Towards innovation capability in retail services: managing the tensions of exploration and exploitation

ABSTRACT

Retailing is said to be at a critical period where much higher demands are being placed on retail actors to develop their capability for explorative innovation for lasting competitive advantage. Developing innovation capabilities is a challenging pursuit, however, and is a topic that is under-researched in the retail context. This paper thus investigates tensions that emerge when retail firms pursue explorative innovation in an organisational context characterised by exploitation-oriented activity, and how these are managed through various organisational mechanisms. The findings from our multiple case study reveal how developing innovation capability in incumbent retail firms gives rise to complex tensions related to strategic intent, organisational culture and structure. These are perceived as organisational paradoxes and managed as such due to the need to balance these opposing poles, emphasising the need for balance instead of making an explicit choice. Retail incumbents establish differentiating mechanisms for innovation, complemented by various integrative mechanisms. The study shows that in order to enable explorative, radical innovation in retail firms, innovation work needs to be differentiated from that of ongoing operations, provided that integration is facilitated at operational and strategic levels. By focusing on incumbent retail firms using exploration-exploitation paradox as a theoretical lens, the study contributes with new perspectives on building innovation capability in this context. The paper gives evidence to how developing innovation capabilities lies in the management of these complex tensions as paradoxes using the combination of differentiation and integration mechanisms.

KEYWORDS:

• Retail
• retail innovation
• innovation management
• paradox
• ambidexterity

Introduction

Innovation research has mostly focused on high technology and manufacturing sectors despite service sectors accounting for the majority of economic activity and value creation in most advanced economies (Tidd and Bessant 2018). Although research on service innovation has increased dramatically in the past three decades, the concept remains relatively unexplored (Carlborg, Kindström, and Kowalkowski 2014). Furthermore, because of the highly heterogenous nature of services, there is a need to comprehend the diversity of innovation trajectories across service sectors and service firms (B. S. Tether and Stan Metcalfe 2004. The focus of this paper is innovation in retailing services, a sector that historically has been given insufficient attention in innovation research due to the external perception that retail firms are less innovative when using traditional markers of innovation intensity (e.g. Schaffers et al. 2011; Sundström and Reynolds 2014).

Operating in an environment of low appropriability, most retailers continuously address customer needs through incremental innovations with relatively short cycles, working incrementally before scaling up innovative activities which become substantial in their effects over time (Sundström and Reynolds 2014). Retail success often comes from ‘capturing the moment’ rather than being a product of deliberate design and detailed planning (Reynolds et al. 2007). However, retail and consumer services is at a ‘tipping point’ in today’s era of globalization, technology, and competition as it experiences revolutionary changes that are impacting how buyers and sellers engage in the marketplace (Paul and Rosenbaum 2020). Digitalisation’s erosion of institutional retailing as the primary interface to the customer is shifting the traditional retail function to new types of competitive actors (Reinartz, Wiegand, and Imschloss 2019). Higher demands are clearly being placed on retail actors and there is an imperative to implement strategies that would allow them to adapt, innovate, and transform to have sustained competitive advantage (Grewal et al. 2021a; Kumar, Anand, and Song 2017). With retail transformation being accelerated by various external forces, traditional retailers especially need to develop capabilities for innovation ‘beyond the steady state’ (Bessant et al. 2005). While there is a growing interest for retail innovation in the research landscape (Pantano, Pedeliento, and Christodoulides 2022), how innovation capabilities can be developed in this context is vastly unexplored.

Having the capability to create gradually improved exploitative innovations while also exploring new opportunities to create breakthrough innovations has been shown to be necessary for long-term success of firms (Lin et al. 2013, Gibson and Birkinshaw 2004; Zi-Lin and Wong 2004). However, pursuing both exploitation and exploration in an organisation cause tensions due to their different processes that compete for scarce organisational resources (March 1991). Finding a balance between the two is difficult, and firms that can manage these tensions, exploiting current competencies and exploring new domains with equal dexterity, are said to be ‘ambidextrous’ (Lubatkin et al. 2006).

