Exploration capability : sensing, attention and new knowledge

EXPLORATION CAPABILITY: SENSING,

ATTENTION AND NEW KNOWLEDGE

Final Version

THESIS

Executive Master in Management Studies (strategy track)

1st Supervisor:

E. Dirksen Msc.

2nd Supervisor:

Dr. M. van der Veen

Amsterdam Business School, University of Amsterdam

by

Mitchel van Motman

Student Number: 10278761

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Statement of Originality

This document is written by Student Mitchel van Motman who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Abstract

Innovation is a hot topic for both the organisational and the managerial researcher nowadays, even though the foundation by Schumpeter is set in 1947. Exploration is a process to radically innovate and may result in sustained competitive advantage. How are sensing, attention, new knowledge related to each other and relate to exploration as the dependant variable. Attention is not discussed in the research literature regularly and related to exploration.

After sending 64 questionnaires, 32 heterogeneous managers and leaders filled in the questionnaire. Results show a significant correlation between sensing and exploration. No moderator effects by attention were found. New knowledge has a small effect on exploration. Theoretical implications are discussed. I suggest sensing is an important capability to adapt fast changing circumstances.

Table of content

2.5.1 Concepts and Hypotheses ... 25

3 RESEARCH METHODS... 26

3.1 PARTICIPANTS AND PROCEDURE ... 27

3.2 INSTRUMENTS AND MEASURES ... 28

3.2.1 Control variables ... 28 3.2.2 Independent variables ... 29 3.2.3 Depending Variables ... 30 4 RESULTS ... 31 4.1 RELIABILITY ... 31 4.2 CORRELATION ANALYSIS ... 32 4.3 RANKING ORDER ... 35 5 DISCUSSION ... 35

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5.1 THEORETICAL IMPLICATIONS ... 36

5.2 RESEARCH LIMITATIONS AND FUTURE RESEARCH ... 37

6 CONCLUSION ... 39

7 REFERENCES ... 40

APPENDIX 1: EMAIL TO DIFFERENT RESPONDENTS ... 47

APPENDIX 2: BRIEF INTRODUCTION OF THE QUESTIONNAIRE ... 48

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1

Introduction

The introduction of the iPhone back in 2007 by Apple was a major step forward in the mobile phone business and a very important innovation project for Apple, because it gave them a huge competitive advantage for a couple of years and a technology they can build further on. Another company with a great innovation success is Nespresso. They turned the coffee market up-side-down by introducing Nespresso coffee machines and Nespresso cups. A total new experience of coffee. Not only the invention of the products is new, there is a whole organisation behind it to made it happen. At Nescafe, they understood that such an innovative idea needed a total new organisation on its own to survive.

These examples show a bit of how innovation for organisations like Apple and Nespresso could pulled off. A part that made the innovation successful is the sensing part, the process to know what is going on in the market, what customers need to have, what technologies are out there and what the competition might have in the pipeline. If it comes down to strategy, it comes down to allocate the right resources, looking for opportunities and threats and making sense of it, seizing it and reconfigure in a way it makes the organisation better and outperforming others. Having the opportunity to have competitive advantage for a long term, innovation is often the key answer. An organisation should deploy exploration processes to be innovative. Still, exploitation is what organisations have the natural preference for (March, 1991), because it is less risky to only enhance the organisational process, it is less demanding. On the other hand, competition can be very tough and some more effort and risk taking with exploration can result in sustained competitive advantage. In this research, the exploration opportunity will be further discussed.

In the markets that are open and changing fast, dynamic capabilities are necessary to cope with those fast changes. Research in the field of the social and behavioural sciences have

7 specified the nature and micro-foundations of the capabilities that are needed to have sustainable competitive advantage (Teece, 2007). It is more than being the owner of difficult-to-replicate assets, it is also about the difficulty to replace dynamic capabilities. Sensing and shaping opportunities and threats are dynamic capabilities to begin with. What is moving a manager into the area of exploration, after he has undertaken the sensing process?

There should be tacit awareness of the background for tasks that are attended (Tsoukas, 2009). In the case of exploration, new knowledge leads to exploration and leads to innovation. Sensing opportunities and threats is the starting point to interpret, learn and create new knowledge. The degree in which knowledge is integrated in the organisation is essential for organisation performance (Grant, 1996).

In the process of sensing, it is assumed not possible to absorb everything into the mind of managers. Attention is here to be assumed to influence the relation between sensing and creation of new knowledge. In the end, exploration is in this research the dependant variable. The research question is which behaviours and capabilities move an organisation into exploration? And particularly, what effect does the sensing process have, that is moderated by attention and mediated by new knowledge on exploration?

2

Theoretical Framework

This research is done in the light of Schumpeter’s theory. Schumpeter states that gaining high market share can be achieved by developing new markets through innovation (Schumpeter, 1934). By distinguishing from others, higher firm performance can be created and greater value can be offered to customers (Schumpeter, 1934). For a short period, there is market power that overrules competitors that are still using old techniques. Schumpeter (1934) argues that the nature of the firm is seeking new combinations and creating new markets. It is about creative destruction, which is a process of continuous innovation. New techniques are

8 successfully applied and the old techniques are destroyed (Schumpeter, 1934). The Schumpeterian hypothesis is about the trade-off between static efficiency and dynamic progressiveness. Many researchers and theories in the business and managerial world, are still referring to Schumpeterian trade-off, as innovation is a major subject in business science. In this study organisation and managerial strategy will come together. In the light of innovation, the next variables of my research that will be reviewed, are sensing, attention, new knowledge and exploration.

2.1 Sensing

Organisations are searching for answers for opportunities and threats. They seek if their resources run out, competitors becoming stronger, consumer needs change, or more convincing opportunities in other markets are ruling (Daft & Weick, 1984). This searching for answers starts with scanning, that can be defined as monitoring the environment and collect data. The available information could be in any form that appears. The information can come from news of scientific breakthroughs or changes in customer feelings and frustrations (Teece, 2007). Also, other responses of the marketplace on changes should be watched (Teece, 2007).

