Organizational adaptation in dynamic environments: Disentangling the effects of how much to explore versus where to explore

Abstract

Research Summary: There is considerable debate about how firms should adapt to environmental dynamism. Theoretically, some scholars suggest that with increasing dynamism, firms should explore more, whereas others argue that firms should explore less. Empirical evidence remains mixed. We attempt to reconcile these mixed findings by (a) distinguishing between two facets of exploration—exploration propensity versus exploration breadth, and (b) recognizing that firms may make these two decisions using different decision-making processes. Using a computational model we show that with increasing environmental dynamism, for high performance, (a) firms' exploration propensity may increase, decrease, or stay the same depending on their decision-making process, but (b) firms' exploration breadth always increases. Our results help explain the mixed findings in this domain and have implications for future empirical work. Managerial Summary: Responding to dynamic environments is challenging for managers. There is limited support for the intuition that firms should explore more in more dynamic environments. We recognize that exploration decisions in firms are temporally and hierarchically separated—senior managers first decide how much to explore and middle managers then decide which projects to fund. In this research, we use a computational model to unpack how these two facets of exploration may change in dynamic environments for firms to maintain high performance. We find that as dynamism increases, how much firms explore depends on how sensitive their decision-making process is to the perceived attractiveness of the different options, but when they explore, they should always choose options further away from their status-quo.