Innovation is a key driver for companies' long-term success. Although, all companies can be distinguished as innovative in some form, they differentiate significantly in their strategy or activity to pursue innovation. There exist two types of activities, the explorative one on the one hand and the exploitative one on the other hand. The explorative one is applied by firms that invest heavily in research and explore new areas of technology. One example is Google, which grew from the pure search engine into a firm that developed an image-recognition application, autonomous vehicle technology and broadband services. Alternatively, the exploitative activity is applied when firms invest in deepening their knowledge in specific areas and become top market leaders. Samsung for example is an expert in electronics for consumer goods such as TV, mobile phones, LCD and LED panels and semiconductors.
The focus of this master thesis is to define and to understand the two groups of explorative and exploitative innovators and determine when, and under which circumstances, a type is more successful than the other. In order to do so, the data on large firms' innovation strategy, which is available in their patent portfolio, are collected and investigated. The collected patents are classified according to the following criterion: is the patent a radical innovation or just an incremental add-on? The data source is acquired from Google Patents which has become a dominant source in innovation research.
Results indicate that for some cases there is some evidence for a positive relationship between an innovation orientation of the firm associated with higher degree of exploration and financial performance measured in stock return. This is particularly the case for firms which own patents citing other patents outside its own technological class. With the given sample, there is no evidence for technological dynamism in an environment to moderate the relationship. This empirical assessment gives implications for further research.
Content
I. LIST OF ABBREVIATIONS
II. LIST OF FIGURES
III. LIST OF TABLES
1 INTRODUCTION
2 RELATED LITERATURE AND HYPOTHESES
2.1 An introduction to innovation
2.2 The exploration and exploitation orientation of organizations
2.3 The balance between exploration and exploitation
2.4 Exploration, exploitation and financial performance
3 DATA AND METHODS
3.1 Data
3.2 Variables
3.3 Descriptive Statistics
3.4 Empirical Model
4 RESULTS
4.1 The effect of innovation orientation
4.2 The effect of technological dynamism
4.3 Robustness Checks
5 DISCUSSION AND CONCLUSIONS
IV. REFERENCES
V. APPENDIX
Abstract
Innovation is a key driver for companies' long-term success. Although, all companies can be distinguished as innovative in some form, they differentiate significantly in their strategy or activity to pursue innovation. There exist two types of activities, the explorative one on the one hand and the exploitative one on the other hand. The explorative one is applied by firms that invest heavily in research and explore new areas of technology. One example is Google, which grew from the pure search engine into a firm that developed an image-recognition application, autonomous vehicle technology and broadband services. Alternatively, the exploitative activity is applied when firms invest in deepening their knowledge in specific areas and become top market leaders. Samsung for example is an expert in electronics for consumer goods such as TV, mobile phones, LCD and LED panels and semiconductors.
The focus of this master thesis is to define and to understand the two groups of explorative and exploitative innovators and determine when, and under which circumstances, a type is more successful than the other. In order to do so, the data on large firms' innovation strategy, which is available in their patent portfolio, are collected and investigated. The collected patents are classified according to the following criterion: is the patent a radical innovation or just an incremental add-on? The data source is acquired from Google Patents which has become a dominant source in innovation research.
Results indicate that for some cases there is some evidence for a positive relationship between an innovation orientation of the firm associated with higher degree of exploration and financial performance measured in stock return. This is particularly the case for firms which own patents citing other patents outside its own technological class. With the given sample, there is no evidence for technological dynamism in an environment to moderate the relationship. This empirical assessment gives implications for further research.
