Pursuing a Dual Strategy of Exploitation and Exploration: Implications for
HR/Reward practices
Prof. Robert M. Wiseman, Ph.D.*
Eli Broad Legacy Fellow of Management
+1-517-432-3508 (phone)
+1-517-432-1111 (fax)
wiseman@msu.edu
Bernadine Johnson Dykes*
+1-517-353-9535 (phone)
john2128@msu.edu
Roman Weidlich
Watson-Wyatt Worldwide
roman.weidlich@eu.watsonwyatt.com
&
Monica Franco-Santos
Cranfield School of Management, UK
+44(0) 1234 751122 ext 2926 (phone)
+44 (0) 1234 757409 (fax)
monica.franco@cranfield.ac.uk
*The Eli Broad Graduate School of Management
Michigan State University
East Lansing, MI 48824-1122
March 22, 2006
Research co-sponsored by
Research overview
Surviving in a transitioning economy often requires that multinational businesses pursue a dual
strategy that attempts to balance the need to leverage their current competencies and resources
(i.e., a strategy of exploitation), while preparing for the future through a strategy of exploration
and experimentation. The preference for either strategy is likely to be influenced by a
company’s parent corporate strategy, the firm’s current success and differences in host country
setting. Such differences include variations in infrastructure, economy and market conditions
that may favor one strategy over another.
Nonetheless, a tension between the strategies of exploitation and exploration often arises. This
tension exists because these two strategies have diverse and opposing purposes. Strategic
exploitation is focused on improving and refining the efficiency of current resources and
capabilities. In essence, exploitation is designed to respond to current environmental conditions
by modifying existing technologies. Conversely, strategic exploration or experimentation
focuses on searching for new products, routines or capabilities, which can enhance a business’
competitiveness in existing markets. In essence, exploration is designed to drive environmental
trends by creating innovative technologies and markets. Strategic exploitation precludes
experimentation or exploration with new routines that may or may not be useful in the future.
Further, exploration may add costs, which puts the business in a competitive disadvantage
relative to firms that are exclusively focusing on the refinement of efficient and known products,
services and routines.
Given the diversity of strategies being pursued by firms in Europe, it is clear that businesses need
to develop compensation plans that are tailored to the business’ own unique strategy and
situation. However, organizations tend to link their compensation plans to strategies of
exploitation while ignoring the need for exploration. Seeking a balanced strategic focus is ideal
for businesses operating in complex environments.
To explore these key management issues, Watson Wyatt Worldwide, Michigan State
University’s Eli Broad College of Business and Cranfield School of Management are conducting
a study to consider:
•
the extent to which European firms are pursuing exploration and exploitation strategies;
and
•
the extent to which European firms are linking these two strategic approaches to their
managerial reward practices.
The research comprises two studies. This report presents key results from the first study. The
second study will take place in the following months and is still being developed.
Results of First Study: Firm Exploration and Exploitation Strategies
A survey of 140 managers from seventeen countries across Europe (with a special focus on
managers from Eastern and Central European countries) was conducted. The purpose of the
survey was to determine to what extent firms (mostly subsidiaries of larger multinational
corporations) were pursuing a balanced strategy between exploration and exploitation.
Key findings of this survey are:
•
Managers in Austria and Romania indicated the strongest strategic exploration
orientation. Alternatively, managers in Hungary indicated the weakest strategic
exploration orientation.
•
Managers in Romania indicated the strongest strategic exploitation orientation whereas
Poland indicated the weakest strategic exploitation orientation.
•
Most significantly, most subsidiaries appear to be pursuing strategic exploration and
exploitation simultaneously by replicating their existing practices in new markets
(strategic exploitation) and exploring new markets, technologies and opportunities in
these same markets (strategic exploration).
As can be seen in table 1, firms in some countries are attempting to balance the dual and
somewhat competing demands of exploiting current routines, while simultaneously devoting
some resources to exploring for new routines and products.
Table 1: Participating Countries & Mean Survey Results*
Mean Score
Exploration
Exploitation
Austria
2.35
1.96
Czech Republic
2.51
2.03
Hungary
2.64
1.99
Poland
2.47
2.12
Romania
2.15
1.78
Russia
2.47
2.11
* 5 point scale: 1 = Strongly agree; 2 = agree; 3 = neither; 4 = Disagree; 5 = Strongly Disagree
Implications and Recommendations for HR/Reward Practices
Balancing exploitation and exploration strategic needs requires special attention to the policies
used by firms to evaluate and reward managers. For firms seeking to create this balance, four
recommendations are in order.
