The perilous leap between exploration and exploitation

Research summary : R&D‐based exploration and exploitation are necessary in order for firms to have sustainable competitive advantage. Yet, transitioning between these orthogonal types of R&D is considered profound organizational change. Building on recent research showing that compact, significant changes in R&D expenditure is an antecedent to the transition between explorative and exploitative R&D, I show that this leap between exploration and exploitation is quite hazardous. The magnitude of changes in R&D expenditure, whether increases or decreases, is positively associated with organizational failure. Firms maintaining higher levels of absorptive capacity are more capable of surviving the leap from R&D‐based exploitation to exploration, and firms that do not use reductions in R&D expenditure to manipulate short‐term earnings performance are more likely to survive the leap from exploration to exploitation. Managerial summary : In order to survive and thrive, innovative companies must be able to exploit their existing competencies, and to explore for new ones once those current competencies decline in value. However, transiting from one form of innovation to the other is difficult because the skills required to explore are fundamentally opposed to those required to exploit. In this article, I describe how difficult this leap between exploration and exploitation can be. I show that the move between R&D‐based exploration and exploitation is related to organizational failure. In addition, firms that are superior learners are more likely to survive the leap from exploitation to exploration, and firms that are not cutting R&D expenditure to manipulate earnings are more likely to survive the leap from exploration to exploitation. Copyright © 2015 John Wiley & Sons, Ltd.     

Knowing when to leap: Transitioning between exploitative and explorative R&D

A common perspective is that consistent R&D investment facilitates innovation, while volatile spending implies myopic decision making. However, the benefits to exploiting extant competencies eventually erode, so firms must disrupt their R&D function and explore for new competitive advantage. We suggest that high‐performing firms recognize when extant competencies decline and increase exploratory R&D to develop new competencies at the appropriate time. We find that changes in R&D expenditure away from the firm's historic trend, in either direction, are indicative of transitions between exploitative and exploratory R&D and are associated with increased firm performance. Increases in R&D expenditure above the trend are associated with an increased likelihood of highly cited patents, suggesting that firms are making the leap between R&D‐based exploitation and exploration. Copyright © 2013 John Wiley & Sons, Ltd.     

Utilizing the balanced scorecard for R&D performance measurement

R&D programs are critical for many firms to achieve and sustain competitive advantage. Yet, measuring R&D performance over time can be quite complex due to inherent uncertainty. The paper responds to calls in the R&D literature to explore integrated performance measurement systems that capture financial and nonfinancial performance. We integrate the Stage-Gate approach to R&D management with the Balanced Scorecard to present a framework to show how firms can link resource commitments to these activities and the firm's strategic objectives. In this paper, we provide specific examples of how firms can apply this integrated performance measurement system to the R&D function.     

New paradigms for the future: keynote perspectives from The R&D Management Conference 2008

The R&D Management Conference 2008 theme of ‘emerging and new approaches to R&D management’ sought to draw out how R&D‐based organizations today are changing the way they manage (in terms of novel approaches, techniques, models and tools) in face of the challenges and opportunities presented in the current environment. Six keynote presentations by executives, representing both the public and private sectors, elaborated on the following subjects reflecting their experiences on the theme: hyperconnectivity and changing R&D tenets, accelerating discoveries in human health via open access public‐private partnerships, role of government in bridging the innovation gap, building sustainability and innovation in a traditional resource sector, R&D management in the aerospace sector, and leveraging diversity to build a culture of innovation. Their presentations highlighted amongst other things – global trends that are affecting how R&D organizations are operating, economic imperatives driving change in business models, working through partnerships within an open innovation environment, and leveraging the diversity presented by an increasingly globalized R&D workforce for success. Within these presentations are also challenges to researchers to generate new thinking to address current and future problems presented by the R&D environment. The keynote perspectives are summarized in this paper.     

How to leverage the impact of R&D on product innovation? The moderating effect of management innovation

Although research and development (R&D) is a key indicator of (technological) innovation, scholars have found mixed results regarding its effect on product innovation and firm performance. In this paper, we claim that variations in R&D effectiveness can be explained by changes in a firm’s social system, in particular in its management innovation. It is still unclear how management innovation influences R&D effectiveness in terms of product innovation. In this study, we address this theoretical and empirical gap in the innovation literature. Our theoretical arguments and findings from a large-scale survey among Dutch firms show that R&D has a decreasingly positive relationship with product innovation, particularly for firms with low levels of management innovation. However, in firms with high levels of management innovation, this relationship becomes more J-shaped, especially in small and medium-sized firms. Our findings also appear to indicate that management innovation may be more important for competitive advantage than just R&D. Overall, our insights reveal that management innovation is a key moderator in explaining firms’ effectiveness in transforming R&D into successful product innovation.     