The aim of this study is to investigate the tensions that emerge when retailers pursue exploration in an organisational context inherently characterised by exploitation-oriented activity, and how these are managed through various organisational mechanisms. Using the exploration-exploitation paradox as a theoretical lens, the study contributes new perspectives on building innovation capabilityin retail services, a dynamic and hypercompetitive sector. The paper utilises a multiple case study approach with three traditional retailers in Sweden – Grocery Retailer (GR), Convenience Retailer (CR), and Home Furnishings Retail (HR) – that established innovative initiatives that are new to their organisation (exploration) and investigate how these are being managed alongside existing retail operations (exploitation).

Literature review

Innovation capability in retail services

Innovative outputs in retail organisations have been well-investigated, including innovative business models (Bilińska-Reformat et al. 2019; Jocevski 2020; Mostaghel, PejvakOghazi, and Sohrabpour 2022; Sorescu et al. 2011) and retail formats (Botschen and Wegerer 2017; Gauri et al. 2021), product co-innovation with customers and suppliers (Albors-Garrigós 2020; Albors-Garrigós and de Miguel Molina 2020), as well as consumers’ perception on retail innovativeness (Pilawa et al. 2022; Lin, 2016). Research on technological innovations in retail and their use in the various functional areas of the retail business has also received significant attention (Grewal et al. 2021b; Pantano and Laria 2012; Pantano and Vannucci 2019; Pantano and Viassone 2014; Shankar et al. 2021). However, although innovation outputs in retail have been discussed in academic literature, innovation capabilities and how these can be developed in retail firms have received less attention. Due to the highly competitive and uncertain environment of the retail sector, retailers’ capability to innovate plays a key role for achieving business profitability (Pantano 2014) and warrants a deeper investigation.

Research on the retail sector reveals how retailers‘ innovate differently’ compared to the dominant, technologist view on innovation (see e.g. Hristov 2007; Hristov and Reynolds 2015; Reynolds and Cuthbertson 2014; Reynolds and Hristov 2009; Reynolds et al. 2007; Schaffers et al. 2011; Sundström and Reynolds 2014). These authors have described how retailers compete in an environment of low appropriability where innovations are often highly visible and easy to get imitated by competitors. In most cases, innovation is part of the daily work and business environment rather than a dedicated activity in retail organisations. The innovation process is thus often less linear or structured and more ad-hoc, with innovations being developed incrementally and through experimentation rather than structured analysis, exhibiting a reverse development and investment cycle where financial and organisational costs are lower at the front end of the innovation process than the end when the retail innovation is potentially rolled out across a large store portfolio.

While these characteristics may be applicable to services innovation in general (see e.g. B. Tether 2013), Hristov (2007, p. 15) also describes innovation in retailing to be ‘highly complex in process and “hybrid” in nature due to the varied make-up of the retail output as a mixture of physical goods, distribution and consumer services. ’Tether and Metcalfe (2004) discuss how large retailers play an ‘orchestrating role’ in a much broader innovation complex extending beyond retailing as a distinct activity, as they have significant influence on actors and organisations across various economic spheres. Retailers are in the position of acting as ‘innovation hubs’ in increasingly retailer-centred supply chains (Hristov 2007). Given the key role that retail services play in innovation systems, there is an opportunity to investigate innovation capabilities of retailers and how firms benefit from elevating innovation as a strategic issue in retail management (Olsson and Johansson 2016; Pantano, Pedeliento, and Christodoulides 2022). The next section presents how this can be approached using the lens of innovation tensions and paradoxes inside an organisation.

Exploitation-exploration paradox: managing innovation tensions in organisations

A paradox denotes contradictory yet interrelated elements (dualities or tensions) that exist simultaneously and persist over time (Smith and Lewis 2011). Exploration and exploitation are opposing but inseparable forces, leading to organisational tensions as they compete for scarce resources (March 1991). The exploitative side of the business is focused on exploiting existing capabilities for profit while the explorative business is focused on exploring new opportunities for growth (O’Reilly III and Tushman 2004). They form a paradoxical relationship (Andriopoulos and Lewis 2010; Smith and Lewis 2011) that places substantially different requirements on organisations in terms of organisational architectures, processes, and capabilities (Benner and Tushman 2003). Dougherty (2006) refers to tensions of innovation work in organisations as ‘paradoxical practices,’ reflecting the fact that these complex tensions (e.g. freedom vs responsibility, new vs old) must be balanced in some way rather than split up.Smith and Tushman (2005) suggest that a paradox is created when tensions in a situation (explore vs exploit) are juxtaposed through actor’s cognition. They also propose that paradoxical cognition – paradoxical frames and cognitive processes of differentiating and integrating – can enable balanced strategic decisions.

