic film. When that market collapses, the company survives because Shigetaka Komori steers the know-how from film chemistry into new fields while the old business is still making money.

Exploration and Exploitation
Business

Polaroid and the Principle of Exploration and Exploitation

In 1993, Polaroid has a working prototype of a consumer digital camera. Even so, the company keeps betting on instant film and goes bankrupt in 2001. Exploration took place, but it was not allowed to change exploitation.

Exploration and Exploitation
BusinessMedia

Reed Hastings, Netflix and the Principle of Exploration and Exploitation

In January 2007, Netflix launches streaming while its DVD-by-mail business is still growing. The company explores the new with the money from the old and builds both side by side for a while.

Exploration and Exploitation
Business

Movie: BlackBerry

The film “BlackBerry” (2023) tells the story of the rise and fall of the Canadian smartphone pioneer. A company perfects its hit device and overlooks the fact that, with the touchscreen, the world is moving in a different direction.

Exploration and Exploitation
FAQ

Questions about the Principle of Exploration and Exploitation

What does the Principle of Exploration and Exploitation say?

Organizations have to use what exists and search for the new at the same time. Because the proven brings faster and more certain returns, it crowds out the new almost by itself unless someone counteracts it.

Where does the principle come from?

It goes back to the organizational scholar James G. March, who described it in 1991 in an article on organizational learning. Later, Charles A. O’Reilly III and Michael L. Tushman developed the concept of the ambidextrous organization from it.

What examples are there?

Fujifilm managed the shift from film to new fields; Polaroid did not, even though it did early research on digital technology. Netflix built streaming alongside its DVD-by-mail business, and the film “BlackBerry” shows how success can blind you to the new.

How well is the Principle of Exploration and Exploitation supported by research?

Evidence: moderate – the model is influential and supported by case studies; a right balance cannot be derived from it.

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