Entrepreneurial Exploration and Exploitation in Family Business: A Systematic Review and Future Directions

(Authors: Sanjay Goel and Raymond J. Jones III)

Research Applied précis prepared by Frank Hoy, Worcester Polytechnic Institute

We use the label “entrepreneur” when we talk about business founders. But does entrepreneurship stop once the firm is up and running? Can family members who join an existing company behave like entrepreneurs? If they do, will that help or hurt the business?

Goel and Jones try to find answers to these questions by reviewing recent studies of entrepreneurship and family business that focus on two central activities: entrepreneurial exploration and exploitation. The authors reviewed studies of the two activities, reporting conclusions about how they might be integrated in future research projects to give us a better understanding of their application in family businesses.

The authors were interested in how family firms create resources (exploration) and find new applications for existing resources (exploitation). They use the term “exploration” to describe searching, risk-taking, discovery, experimentation, prototyping, and flexibility. By “exploitation”, they mean delivering desired outcomes by applying current core capabilities. Exploitation typically has the goal of improving quality and efficiency. It relies on existing knowledge, skills, technologies, and capabilities in the organization. There may be tradeoffs that have to be made when trying to explore and to exploit, but a balance is needed for optimal organization success.

What leaps out is that efforts to explore and efforts to exploit can conflict with each other. Taking risks and experimenting consume resources, running counter to attempts to be lean and efficient. We can see how family members may disagree on the desire to create and maintain personal wealth versus investing in new activities designed to grow the firm and keep it competitive. But some of the research described by the authors shows that the best results for a firm’s long-term survival and success can be attributed to both exploration and exploitation.

The authors make it easy to see what researchers have reported about entrepreneurial exploration and exploitation. Table 1 and Table 2 in the paper summarize the findings from the various papers they reviewed in their study.

It comes as no surprise that the authors raise more questions than answers. Some of their calls for future research (see Table 3) may lead to findings that could be especially valuable to family business advisors. Examples include:

• Are family leaders who prefer exploration likely to choose successors similar to themselves or do they want someone better at exploitation of opportunities?
• If families have built up social capital in their communities and industries, are they more likely to use that capital to explore or to exploit?
• Does hiring more non-family managers improve exploitation or exploration?
• When family firms bring in non-family investors, do they become better or worse at exploration or exploitation?
• And, of course, how do family conflicts affect the quality of exploration and exploitation?

They do, however, offer a few answers. One finding that reinforces what has long been reported about family businesses is that non-family firms have shorter time horizons than those owned and controlled by families, thus demanding that exploration pay off faster. Family firms may be more conservative about launching experiments, but they may gain more in the longer term through their patience. Another point that ties in with the long-term orientation is that family companies are less transparent regarding their goals than publicly-trade corporations. The result is that they are not setting expectations for outsiders about the outcomes for innovative initiatives.

Practitioners should note that review articles are primarily written for researchers, however, practitioners can gain new insights and understandings from these articles. For example, imagine that you are working with a family business where there is the following conflict: the junior generation is more focused on improving the efficiency of the existing business and the senior generation is more focused on expanding the product line of the business. This paper gives you the terms (exploration and exploitation) and the awareness of the research that has been done to help you work with this client. You can now start to help your clients see this NOT as a conflict, but as a way to start a conversation about the strategic direction of the company for the future.

Read the complete article here.

About the contributor

Frank Hoy is the Paul R. Beswick Professor of Innovation & Entrepreneurship at Worcester Polytechnic Institute. He is an FFI Fellow, a past vice president and chair of the Body of Knowledge Committee for the Family Firm Institute and a recipient of FFI’s Barbara Hollander Award. Frank can be reached at [email protected].