I. List of abbreviations
Abbildung in dieser Leseprobe nicht enthalten
II. List of figures
Figure 1: The (inverted) U-shape relationship between exploration and exploitation and firm performance
Figure 2: Overall research model
Figure 3: Development of the annual stock return from 1960-2009
Figure 4: U-shape relationship between backward non-self-citations and operating return
Figure 5: Margins plot of the interaction effect
III. List of tables
Table 1: Overview of variables included in the research models
Table 2: Descriptive statistics
Table 3: Correlation matrix
Table 4: Correlation matrix (continued)
Table 5: Regression results - single model estimation with share of backward non-self -citations as main regressor
Table 6: Regression results - baseline specification using fixed and random effects and share of backward non-self-citations as main regressor
Table 7: Regression results - baseline specification using GMM and share of backward non-self-citations as main regressor
Table 8: Regression results - single model estimation using the share of classification as alternative measure of innovation orientation
Table 9: Regression results - baseline specification using fixed and random effects and the share of classification as alternative measure of innovation orientation
Table 10: Regression results - baseline specification using GMM and the share of classification as alternative measure of innovation orientation
Table 11: Regression results - estimation of the interaction between backward nonself-citations and share of other classification on level 2
Table 12: Regression results - estimation of the interaction between share of backward non-self-citations and industry R&D intensity
Table 13: Regression results - estimation of the interaction between the alternative measure share of classification and industry R&D intensity
1 Introduction
Since the early existence of corporations, there has been the persistent question of how much attention and how many resources should be invested in different types of activities. With the emergence of the digital era, firms seek opportunities, experience chances as well as challenges derived from new technologies (i.e. Big Data, Internet of Things, 5G, Artificial Intelligence) and new business models (i.e. digital ecosystems) (Jacobides et al., 2019). Alone with the Internet of Things, companies generate over US$11.1 trillion in revenues by 2025 (GSM Association, 2019). This digital revolution has transformed all areas of life and societies with speed and scale which has never been known before (Sirimanne, 2019). Firms, more than ever, need to sustain competitive advantage while creating value and economic growth in a rapid changing environment. With the rising intensity of technological dynamics in environments, it is evident that firms face the threat to become obsolete by failing to do so (S0rensen and Stuart, 2000). The continuous risk forces firms to depart from existing products, services and markets (Jansen et al., 2006). Hence, the disclosure of emerging markets or the development of new products, services and business models become substantial. More importantly, it is crucial for firms to manage technologies efficiently and to develop a strategy which effectively allocates resources and skills (Adler, 1989; Zahra, 1996). Two broad types for firms on how to develop and learn as suggested in literature of organizational learning are exploration and exploitation. Explorational innovators invest heavily in research and development while expanding in other knowledge areas. Exploitative innovators deepen existing knowledge while becoming experts in niche markets (Lavie et al., 2010).
This concept of exploration and exploitation is employed and has been expanded in many different fields such as in knowledge management (i.e. Darroch, 2005), organizational design (i.e. Tushman & O'Reilly, 1996) and adaption (i.e. Eisenhardt & Brown, 1997). Studying exploration and exploitation has also become increasingly interesting in the managerial context, such as strategic management (i.e. Uotila, Maula, Keil and Zahra, 2009) and technological management as well as innovation management (i.e. Lin, McDonough, Lin and Lin 2013). There have also been studies on different levels, capturing exploration and exploitation on micro (i.e. individuals) to macro level (i.e. industry-level) (Lee and Meyer-Doyle, 2017).
An orientation towards exploration, characterized by the introduction of radical innovations, is suggested to boost company performance in the short-term and long-term period (Tushman and O'Reilly, 1996). Despite radical innovations to be riskier, those innovations also have a greater potential for higher pay-outs (Dess and Lumpkin, 2001). There has been increasing suggestions for firms to become ambidextrous by pursuing both explorational and exploitational activities (He and Wong, 2004; Tushman and O'Reilly, 1996). Within firms' explorative and exploitative behavior, incremental and radical innovations allow firms to sustain competitive advantage and increase business performance (Lin et al., 2013). The optimal balance between exploration and exploitation is influenced by environmental factors like technological dynamism and market competitiveness. The dependency on environmental conditions is another key aspect of strategic, entrepreneurial and innovation orientation (Jansen et al., 2006). This study thus examines which type of innovation orientation for firms in either low or high technological dynamism environments is more successful. It aims to provide a better understanding under which circumstances organizations and their strategic innovation orientation may be beneficial for performance.
In summary, this thesis explores the explorative and exploitative innovation orientation of firms, drawing from theoretical approaches of organizational design, organizational learning and strategic management. It focusses on distinguishing both types of innovators and how their activities impact financial performances. The firms are thus investigated in their orientation towards the construct of exploration and exploitation in their investment in technological innovations. This study further suggests that the success of each type depends upon external factors as the technological dynamism in the environment. The next section therefore examines related literature on fundamentals of innovation, explorative and exploitative innovations, the balance of both, environmental moderators and financial performance. It draws the organizational ambidexterity and technological dynamism hypotheses which are tested using U.S. patent data of 849 firms across 89 industries for 39 consecutive years described in the next section. Patents are used as a basis to define radical and incremental innovations. After describing the research method, the empirical results are presented and discussed and concluded with implications for further research and limitations of this thesis.
