Exploration and exploitation within and across intra-organisational domains and their reactions to firm-level failure

Abstract

This study examines the evolution of exploration and exploitation within intra-organisational domains, specifically, the technological and market knowledge domains in high-technology firms. It simultaneously tests the interaction between exploration and exploitation across domains. Furthermore, this paper examines the impact of firm-level failure experience on exploration and exploitation within each domain. Based on longitudinal analysis of cross-national panel data on drug development initiatives obtained from 191 biopharmaceutical firms from 1990 to 2008, we find a negative relationship between firms’ innovation experience and exploration orientation within domains. Technological exploration and market exploration are competing with each other. We further find that failure experience stimulates technological search but not market search. This work contributes to the exploration and exploitation literature by extending domain separation to the internal context of an organisation theoretically and empirically. It further contributes by using performance feedback theory to explore the impact of failure on exploration and exploitation.

Keywords:

• exploration exploitation
• failure experience
• domain separation
• technological domain
• market domain
• research and development
• pharmaceuticals
• clinical trials

Acknowledgements

We gratefully acknowledge the feedback and insights provided by Thomas Allen, Ciaran Heavey, Brian McGrath, Dorota Piaskowska, Lourdes Sosa, participants at the Innovation General Track of EURAM 2011 annual conference and our anonymous reviewers. We especially acknowledge the financial support from the Irish Government's Programme for Research in Third Level Institutions (PRTLI 5) project grant entitled ‘Innovation Policy Simulation for the Smart Economy (IPSE)’. Peiran Su extends his thanks to UCD Ad Astra Research Scholarship fund for supporting his doctoral research.

Notes

Therapy codes are grouped under Anatomical Therapeutic Chemical (ATC) Drug Classification System (WHO 2003).

There are three statuses of a drug development initiative, namely, ceased, active and fully launched. All the ceased drug development initiatives are considered as failures in this study because the ceased dataset contains those drugs whose development has been completely discontinued by the company concerned and those withdrawn from the market after launch, according to Pharmaprojects. A drug development initiative in pharmaceutical companies begins with the discovery of a molecule based on a combination of new and existing knowledge. It is followed by six stages: pre-clinical trial, Phase 0, Phase I, Phase II, Phase III and Phase IV clinical trials (Food and Drug Administration (FDA) 2006). The results of these trials are submitted to regulatory authorities before the drug can be commercialised and reach the market (Pisano 1994). Failure can occur at any of the six stages before the final approval by an authority.