Exploration and Exploitation

In his article Exploration and Exploitation, James March stresses the importance of balance between the two.  An organization with exploration and limited exploitation suffers the cost of experimentation without gaining many of its benefits. The company will have too many underdeveloped ideas and too little distinctive competence. And vice versa, an organization that focuses on exploitation without exploration will be trapped in an inferior state of equilibrium. Finding the perfect equilibrium is difficult but essential to survival.

Each of these “adaptive process,” as they are referred to in Organizations and Organizing, competes for the organizations scarce resources. The rational model of choice assumes that there exists several alternative investment opportunities but there must be tradeoffs between the two. An organization can choose to gain new information about alternative and thus improve future returns or can use the information currently available to improve present returns. There exists a problem with balance because a focus on one process deters the others improvements. If exploration becomes the concentration, it reduces the speed with which skills at existing ones are improved. Similarly, if the attention is on exploitation there may not be enough resources for R&D.

The essence of exploitation is the refinement and extension of existing competences, technologies, and paradigms; its returns are positive and predictable. The essence of exploration is experimentation with new alternatives; its returns are uncertain, distant and often negative. The greater the risk the greater the return is what we always learned in accounting. I think that Enron believed if they constantly had new and innovative businesses they would make great returns. I am interested in examining the different aspects of the Enron model to determine when they made successful choices in exploration and exploitation and when the failed. My current hunch is that many of the Enron businesses were not carefully thought through and were examples in which they over explored and under exploited.  Some examples that come to mind are Azurix, EES and Broadband.

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