After the information or data is collected, should be given meaning to make it understandable and usable in the organisation. To give data meaning, data should be interpreted. This is engaged by the interpretation process of the human cognition (Daft & Weick, 1984) and shared in the organisation. Because interpretation is processed by different human resources in organisations, value can be created. This is done by an individual that finds an opportunity that another individual cannot see (Nonaka & Toyama, 2007). The interpretation process by Daft & Weick (1984) can also be considered as sensing.

Hence, the definition of sensing is the activity by organisations to monitor the environment and understand the foundations of long term organisational success. Sensing is about finding

9 and highlighting the opportunities and threats that are important, in other words to delineate relevant strategic considerations and the priorities managers must adopt to enhance their organisation’s performance and escape the zero-profit tendency (Teece, 2007).

Organisations or their managers can employ analytic frameworks to facilitate sensing. Teece (2007) perceives the surroundings of an organisation as an ecosystem that can be utilized for assessing developments. The information gathered from the ecosystem and communicated inside the organisation should be on time. Effort is needed to see through a huge pile of information. As discussed further in the next subtopic of this research, attention can be an important resource in this process of sensing relevant information. Relevant information can be sensed by using a framework. Like a model it abstracts from reality and categorize different that are involved (Teece, 2007). Figure 1 shows the analytic framework by Teece (2007). The framework condenses all individual and organisation efforts and capabilities needed to sense, filter, shape and calibrate opportunities. One foundation of this framework is Schumpeterian. It supports by assembling and orchestrating difficult-to-replicate resources. In the end, competitive advantage can be created and the environment can be shaped. The framework consists four elements of the ecosystem that are involved and to be analysed are processes of the internal R&D department, the organisation’s supplier, external developments and the customer.

First, the processes that direct the R&D department, are selecting new technologies. Productive R&D’s can achieve new products, adopting best practice and deliver good products and services (Teece, 2007). Hence, it is very important to invest in R&D to develop and protect its knowhow to sustain competitive advantage.

Second, the supplier innovation should be watched how they act on structural evolutions of industries.

10 Third, other external science and technological developments should be watched to find out what opportunities arises and perhaps missed by competitors.

Fourth, the processes to identify customer demands and target market segments are involved in the sensing process (Teece, 2007). This framework is a part of dynamic strategy an organisation develops.

Figure 1 Elements of an ecosystem framework for 'sensing' market and technological opportunities (Teece, 2007)

Source: Teece, 2007

With dynamic strategy, it is about selecting and developing technologies to answer customer needs and create business models with difficult-to-replicate resources that builds competitive advantage. These activities shape competition instead of coping with competition (Teece, 2007).

In an organisation, sensing is done by its resources and routines. These are strategy-making process linked to variation, resources with knowledge about competition and awareness of changes in technology (O’Reilly & Tushman, 2008). Another important ingredient for good sensing in an organisation, is the balance in centralization and decentralisation of control. This motivates feedback from units connected closely to the market. Or an open culture for a good debate. Also for leaders with commitment for resources. These resources can be understood as time and finance that engage long-term thinking. And a senior management team that encourages a long-term mind-set and exploration (O’Reilly & Tushman, 2008;

11 Burgelman, 2002; Edmondson, 1999; Rotemberg & Saloner, 2000). Sensing is not an easy job, as researches argue that senior managers find it hard to sense opportunities (O’Reilly & Tushman, 2008). Senior managers are far more sensitive for threats and fail in their way to alter their mind-set and come with new business models for example (O’Reilly & Tushman, 2008). The skill of exploiting opportunities is not like exploring opportunities (Teece, 2007). In Teece’s earlier work, he researched about firm’s erosion of its competitive advantage. This research discusses already about identifying new opportunities. Although the answer how organisations can do well or how they can improve is criticized. But it is generally more fundamental to private wealth creation than it is strategizing, if by strategizing it is meant engaging in business conduct that keeps competitor’s off balance, raises rival’s costs and excludes new entrants.

Teece (2007) has done research on strategic management to make an advantage in dynamic markets and specifies in his paper of 2007 the nature and micro foundations of dynamic

capabilities1 to attain sustained competitive advantage. And sensing is one of the dynamic

capabilities that undergird the micro foundations distinct skills, processes, procedures, organisational structures, decision rules and disciplines (Teece, 2007). Sensing is all about identifying opportunities and threats and shaping them with activities of scanning, creating, learning and interpretation. Much of the external environment is unknown, but still one has got to know what is going on and should inform him or herself by different information sources. It is making sense of things that might have opportunities for the organisation to create new knowledge in this case. Making sense is in other words something tacit for the organisation. It is a translation to understood by individuals in the organisation that are going

1

Dynamic capabilities are the antecedent of organisational routines by which managers are altering, acquiring and shedding their resources, integrate them together and recombining them. These activities are made in order to generate new value-creating strategies (Teece 1997).

12 to deal with it. Sensing is also a way to stay ecologically fit and timely responsive when necessary to reconfigure and transform. In this early stage to sustain competitive advantage, sensing already has the goal be ahead of competitors. It also already aims in matching the evolution of the market and technology (O’Reilly & Tushman, 2008). Sensing is a compulsory activity or else an organisation gets stuck into existing market and existing technology paths (O’Reilly & Tushman, 2008; March, Garud, Nayyar & Shapira, 1997). To identify change and problems, organisations develop contingency plans. Plans in the form of knowledge piles about products, technologies, markets and social and political context. These contingency plans build networks of contacts with consultants and colleagues (March & Levinthal, 1993). Informal social relations affect the exploratory actions, as it is suggested by the density of the social network. In other words, the connectedness of individuals inside and outside the organisation (Jansen, Van den Bosch, Frans, & Volberda, 2006). Connectedness increases opportunities to sense relevant information. Although connectedness has its limitations for positive effects on exploration. As time passes, the same knowledge is communicated and it will defuse its novelty (Jansen et al., 2006; Jaworski & Kohli, 1993). Sensing is at some point practical to communicate between human resources and the environment. It creates individual future perspective or personal faith (Nonaka & Toyama, 2007).