#1: Share the Rewards of Improved Performance for Strategic Exploitation Orientation
In pursuing an exploitation strategy that focuses on minimizing costs or improving quality
control, the compensation design must be tied to measurable improvements in these areas. This
begins with gathering reliable measures of current productivity and quality that can be used as a
baseline for measuring and rewarding improvements in these areas. A variety of compensation
plans can assist in achieving improvements in operational efficiency (such as Scanlon plans, and
gain-sharing programs). In general, these encourage employees to share their experience and
knowledge in an effort to find better and more efficient ways of performing day-to-day tasks.
Sharing the rewards of improved efficiency with those that are likely to be the most threatened
by improvements in efficiency can also reduce anxieties associated with change. In addition,
rewarding contributions that save money can encourage more involvement in the process of
finding and implementing improvements in manufacturing processes.
#2: Use Long Time Horizon Designs for Strategic Exploration Orientation
For companies that choose to focus mostly on revenue enhancement through marketing and
product development, compensation designs should include longer time horizons. That is, pay
should be linked to the achievement of performance targets established beyond the normal
budget cycle and instead be tied to the company’s product development cycle. This is because
product development and market penetration initiatives require longer time frames in which to
succeed. In addition, given the difficulty of forecasting in dynamic and developing markets,
these plans must also be flexible such that they recognize employee efforts even in the event of
failure.
#3 Develop a No Blame Culture
Not all new product ideas or marketing innovations will succeed. Therefore, employees must
believe that innovations will not be punished should they fail. Otherwise, employees will learn to
avoid taking the risks, which will dampen innovation in the firm. Consequently, firms should
develop a “no blame” culture whereby risk taking is encouraged and appreciated, and where
failure is tolerated. However, whenever failure does occur, firms should seek to learn and
develop from their mistakes.
#4: Develop Dual-Purpose Designs
Combining both an exploration and exploitation strategy means that compensation must be
designed to reward revenue enhancement, while at the same time encourage greater operational
efficiency and productivity. Pursuing both sets of objectives simultaneously is not easy since the
former often involves being innovative and taking risks, which can increase costs, while the
latter often leads to increased control over routine operations. When companies pursue multiple
and potentially incompatible strategic initiatives (such as controlling costs while simultaneously
developing new and innovative products), compensation designs can play a significant role in
hindering or enhancing the pursuit of these objectives. The key is to ensure that the pursuit of
each strategy does not lead to confusion by creating contradictory objectives that cannot be
satisfied. This may mean linking a portion of pay to investments designed to develop future
revenue streams and to efforts dedicated toward enhancing returns from current revenue sources.
In sum, a key to the execution of a dual strategy is the development of human resource
management practices, including compensation, staffing, and performance evaluation practices,
that reward the search for efficiency in current processes, while encouraging some level of
exploration in the search for the next generation of products, services and organizational
routines. This is a difficult task, but one that if managed correctly can ensure that firms not only
compete well in today’s environment, but also are well-positioned for where these developing
markets are headed in the future. Ultimately, a firm should develop a strategy that is internally
consistent (i.e., pursuit of strategies goals that do not interfere with each other), feasible (i.e., the
firm has the necessary resources and capabilities), consonant with the environment (i.e., the
strategy reflects the conditions of the market), tolerant of failure and advantageous over rival
firms. Once the strategy is formulated, managers should consider how the firm’s compensation
design supports the strategy by linking rewards to both financial and non-financial outcomes that
drive the company’s near and long-term success.
Second survey: The Linkage between Exploration and Exploitation Strategies
and HR/Reward Systems
The second part of the research project is being developed and it will take place in the following
months. It will examine the extent to which firms’ exploration and exploitation business
strategies match their HR/reward practices.
If you are interested in collaborating in this second phase of the study, please contact Monica
Franco (monica.franco@cranfield.ac.uk).
Thank you to those respondents who participated in the first part of the research project.
Your contribution and cooperation is greatly appreciated!