2 Related Literature and Hypotheses
This section addresses and explores relevant theoretical content. First, section 2.1 gives a broad idea of the literature on innovation to understand how it is defined and distinguished. Second, section 2.2 explores the definition of exploration and exploitation, especially regarding innovation. Section 2.3 addresses why and how to achieve a balance between both explorational and exploitative activities. Finally, section 2.4 investigates the impact of explorative and exploitative activities on corporate performance and defines four hypotheses which will be tested later.
2.1 An introduction to innovation
The concept of exploration and exploitation appeared as the two fundamental ideas of organizational learning and survival. Over time, these were extended into other areas of research such as knowledge management, strategic management and innovation. Organizational and management research on innovation distinguish between inventions and innovations. Inventions describe the first occurrence of an idea for a new product or process. When the idea is commercialized, it becomes an innovation (Fagerberg, 2003). For example, the first computer was invented in the early 90s, but it was not an innovation until it was first sold for money. It could be argued that this makes invention a forerunner to innovation (Ruttan, 1959). In some sectors like biotechnology, it is difficult to determine the difference between inventions and innovations because significant time passes, even up to several decades, between an invention and the commercialization of it (Rogers, 1995; Ruttan, 1959). The biotechnology industry is characterized through the extensive amount of research and development (R&D) in fields of biomedicines and foods, healthcare and bioenergy. Therefore, it is crucial for researchers to protect intellectual property because the investments are highly risky. In general, inventions turning into innovation is a continuous process difficult to track. Airplanes for example as known today evolved from several inventions and innovations from its first commercialization. Inventions typically can evolve anywhere, for example in universities, while innovations are carried out by firms which meet the requirements of knowledge, capabilities, skills and resources. Firms combine these for carrying out innovations in practice. This may be one of the reasons why long lags between invention and innovation happen due to the lack of these conditions. First, production may not have been possible yet (i.e. missing materials and skills) and second, the market may have no demand for it yet (Fagerberg, 2003).
The distinction between the two types of innovations, namely “product innovation” and “process innovation”, derive from classifications such as Schumpeter's five types of innovations: new products, new methods of production, sources of supply, exploitation of new markets and new ways to organize business (Fagerberg, 2003; Schumpeter, 1947). New products and new methods of production became primarily the focus in research. Utterback and Abernathy (1975) built two models around these two types and defined a production process as “the system of process equipment, work force, task specifications, material inputs, work and information flows that are employed to produce a product or a service” (p. 641). Product innovation is “a new technology or combination of technologies introduced commercially to meet a user or a market need” (p. 642). Over the years of studies on innovation, researchers found a numerous type of characteristics in different fields of research. It has become commonly accepted that innovations include some kind of novelty, commercialization and/or implementation related to product, process and services (Baregheh et al., 2009; Popadiuk and Choo, 2006). However, Dewar and Dutton (1986) argue that definitions of novelty do not capture the extent of how new an innovation is. In this context, Chandy and Tellis (1998) first relate incremental and radical innovations with technological and market dimensions. The technological dimension is the extent to which the product incorporates a new developed technology, while the market dimension is the extent to which it fulfills key customer needs better than existing products do. According to the authors, if an innovation fulfills both dimensions on a high level, it is defined as radical, whereas no significant newness of technology and no greater customer benefits imply an incremental innovation. Abernathy and Clark (1985) define radical innovations in their capability to offer new design, create new markets, or develop new channels of distribution.
Radical and incremental innovations also explain different types of technological product processes and products. The distinct difference between both is the degree of new technological process, hence new knowledge which an innovation contains. Henderson and Clark (1990) also refer to knowledge in their model of incremental and radical product innovation. They characterize both types with the architectural knowledge of the product's components and the knowledge of the linkages between these components. Enhancement of both architectural and component knowledge define an incremental innovation, whereas the destruction of both types describes a radical innovation.