2.2 Attention

Attention is a critical topic when it comes to understand how firms can adapt to changes, externally and internally. Humans have limited information processing capacity and can experience information overload. It is the human brain that cannot simultaneously process all external input. Therefore, one should choose to which input attend to and which input must be ignored (Ocasio, 2011; Lavie 1995). Simon (1947) already describes attention as a complex organisational behaviour. He had a concept of organisational structure of attention from

13 individual decision-makers. The definition of attention is the focus defined by the noticing,

encoding, interpreting and focusing of time and effort by organisational decision-makers 2.

Further on, it is these decision-makers focus on the available collection of categories for making sense of the environment and the available collection of action alternatives (Ocasio 1997). Three basic principles of attention are developed by Ocasio (1997).

First he described attention at the level of individual cognition as focus of attention. It is what Simon (1947) calls selective attention, which is directed by organisations to channelize behaviours that provide objectives for action. This is because of the limited number of problems or changes in the market decision-makers can focus on in any kind of condition. That is also described as bounded rationality, introduced by Simon (1947), which is a human capacity that is limited. Attention is a limited behaviour. Hence, organisational processes should influence attention what aspects should be attended to and what aspects should be ignored.

Second, Ocasio (1997) described situated attention as attention that indicates what decision-makers focus on, depending in what context they are in (Ocasio, 1997). Situated attention appears at the level of social cognition (Ocasio, 1997; Fiske & Taylor, 1991).

And third, structural distribution of attention. Simon (1947) already defined organisational behaviour as an attentional process that forms a complex network. To be more specific, in the face of structural distribution of attention, decision-makers are conscious of the context they are finding themselves in. Their focus depends on the organisational distribution and controlling of allocation of problems and solutions. They are conscious of specific firm

2

Decision-makers are the concrete individuals who jointly participate, within any specific procedural and communication channel, in the enactment of the environment and the social construction of organisational moves.

14 activities too and how organisation’s communication works and what the procedures are. The way of how organisations channel and distribute the attention of their decision-makers results in firm behaviour. Behaviour that is coordinated by various mechanisms to direct attention, besides combining key resources and functions, necessary to develop innovations (Van de Ven, 1986). Structural distribution of attention is about organisational attention. It is a social network of attention by organisation’s decision-makers (Ocasio, 1997). The cognition for organisational attention is not a summation of individual cognition, but a result from the communication and procedures where social cognition takes place (Ocasio, 1997). The human cognitive aspect and human attention is not an activity shared collectively, but attention is distributed by diverse tangible organisational procedures and organisational structure (Ocasio, 1997; Hutchins, 1995). Decision-makers depend on the issues and answers they focus their attention on (Ocasio, 1997). In the business area, managerial cognition attention is associated with selective attention to environmental stimuli (Daft & Weick 1984). In the interpretation model of Daft & Weick (1984) it is the initial step in the information processing. Sequential allocation of attention to divergent goals is generally seen as the result of goal conflict and bounded rationality (March & Levinthal, 1993) too. Another assessor, is the simplification of experiments with changing process of the organisation (March & Levinthal, 1993). Attention can also be part of risk strategies. Organisations exist because they are creating value for others. To keep on creating value better than the competition, some risks should be taken by the decision maker or risk-taker. Nothing is very certain in dynamic markets, but the level of risk or unreliability can be determined by the variation of experience, conflict and control (March, 1992). Risk taking that can either be relatively low or high. Risk can be low when attending to survival or risk can be high for attending to aspiration (March, 1992). The direction to one of both, is affecting the level of risk taken (March, 1992). The trade-off between the negative possibilities and the positive possibilities is less the result of explicit

15 calculation. Yet, the focus of attention on the advantages of an experiment is greater instead of the focus of attention just on the dangers (March, 1992). Attention here is particularly evident to sense relevant data. And that may result in a shorter time between anticipation of a change or a problem and its arrival time into the organisation. If sensing takes too much time, creating knowledge or accumulating the experience is too late to respond to a change or a problem (March & Levinthal, 1993). The output of attentional processing of decision-makers in an organisation are the organisational moves. These moves are multiple actions by the firm and its decision-makers to answer or anticipate on changes in the externally and internally (Ocasio, 1997).

The attention-based-view of Ocasio (1997) is focused on attention to understand how organisational action and adaptation happens. Attention shapes organisational adaptation (Ocasio, 2011). At a later stage of attention, Ocasio has done research in the light of neural science and argues that attention is unlikely a unitary process. Although, attention must be a variety of interconnected processes in the neural networks of the brain (Ocasio, 2011; Posner & Rothbart 2007). Three various forms of attention have been recognized, which are selective attention, attentional vigilance and executive attention (Ocasio, 2011).

Selective attention is about the choice by an individual to which range of stimuli to focus on during information processing (Ocasio, 2011). Because of the limited capacity of the human brain to process information, not all information can be processed simultaneously. There is a range of stimuli to attend to and there is a range of stimuli that should be neglected (Ocasio, 2011; Lavie, 1995). It is important that the selection mechanism works coherently when facing the competition and the distraction of different sources of stimuli.

Attentional vigilance defines the course of human beings maintain concentration on motivation. At some point in time, finding of motivation declines (Ocasio, 2011) and therefor

16 it is suggested that attentional vigilance has effect on the organisational outcome and performance (Ocasio, 2011; Weick & Sutcliffe, 2006).

Executive attention is the focal point for organisational processes. Examples of these processes are planning, problem solving, conflict resolution and decision making. Independent from sensed data, executive attention is about allocation of controlled cognitive resources in working memory to information.

To understand the conceptualization of attention more, we should look beyond these three forms of attention. Ocasio (2011) describes five classes of metatheories that link to attention, which are behavioural theory of the firm, managerial cognition, issue selling, attention-based-view and ecology of attention. In the attention based attention-based-view, attention means implicitly focussing on both executive attention and selective attention (Ocasio, 2011).