Research has shown that various differentiating and integrative approaches can address the tensions arising from exploration and exploitation in organisations (Andriopoulos and Lewis, 2009; Koryak et al. 2018; Papachroni, Heracleous, and Paroutis 2016). Differentiation focuses on either exploitative or exploratory qualities of the paradox and cultivating distinct aspects of each (Andriopolous and Lewis, 2009). Structural differentiation or the subdivision of organisational tasks into different units has been suggested in research because individuals who have operational activities cannot be expected to perform both simultaneously due to contradictory frames that lead to operational inconsistencies and implementation conflicts (Benner and Tushman 2003; Gilbert, 2004). These contrasting units have different strategies, structures, processes and cultures (O’Reilly III and Tushman 2004).

Integration, on the other hand, emphasises synergies and linkages (Smith and Tushman 2005). O’Reilly III and Tushman, (2004) emphasise that strategic integration across differentiated units is achieved through coordination at the senior management level, common senior-team rewards, and widely shared corporate culture. According to O’Reilly III and Tushman (2011), an articulation of a common vision and values can provide for a common identity and culture across the organisation. Lubatkin et al. (2006) also reports on the pivotal role of top management team behavioural integration in facilitating the disparate demands of exploration and exploitation activities in the organisation. Jansen et al. (2005; Jansen et al. 2009) discuss other organisational integration mechanisms including social relations, and formal, cross-functional interfaces through e.g. liaison personnel, task forces, and teams that enable knowledge exchange across differentiated units.

The use of a paradox approach explores how organisations could become more accepting of inherent contradictions and attend to them simultaneously since long-term sustainability requires continuous efforts to meet multiple, divergent demands (Smith and Lewis 2011). Managing the paradoxical relationship of exploration and exploitation requires differentiation and integration through various complementary organisational tactics (Andriopolous and Lewis, 2009; Koryak et al. 2018).

Methodology

Research design

Starting with the literature review and the understanding of the increasing importance of developing innovation capability in retail firms, the present work aims to provide an initial yet in-depth exploration of retail innovation tensions and their management in the organisations. This exploratory study uses a multiple case study research methodology. Case study research methodology is appropriate for investigating contextual questions, when there is a desire to understand social phenomena, including organisational and managerial processes (Yin 2003). Moreover, evidence from multiple cases is often considered more compelling, leading to a more robust study overall (Herriott and Firestone 1983). Using a qualitative method allows us to gather rich data on the different organisational structures and processes and the relations with the innovative outcomes. In innovation management research, qualitative case studies are often considered to be well suited to address the complexities existing in this field due to their ability to offer rich, contextualised explanations of actors’ actions and interactions over time (Elsahn et al. 2020).

Case selection

The principle of purposeful sampling (Patton 2002) was used in case selection, narrowing down on retail firms in Sweden that have a significant market share in their categories. Rather than generalizing the results to a larger population, cases were selected on the basis of their relevance to the topic being investigated, which is innovation capability in retail. Retailing in Sweden has been predominantly dominated by domestic brands and a small number of large chains particularly in certain sectors like food retail and furniture retail. The high concentration of the food retailer market in Sweden for instance implies that strategies of one or two retailers have a great impact on the market as a whole (Anselmsson and Johansson 2009).

