The Evolutionary Nature of Breakthrough Innovation: Re-Evaluating the Exploration vs. Exploitation Dichotomy

Over the past few decades, a consensus has emerged that breakthrough innovations emerge from exploration of novel terrain while more routine innovations are the product of exploitation. In this paper, we revisit this explore versus exploit dichotomy with an analysis of over two and half thousand firm-level innovation histories spanning three decades. Our data and a novel measure of search (Technological Focal Proximity) enable us to characterize at a detailed level the search strategies of firms and to examine breakthroughs and non-breakthroughs associated with different search strategies. Using our novel firm-level data and method, we find (contrary to the existing literature) that breakthrough innovations evolve through a process involving both exploration (initially) and exploitation (subsequently). The breakthrough innovation process appears to evolve through phases. In the early phases, firms explore unfamiliar terrain. However, as the process unfolds, firms shift their search strategies to focus on exploiting cumulative knowledge. Our findings call into question the strong dichotomy between exploration versus exploitation that has played such a prominent role in thinking about the origins of breakthrough innovation, and have potential implications for strategy, organizational design, management practice, and corporate culture.