Managing the Innovators for Exploration and Exploitation

Abstract

I analyze how to manage employees to achieve a balance between exploration and exploitation in large established firms. Previous studies suggest that, although firms need to undertake both exploration and exploitation simultaneously, this is difficult either because of the scarcity of resources or because of the incompatibility of these two processes. Proposed solutions have been ambidexterity, punctuated equilibrium or specialization. I suggest another method: managing employees. Specifically, I argue that using the so-called “innovative” system of human resource management practices, consisting of team-based incentive system, team-based job design, and job rotation, enables the firm to undertake exploration and exploitation simultaneously because it provides the psychological safety for people to explore new knowledge to make novel products and develops employees to have the perspective-taking capability that enables the integration of knowledge cross-functionally for efficiency. Using the so-called “traditional” system of human resource management practices, consisting of individual-based incentive system, individual-based job design, and no job rotation, has limited impact on either exploration or exploitation because it does not create the psychological safety for people to explore new knowledge and does not develop the perspective-taking capability needed for exploitation. Moreover, mixing practices from both systems is better than only using the traditional system in achieving exploration or exploitation, but less effective than only using the innovative system as the mix of practices can create inconsistent expectations on employees.