Behavioural theory of the firm is suggested to be the base perspective to look at the allocation of attention in organisations (Ocasio, 2011; Cyert & March, 1963). It sees firms as problem-solving bodies with bounded attentional capacity. Attentional perspective is driven by the organisational experience and attentional engagement meet aspiration levels caused by failure in the past. Attentional perspective has effect on both less mindful or automatic information processing and mindful, controlled or non-automatic information processes. In the context of attention, mindfulness means attention to context and the capacity to answer to unanticipated cues or signals externally or internally.

The metatheory of managerial cognition suggests organisations as interpretation systems (Daft & Weick, 1984). This view sees enactment and sense making central to organisations and organising (Ocasio, 2011; Weick, 1979; Weick, 1995). Managerial cognition suggests that interpretation of the environment shapes organisational response to adapt (Ocasio, 2011).

17 Issue selling is viewed from top management view on attentional selection and is broadly focussing on issues and agendas.

Attention-Based view is a combination of earlier work about attention and it proposes three earlier discussed principles of attention, (1) focus of attention, (2) situated attention and (3) structural distribution of attention. Organisational attention is viewed as building a pattern of attentional focus that results in the firm’s strategy (Ocasio, 2011).

At last, ecological perspectives mark the competition of attention between substitute goals, that can either be problems, issues or initiatives (Bouquet, Morrison & Birkinshaw, 2009). Also, individuals or social groups internally or externally (Ocasio, 2011; King, 2008), competitors (Ocasio, 2011; Bothner, Kang & Stuart, 2007) and other theories or logics (Ocasio, 2011; Lounsbury; 2007). This view also looks at attention mainly as predominant and suggests selective attention as a bottom-up process driven. Besides by individual target characteristics of attention, also by crowding and visibility of alternatives for attentional focus (Ocasio, 2011). Empirical research by Ocasio (2011) finds five propositions. First, attentional perspectives are integrated in market structure, cultural structure and social structure. In dynamic markets, it can be possible that organisational focus of attention is more often pointed at the competition and market forces, that it can be in low velocity markets.

Second, the forward-looking attentional view of top management is the foundation to cope with structural inertia and core rigidities. This view facilitates top-down strategy for change. Change in performance by international attention is researched by Bouquet et al. (2009). They find an inverted U-shape relationship of international attention and organisational performance. Moderators of international attention on performance are international assignment experience of top executives, the independence of value-adding activities across country locations and degree of industry dynamism (Bouquet et al., 2009).

18 Third, attentional engagement enables variation in established attentional perspectives and sensing. It indeed has connection to sense making, as it links top-down and bottom-up cognitive processes, that supports individuals in organisations to identify new issues and making sense out of them (Ocasio, 2011).

Fourth, the similarity of attentional engagement across an organisation that makes change possible in an organisation attentional perspective. That leads to learning and change.

Fifth, attentional selection is mediated by attentional engagement of internal and external players, which is another form of sense making.

Especially the fourth proposition of Ocasio (2011) is interesting, because it relates to the next subtopic new knowledge.

2.3 New Knowledge

In changing markets, many researchers are concluding that the ability to learn is a source of sustaining competitive advantage (March & Levinthal, 1993). It starts at an organisation with sensing information externally and recognizing opportunities for creating and capturing value. Therefore, it should have the capability to innovate (Cohen & Levinthal, 1990). That capability is described by Daft & Weick (1984) in the third stage of their model, which is learning. In their model, learning is the new response of action after interpretation. The learning capability is proposed to be an organisation’s absorptive capacity on both the level of individual cognition and on the organisation level of cognition (Cohen & Levinthal, 1990). Besides absorptive capacity for organisational knowledge outside the firm. Inside the firm

there is potential knowledge base for future success (García‐Morales, Lloréns‐Montes &

Verdú‐Jover, 2008). This is the knowledge slack that is crucial for creating new knowledge

19 Another view on creating new knowledge, is brokering knowledge. By creating new combinations of existing ideas in the organisation, new knowledge can be created (Hargadon, 2002). Jansen (2005) clearly makes a distinction between potential absorptive capacity and realized absorptive capacity. It is the distinction between exploratory action and exploitative action. Exploratory, as an organisation is seeking for new knowledge. Exploitative action, as it is innovation with existing knowledge (Jansen, Van den Bosch, Frans, & Volberda 2005). Especially, when organisations decide to innovate, they should build their absorptive capacity through investment in Research &Development. They should than allocate their resources to innovate (Cohen and Levinthal, 1990). As learning opportunities from experimentation are transferable between different units in an organisation, the organisational knowledge is growing (March & Levinthal, 1993). Organisations with learning capabilities out of experience are having the opportunities to innovate (March & Levinthal, 1993). Innovation implies elaborate knowledge management processes of detecting new ideas and opportunities to create new products or services (Andriopoulos & Marianne, 2009; Subramaniam et al, 2005). Exploration requires, besides novelty for profound innovation, creation of new knowledge and experimentation to nurture distinction (Andriopoulos & Marianne, 2009). Research about suggestions that continues innovation is a function of knowledge creation, that is sensing new technological opportunities.

There is a difference between knowledge management processes to apply knowledge for either exploration and exploitation, because they are two contradictions (March, 1991). Besides this assumption, they are also ambidextrous in many studies, which means, although they are their opposite of each other, both can be applied together in an organisation. The deference in knowledge is that exploitation asks for existing knowledge and exploration on the other hand needs new knowledge. Effort is required to search, vary and experiment to produce novel combinations of knowledge. These activities are evident for product or service

20 development and long-time performance (Andriopoulos & Marianne, 2009; Tushman & O’Reilly, 1996). The relationships between knowledge and innovation by organisations is

often limited, what causes a failing sustained competitive advantage (García‐Morales et al.,

2008).

Doloreux (2004) has done research on regional innovation systems, a framework that allows the understanding of the innovation process in the regional economy. Although, I am not specifically researching regional innovation in this paper, some antecedents are explained by Doloreux (2004) quite clearly how innovation works and how it works for creating knowledge, the new knowledge. Starting with the main body systems of innovation, you can say that innovation has a social aspect (Doloreux, 2004; Edquist, 2004). Innovation refers to the collective learning process within and between all layers of an organisation, if you look internally at an organisation (Doloreux, 2004). This is also supported by Hargadon (2002), who adopts the microsociology perspective for understanding how individual cognition is shaped in the social structure. Enacted social structure influence the flow of information between subunits of an organisation (March & Levinthal, 1993). Also, Tsoukas (2009) is pointing in the direction of social interaction. He argues that new knowledge begins on one’s individual capability in doing its task and from there on defining new distinctions.

