The Role of Knowledge in Resource Allocation to Exploration versus Exploitation in Technologically Oriented Organizations*

Abstract

ABSTRACT Decisions regarding research and development (R&D) activities of an organization greatly affect the fiscal and market outcomes of technologically oriented firms. Yet, the resource allocation choices between these two activities are tied strongly to an organization's technology knowledge. Technological knowledge is itself a resource that the firm can manage to achieve strategic and competitive advantage. In this paper, the authors present a system dynamics view of the decomposition of R&D efforts into explorative and exploitive activities and the resultant knowledge‐specific and performance outcomes from the decision to focus on one type of activity or another. Four factors are shown to affect the relative value of innovative knowledge to the organization: resource availability, exogenous competition, aging of knowledge bases, and adaptive capacity, a firm's ability to adapt to its environment. A variety of long‐ and short‐term strategic issues are discussed in relation to these forces.