Corporate technology portfolios and R&D performance measures: a study of technology intensive firms

This paper examines the relations between technology portfolio strategies and five commonly used research and development (R&D) performance measures. Patent and financial data of 78 US-based technology companies from 1976 to 1995 were gathered and analysed to investigate how a well-managed technology portfolio can create synergy and affect R&D performance. A technology portfolio can be characterized by its composition and technology concentration. A valuable technology portfolio that consists of patents with higher average citation made and self-citation ratio can have a positive effect on firm value. Our findings suggest that large firms may enjoy advantages for technological innovation because they can exploit synergy effects of their technology portfolios. Technology concentration strategy does not work well because firms focusing on few technology fields can experience diseconomy to patents received since high-quality patents are increasingly difficult to obtain. This paper lays the groundwork for future empirical research on technology portfolio and R&D performance.     

The path of R&D efficiency over time

In this paper we investigate the pattern of R&D efficiency in terms of the number of product innovations achieved by firms over time. Using a panel dataset of Spanish manufacturing firms for the period 1990–2006, we follow the innovative performance of R&D active firms and observe that innovation rates change over firms' R&D histories. To explain these facts we propose a model that explicitly acknowledges the twofold composition of firms' R&D expenditures, comprising spending on both physical capital for R&D projects and payments to researchers. We regard this latter component of R&D as a source for dynamic returns to firms' R&D investments. Consequently firms' innovation outcomes clearly depend on how long they have been investing in R&D and also on whether there have been any interruptions in the temporal sequence of R&D activities. Our results suggest that R&D activities exhibit dynamic returns that are positive but at a decreasing rate, and that interruptions in R&D engagement reduce R&D efficiency.     

Managing technology as a virtual enterprise

The complexity of R&D projects and growing international competition are factors leading to more co‐operation especially among small and medium‐sized firms. But even large integrated firms are often not willing or able to perform the necessary amount of R&D and to cope with the uncertainty associated with radical innovations.
In a virtual company, members form a network, thereby enabling projects to be pursued by combining member's resources. Specific assets of a virtual company are its flexibility and ability to handle variety. Costs of co‐ordination and motivation are lowered if the virtual company succeeds in building trust and commitment. On the other hand, lack of these pose severe problems.
In markets with a strong scientific‐technological basis and rapid rate of change the concept of a virtual organization seems appealing. High R&D costs and risks can be shared, developments and time‐to‐market can be accelerated and the partners can concentrate on their respective core competencies.
In the paper we use an example from the biotechnology industry as a case study and discuss some of the theoretical and practical problems that are encountered in the virtual enterprise.     

Interorganizational collaboration strategies and innovation abandonment: The more the merrier?

Investments in innovation activities involve uncertainty. Abandonments of innovative projects are frequent and can entail great losses. Interorganizational collaboration can help a firm to leverage and complement its own competencies and technologies, contrasting the factors that may cause the abandonment of innovation activities. This article shows that firms collaborating with a wider network of external partners to conduct their innovation activities are less likely to abandon them. The article also analyses how different categories of partners among customers & suppliers, competitors, consultants & private R&D institutions, universities & public R&D institutions are associated with the risk of innovation abandonment. Finally, the results show that international collaborations are more likely associated with innovation abandonment than domestic ones. Strategic and theoretical implications are drawn.     

Achieving contextual ambidexterity in R&D organizations: a management control system approach

Research on how managers control R&D activities has tended to focus on the performance measurement systems used to exploit existing knowledge and capabilities. This focus has been at the expense of how broader forms of management control could be used to enable R&D contextual ambidexterity, the capacity to attain appropriate levels of exploitation and exploration behaviors in the same R&D organizational unit. In this paper, we develop a conceptual framework for understanding how different types of control system, guided by different R&D strategic goals, can be used to induce and balance both exploitation and exploration. We illustrate the elements of this framework and their relations using data from biotechnology firms, and then discuss how the framework provides a basis to empirically examine a number of important control relationships and phenomena.     