The many different and inconsistent definitions of innovation and its distinctions made in literature are rather difficult to measure (Dewar and Dutton, 1986). This may also be caused by the variety of research methods, samples, databases and industries. The most common and important indicators for an organization's direction of innovative performance are R&D inputs, patent counts, patent citations and other measures like number of product announcements and survey-based measures (Hagedoorn and Cloodt, 2003; Pavitt, 1982). While some use solely one measure for the same construct, Artz, Norman, Hatfield and Cardinal (2010) for example use new product announcements in the media, R&D spending and number of patents to measure firm's innovative activities. Other studies also draw on multiple measures because there are suggestions of an overlap between R&D, patents and new products (Hagedoorn and Cloodt, 2003).
Despite the presence of different measures, patent statistics gained attention and acceptance in economic analysis as the most direct indicator for innovation activities, strategy and output in early years (Griliches, 1990). However, there has been difficulties with patent counts as solely indicator because there has been observed differences in a patent's economic value and technological impact (Balsmeier et al., 2017; Hall et al., 2005; Pakes and Griliches, 1980; Pavitt, 1982). The number of filed patents may underestimate innovation activities in large firms, because they file a low number of patents but with high impact. Smaller firms meanwhile tend to file a high amount patents with rather low impact (Harhoff et al., 1999; Schankerman et al., 2016). The number of citations which a given patent receives, is one construct to incorporate value and impact in patents. These forward citations imply that subsequent technological innovations invested in that particular technology to develop it further (Harhoff et al., 1999). This method to use patents as an indicator beyond the simple aggregated numbers of patents has been seen in a wide range of other studies (i.e. S0rensen and Stuart, 2000; Verhoeven, Bakker and Veugelers, 2016). Moreover, patent information provides additional information on backward citations and technological classifications (Hall et al., 2005). Backward citations are patents in the past, cited by a given patent. Backward citations primarily from a firm's own patent portfolio indicate a rather incremental innovation, whereas the deviation from the portfolio represents radicalness (Ahuja and Lampert, 2001). Rosenkopf and Nerkar (2001) investigate the number of backward citations outside the technological class of the given patent.
They postulate that a patent made up of other patents in other technological spheres, can be defined as more radical than one staying within its own boundaries. This study therefore draws on backward citations and technological classification as characteristics for innovation activities.
Schumpeter (1947) first explored the relationship between firm innovativeness and firm performance and developed a theory of profit extraction. It suggests innovation to put firms into a quasi-monopolistic position which temporarily allows firms to extract rents. This condition disappears over time, as imitation from competitors causes a dissipation of the monopolistic position of the innovator. Also, higher rent extraction is solely profitable until the introduction of an innovation which makes the central firm's innovation outdated. Therefore, one central assumption is that firms stay in their market position and maintain their power when innovations are continuously introduced. Several studies test this this predominant view which support the positive relationship between firm innovativeness and performance. Rubera and Kirca (2012) for instance find in their meta-analytical review an indirect effect of innovativeness on firm value through market and financial position. However, this indirect effect made up only 24% of the explanation. Therefore, the results suggest a strong direct positive relationship between innovativeness of a firm and firm value.
Sharma and Lacey (2004) attempt to test the different types of innovations and find that successful product innovation have an economical effect and result in temporary gains, while product development failures have negative market effects. van Leeuwen (2001) investigates the impact of process innovation on performance and finds a positive relationship. Performance is measured in sales performance, sales per employee, and employee growth. However, there has been findings of opposite associations, where results are insignificant or even negative. Through different uses of definitions, methodologies, variables and measures for innovativeness and performance, researchers tried to reconcile these controversial assumptions but generalizability remains difficult (Crossan and Apaydin, 2010; Rubera and Kirca, 2012). This paper therefore does not make explicit exceptions and thus draws on the definition, similar to du Plessis (2010), that innovation creates new knowledge and ideas used to improve business processes and structures and to create products and services. It draws on concepts of knowledge, capabilities and skills of the organization required for innovative activities. The term innovation captures both radical and incremental innovation.
2.2 The exploration and exploitation orientation of organizations
The notion of exploration and exploitation originally derived in the context of organizational learning and has been a central research objective in several literatures (i.e. March, 1991; Holmqvist, 2004). March (1991) first defined exploitation in his work as the built-up on existing firm knowledge, whereas the exploration process looks for new knowledge and capabilities. Exploration involves terms like search, variation, risk taking, experimentation, play, flexibility, discovery and innovation. Refinement, choice, production, efficiency, selection, implementation and execution are terms capturing exploitation. With the number of studies come a variety of definitions of the concept of exploration and exploitation. For example, Nerkar (2003) uses the notion of exploration and exploitation to refer to models of knowledge creation and Popadiuk and Choo (2006) additionally link it to innovation.
