Allocating Resources between exploitation and exploration: a longitudinal study of product modifications of the Automotive Industry in the U.S. Market

In this paper, an effort is made to reconcile the disparity between the normative conjecture that companies should attempt to balance exploitation and exploration and the observation that in practice these companies show polar inclinations to explore or exploit. This is achieved by investigating the organizational mechanism that drives companies inclinations to undertake either activity or about whether and how firms balance the two activities. We address this problem by following contradictory findings to the normative assumption of balance, we thus also expect that either exploration or exploitation will dominate product development / modification decisions at any given time and previous experience on either exploration or exploitation will influence subsequent decisions. However, we also draw on incentive to act related theories such as from the organizational change, learning and decision making. Specifically, this study argues that the polar inclinations to explore and to exploit found in practice are temporary. The decisions are also influenced by incentive to act from both within and outside the company. Particularly, we hypothesize that when competitors make major product modifications (exploration), or when the focal company experiences a profit decline, the focal company will have incentives to increase both the number of exploration (by making major modification to its cars) and exploitation (by making incremental modification to its cars). However, when the company experiences a rise in profit, it has incentives to increase the number of exploitation, tilting the companys tendency towards exploitation. The study observes the major and incremental product modifications in the U.S. automobile market between 1950 and 1995 and will employ a negative binomial model to estimate the effects of the independent variables on the likelihood of a company to undertake higher number of major or incremental modifications. The data set contains 323 major modifications and 655 incremental modifications from 27 companies.