Sunk Costs,Extensive R&D Subsidies and Permanent Inducement Effects

Using firm‐level data on Spanish manufacturing firms we estimate a model of the firm's optimal R&D decisions (whether to perform R&D and how much to invest). We quantify the fixed (proper fixed costs plus firms' outside option) and sunk costs of R&D and find the former to be substantially higher than the latter. While sunk costs act as a barrier to entry into R&D for some firms, fixed costs are the binding obstacle for many more firms. Simulation based on the estimated model reveals that one‐shot trigger subsidies cause a substantial increase in both the share of R&D firms and average R&D expenditures. This effect shows persistence over time, but totally fades away after seven years as firms are gradually hit by negative R&D profitability shocks.     

Evolutionary diffusion: internal and external methods used to acquire encompassing,complementary, and incremental technological changes in the lithotripsy industry

This study links theories concerning methods that firms use to acquire technology with theories concerning types of technological change. We place particular emphasis on interorganizational relationships. We predict that firms will often acquire know-how needed for encompassing technological change through equity-based arrangements with other organizations, complementary technological changes through nonequity interorganizational arrangements, and incremental changes through internal R&D. Our theory draws on perspectives that emphasize the need to develop new competencies within a business organization and to protect the value of existing competencies. Our empirical analysis examines methods of technology acquisition that firms have used in the commercialization of medical lithotripters, which are devices that fragment stones in the kidney and gall bladder. The analysis contributes to a better understanding of how technology acquisition methods vary with the manner in which technological change relates to a firm's existing capabilities. The study also helps develop our understanding of the evolutionary processes by which capabilities diffuse through an industry. © 1998 John Wiley & Sons, Ltd.     

Firms' technological resources and the performance effects of diversification: a longitudinal study

While agency theory claims managerial self‐interest creates a diversification discount, strategic theory explains that firms with certain kinds of resources should diversify. Longitudinal data on 227 firms that diversify between 1980 and 1992 reveal that the sample firms invest less in R&D and have greater breadth of technology (based on patent citations) than their industry peers prior to the diversification event. Also, acquiring firms may appear to have lower performance because of accounting conventions and because firms that use internal growth rather than acquisition pursue less extensive diversification. These findings help explain how diversification and financial performance are endogenous. Copyright © 2004 John Wiley & Sons, Ltd.     

Leaders,laggards, and the pursuit of foreign knowledge

This paper analyzes how firms in different technological and market share positions use foreign R&D to augment their technological capabilities. Technology transfer issues and absorptive capacity arguments are examined to analyze the different technological capabilities of leading and lagging firms. In addition, a new strategic rationale (in terms of non‐dominant market share firms) that has not been considered in prior studies analyzing knowledge‐seeking FDI is offered. From a panel dataset which includes information on all foreign R&D investments made by publicly traded Japanese manufacturing firms (from 1974 to 1994), I show that Japanese firms investing in foreign R&D tend to be the non‐dominant market share firms, but also the technologically leading firms across fairly diverse industries. By considering both the technological and market share positions of firms, this study reveals important characteristics that influence when firms use foreign R&D as part of a strategy to augment their technological capabilities. Copyright © 2005 John Wiley & Sons, Ltd.     

Systemic absorptive capacity: creating early-to-market returns through R&D alliances

For most complex emergent technologies, product-market success depends on efficient linkages between changing lead innovators within the R&D process. In this paper, our unit of analysis is a complex high technology product and the system of alliance linkages formed to progress a product through R&D milestones. We present a model and evidence for advancing our understanding of how achieving early-to-market returns depends on systemic absorptive capacity. This systemic absorptive capacity is the cumulative efficiency in the use of absorptive capacity to link changing lead innovators across successive milestones in R&D product development. We advance propositions of how systemic absorptive capacity can explain performance differences between rival product development systems competing for early-to-market returns with similar products through accelerating speed to market, cost and quality advantages. These explanations are contrasted with the conclusions of previous studies that have focused on absorptive capacity of single firms or single alliances in R&D.     

