Managing the tension between knowledge exploration and exploitation : the case of UK biotechnology
In prior literature it has been argued that there exists a tension between balancing investments in Exploration for new organisational knowledge against the Exploitation of current stocks. It is argued that over time firms tend towards an ever increasing focus upon Exploitation to the exclusion of investments in Exploration. It is argued that this bias is in part due to the causally complex feedback loops between Exploration activities and financial performance. The tendency for Exploitation to drive out Exploration activities over time is argued to pose a serious threat to firm's long term prosperity and survival. This thesis first reviews and interprets the diverse literature on the tension between Exploration and Exploitation. This interpretation of prior work highlights that Exploitation is not a single process, but rather two: incremental Development of current stocks of knowledge and Appropriation of a return from those stocks through use and sale in the marketplace. It is argued that the classic tension between Exploration and Exploitation is intermediated by the process of Devlopment, which seeks to convert new organisational knowledge into forms amenable to appropriation of a financial return, in addition to making incremental improvements to current stocks of organisational knowledge. It is argued that the tension between these three processes only exists in the short term. In the long term the success of each process is dependent upon the other two. It is argued, however, that in the long term it is difficult sustain individual efforts to extend the firm's knowledge stocks through Exploration, Development, or efforts to Appropriate a return through use, due to the existence of three antagonistic processes that impede each of these three processes individually. These antagonists are Core Rigidities, Slow Rate of Learning and Imitation by competitors. Through the literature review insights are offered into how management can suppress these antagonistic processes. Chapters Three and Four empirically study the phenomena of Exploration and Exploitation of organisational knowledge in the context of the UK therapeutics biotechnology sector. In Chapter Three an in-depth case study of a leading firm, Ceiltech, is undertaken. From this case it is argued that contrary to prior literature it is possible for a firm to maintain a balance between Exploratidn and Exploitation beyond the short term. It is shown that Ceiltech's Exploration activities can be linked directly to the financial renaissance of the firm between 1990 and 1998. Insights are offered into how management sought to maintain this balance and ensure that the long term complementary relationship between the processes of Exploration, Development and Appropriation was not undermined by short-term actions. Based on the experiences of Ceiltech and other biotechnology firms key quantifiable outputs of the processes of Exploration, Development and Appropriation are devised. Using an event study methodology, announcements of these key outputs, by all publicly quoted UK biotechnology firms between December 1995 and January 1999, are analysed. It is found that contrary to prior theoretic suggestions the outputs of both Exploration and Exploitation activities generate observable financial valuations in the stock market. Announcement of positive progress in Exploration and Development activities are found to coincide with increases in share price over and above either the past performance of the firm or the contemporary performance of market indices. This suggests that contrary to theoretical arguments in the literature the causal feedback loop between Exploration and Development activities and financial performance can be quite direct. It is also found that alliance formation plays an important role in value creation. It is argued that the increase in market capitalisation that formation of alliances generate is not fully explained by the sharing of resources and capabilities alone. It is argued that formation of an alliance with a firm that has a high scientific and commercial reputation within the stock market has a knock on reputational effect upon the valuation of its biotechnology partner. The alliance offers uncertainty reduction information to shareholders about the likely success and value of Exploration and Development projects undertaken by the biotechnology firm, resulting in an increase in the value of the firm. The concluding chapter of this thesis highlights major implications that the findings of this study may have for both the pharmaceutical sector and industry in general.