We selected firms that have well-established histories in physical (brick-and-mortar) retail, but are in a transformation journey towards omnichannel retailing, driven by increasing digitalization of the retail landscape. Three retail chains – a grocery retail chain (GR), a convenience retail chain (CR), and a home furnishings retail chain (HR) – were selected because these companies represent successful, well-known retailers from three retail sectors (grocery, convenience, furniture) and have differences in company size and age as well as product range, ownership structures, market shares and market reach. For confidentiality reasons, the retail firms are anonymised in the paper and detailed background information cannot be provided except for brief descriptions (see also Table 1). Grocery retail chain (GR) operates on a business model of independent retailers working together, where economies of scale are combined with the entrepreneurship of the local retailers. Convenience retail chain (CR) is a convenience retailer specializing in franchise-operation with convenience stores and kiosk formats. Home furnishings retail chain (HR) is a big-box furniture retailer with complex multinational ownership and governance structure. While all three retailers have presence in different markets, the study is limited to their business units in Sweden.

Table 1. Case subjects.

Case study	1: Grocery Retailer (GR)	2: Convenience Retailer (CR)	3: Home Furnishings Retailer (HR)
Number of employees and stores (Sweden)	8,600 employees 1,267 stores	2,400 employees 394 stores	9,400 employees 20 stores
Initiative in focus	New workgroup: Private Label Innovation team	New store formats: Unmanned Store and Sustainability Store	New retail expansion programme: city centre penetration with new, small store formats
Data sources	One-on-one semi-structured interviews: 15 interviews (5 respondents) Participant observation: 9 workshops, 3 meetings, and 1 site visit	One-on-one semi-structured interviews: 31 interviews (20 respondents) Participant observation: 9 meetings and 5 site visits	One-on-one semi-structured interviews: 19 interviews (12 respondents) Participant observation: 4 meetings and 3 site visits

Given the purpose of this study, established, incumbent retail firms were found to bea suitable focus as these are type of organizations that especially need to challenge their current paradigms to avoid ‘incumbent inertia’ (Lieberman and Montgomery, 1988) in the face of environmental changes in the retail landscape. These retail chains were selected because of their current strategic direction of attempting to engage in explorative activities that are completely new to their organisation. The study followed innovative initiatives in each organisation and how these were being managed alongside existing retail operational activities throughout the study period of 19 months, from November 2019 until June 2021.

Data collection

Two main types of data sources were used, and respondents involved were managers directly linked to the innovation initiatives as well as internal stakeholders connected to these initiatives (see Table 1). Semi-structured interviews were conducted and served as the main source of data for this paper. An interview session would last from 60 to 90 minutes. Interviews were recorded and transcribed verbatim, with the approval of the respondents. The semi-structured interviews were based on an interview structure that addressed key topics of the research:

The second type of data collection method was through participant observation, in which direct observation of practices and interactions were conducted through natural conversations and unstructured interviews during physical or online meetings, workshops, as well as site visits to the company office. To capture the data collected during participant observations, field notes were taken which include our observations and reflections, as well as well as records on the details and content of the meeting or workshops, e.g. meeting agenda, workshop material, etc. In addition to the field notes, internal and public documents were also used as supplementary information to help build the case studies and for triangulation purposes. These include financial statements, annual reports, administrative data, press releases, and internal reports and documents. The field notes and archival material were reviewed, reduced, and then compiled into research memos that organise and summarise the supplementary information.

Data analysis

Relevant aspects were extracted from the various data sources and structured into comprehensive case studies. The data analysis process in this case study involved a process of ‘systematic combining’ or an abductive approach to case study research (Dubois and Gadde 2002), following thematic analysis (Braun and Clarke 2006) as a qualitative analytic method. This entailed an iterative process of looking at what the empirical data is saying, creating themes that are seen to best represent the data, looking at the connection and relationships between the themes, and eventually deriving patterns based on the available material, which were then used to illustrate what lies behind the firms’ pursuit of innovation in retail.

First, an open coding process was performed for each interview transcript, using software (ATLAS.ti) during initial coding to improve traceability and transparency, resulting in a set of first-order codes which were ranked in frequency and relevance. This was followed by sorting and synthesizing of the data, wherein challenges and enablers of innovation inside each retail case emerged and were further developed as initial categories. Building upon these, a more theoretically-driven stage followed, which provide less of a rich description of the data and more of a focused analysis on some aspects of the data (Braun and Clarke 2006). A more focused literature review was performed, looking into the topics of organisational ambidexterity and paradox perspective. These were used to analyse whether emerging themes in the data suggested concepts that help explain the phenomena being investigated. Categories were then reduced to a manageable size, developed and related based on similarities and differences found between them. Throughout this process, the research memos from the field notes and archival material were used to fill in additional information that can help build the case study.

