Exploration and exploitation in crisis environment: Implications for level and variability of firm performance

Abstract

Exploration and exploitation are two generic strategies of firms' adaptation to their environments. However, the effectiveness and reliability of these approaches are not fully understood when the business environment is undergoing a major crisis. Building on organizational adaptation, strategic fit, and organizational decline streams of literature, we develop a framework that examines exploration and exploitation in crisis contexts. We argue that the severity of crisis a firm is exposed to acts as a positive contingency for the impact of exploration on firm performance level and variability, and as a negative contingency for exploitation’s level and variability effects. Employing the multiplicative heteroscedasticity regression model on the data from 500 Russian SMEs, we test the proposed theoretical framework linking exploration and exploitation activities to the distribution of firm performance under different conditions of the firm-specific crisis severity. The results provide an improved understanding of strategic management approaches under economic crises and related turbulence.