Doloreux (2004) argues that knowledge creation that emerges externally is characterized by co-operation. Different organisations from commercial companies to universities work together in the innovation. With other words, new knowledge is embedded internally by collective learning within an organisation and by external co-operation with other organisations.

Like there is bounded rationality (Simon, 1947), cognitive limits influence learning too. With learning implications from information, memory, personal experience with knowledge of others are involved (March & Levinthal, 1993). These cognitive limits of individuals are

21 accentuated by organisational limitations and are eventually making it difficult to learn from experiments (March & Levinthal, 1993; March, 1991). Another problem could be the reaction time on problems or changes in the market that occur as sometimes organisations act after a problem arises (March & Levinthal, 1993). This requires stocks of competencies and can be applied once a problem occurs (March & Levinthal, 1993). To adapt to changing circumstances, broader and deeper knowledge is required.

In the end the intensity of organisational learning, that leads to new knowledge, has positive

effect on performance and innovation of an organisation (García‐Morales et al., 2008).

Creating new knowledge makes it hard to imitate by competitors (Grant, 1996). But rather than creating it, organisational knowledge should be applied (Grant, 1996). A problem of new knowledge is the need of slow learners rather than fast learners as March’s (1991) vertical socialization model tells. Slow learners are effortful as fast learners are effortless (Kahneman, 2003). Fast learners judge on intuition as slow learners judge on reasoning. Although in the reasoning, effort and concentration rather are bringing a more complete set of considerations. The expansion of considerations may produce a mediocre decision, without low weighting of a second consideration (Kahneman, 2003). In Kahneman’s model, system 1 represents perception and intuition of information, which is effortless and therefore fast learning. System 2 represents the reasoning and is effortful and therefore slow learning. Kahneman (2003) assumes there is a two-system structure with a large role for System 1.

By keep stock piling equilibrium knowledge, produced by heterogeneous population of fast learners and slow learners, the problem of scarcity among slow learners can be overcome (March, 1991). Vertical socialization is a top-down mechanism. That means the organisational code or dominant knowledge of superior resources is communicated by top management to all human resources inside the firm (Kim & Rhee, 2009). Horizontal socialization on the other hand, is a mechanism of socializing individuals and transferring,

22 modifying of knowledge within communicating groups of individuals (Kim & Rhee, 2009). Vertical and horizontal socialization are mechanisms that improve organisational knowledge and in the same time decrease the internal variety (Kim & Rhee, 2009).

Differently is new knowledge creation from dialogue. Reinterpretation of established findings on organisational knowledge research, suggest new knowledge creation from dialogue (Tsoukas, 2009). From a dialogical approach, new knowledge emerges from potential cognition by productive dialogues. Queer experiences by both cooperative practitioners will get more meaning when they have a productive dialogue with each other about the same issue they have a relation with (Tsoukas, 2009). Both horizontal socialization mechanism and the dialogical approach, are supporting the knowledge articulation. New distinctions in an organisation are challenged by individual opinions and beliefs (Zollo & Winter, 2002). New knowledge involves its creation from autonomous processes that distresses proposals arising outside current strategy’s scope (Raisch, 2008).

2.4 Exploration

How can organisations adapt to change? Many organisations are too set in their old ways. They may have the problem of core rigidity (O’Reilly & Tushman, 2008; Leonard-Barton, 1992), but a few do succeed. This is because it is suggested that a successful organisation has dynamic capabilities. For example, the dynamic capability to reconfigure its assets to adapt to change (O’Reilly & Tushman, 2008). Successful firms in dynamic markets have leadership with the ability to recombine and integrate their resources to align with the changing environments (Eisenhardt & Martin, 2000; Teece, Pisano & Shuen, 1997). Generating new alternative practices is evidential in a dynamic environment (March, 1991). Research on this topic, has proven that increasing change in an environment result in more exploration in an organisation that is in such an environment (Kim & Rhee, 2009; Sidhu, Volberda & Commandeur, 2004). There are two sides, one group of researchers that suggests adaptation to

23 change and one group of researchers that suggest evolution, incremental change (O’Reilly & Tushman, 2008). In many business administration studies about adaptation, the two opposites are discussed, exploration of new opportunities and the exploitation of existing certainties in organisations (March 1991; Schumpeter, 1934; Holland, 1975, Kuran, 1988).

Exploration often goes with risk taking, uncertainty, search, variation, experimentation, innovation (March, 1991). Exploration is the learning extracted from processes of concentrated variation, intentional experimentation and play (Raisch, 2008). This “play” is further researched by Yuan & Woodman (2010). They found significant effects of outcome expectations on innovative behaviour. These outcome expectations are shaped by contextual and individual differences and organisational support. Exploration or innovation can be either radical or incremental (Greve, 1991). Radical seems to be more in line with the definition of exploration, because it’s about developing new knowledge instead of exploiting existing knowledge (Greve, 1991). March in his paper in 1991 is discussing that organisations that adapt to dynamics of the market by exploration, will have long term competitive advantage. Exploitation will have the advantage at a greater pace, but for a short term. Nelson & Winter (1982) argue that markets with fast technological change, are having organisations with a greater R&D focus than organisations in a slower changing market. In the light of Schumpeter’s model, that represents increase of market power and decrease of competitors with innovation (Nelson & Winter, 1982). Organisations that successfully innovate, are hard to imitate and can use profits to invest and grow (Nelson & Winter, 1982). Eisenhardt & Tabrizi (1995) argue that global computer industries adapt at a fast pace by product innovation. From the exploration perspective, adaptation means that organisations are flexible, malleable and can find solutions to match de changes of the environment (Eisenhardt & Tabrizi, 1995). In the end, it means the identification of new opportunities and organizing effectively and efficiently with a strategy that keeps the competition out of balance, raising

24 rival costs and make it hard for new entries (Teece et al., 1997). Perhaps that is just one strategy in gaining more competitive advantage.

