Exploration and exploitation: internal variety and environmental dynamism

Abstract

This article proposes that specific features of environmental dynamism and the notion of internal variety should be taken into consideration in response to caveats in prior research on choice or balance between exploration and exploitation and its implications for organizational performance. The study extends March's exploration—exploitation model by (1) conceptualizing and varying two dimensions — amplitude and frequency — of environmental dynamism and (2) articulating the notion of internal variety in an organization. Results from the simulation models show how a combination of organizational practices shapes internal variety, which in turn influences an organization's level of knowledge over time amid a changing environment.The study's findings suggest that the level of internal variety, along with the mechanisms by which each practice influences internal variety, affect adaptations of organizational knowledge. Managing internal variety through a combination of strong complementary practices, rather than anchoring on moderate levels of those practices, can achieve the balance between exploration and exploitation.