ORGANIZATION SCtENCE
Vol. 2. No 1, February 1991
Primed in U.S.A.
EXPLORATION AND EXPLOITATION IN
ORGANIZATIONAL LEARNING*
JAMES G. MARCH
Graduate School of Business, Stanford University,
Stanford, Califomia 94305
This paper considers the relation between the exploration of new possibilities and the
exploitation of old certainties in organizational learning. It examines some complications in
allocating resources between the two, particularly those introduced by the distribution of
costs and benefits across time and space, and the effects of ecological interaction. Two
general situations involving the development and use of knowledge in organizations are
modeled. The first is the case of mutual learning between members of an organization and an
organizational code. The .second is the case of learning and competitive advantage in
competition for primacy. The paper develops an argument that adaptive processes, by
refining exploitation more rapidly than exploration, are likely to become effective in the short
run but self-destructive in the long run. The possibility that certain common organizational
practices ameliorate that tendency is assessed.
(ORGANIZATIONAL LEARNING: RISK TAKING; KNOWLEDGE AND COMPETI-
TIVE ADVANTAGE)
A central eoneem of studies of adaptive processes is the relation between the
exploration of new possibilities and the exploitation of old eertainties (Sehumpeter
1934; Holland 1975; Kuran 1988). Exploration includes things captured by terms such
as search, variation, risk taking, experimentation, play, flexibility, discovery, innova-
tion. Exploitation includes such things as refinement, choice, production, efficiency,
selection, implementation, execution. Adaptive systems that engage in exploration to
the exclusion of exploitation are likely to find that they suffer the costs of experimen-
tation without gaining many of its benefits. They exhibit too many undeveloped new
ideas and too little distinctive competence. Conversely, systems that engage in
exploitation to the exclusion of exploration are likely to find themselves trapped in
suboptimat stable equilibria. As a result, maintaining an appropriate balance between
exploration and exploitation is a primary factor in system survival and pros-
perity.
This paper considers some aspects of such problems in the context of organiza-
tions. Both exploration and exploitation are essential for organizations, but they
compete for scarce resources. As a result, organizations make explicit and implicit
choices between the two. The explicit choices are found in calculated decisions about
alternative investments and competitive strategies. The implicit choices are buried in
many features of organizational forms and customs, for example, in organizational
procedures for accumulating and reducing slack, in search rules and practices, in the
ways in which targets are set and changed, and in incentive systems. Understanding
the choices and improving the balance between exploration and exploitation are
complicated by the fact that returns from the two options vary not only with respect
to their expected values, but also with respect to their variability, their timing, and
their distribution within and beyond the organization. Processes for allocating re-
sources between them, therefore, embody intertemporal, interinstitutional, and inter-
personal comparisons, as well as risk preferences. The difficulties involved in making
*Accepted by Lee S. Sproull and Michael D. Cohen; received August 18, 1989.
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91, The Insuiuie of Manasemeni Sciences

72 JAMES G. MARCH
such comparisons lead to complications in specifying appropriate trade-offs, and in
achieving them.
1. The Exploration / Exploitation Trade-Off
Exploration and Exploitation in Theories of Organizational Action
In rational models of choice, the balance between exploration and exploitation is
discussed classically in terms of a theory of rational search (Radner and Rothschild
1975; Hey 1982). It is assumed that there arc several alternative investment opportu-
nities, each characterized by a probability distribution over returns that is initially
unknown. Information about the distribution is accumulated over time, but choices
must be made between gaining new information about alternatives and thus improv-
ing future returns (which suggests allocating part of the investment to searching
among uncertain alternatives), and using the information currently available to
improve present returns (which suggests concentrating the investment on the appar-
ently best alternative). The problem is complicated by the possibilities that new
investment alternatives may appear, that probability distributions may not be stable,
or that they may depend on the choices made by others.
In theories of limited rationality, discussions of the choice between exploration and
exploitation emphasize the role of targets or aspiration levels in regulating allocations
to search (Cyert and March 1963). The usual assumption is that search is inhibited if
the most preferred alternative is above (but in the neighborhood of) the target. On
the other hand, search is stimulated if the most preferred known alternative is be-
low the target. Such ideas are found both in theories of satisficing (Simon 1955) and
in prospect theory (Kahneman and Tversky 1979). They have led to attempts to
specify conditions under which target-oriented search rules are optimal (Day 1967).
Becau,se of the role of targets, discussions of search in the limited rationality tradition
emphasize the significance of the adaptive character of aspirations themselves (Mareh
1988).
In studies of organizational learning, the problem of balancing exploration and
exploitation is exhibited in distinctions made between refinement of an existing
technology and invention of a new one (Winter 1971; Levinthal and March 1981). It is
clear that exploration of new alternatives reduces the speed with which skills at
existing ones are improved. It is also clear that improvements in competence at
existing procedures make experimentation with others less attractive (Levitt and
March 1988). Finding an appropriate balance is made particularly difficult by the fact
that the same issues occur at levels of a nested system at the individual level, the
organizational level, and the social system level.
In evolutionary models of organizational forms and technologies, discussions of ihe
choice between exploration and exploitation arc framed in terms of balancing the
twin processes of variation and selection (Ashby 1960; Hannan and Freeman 1987).
Effective selection among forms, routines, or practices is essential to survival, but so
also is the generation of new alternative practices, particularly in a changing environ-
ment. Because of the links among environmental turbulence, organizational diversity,
and competitive advantage, the evolutionary dominance of an organizational practice
is sensitive to the relation between the rate of exploratory variation refiucted by the
practice and the rate of change in the environment. In this spirit, for example, it has
been argued that the persistence of garbage-can decision processes in organizations is
related to the diversity advantage they provide in a world of relatively unstable
environments, when paired with the selective efficiency of conventional rationality
(Cohen 1986).