Exploration and Exploitation in Organizational Learning by James G. March

A mental model that doesn’t get the attention that it deserves, at least in my opinion, is the model of ambidexterity for exploration vs exploitation. “Exploration includes things captured by terms such as search, variation, risk taking, experimentation, play, flexibility, discovery, innovation. Exploitation includes such things as refinement, choice, production, efficiency, selection, implementation, execution.” (p.71) Based on these definitions and the fact that there is a trade-off between exploration of new possibilities and the exploitation of old certainties I think you understand why I find this mental model to be so important. The mental model of ambidexterity for exploration vs exploitation is not only important in investing, business and sports but also in everyday life. The article that i present today and that I base my mental model of ambidexterity for exploration vs exploitation on is written by professor emeritus James G. March.  The article was published in 1991 and is called Exploration and Exploitation in Organizational Learning.

Please comment if you have read the article and what you thought of it. Also, if you have found a worldly wisdom in the article that you think I should have included please comment on that as well. I’m very interested in what caught your eye while reading and why.

Four worldly wisdom’s from the article

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. (p.71)

The certainty, speed, proximity, and clarity of feedback ties exploitation to its consequences more quickly and more precisely than is the case with exploration. The story is told in many forms. Basic research has less certain outcomes, longer time horizons, and more diffuse effects than does product development. The search for new ideas, markets, or relations has less certain outcomes, longer time horizons, and more diffuse effects than does further development of existing ones. (p.73)

Since performance is a joint function of potential return from an activity and present competence of an organization at it, organizations exhibit increasing returns to experience (Arthur 1984). Positive local feedback produces strong path dependence (David 1990) and can lead to suboptimal equilibria. It is quite possible for competence in an inferior activity to become great enough to exclude superior activities with which an organization has little experience (Herriott, Levinthal, and March 1985). Since long-run intelligence depends on sustaining a reasonable level of exploration, these tendencies to increase exploitation and reduce exploration make adaptive processes potentially self-destructive. (p.73)

But it may be instructive to reconfirm some elements of folk wisdom asserting that the returns to fast learning are not all positive, that rapid socialization may hurt the socializers even as it helps the socialized, that the development of knowledge may depend on maintaining an influx of the naive and ignorant, and that competitive victory does not reliably go to the properly educated. (p.85)

James G. March (1991), ‘Exploration and Exploitation in Organizational Learning’, Organization Science


The Worldly Wisdom Project #4

One of the most influential articles for my development of mental models regarding learning and knowledge creation is written by March, J, Sproull, L, & Tamuz, M in 1991. The reason why I find it so influential is that it stresses a very important fact that is often overlooked in organisations, investing and life in general. That is, we learn and create knowledge from very small pool of outcomes. The article does not only make us aware of this fact but also how we can learn from samples of one and fewer with minimised effect from lady Fortuna and here companion Mr Noise.

Please comment if you have read the article and what you thought of it. Also, if you have found a worldly wisdom in the article that you think I should have included please comment on that as well. I’m very interested in what caught your eye while reading and why.

Five worldly wisdom’s from Learning from Samples of One or Fewer by March et al.

Because experiencing an outcome as a success or failure depends on the relation between the outcome and adaptive aspirations for it, what is learned from any particular kind of experience can vary substantially across time and across organizations. (p.4)

In trying to understand unique experiences, organizations make implicit choices between two alternative perspectives on history. In the first perspective, realized events are seen as necessary consequences of antecedent historical conditions. In the second perspective, realized events are seen as draws from a distribution of possible events. If historical events are (possibly unlikely) draws from a wealth of possibilities, an understanding of history requires attention to the whole distribution of possible events, including those that did not occur (Fischhoff 1980, Hogarth 1983). The organizational problem is to infer an underlying distribution of possible events from a series of realized events having varying, but possibly quite low, probabilities. (p.4)

Future admirals learn not only from the battle but also from its near-histories. Standard folkloric observations that great failures often are the consequence of bad luck or timing and great successes the consequence of good luck or timing suggest an implicit distribution of possible outcomes around the observed outliers. They emphasize that the near-histories of genius and foolishness are more similar than their realized histories. (p.5)

The learning process is generally conservative, sustaining existing structures of belief, including existing differences, while coping with surprises in the unfolding of history. Organizations create the same kinds of coherent systems of belief that in science are called knowledge, in religion are called morality, and in other people’s societies are called myths. Experience is used to strengthen and elaborate previously believed theories of life. (p.7)

Every unique historical event is a collection of micro events, each of which can be experienced. In this sense, the learning potential of any historical event is indeterminate. Because both the scope of an event and the depth of its decomposition into elements are arbitrary, so also is the richness of experience. By considering additional aspects of experience and new dimensions of preferences, an organization expands the information gained from a particular case. The pursuit of rich experience, however, requires a method for absorbing detail without molding it. Great organizational histories, like great novels, are written, not by first constructing interpretations of events and then filling in the details, but by first identifying the details and allowing the interpretations to emerge from them. As a result, openness to a variety of (possibly irrelevant) dimensions of experience and preference is often more valuable than a clear prior model and unambiguous objectives (Maier 1963; March 1978, 1987). (p.8)

March, J, Sproull, L, & Tamuz, M 1991, ‘Learning from Samples of One or Fewer’, Organization Science.