Balancing Exploration and Exploitation for Firm’s Superior Performance: The Role of the Environment

A central concern of corporate strategy has to do with making choices about how much to invest in exploration and exploitation activities and how to maintain an optimal balance between them. In this study, exploration represents technological innovation activities aimed at new technologies and products (measured by the firm's R&D expenditure), and exploitation reflects activities aimed at maximizing existing products and market domains (measured by the firm's sales, marketing, and general expenditure). Using longitudinal financial panel data for 605 public technology firms, our findings demonstrate that the effects of exploration and exploitation on firm performance are curvilinear; in other words, both exploration and exploitation efforts have optimal levels of effective intensity at which the firm's performance is highest (inverted U-shaped relationships). Furthermore, these curvilinear relationships between exploration and exploitation with performance are moderated by environmental conditions (dynamism and competitiveness) and differ for short-term and long-term performance outcomes. Accordingly, a firm's constructive balance between exploration and exploitation efforts varies depending on the environmental conditions, the performance outcome, and the respective optimal levels of intensity for exploration and exploitation activities.