Within-case analysis was followed by a cross-case search for differences and similarities of patterns across the cases (Eisenhardt, 1989). To promote data credibility and enhance the overall study quality, triangulation of data sources, data types and researchers was used as a primary strategy to view the phenomena being studied from multiple perspectives.

Results: case findings

This section presents the case summaries followed by a cross-case analysis in the next section where the findings from the cases are connected into an overarching empirical generalisation that is discussed in relation to extant literature.

Case study 1: Grocery Retailer(GR) and its private label innovation and concept development team

Grocery Retailer established a new private label ‘innovation and concept development team’ in 2019 to strengthen the private label brands through innovative product concepts that are aligned with the retailer’s overall strategic areas of sustainability and health. This study followed the activities surrounding the team’s establishment as the team was built and their innovation process and routines were set up, e.g. forming their purpose, strategy, and innovation portfolio. Figure 1 shows the data structures for identified tensions in the organisation as this innovation subunit was established, and how these are addressed. The case illustrates how structural separation of the innovation team and codification and clarification of innovation work were necessary in providing the space and resources for explorative work to thrive in a business unit (C&P) characterised by cost-efficiency, although higher level (i.e. senior management) integration is important in securing support from internal stakeholders.

Figure 1. Data structures for innovation tensions and their management in GR.

Case study 2: Convenience Retailer (CR) and its experimental store formats

Convenience Retailer, a retail chain with kiosk and convenience store formats, established two new stores that were completely different from their existing stores. One is an ‘Unmanned Store,’ similar to the concept of Amazon Go, a cashier-less store where customers can purchase products without using a cashier or self-checkout station. The second is a ‘Sustainable Store’ which offers products and services geared towards sustainability and the circular economy. This study followed the project management and establishment of these stores which overlapped with the onset of the COVID-19 pandemic. Figure 2 shows the data structures for identified tensions in this establishment process, and how these are addressed. The case illustrate show these huge, innovation projects not only necessitated the use of clearer, established innovation process, but also initiated a broader shift in the organisation towards an increase in formalised processes and control systems. To encourage greater transparency and accountability, newly codified processes and guidelines were implemented by management, and its roll-out was facilitated by an organisational climate of openness and trust.

Figure 2. Data structures for innovation tensions and their management in CR.

Case study 3: home furnishings Retailer (HR) and itsretail expansion programme

Home Furnishings Retailer is a retail chain that is initiating massive organisational changes in order to keep up with evolving customer needs and to maintain competitive advantage in the dynamic market of home furnishings retail. The company is said to be embarking on a path into ‘a new era’ of their retail business – a multi-year, organisation-wide transformation journey which includes restructuring of the entire organisation but also diversifying their store portfolio that has long been relatively unchanged. They are veering away from their traditional expansion strategy of building bigger stores in city outskirts to increasing presence and accessibility in city centres with new, smaller store formats, in addition to also strengthening their existing online platform. An organisation-wide programme, hereby called HR-x, was established to facilitate the new expansion approach globally which entails a new, standardised process of planning new store expansions in chosen cities around the world from 2019 to 2021.This study followed the planning process in the Sweden market (HR-x:Sweden) which also overlapped with the onset of the COVID-19 pandemic. Figure 3 shows the data structures for identified tensions in this planning process, and how these are addressed. The case illustrates how the integrative role of leadership and corporate culture – catalysed by the urgency of crisis management in the pandemic – facilitated the company’s transformation journey that included emerging tensions from a growing pressure for profitability and stronger demand for accountability through formal controls.

Figure 3. Data structures for innovation tensions and their management in HR.

Discussion: managing innovation tensions in retail services

Despite a growing acknowledgment of the importance of innovation as a source of competitive advantage, it is still challenging for incumbent retailers to enable exploration along with exploitation in the organisation due to tensions that emerge from this pursuit. Building from extant literature and the qualitative case study findings, we present the following proposition:

Proposition 1:

Developing innovation capability in incumbent retail firms gives rise to challenging, complex tensions that are managed as paradoxes, emphasising the need for balance instead of making an explicit choice.