From a technology perspective, strategies that are focused on extending the life of established component technology should be aware of the technology S-curve and should know when the technology is aging (Christensen, 1992). At some point, the S-curve of the product ends and the potential for technological improvement of the product is gone and then a company should switch the technological S-curve. In other words, after exploiting a product and it cannot be exploited anymore, a company should explore and innovate new technologic components or products. After some time, product values get eroded and should be replaced. Erosion can also be said for the product market (Christensen et al., 1998). If a firm intends to enter a market, it should be aware, whether it is an emergent or better a new market segment or an existing market. Architectural innovation, innovation of a complete new product, has a higher probability to succeed than targeting an existing market or innovate only on component level (Christensen et al., 1998). As discussed by Chesborough (2003), a company can create value by exploration and innovation, it still can be unsuccessful to capture the value. You may conclude from Chesborough’s (2003) report on Xerox, that innovation inside the company, might have more value outside the company. Some innovations are valuable on their own and not only to make an existing product more valuable. To capture more value, innovation should be commercialized and open. Not all innovations can be successful for other applications, but some do for multiple ones.

Problems for exploration, are existing capabilities that reduces exploration (March, 1991). Exploration has greater risk than exploitation and has less routinization (Greve, 2007). Exploration has an uncertain possible outcome too, resulting often in failure. In turn, that leads to more exploration, that eventually may lead to a failure gap (Gupta, Smith & Shalley, 2006). Also, direct competition between exploitation and exploration is problematic

25 (March,1991). A workable solution to reduce the risk of exploration is open innovation (Chesborough, 2003). It can be the acquisition of external knowledge or more thorough, collaboration with other organisations in the innovation process (Grimaldi, Quinto & Rippa, 2013). Specially for SMEs to increase their performance and competitiveness, open innovation is an essential dynamic process (Grimaldi et al., 2013). Exploration is often referred in the research literature to the mechanism of punctuated equilibrium that suggests it is a temporal period of action (Gupta et al., 2006). Advantage of innovation suggested by Nelson & Winter (1982) is there because its inimitability. Over time, there will be an imitator that succeed to imitate. Hence, investment in R&D will increase in fast pace technological markets to sustain competitive advantage (Nelson & Winter, 1982).

2.5 Conceptual model

In the previous section the two main hypotheses for this research have been established. The model depicted in figure 2 demonstrates the direct effect of the independent variable (x) sensing on the dependent variable (y) exploration. This effect is mediated by new knowledge. The conceptual model also illustrates the moderator (m) attention on the relation between sensing and new knowledge.

FIGURE 2CONCEPTUAL MODEL:SENSING, ATTENTION, NEW KNOWLEDGE AND EXPLORATION.

2.5.1 Concepts and Hypotheses

This research is about organisational behaviour, that is influenced by both strategic management and organisation. Independent variables in my research involve sensing,

Attention

Sensing

New knowledge

26 attention and new knowledge and are suggested to have positive impact on the dependant variable exploration.

Opportunities that are sensed from the environment, are interpreted and learned from. New knowledge is created from the external environment.

Hypothesis 1: There is a positive relationship between new knowledge and exploration. In the organisational and strategic management research environment, new knowledge is the foundation of exploration and innovation. Getting value out of opportunities, new knowledge is needed and makes exploration and innovation possible. I suggest there is a positive correlation of new knowledge and exploration.

Hypothesis 2: The positive relationship between sensing and exploration is mediated by new knowledge

Sensing is a continuous process that produces a considerable amount of data to make sense of. Because bounded rationality, I suggest selective attention has a positive moderating effect on creating relevant new knowledge.

Hypothesis 3: The positive relationship between sensing and new knowledge is moderated by attention.

3

Research Methods

I have developed a theory and want to expose it to a rigorous test, which is deduction. In this chapter of my research, the method of this research is described. Previously, I have deduced the theory to testable propositions about the relationships of two or more variables of the theory, which are the hypotheses. These hypotheses are expressed in operational variables. In the first section of this chapter, the sample and procedure for the testing of the operational hypotheses are described. The second section provides an overview of the measurements,

27 items and scales used to test the variables. The last section explains the analytical strategy used. The survey that is ran for data collection in this research can be found in the appendix.

3.1 Participants and Procedure

Quantitative data is collected to do statistic tests. For acquiring quantitative data, 64 respondents were send a questionnaire by email, LinkedIn or WhatsApp in the beginning of May 2016. A few respondents forwarded the questionnaire link to their own contacts, which

cannot be verified as the research is anonymous. Between the 4th of May and 27th of

September 2016, respondents filled in the questionnaire.

In the end, only 32 respondents were recorded by qualtrics.com and resulted in a dataset that could be tested. The respondents or participants in this research are generic managers, they are managers of different kind of organisations that are allocated in a market that changes. This way, heterogeneous data can be collected, that could give a broad generic vision of the results.

These managers are having power in their organisation to change methods and strategy. They are familiar with and understand the main topics in this research. In the approach of the participants, I introduced my research and asked them to join my research if they felt they are familiar with the topic. In any case, the participants could find out what the research is about in a brief introduction of the questionnaire of this research.

In the end, some participants were not able to fill in the questionnaire and left it blank. I considered these participants were probably not the right persons to ask for participation. Other participants left only a few questions blank.

28

3.2 Instruments and Measures

Most items used in the research have been used in previous scientific research and have a high degree of reliability and validity. For items that refer to the attention variable, I have made the questions myself.

The questionnaire is build online in qualtrics, which can be reached by any media device with an internet connection. The questionnaire is even set up for mobile devices. This maximizes the accessibility of the questionnaire and I assume the number of responses too.

After a small pilot test with one person, I processed the remarks in the final questionnaire. The survey was administered in the English language, which made back translation not necessary and the items were originally developed in the same language. The introduction text was reviewed by a native speaker, to decrease misinterpretation.