On the one hand, the sense of this broad definition makes different interpretations quite easy, on the other hand it is difficult at the same time to restrict it (Lavie et al., 2010). Levinthal and March (1993) attempt to limit their definitions to exploration as the gain of new knowledge of unknown things and exploitation as the use and development of existing things. This restriction became a widely accepted approach of scholars to focus their studies towards creating new knowledge or leveraging already existing knowledge as a basis (i.e. S0rensen and Stuart, 2000). For Benner and Tushman (2002), exploratory activities involve deviating from prior firm's knowledge, skills and capabilities in order to search for new knowledge at a distant. In the contrary, rooting in existing firm knowledge is of increasing exploitative nature. Lavie, Stettner and Tushman (2010) accordingly state that one premise for exploitation is that a firm maintains within its technological field and takes advantages of prior acquired knowledge and skills. Other studies have common ideas that exploration and exploitation involve innovation, learning and improvement. For instance, He and Wong (2004) define an innovation as exploitative whenever the technology improves an existing product market, whereas an exploratory innovation aims at entering new product markets.
Extending this line of work, Rosenkopf and Nerkar (2001) and Benner and Tushman (2003) suggest that radical innovation is a form of exploration and incremental a form of exploitation because the development of new technology per definition is part of the knowledge development.
Incremental innovations, for instance, build upon existing knowledge while meeting the needs of existing customers. Radical innovations in contrast are designed for customers in emerging markets, as new knowledge and skills are developed as explored by March (1991) and Levinthal and March (1993). Following this logic, the distinction between radical and incremental innovations relate to a theoretical continuum, in which innovations move from radical to incremental throughout their lifecycle (Dewar and Dutton, 1986). Benner and Tushman (2002) underline that innovation activities of organizations happen along a continuum. They measure the degree of exploration and exploitation by the deviation from existing knowledge already used in previous innovations. The authors hereby use patent data to refer to existing or new knowledge. More specifically, they assess a patent's backward citations whether the patent is built on patents not owned by the company, hence new knowledge, or patents already filed by the same company, hence existing knowledge.
It is evident that there has been approaches to conceptualize explorational and exploitational innovation activities. However, following the difficulty to measure general innovative activities, the lack of a clear definition makes it critical for researchers to align empirical investigations with conceptual definition (Lavie, Stettner and Tushman, 2010; Gupta, Smith, Shalley and Smith, 2012). This may be the reason, why studies focusing on the impact of exploration and exploitation explain the extent of product innovation differently by using two or more variables. This consequently leads to different findings. Despite the literature on radical and incremental innovations in this context, this present analysis does not attempt to refer exploitative patents to incremental innovations and explorative patents to radical innovations of the firm. For instance, the strategic orientation towards exploitation or exploration happens ex-ante to innovation introduction, while the question of radical or incremental innovation appears ex-post announcement (He and Wong, 2004).
Greve (2007) identifies the lack of applicability of incremental and radical innovation on exploration and exploitation on firm-level. Radical innovations solely apply to the whole industry, which consequently overlook the knowledge different firms possess about the innovation and the knowledge prior to the launch of the innovation. Less prior knowledge may indicate more explorative activity since the necessary knowledge had to be acquired. Hence, the explorative activity could be an exploitative to another firm based on the existing knowledge at that point (Cohen and Levinthal, 1990; He and Wong, 2004).
