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

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 three decades of innovation histories of over two and a half thousand firms. Longitudinal firm-level data and a novel measure of search (Technological Focal Proximity) enable us to characterize corporate activity at a detailed level and examine both search strategies that lead to breakthroughs and those that do not. Contrary to the existing literature, we find that breakthrough innovations develop from a search process that evolves in phases and involves both exploration (initially) and exploitation (subsequently). 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 theories about the origins of breakthrough innovation, and have potential implications for strategy, organizational design, management practice, and corporate culture.