Effect of agglomeration on firms’ research and development investment: a U-shaped relationship

Extant research on how agglomeration affects firms’ R&D investment reveals conflicting views. Some studies suggest that, owing to free riding arising from knowledge spillovers, agglomeration reduces firms’ R&D investment, whereas others find that it creates additional incentives for innovation through intensifying local competition, thereby increasing firms’ R&D investment. Thus, this study attempts to reconcile these two conflicting views. We propose a U-shaped relationship between agglomeration and firms’ R&D investment; that is, when the extent of agglomeration is low, knowledge spillover effects are important, while local competition is negligible. The free riding effects dominate local competition effects. Therefore, firms’ R&D investment decreases with the extent of agglomeration at a decreasing rate. By contrast, when the extent of agglomeration is high, local competition becomes the dominant force. Consequently, firms’ R&D investment increases with the extent of agglomeration at an increasing rate. Using data from 299,256 manufacturing firms in China, we find that firms’ R&D investment first decreases with the extent of agglomeration to reach a minimum, then increases as the extent of agglomeration continues to rise. These results indicate that there is a robust U-shaped relationship between agglomeration and firms’ R&D investment.     

Clustering and the R&D management of high-technology small firms: in theory and practice

Much of the policy assistance for high-technology small firms (HTSFs) over recent years has been directed at encouraging their research and development (R&D) collaboration through local networking and technology transfer. Following a consideration of why HTSFs are formed, and how they perform R&D in order to cope with the competitive environment, this paper explores the value of external collaborative R&D to internal R&D management, inside geographically concentrated incubators, science parks or clusters. It is concluded that, although R&D collaboration with external partners occurs in limited instances, much HTSF R&D is highly confidential, competitive and wholly internalised. This tendency, as far as it relates to R&D management, is significant in that it minimises the likelihood that local management collaboration between co-located firms will improve the performance of R&D projects.     

Types of R&D Collaborations and Process Innovation: The Benefit of Collaborating Upstream in the Knowledge Chain

This paper explains how research and development (R&D) collaborations impact process innovation; given the differences in innovation mechanisms, prior insights from studies of product innovation do not necessarily apply to process innovation. Extending the knowledge‐based view of the firm, this paper classifies four types of R&D collaborations—with universities, suppliers, competitors, and customers—in terms of two knowledge dimensions: position in the knowledge chain and contextual knowledge distance. Position in the knowledge chain is the position of the R&D collaboration partner in the knowledge chain of the industry—the input–output sequence of activities that result in the transformation of raw materials into products that are used by end customers. Based on this knowledge chain, this paper considers universities and suppliers as upstream R&D collaborators, and competitors and customers as downstream R&D collaborators. Contextual knowledge distance is the difference in industry‐related contexts of operation of the R&D collaboration partners and the firm. Based on this, this paper views R&D collaborators that are suppliers and competitors as having low contextual knowledge distance to the firm, and R&D collaborators that are customers and universities as having high contextual knowledge distance to the firm. Using this classification, this paper proposes a ranking of R&D collaborations in terms of their impact on process innovation: R&D collaborations with suppliers have the highest impact, followed by R&D collaborations with universities, then R&D collaborations with competitors, and finally R&D collaborations with customers. These arguments are tested on a four‐year panel of 781 manufacturing firms. The results of the analyses indicate that R&D collaborations with suppliers and universities appear to have a positive impact on process innovation, R&D collaborations with customers appear to have no impact, and R&D collaborations with competitors appear to have a negative impact. As a consequence, the main driver of the impact of R&D collaborations on process innovation appears to be position in the knowledge chain rather than contextual knowledge distance. These novel ideas and findings contribute to the literature on process innovation. Even though process innovation tends to be internal and tacit to the firm, it can still benefit from external R&D collaborations; this paper is the first to analyze this relationship and provide a theoretical framework for understanding why this would be the case. This study also has important managerial implications. It suggests that managers need to be careful in choosing the partners for their firms' R&D collaborations. Engaging in R&D collaborations with universities and suppliers appears to be helpful for process innovation, whereas conducting R&D collaborations with competitors may potentially harm process innovation.     

Who Benefits from Training and R&D,the Firm or the Workers?

The present paper offers a novel study of the effects of intangible assets on wages and productivity. Training, R&D and physical capital are all taken into account, and their joint effects are examined. We use panels of firms in order to control for unobserved fixed effects and the potential endogeneity of training and R&D, using data for France and Sweden. The estimation of productivity and wage equations allows us to show how the benefits of investment in physical capital, training and R&D are shared between the firm and the workers. We found that firms indeed obtain the largest part of the returns to their investments, but their share is relatively lower for intangible assets (R&D and training) than for physical capital.