2.3 The balance between exploration and exploitation
Explorative and exploitative activities in organizations both contribute to an organization's survival by sustaining competitive advantages. This is based on the fact that both activities are crucial for organizational success. Building on this assumption, March (1991) proposes a higher degree of exploration to be more desirable than higher exploitation for stable environments, in which organizations are little exposed to environmental changes. In fast changing environments, however, exploration and exploitation activities in firms compete for the same scarce resources, which in nature of competition, create tension and require the decision to emphasize one over the other (Gupta et al., 2012; March, 1991). The central concern of corporate strategy thus is the decision how to allocate resources between explorational and exploitational activities. On the one hand, remaining in existing fields and focusing on core capabilities in fast changing environments seem attractive at first. Exploitative activities enhance existing processes and capabilities and thus may improve effectiveness and efficiency for a short period of time. On the other hand, staying solely in the same spheres and using existing knowledges may drive the firm into being obsolesce for environmental and technological changes (Belderbos, Faems, Leten and van Looy, 2010). These capabilities eventually become highly specialized competencies that in turn convert into core rigidities which negatively influence organizational survival (Leon-Barton, 1995). At the same time, explorative innovations do not take the advantage of an existing knowledge base to capitalize expertise and capabilities in the market. Usually, exploitative activities are likely to succeed and transfer into value for the firm, because it moves in fields already known (Wang et al., 2017). A high amount of R&D efforts in introducing a new product into the market may not be turned into a value in the short and long run (Burgelman and Sayles, 1986). R&D efforts involve the acquisition of new knowledge which requires risk taking on management side. Risk taking is closely related to uncertainty, in which radical or explorative innovations are exposed to a higher risk of failure. The benefits are difficult to predict and may or may not realize years after the introduction in the market (Lubatkin, Simsek, Ling and Veiga, 2006). It consequently leads into a never ending cycle of failure, search and change (Levinthal and March, 1993). Therefore, a firm will never gain return from its investments in knowledge while being solely explorative. Focusing only on explorational activities, thus, might prevent short-term profits and growth (Levinthal and March, 1993). It is evident that researchers and practitioners are concerned with this trade-off between exploration and exploitation.
Eventually, this trade-off causes researchers, practitioners and organizations to be stuck by constantly trying to decide for either exploration or exploitation (Andriopoulos and Lewis, 2009; Levinthal and March, 1993). They share the common view of exploration and exploitation being contrary concepts, whose processes are thus incompatible (O'Reilly and Tushman, 2013).
However, exploration and exploitation have also been argued to be complements and coexisting concepts. It is indicated in many organizational literatures that simultaneous processes generate benefits and synergistic effects. For instance, Kauppila (2010) demonstrates that the existence of collaboration between explorative and exploitative partners (organization, manufacturing and supply partners) provides opportunities to extract rents. These insights indicate a balance of exploration and exploitation to be necessary and crucial for organizational survival and prosperity (He and Wong, 2004; March, 1991). This view has been widely accepted by Raisch and Birkinshaw (2008) who declare that success of firms translate into the joint employment of exploitation and exploration in the long run. The easiness to pursue both type of explorational and exploitational activities and the impact therefore depend on the firm to regard them as complementary rather than competing (Gupta et al., 2012). The ability to do that is known as organizational ambidexterity (Duncan, 1976). Thus, firms are ambidextrous, when they are capable of exploiting existing knowledge while managing to explore new areas equally (Tushman and O'Reilly, 1996). Lin et al. (2013) refer one firm's capability to one firm's learning mechanisms and knowledge sharing. They imply that learning capabilities may foster radical and incremental innovations and find that there is a link between a firm's learning capability and organizational ambidexterity.
In line with the difficulty to define exploration and exploitation as itself, the construct of ambidexterity simultaneously contains many definitions. Lubatkin et al. (2006) suggest ambidextrous firms to be able to equally exploit skills and competencies on the one hand as well as to explore new opportunities on the other hand. Tushman and O'Reilly (1996) defined organizational ambidexterity as the capability to simultaneously pursue both incremental and disruptive innovation. Gupta et al. (2012) add to this by suggesting that a balance between exploration and exploitation can be achieved through the notion of “punctuated equilibrium”. In a punctuated equilibrium, exploration and exploitation are not simultaneously adapted but rather follow a rotating cycle. Firms therefore actively switch between the focus on exploration and the focus on exploitation (Benner and Tushman, 2002; Lavie et al., 2010).
The aim is to achieve balance by exploring for a given time and then shifting to exploitation, and vice versa (Lavie et al., 2010). Over the years of research, the concept of organizational ambidexterity appears to be fundamentally substantiated as some advocate a balanced exploration versus exploitation ratio (i.e. Benner & Tushman, 2003; Uotila et al., 2009). The impact of the balance between exploration and exploitation will be explored in the next section.
