Exploration and exploitation under resource scarcity : evidence from entrepreneurial succession

Abernathy (1978) and March (1991) inspired a continuous stream of research on how managers can balance operating efficiency through better exploitation of existing resources with innovation and exploration of uncharted waters. While organization scholars have eagerly embraced the necessity of exploitation and exploration to firms' survival and growth, the theory has raised challenging specification issues in empirical research. In the introduction to a recent research forum in the Academy of Management Journal, Gupta et al. (2006) flagged the need for further investigation of the temporal dynamics of exploration and exploitation. The present research examines the temporal interplay of exploration and exploitation in the aftermath of entrepreneurial succession in SMEs. Prior research has shown that exploration and exploitation can co-exist and are, indeed, necessary for long term survival and growth. However, researchers disagree on whether firms can pursue both simultaneously or sequentially. March (1991) contended that, under resource scarcity, organizations can not engage in exploitation and exploration simultaneously, but sequentially. Granted that March's argument for sequential balancing under resource scarcity could be verified empirically, we still would have to understand why organizations would opt for exploitation or exploration at a particular time. Entrepreneurial succession at in SMEs is a good context for testing March's conjecture. Indeed, new owners of SME typically operate under resource scarcity. Further, they have to make choices as where to focus in the period following the acquisition: exploration or exploitation or a combination of both.