3.2.1 Control variables

The control variable in this study is age. The World Health Organisation (1993) concludes in her report, that older workers have experience for a long time, better routine skills than younger workers and are more stable. There are mental capacity differences between age groups when it comes to problem-solving, experience and stability. The pace of information that is processed by an individual, slows down substantially at a higher age (WHO, 1993). Although older individuals respond slower, they respond more accurately (WHO, 1993). In table 1, the age groups of my respondents can be found. There is a mix of experience workers, as the age group of 35-44 years has the highest percentage of the total of respondents. Question 23 of my questionnaire is about which age group the respondent belongs to.

29 TABLE 1AGE GROUPS.

3.2.2 Independent variables

The questionnaire of the research is divided in the main variables of the research, that are sensing, attention, new knowledge and exploration.

Questions 2 and 5 to 6 are questions about sensing. As I have not found validated questions about sensing, my goal was to build validated and reliable questions. Sensing could be not so familiar topic for perhaps some respondents, as my intention was to find respondents among generic managers or leaders. During the creation of many questions of the questionnaire

30 myself, I was aware that some of my respondents are not business school educated. In that case, the first question contains regular topics about sensing the environment, to get the respondent more familiar with sensing. About getting new information of the environment where the respondent’s organisation is in. For example, if they get information from newspapers, surveys, personal contacts or business events. All forms of information available could be valuable (Teece, 2007).

Questions 3, 4 and 8 to 9 are questions about attention. One question for example, is the distinction between exploration and exploitation. How selective is the respondent’s attention when sensing his or her environment to rather look for exploration opportunities or exploitation opportunities? Other attention based questions are about executive attention, selective, but triggered by the business schedule or motivation or other business stimulators. Questions 10 to 16 are about new knowledge. Many of these questions are validated and used in many other researches. New knowledge creation is about sharing, so respondents are asked if they share their reviews of external information. Also, I have asked different questions about new methods. Are they used, or talked about with other colleagues. New knowledge has its value if the necessary skills are available to implement it, which I have asked the respondents. I also asked the respondents if competences are available to transform new acquired knowledge, so it can be applied in their organisation.

3.2.3 Depending Variables

Questions 17 to 22 are about exploration and only one I have created myself. Other are validated and used in many other researches. A few questions are about individual behaviour and are about feelings or opinions of disruptive action, risk and experiments. Other few questions are from an organisational character. They are asking whether new opportunities are utilized in new markets or if new distribution channels are used.

31

4

Results

The statistical test is done by using SPSS version 24.0.0. Because a few participants let a few questions unanswered, data are missing at random. Before going to proceed with the analysis, a test is done to find out whether the null hypothesis if the missing data is in a random way. In SPSS, Little’s Missing Completely at Random (MCAR) Test is performed. The result of this test is that Chi-Square=148,534, DF=200, Significance=0.997. In that case, we have failed to reject the null hypothesis, which means the data are missing at random. We cannot ignore the missing data and proceed the analysis. We must deal with it and we can do that by replacing missing values with the expectation maximization technique. This technique was used on the dataset of each individual question since these questions are correlated. The ordinal data that results from the questionnaire is non-parametric, because the multiple-choice options of all the questions with a Likert scale of 7, don’t have equal values. That means we must deal with non-nominal distributed data and therefor the data has violated parametric assumptions. Besides solving missing data, usually outliers are identified to reject them. But by the very nature of the variables, both a floor and ceiling exists. The Likert scale is 7, that means that the choice is between 1= strongly disagree and 7= strongly disagree. The type of variables is ordinal. Thus, it seems imprudent to reject individuals because they responded at either the low or high end of this narrow spectrum.

4.1 Reliability

To oversee the results of the correlation tests, means of all items of the separated variables are computed. The reliability test is executed for all means as well. For the mean of all 24 items for sensing, Cronbach’s Alpha is 0.833, which is good and no item should be deleted. For the mean of all 3 items for attention, Cronbach’s Alpha was just 0.194 and could unfortunately only be enhanced to an alpha of 0.203 if question 4 was deleted, which I have not. For the mean of all 7 items for new knowledge, Cronbach’s Alpha is 0.467. After deleting and

32 computing the total mean of new knowledge with only the 3 items of about implementing, transforming and using newly acquired knowledge, Cronbach’s Alpha is 0.881. The Cronbach’s Alpha of the total mean of all 7 items for exploration is 0.747, which cannot be enhanced much more and is good enough. No items for exploration are deleted.

4.2 Correlation analysis

For the correlation analysis, I have chosen for the Spearman’s rho correlation analysis, which suits for analysing ordinal data (Field, 2009). A small effect size is defined as rho between 0.10

and 0.30, a medium effect size as rho between 0.30 and 0.50, and a large effect size is operationally defined as one that yields rho ≥ 0.50 (Cohen 1988).

TABLE 2CORRELATION ANALYSES OF TOTAL MEANS

Hypothesis 1 states that there is a positive relation between new knowledge and exploration. In this research, as you can see in table 2, there is a small positive correlation coefficient of 0.237. But the p-value of the correlation between new knowledge and exploration is 0.191, which is higher than significant level of 0.05. Therefore, in this research, a positive correlation between new knowledge and exploration is not significant and cannot be accepted.

33 In hypotheses 2 I assumed there is a positive relation between sensing and exploration, with mediation of new knowledge. In table 2 the direct correlation of sensing and exploration has a positive coefficient of 0.507 and can be assumed to have a large effect size. With a p-value of 0.003 it is significant at the 0.01 level, although 0.05 level would have been enough to be significant. Both the correlation of sensing with new knowledge and the correlation of new knowledge on exploration are positive, but not significant at a p-value lower than 0.05. The assumption that there is a mediation effect of new knowledge is very small and not significant.

Hypothesis 3 about the moderation effect of attention on the relationship between sensing and attention is very small and not significant and cannot be accepted.

With a regression analyses for the moderation effect of attention, I have used the process procedure by A.F. Hayes. With this regression analyses I would like to find more precisely the moderation effect that attention might have on the relation of sensing and new knowledge. Does the interaction of sensing and new knowledge increases by the moderation of attention? Table 3 shows the regression analyses of the model of sensing as the independent variable,

new knowledge and attention as the moderator. With only R2 increase of 0.0216

(p-value=0.4217), hypothesis 3 is violated again. This assumes there is no significant contribution of attention in this research.