2.4 Exploration, exploitation and financial performance
Financial performance has been the dominant indicator for firm success in empirical strategy research and has been associated with the balance between explorative and exploitative innovations (Venkatraman and Ramanujam, 2013). The link has been investigated in many different ways as well as over a different period of time (Uotila et al., 2009). For instance, He and Wong (2004) first empirically test the ambidexterity hypothesis on technological innovations. They retrieve data from 206 manufacturing firms and investigate their innovation activities. On the one side, they find out that the interaction between exploitative and explorative innovation strategies has a positive effect on financial performance measured in sales growth rate. On the other side, an imbalance between explorative and exploitative innovation strategies is negatively associated with sales growth rate. Lubatkin et al. (2006) use a similar approach and test for a positive relationship between ambidexterity in firms and sales growth rate, market share growth, return on equity and return on total assets. They use survey data from 139 small- and medium-sized enterprises. Similar to the results provided by He and Wong (2004), they find evidence for a positive effect of the simultaneous pursuit of exploitative and explorative activities on performance. Other studies like Eberhart, Maxwell and Siddique (2004) investigate the impact on stock return and profit margin. Belderbos et al. (2010) look at financial performance in terms of market value. While financial performance is measured in several ways in existing literature, it can be assumed that it is affected in different ways and magnitudes by explorative and exploitative events. This is the case because over a certain time period, exploitative activities have a slower effect, while explorative activities realize an immediate effect (Uotila et al., 2009). Assumingly, that a firm with a relatively low degree of exploration orientation focuses mainly on exploitation, while a firm with a relatively high degree of exploration primarily focuses on explorational activities, the first hypothesis can therefore be defined as follows:
H1. There is a positive relationship between the innovation orientation (relative degree of exploration) and financial performance.
According to Zahra (1996), the environment, which a firm operates in, has an effect on the relationship between innovation and performance. Environmental dynamism is one form of instability, stability and turbulence in environmental dimensions. It is characterized by the rate of environmental change and the unpredictability of this change (Dess and Beard, 1984). Changes can occur in technology, customers, product demand or supply and competitors (Zahra, 1996). With the increasing threat of prior knowledge and capabilities to become obsolete, rapid environmental changes promotes the creation of new knowledge and competences (S0rensen and Stuart, 2000). This is the reason for observations of variances in R&D expenditures depending on industry characteristics. Firms in dynamic environments tend to invest more in research and development of new products and technologies as an attempt to keep up with the capabilities of competitors and the rapid change. In accordance to this, patents increasingly become more important in certain industries than in others. For firms in the chemical or pharmaceutical sector, the use of patents is a more common way to protect intellectual property as R&D input compared with for example the rubber or textile industry (Ernst, 2001; Zahra, 1996).
This also implies that the focus on explorational activities to deviate from existing technologies, market, products, processes and services is necessary for survival and growth (S0rensen and Stuart, 2000; Zahra, 1996). Low technological dynamism environments, however, allow firms to concentrate on exploiting existing knowledge to maintain current operations for short-term performance. Returns from exploitative activities in turn can be used and reinvested into explo- rational innovations (Dess and Lumpkin, 2001). Explorational activities are thus considered as more important in dynamic environments and exploitational activities in static environment (Tamayo-Torres et al., 2017). It is therefore expected that in dynamic environments, firms with exploratory innovation orientation pursue a higher financial performance. Simultaneously, exploitative innovation orientations tend to perform worse over time because firms' effort exploiting existing products and services is less valued by the environment (S0rensen and Stuart, 2000). It is therefore hypothesized:
H2. Technological dynamism moderates the relationship between the innovation orientation (relative degree of exploration) of the firm and financial performance.
With different levels of technological dynamism in an environment, a balance of exploration and exploitation to maximize performance may be required, because the level of external dynamism in a firm's environment is argued to have an impact on ambidexterity (Raisch and Birkinshaw, 2008; Uotila et al., 2009). Levinthal and March (1993) emphasize the need to balance exploration and exploitation for two reasons. First, overly exploiting existing R&D assets lead to a firm into a sub-optimal equilibria and obsolescence of innovation output. Second, on the contrary, overemphasizing exploration activities may deter short-term and stable profits, which consequently fail to provide sustainability for exploration in the long-term. Belderbos et al. (2010) confirm these findings in their study on technological activities of firms and their impact on financial performance. They use firms with the most intensive R&D and find the best-performing firms exhibit a moderate exploration share in their technological portfolio. The others performing lower have either a low or high exploration orientation. The relationship between exploration and exploitation therefore suggest being a curvilinear inverted U-shape. In other words, firm performance increases with exploitation at a decreasing rate to reach a maximum, then firm performance decreases at an increasing rate (Haans et al., 2016). It is therefore argued that firms outperform others who focus solely on exploration or exploitation rather than achieving a balance between exploration and exploitation.