Table 2 presents the tensions in retail innovation related to strategic intent, culture, and structure or control, and how these are addressed through a mixture of differentiation and integration mechanisms. The underlying tensions of managing innovation in retail organisations can be distilled into profit versus impact, predictability versus risk-taking, and adhoc versus formal. These complex tensions are perceived and managed as paradoxes because respondents tend to describe the need to balance these enduring, opposing poles instead of making a choice between them, reflecting on the complementary nature of the opposing sides, i.e. interwoven and synergistic as opposed to simply being either/or dilemmas (Smith and Lewis 2011; Andriopolous and Lewis, 2009).

Table 2. Tensions in retail innovation and mechanisms for their management.

Tensions in retail innovation
Profit – Impact (strategic intent)	Predictability – Risk-taking (culture)		Ad-hoc – Formal (structure)
Mechanisms for managing innovation tensions
Differentiation mechanisms		Integration mechanisms
Structural separation of innovation e.g., innovation team, innovation projects/pilot studies, innovation hub, living lab Systematisation of innovation e.g., codified processes, tools, and tasks; innovation performance measurement		Senior team integration e.g., ambidextrous managers, paradoxical vision Coordination and collaboration (formal and informal) e.g., cross-functional interfaces; internal networks Shared values e.g., trust, communication, entrepreneurialism

The first tension of profit versus impact relates to strategic intent. While short-term profit is essentially what keeps the retail business running, the impact (besides tangible output) of strategic innovations and its contribution to long-term growth was acknowledged to be necessary, reflecting a paradoxical link. In particular,the impact referred to here is non-financial, in terms of increasing brand loyalty and customer value through sustainable retail practices. In all cases, sustainability was considered as a major driver of innovation; however, it was still difficult to reconcile a sustainable vision with short-term financial objectives in retail. In a way, this relates to the persistent issue of how to reform profit-maximising businesses operating in our current model of capitalism, which has led to concepts such as the ‘double bottom line’ or ‘shared value’ (see e.g. Porter and Kramer 2011; Wilburn and Wilburn 2014). It is an overarching paradox because all the value creation and capture activities in retail are primarily aligned to the profit imperative, but if innovation (for instance driven by sustainability) is to be elevated as a strategic issue with a formal innovation mandate enacted by certain people, teams, or projects, then tensions that are manifested in relation to the contrasting agendas need to be ultimately addressed on a higher level, i.e. senior leadership.

The second tension of predictability versus risk-taking relates to organisational culture or climate, particularly behaviours and perceptions towards uncertainty and change. Risk taking, which broadly refers to uncertainty about the potential outcomes of one’s decision (Sitkin and Pablo 1992) is a facet of an organisation’s internal climate that has been shown to be connected to innovation performance (García-Granero, Óscarllopis, and Alegre 2015). There has been evidence that organisational climatefor risk-taking is perceived to be weak in traditional retailers (Olsson et al. 2019). Differences were observed between the cases, with the smallest organisation (CR) appearing to be more open to risk-taking and experimentation than the two other retailers (GR and FR). Nonetheless, a culture of predictability and efficiency in these traditional retail organisations results from typical practices of streamlining business processes, which characterise most organisations, not least in retail. While there is evidence that retailers have certain elements of an organisational climate that enable innovation and creativity (Olsson et al. 2019), this seems to relate more towards short-term perspectives with less unknown outcomes. A paradox exists because respondents acknowledge the role of risk-taking in exploring new opportunities for growth although operating in a context wherein uncertainty is minimised at all costs as retailer aim to identify and address inefficiencies in what and how retail offerings are being purchased.

