The knowledge strategy orientation scale: individual perceptions of firm-level phenomena.

One of the most serious threats to the relatively new field of strategic management research is poor construct measurement (Boyd et al., 2005). Due to the relatively complex nature of strategic management variables, quality of measurement is crucial (Godfrey and Hill, 1995) and strategic management research must place greater emphasis on research design, construct validation, and more sophisticated analytical techniques (Bergh, 2001). Many researchers tend to operationalize latent constructs with the use of proxy variables. For example, Boyd et al. (2005) found that constructs such as available organizational resources, public profile, core rigidity, and ability to initiate competitive action have all been operationalized by single-item archival measures of organizational size. Additionally, organizational size can be measured as number of employees, number of products, number of production facilities, or any of at least a dozen other measures. The reliance on single-item measures to the exclusion of multi-item scales virtually ensures that research is conducted with unreliable measures that attenuate results. More importantly, there is a clear question of validity. Does organizational size truly represent core rigidity, ability to initiate competitive action, or something altogether different? Additionally, Payne et al. (2003) suggest that the use of archival data has several disadvantages. These include the fact that the data may have been originally collected for some other purpose, there may be missing data points, archival data may be susceptible to experimenter bias as some researchers might examine the data before they propose hypotheses, and that archival data may not be readily analyzable. Given that all of the above are distinct problems plaguing strategic management research, the truly important issue is that there is no real valid representation of many key constructs.

In fact, Boyd et al. (2005) call for the development of new multi-indicator measures for constructs in strategic management research, especially for more contemporary approaches to strategy. Traditional research in strategic management has used a variety of measures for the Miles and Snow (1978) typology of prospectors, analyzers, defenders, and reactors, and the Porter (1980) typology of low cost, differentiation, and focus. However, these approaches to strategic management have been criticized for a variety of reasons (see Grant, 2005). Today, the school of strategy that is attracting a wide degree of attention is the knowledge-based view of the firm, with its typology of exploration and exploitation knowledge strategies. However, an acceptable multi-indicator measure of these constructs has not been generally accepted in the literature.

Thus, the purpose of our study is to examine the factor structure of responses to items designed to measure the knowledge strategy constructs of exploration and exploitation and to provide evidence of external validity using other measures of theoretically-related variables. In keeping with this concern for greater methodological rigor we suggest that the further delineation of these two constructs is appropriate and necessary for future research in this area. In the sections that follow, we give some insight into the theoretical background of our focal constructs, an overview of our analytical methods, the results of our analysis, and a discussion of these results.

THEORETICAL BACKGROUND

A knowledge strategy can be viewed as a firm's set of strategic choices regarding two knowledge domains: 1) exploration, or the creation or acquisition of new knowledge and 2) exploitation, or the ability to leverage existing knowledge to create new organizational products and processes. A firm's knowledge strategy guides its resource allocation--the degree to which the firm focuses its resources on either generating radically new knowledge or incrementally enhancing the existing knowledge base (March, 1991; Bierly and Chakrabarti, 1996). In addressing these trade-offs, March (1991) argued that exploitation is likely to maximize profits in the short run, and that exploration is more likely to maximize long-term firm success. Accordingly, exploration entails higher costs and increased risk for a firm, but is more likely to lead to a sustainable competitive advantage. However, concentrating resources too heavily on exploration may prevent firms from reaping the benefits that come from developing these knowledge breakthroughs. Focusing on exploration tends to slow down the development and refinement of skills and processes associated with the firm's current competencies. On the other hand, a strong commitment to an exploitation strategy entails trade-offs as well. According to March (1991), organizations that focus on the incremental knowledge gain associated with exploitation may find themselves to be experts in areas that have become obsolete, thus getting better and better at things that customers no longer value.

Exploration and Exploitation Constructs

Conceptualizing exploration and exploitation as two separate constructs implies that they are not simply the two extremes of a single continuum (wherein movement toward one strategy inherently means movement away from the other). Rather, they are two sets of strategic choices, each positioning the firm to develop their intellectual capital in a specific direction, toward excellence in either the creation and acquisition of new knowledge or the leveraging of existing knowledge. In essence, the orthogonal nature of the constructs indicates that firms may pursue one, both (simultaneously), or neither of the strategies. Because certain strategic choices, such as the decision to develop competence in a specific technology, may be necessary to both exploration and exploitation, and therefore would represent overlap in the two sets of strategic choices, we expect a moderate degree of positive correlation between the two constructs. Researchers (March, 1991; Bierly and Chakrabarti, 1996; Zack, 1999) have made claims as to the existence of differentiated knowledge strategies; however, there has been very little empirical research conducted in this area. Using a cluster analysis, Bierly and Chakrabarti (1996) did find evidence of distinct knowledge strategies, but their study was limited to large resource-rich pharmaceutical companies. Yet we believe each orientation to have enough unique elements that exploration can be viewed as independent and distinct from exploitation.

The general argument made by many of the researchers mentioned above is that choosing between exploration and exploitation necessitates trade-offs, and therefore the two strategies are substitutes and, thus, negatively correlated. According to this view, firms that develop competencies in exploitation are likely to focus more of their resources on further exploitation and fewer resources on exploration and vice versa (Levinthal and March, 1993). Basically, this view stresses the value of specialization and efficiency of learning. An alternative perspective, proposed by Knott (2002), is that exploration and exploitation are complements rather than substitutes. Firms that develop the capabilities necessary to foster exploration are also more likely to engage in exploitation, and vice versa. Even though there are difficulties in simultaneously pursuing exploration and exploitation (as described above), there are also organizational systems and human resource practices that support both. More specifically, team-based structures, an organizational culture that values and promotes change, open communication channels, and human resource practices that promote creativity and innovation will help to sustain both exploration and exploitation (Bierly and Daly, 2002). Consistent with this perspective, Helfat and Raubitschek (2000) argue that successful exploitation (referred to as incremental learning) in the past can lead to and support exploration (referred to as step function learning), and that current exploration promotes future exploitation. Anecdotal evidence that some companies can successfully pursue exploration and exploitation simultaneously is provided by Knott's (2002) case study of Toyota, Ichijo's (2002) study of General Electric, and Helfat and Raubitschek's (2000) studies of Sony, Canon, and NEC.

Consistent with Knott's (2002) perspective, we conceptualize explorer and exploiter as independent constructs and have developed two four-item scales to measure individual's perceptions of the knowledge strategy constructs known as exploration and exploitation. Even though the concepts of exploration and exploitation are central components of the popular knowledge-based view of the firm, little research has been conducted to examine the legitimacy and relationship of these constructs. An acceptable measurement tool has not yet been developed that has been properly field tested and widely accepted. The vast majority of articles about exploration and exploitation are either conceptual, use computer simulations (e.g., March, 1991; Lee et al., 2003; Garcia et al., 2003), or are based on case studies (e.g. Knott, 2002; Helfat and Raubitschek, 2000; Holmqvist, 2004; McNamara and Baden-Fuller, 1999). A few researchers use patent, or research and development data, or they focus on the number of new products from a firm as proxies for exploration and exploitation (e.g., Bierly and Chakrabarti, 1996; Katila and Ahuja, 2002; Rosenkopf and Nerkar, 2001). To our knowledge, only He and Wong (9004) have used perceptual measures gathered in a survey to measure these specific constructs.

Radical and Incremental Innovation