Uotila et al. (2009) provide further empirical evidence for the ambidexterity hypothesis but also add to research by introducing the assumption for a change in the curve so that the inverted U- shape flips into a U-shape, or vice versa. For instance, they find that for firms operating in a low technological dynamic industry, relative exploration has a U-shape relationship with firm performance, whereas high technological dynamism moderates the effect to an inverted U- shaped relationship. The illustration below (Figure 1) shows the U-shape and inverted U-shape relationship between the focus on explorative and exploitative activities and performance. It illustrates that emphasizing on both extreme tails have either a negative or positive effect on firm performance depending on the nature of environment. Haans, Pieters and He (2016) theoretically explain this phenomenon through two underlying latent mechanisms. First, firms experience high coordination costs when balancing exploration and exploitation activities, because resources differ in their components and must be evenly divided (March, 1991).
Figure 1: The (inverted) U-shape relationship between exploration and exploitation and firm performance
Abbildung in dieser Leseprobe nicht enthalten
Focusing on either exploration or exploitation may decrease coordination costs, which implies that coordination costs are a concave function of relative exploration. Environmental changes, however, do not affect the curve of coordination costs because the trade-off of allocating resources is internal to the firm (March, 1991). The moderating effect, thus, may come from the other latent mechanism: benefits to relative exploration (Haans et al., 2016). Firms in stable environments experience less risks to become obsolete so that exploiting knowledge improves efficiency and adaption to the current environment (Uotila et al., 2009). Therefore, benefits decrease with exploration in a low dynamic environment. Combined with the concave function of coordination costs, the relationship between relative degree of exploration and firm performance becomes U-shaped (Haans et al., 2016). Therefore, depending on the environment, the relationship may be U-shaped or curvilinear (inverted U-shape). In line with the previous research, the following hypothesis is formulated:
H3. There is a (inverted) U-shape relationship between the innovation orientation (relative degree of exploration) of a firm and its financial performance.
The overall research model is displayed Figure 2below.It summarizes hypothesis 1 assuming the positive linear relationship between a firm's relative degree of exploration and financial performance, as well as the potential positive moderating effect by industry technological dynamism in hypothesis 2. Hypothesis 3 presents the possible (inverted) U-shape relationship between firm's innovation orientation (relative degree of exploration) and firm performance.
Abbildung in dieser Leseprobe nicht enthalten
Figure 2: Overall research model
3 Data and Methods
Section 3.1 describes the sample and the method how the patent and financial fundamentals data are obtained and processed. The next section defines and explains the variables in detail. The descriptive statistics are presented in section 3.3. Finally, the underlying empirical models which investigate the effects of innovation orientation on corporate performance, potentially moderated by industry technological dynamism, are formulated.
3.1 Data
In order to test the hypotheses presented in chapter 2, patent data was obtainedcovering a total period of 49 consecutive years between 1960 and 2009. The aim is to bring this information from a patent level to a firm level to estimate individual innovation activities. To achieve this, the construction of the data is executed in three parts. The first part includesthe search for a list of all filed U.S. utility patents linked to a firm identifier. The United States Patent and Trademark Office (USPTO) grants patents and provides digital access to a large amount of patent records of large U.S. firms starting from 1790 to the present (USPTO, 2015). The list for the period 1960 to 2010 isavailable for download and serves as the initial search query dataset.For the firm identifier, the patent list solely contains the unique permanent security identifier (PERMNO) from the Center for Research in Security Prices (CRSP) database, which requires a matching to the unique permanent company identification number (PERMCO) later in this process.
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- Citation du texte
- Jenny Giang (Auteur), 2019, Exploitation versus Exploration. Which companies exploit existing R&D assets and which explore new technologies?, Munich, GRIN Verlag, https://www.grin.com/document/1189591
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