The final tension, which may be most unique to retail, relates to structure and control—ad hoc versus formal. Given retail’s ability to obtain immediate feedback due to their proximity to the end customer in the value chain, they are more capable to be adaptable and flexible when innovating on an incremental yet ad hoc basis. Tensions emerge when retailers begin to actively pursue more ambitious and explorative activities towards radical innovation because these involve greater resources and require collaborative action, which in these retail cases led to a shift towards clearer, and often formal, lines of accountability. Formalisation refers to the degree to which rules, procedures, instructions, and communications are formalised or written down (Khandwalla 1977). Previous research in services innovation suggested the need for a more detailed understanding on the effectiveness of formalisation of innovation across different service contexts (B. Tether 2013). The study reveals that in retail, formalisation is a means of enabling innovation because it leads to transparency, accountability, and clarity with regards to innovation activities in an organisational context that is otherwise characterised by loose, flexible, ad hoc activity. Retailers, in their aim to increase explorative, innovative activity, are challenging existing ways of working and adopting greater structure and active control of the innovation process to facilitate clearer, strategic focus of their innovation efforts.

Unlike other industries with firms that struggle the other way (i.e. moving from highly controlled to flexible and adaptable), this is where retailers’ inherent way of ‘innovating differently’proves to be a critical point. Flexibility and adaptability are essential for creative problem solving and innovation, but these do not come at the expense of monitoring and feedback mechanisms that capture lessons from both successful and unsuccessful innovation efforts. ‘Lower-level’ learning in organisations occurs through repetition and routine, but ‘higher-level’ organisational learning is usually intertwined with structural change, e.g. differentiated structures, rules, etc. that deal with a lack of control (Fiol and Lyles 1985). Retailers therefore face the need to navigate between formalisation and control of innovation work and the inherent nature of adaptability and ad hoc activity of retail operations, showing that ‘disciplined experimentation is a balancing act’ (Pisano 2019). Studies have suggested an ‘enabling’ rather than ‘coercive’ type of formalisation and bureaucracy, for instance (Adler and Borys 1996).

Managing these underlying tensions as paradoxical practices, i.e. balanced in some way rather than split up (Dougherty 2006) requires a combination of differentiation and integration mechanisms (see Table 2). Differentiation through structural factors, particularly structural separation of innovation work (through the creation of e.g. innovation functions and roles, innovation projects, innovation hub, living labs, etc.) and systematisation of the innovation process (e.g. through codification of processes, tools and tasks) have become increasingly relevant in retail. Our findings reveal that retailers are actively organising for innovation through differentiated mechanisms that safeguard the space and resources to carry out explorative activity that is more associated with radical (as opposed to incremental) innovation, embracing a greater structure and control of innovation work. This signals a change from previous research describing the lack of innovation-related structures and processes in retail organisations. Hence, we present a second proposition:

Proposition 2:

In order to enable explorative, radical innovation in incumbent retail firms, innovation work needs to be differentiated from that of ongoing operations, provided that integration is facilitated at operational and strategic levels.

Our study in retail organisations also confirms previous research (e.g. Andriopolous and Lewis, 2009) that differentiated mechanisms of structural nature are complemented by integrative mechanisms of mostly social and cultural nature in order to balance the tensions. Integration of the differentiated structures, activities and strategic agenda is ultimately dependent on integration at senior team level (Jansen et al. 2009) as they are responsible for decision-making regarding resource allocation, portfolio management, and putting in place solutions that allow for the simultaneous pursuit of exploration and exploitation. Balanced strategic decision making is rooted in paradoxical cognition of senior team management (Smith and Tushman 2005) and therefore, senior managers who are capable of ambidextrous thinking and paradoxical leadership (Lewis, Andriopoulos, and Smith 2014) are key in managing organisational tensions resulting from exploration and exploitation.

Beyond integration at senior management level, the study also confirms the importance of social and cultural factors that facilitate integration including cohesive or shared cultural values (O’Reilly III and Tushman 2011), and coordination and collaboration mechanisms that may be formal (e.g. cross-functional interfaces) or informal (e.g. internal networks, social relations) (Jansen et al. 2009; Jansen, Van Den Bosch, and Volberda 2006). Shared values of trust, openness and communication, as well as an entrepreneurial mindset stand out especially in our interviews, which respondents relate to the quality of social ties and relations among employees. Our resultson the importance of these socio-cultural factors are in alignment with Hsing-Er and McDonough’s (2011) findings that organisational culture can be a mechanism that can instil values like trust and openness to challenge to help ‘turn inconsistencies into consistencies,’ and making the work of managing paradoxes not only senior management’s concern but a shared responsibility across various organisational levels. The study reveals that in the case of incumbent retail firms that are actively aiming for increased innovativeness, structural separation and systematisation of innovation shows great potential in building and developing innovation capability because these are complemented by an organisational climate that is supportive of innovation. When these values are strongly shared across the retail organization, climate or culture serves as informal social control that complement the formal structures and measurement systems meant to introduce discipline into the creative work of innovation.