34 TABLE 3REGRESSION ANALYSES OF MODERATION

35

4.3 Ranking order

For the variable attention, I have applied a ranking order to find out how decision-makers think of different aspects of attention and put them into order. As the mean and median in table 4 are assuming, the business goal has the average highest ranking. This assumption is supported by Chi-square test, a p-value of 0,000, as shown in table 5.

TABLE 4RANKING ATTENTION ANTECEDENTS

TABLE 5CHI-SQUARE TEST

5

Discussion

Next I want to discuss and elaborate on the results found in the previous chapter. I use existing theories and relevant literature to provide explanations of the results. I also note some

36 practical implications for managers on how these results can best be applied. I also look at limitations of this research and provide suggestions for future research.

5.1 Theoretical Implications

In this research, I want to take closer look at the relationship of sensing and exploration with new knowledge and attention. Therefore, the research question is, what behaviours and capabilities move an organisation into exploration? And more precisely, what effect does the sensing process have, that is moderated by attention and mediated by new knowledge on exploration?

The results show that there is a clear direct relation between sensing and exploration. Sensing is a behaviour that positively affects exploration. Sensing is assumed to be one of the dynamic capabilities for adaptation to change in the external environment of an organisation (Teece, 2007). These changes can indicate technological breakthroughs for example. Sensing technological changes on time can be important to be the first organisation that can apply new technologies. Being first may result in sustained competitive advantage. Sensing is a Schumpeterian effort to stay ahead of competitors with innovation. Innovation can give organisations market power. The effort of sensing means that individuals in the organisation need to keep informed what is going on in the dynamic environment that changes fast. Managers should keep their personal contacts alive, reading newspapers and their business literature. They can also see seminars to stay fresh with genuine facts. Organisations should be aware what competitors are doing with technology. Are they applying new technology or do they miss opportunities? Suppliers could also be sources of information. Keeping up with changing markets, means often large R&D departments are needed. Of course, customer needs must not be neglected. Connection with the customer is very important. Customer needs changes with time. The customer used to find it important what material a product is

37 made of, now the customer is looking for a product experience. There is more needed than only the product itself, customer’s need is changing.

On the other hand, results do not assume that knowledge declares the relationship of sensing and exploration. The assumption that new knowledge has a mediating effect on the correlation of sensing and exploration cannot stand. New knowledge is not the exact answer why the relationship between sensing and exploration exist. In contrast, it is assumed that exploration requires creation of new knowledge to nurture distinction (Andriopoulos & Marianne, 2009). New knowledge creation is needed to adapt in a dynamic market (Andriopoulos & Marianne, 2009) and is needed to raise organisational capabilities.

Sensing opportunities is one capability, exploration or innovation is another capability. New knowledge is inevitable, but again it doesn’t declare why sensing has a positive effect on exploration.

Furthermore, the results show that attention has clearly no effect on the relationship between sensing and new knowledge creation. Still, attention does narrow the focus what to sense for. And that may result in a shorter time that relevant information arrives into the organisation. Time is crucial to respond to a change or a problem (March & Levinthal, 1993).

5.2 Research Limitations and Future Research

This research only lightens a few antecedents of exploration and put them in an order from starting point to the end, from sensing to exploration through new knowledge. It is very narrow for a very broad topic that innovation is. There are a dozen other antecedents that include exploration. And it is not a research that endorses only radical innovation for success. It is for long-term success, but many risks may not return costs on the investments. A firm also should consider the right organisational momentum (Kelly & Amburgey, 1991). And for continuation, routinization, refinement and return on investments, exploitation should not be neglected. It is recommended to find the right balance continuously (Greve, 2007). In

38 dynamic markets, the pace of change is high. Established firm that don’t adapt will see their glance of success vanish in a short time. We have seen that with Nokia, after Apple entered the mobile market and radically change that. Sensing opportunities to explore may lead to sustained competitive advantage. The greater attention there is, the greater the effect is of sensing on new knowledge is an assumption that is not approved by this research. It is not assumed attention is needed for existence of effect of sensing on creating new knowledge. Sensing in this research has a significant effect on exploration. But it still is just a part of what successful innovation depends on. For example, Teece (2007) has mentioned other dynamic capabilities that are needed to sustain competitive advantage, which are seizing and reconfiguring.

Although it is perhaps beyond the scope of this research, the result of question 9 is interesting. It shows that most respondents have ranked the business goal highest. That assumes that attention for the greatest number of respondents, is driven by the business goal, what is a top-down organisational effort (Ocasio, 2011). Attention should ideally be both bottom-up and top-down driven. This finding of top-down driven attention would make it interesting for future research of innovation processes.

Finally, the question remains if attention is enhancing competitive advantage. Results show there is no moderating effect of attention and are clearly in contrast of previous research. Attention needs more research, as is suggested by Ocasio (2007). It is a topic that goes beyond organisation and managerial studies and therefore rather complex. Attention is linked to neurological research for example. It is important to explore more about attention as it seems it needs more explanation.

39

6

Conclusion

Exploration is a process that is not easily chosen, as most managers stick to exploitative process, as they show quicker good results and have higher probability to have returns on investment. They are anxious to receive a bad reputation for failing their innovation. And there are firms that have intentions to innovate, but with old wisdom. The purpose of this research is to see what the implications are of exploration and what the direction of opportunities is, to overcome these implications that limit exploration processes. As this research suggests, new knowledge raises organisational capabilities (Tsoukas, 2009), that makes the hurdle to exploration lower, but in this research, it is not a significant assumption. The items in this research that are forming sensing, are assumed to have a significant positive effect on exploration. Attention on the other hand is not significant assumed to explain the relation of sensing with creating new knowledge. And sensing has not a significant effect on creating new knowledge as well.

Sensing must be considered as an important capability to adapt to the fast-changing circumstances in the dynamic market.

40

7

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