Concluding remarks

Drawing upon existing literature and the results of the multiple case study, the paper gives evidence to how developing innovation capabilities lies in the management of these complex tensions as paradoxes. This study’s theoretical contribution to innovation management and retail services research is its presentation of an in-depth, qualitative account of the tensions that emerge when traditional retail firms attempt to pursue explorative innovation, and how these are managed as paradoxes using the combination of differentiation and integration mechanisms. The study reveals howretail incumbents have started to establish differentiating mechanisms for innovation. When complemented by the appropriate formal and non-formal coordination mechanisms and empowered by ambidextrous senior management and shared cultural values, innovation initiatives are enabled to thrive while facilitating their integration into existing retail operations. Thus, this research demonstrates a notable shift from past studies that described innovation not being institutionalised in retail firms, and it has challenged the existing notion that retailers have only been engaging in incremental and continuous change. Although this might have been true in the past, the case study provides a contemporary understanding of how large, established retail firms with long traditions in brick-and-mortar retail are starting to face the innovation imperative head-on by actively implementing organisational mechanisms that aim to enable explorative, radical innovation.

The managerial implications of this paper reside in informing retail leaders on how innovation capabilities can be strengthened by implementing organisational changes that encourage balance between exploitation and exploration activities. The study captures an on-going and highly relevant issue, as retailers are increasingly acknowledging the importance of innovation management given that innovation itself is no longer distant from the primary concerns of the organisation as it becomes less of an optional endeavour and more of a hygiene factor in the current era of hyper-competitive retailing. While it could be said that retail services have always been evolving and adapting to consumer needs, it is also evident that the retailers in the study are in the midst of organisation-wide transformation as they re-examine their existing ways of working when it comes to the innovation process. Drawing on the study findings, retail executives and managers can reflect on the organisational aspects where tensions emerge (e.g. strategic intent, culture, structure) and assess how their organisation currently looks upon innovation and its management. In essence, the study encourages retail leaders to consider how innovation can be enabled in a more sustained and systematic way in their organisations without necessarily compromising operational strengths, which requires a delicate balancing act of safeguarding the space and resources for exploration and innovation to thrive while facilitating integration of innovative output to the rest of the organisation.

While this study offers contributions to research and practice, there are certain limitations that should be considered, given its exploratory nature. This paper uses a qualitative, multiple case study of three established retail firms (grocery retail, convenience retail, and home furnishings retail) in a mature economy; as such, generalisability limitations exist, and caution should be taken in applying the findings to other types of organisations and contexts.The case studies also took place in one country (Sweden) despite all organisations having a broader regional presence. For future research, qualitative and quantitative studies could be carried out to extend knowledge of innovation capability in other types of retail actors and settings to observe the differences in underlying tensions in innovation in these specific contexts, and the organisational mechanisms used to best manage them. Finally, this exploratory investigation on exploration-exploitation tensions demonstrates the potential for further investigations on the topic of organisational ambidexterity in retail organisations, a topic requiring multiple approaches and levels of analysis.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by Vinnova, Sweden’s government agency for innovation.

Notes on contributors

Karla Marie B. Paredes

Karla Marie B. Paredes has a PhD in Innovation Engineering, Faculty of Engineering at Lund University. Her research is focused on strategic innovation management in retailing and how incumbent retail organisations can develop innovation capability through organisational structures, systems, and climate.

Malin Olander Roese

Malin Olander Roese is a researcher and senior lecturer in Innovation Engineering, Faculty of Engineering at Lund University. Her research brings together firms’ strategy with customer orientation and innovation capabilities, focusing on strategic change in various industries.