How to counteract the suppression of exploration in publicly traded corporations

Abstract

Top management teams frequently overemphasize efforts to exploit the current product portfolio, even in the face of the strong need to step up exploration activities. This mismanagement of the balance between explorative R&D activities and exploitation of the current product portfolio can result in the so-called ‘success trap’, the situation where explorative activities are fully suppressed. The success trap constitutes a serious threat to the long-term viability of a firm. Recent studies of publicly traded corporations suggest the suppression of exploration arises from the interplay between the executive team’s myopic forces, the board of directors as gatekeeper of the capital market, and the exploitation-exploration investments and their outcomes. In this paper, system dynamics modeling serves to identify and test ways in which top management teams can counteract this suppression process. For instance, we find that when the executive board is suppressing exploration, the board of directors can still prevent the success trap by actively intervening in the exploitation-exploration strategy.

Full text

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How to counteract the suppression of exploration in publicly
traded corporations1
Bob Walrave*
Kim E. van Oorschot**
A. Georges L. Romme*
* Eindhoven University of Technology
School of Industrial Engineering
P.O. Box 513, 5600 MB Eindhoven
The Netherlands
+31 40 247 3171
** BI Norwegian Business School
Department of Leadership and Organizational Behavior
NO-0442, Oslo
Norway
b.walrave@tue.nl
kim.v.oorschot@bi.no
a.g.l.romme@tue.nl
Forthcoming in R&D Management
1 The authors are grateful to the editor and two anonymous reviewers for their valuable
feedback and comments on earlier versions of this paper. A previous version of the paper was
presented at the 2014 international conference of the System Dynamics Society. The model
documentation with all the technical details of the model and simulation experiments is available
upon request from the authors.

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How to counteract the suppression of exploration in publicly
traded corporations
Abstract
Top management teams frequently overemphasize efforts to exploit the current product portfolio, even
in the face of the strong need to step up exploration activities. This mismanagement of the balance
between explorative R&D activities and exploitation of the current product portfolio can result in the
so-called ‘success trap’, the situation where explorative activities are fully suppressed. The success
trap constitutes a serious threat to the long-term viability of a firm. Recent studies of publicly traded
corporations suggest the suppression of exploration arises from the interplay between the executive
team’s myopic forces, the board of directors as gatekeeper of the capital market, and the exploitation-
exploration investments and their outcomes. In this paper, system dynamics modeling serves to
identify and test ways in which top management teams can counteract this suppression process. For
instance, we find that when the executive board is suppressing exploration, the board of directors can
still prevent the success trap by actively intervening in the exploitation-exploration strategy.
Keywords: exploitation-exploration, management-board interaction, success trap, suppression
process, system dynamics, intervention.

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1. Introduction
Exploitation and exploration activities are critical to organizational learning (Levinthal and
March, 1993). Exploitation refers to learning processes that incrementally improve the firm’s current
knowledge base, often translating into product enhancements. In that sense, exploitation is about
choice, execution, and variance reduction (Lavie et al., 2010). On the other hand, exploration is
directed toward the generation of knowledge that is different from the current knowledge base (Greve,
2007; Lavie et al., 2010). Typically achieved through R&D investments (Harmancioglu et al., 2007),
exploration enhances search, experimentation, and variation – and is about developing radically new
products (Roome, 1994; Tushman et al., 2010).
Firms directed toward the simultaneous pursuit of exploitative improvements and explorative
R&D are able to adjust faster to environmental fluctuations (e.g., such as changes in the level of
competitiveness) and, therefore, tend to survive longer in the market place (McCarthy and Gordon,
2011; Helfat et al., 2007; De Visser et al., 2010). For instance, after IBM’s struggle for survival
during the beginning of the 1990s, IBM’s management successfully launched its ‘Emerging Business
Areas’ program around 2000 that led to the company’s remarkable comeback (O’Reilly et al., 2009).
Nevertheless, the top management teams of Rubbermaid, Caterpillar, Polaroid and many other firms
at some point failed to direct their firms toward an exploitation-exploration portfolio sufficiently
aligned with the environmental conditions and, therefore, underperformed on the long run (Helfat et
al., 2007; Tripsas and Gavetti, 2000; Walrave et al., 2011).
A key reason underlying these failures is that a focus on exploitation tends to reinforce itself
(Gupta et al., 2006; March, 1991; Walrave et al., 2011). As the organization develops greater skill in,
and success with, exploitation, it tends to engage in that activity more and more, thereby further
suppressing exploration (Shibata, 2012). This vicious loop is commonly referred to as the success trap
(Levinthal and March, 1993; March, 1991; Lavie et al., 2010). The success trap substantially limits
the firm’s ability to develop a balanced portfolio of exploitation and exploration activities, particularly
when the firm’s environment is continually changing. As such, the success trap undermines the firm’s
potential to survive in the marketplace (Walrave et al., 2011).

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Interestingly, the literature does not provide any evidence-based clues regarding how to
counteract the success trap (cf. Vermeulen, 2010): some authors have argued that explorative
investments (starting as early as possible) will counteract the suppression of exploration (e.g., Helfat
et al., 2007; Tushman et al., 2004) and others have pointed out that drastic turnarounds, such as an
exit from the stock market, are required to escape the success trap and avoid bankruptcy (e.g.,
Walrave et al., 2011; Wiersema, 2002). As such, in this paper we intend to create a deeper
understanding of the mechanisms that serve to restore the alignment between exploitation-exploration
activities and the firm’s environment before the need for a major turnaround effort arises. The main
contribution to the literature as well as managerial practice is the codification of courses of action, at
the executive as well as supervisory board levels, that serve to counteract the suppression of
exploration in publicly traded firms.
By means of causal loop diagram analysis and system dynamics modeling, we find that the
success trap can be effectively counteracted, but only when top management adopts rather specific
intervention strategies. For instance, our study suggests top managers need to avoid launching
explorative R&D initiatives too early (i.e., before substantial environmental change sets it), which
extends earlier work advocating to start with exploration as early as possible (Helfat et al., 2007;
Tushman et al., 2004). Furthermore, a thoughtful collaboration between the executive and supervisory
boards yields the best chances to successfully counteract the suppression of exploration – rather than
sharply separating the executive and supervisory powers in public corporations suggested by others
(Bednar et al., 2012; Lhuillery, 2011).
The next section presents the theoretical background. We then develop several propositions on
how management teams and boards can counteract the suppression of exploration. Subsequently, we
test these propositions through system dynamics simulation experiments. Finally, we conclude by
discussing the implications of this work.
2. Theoretical background
Exploitation and exploration are defined as all activities that result in organizational learning
(Levinthal and March, 1993). Exploitation typically involves a smaller amount of learning compared

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to exploration (Greve, 2007; Gupta et al., 2006; March, 1991). Accordingly, the distinction between
the two concepts can be considered more a matter of degree than of kind (cf. Greve, 2007; Lavie et
al., 2010). Exploitation and exploration are, therefore, often considered as two ends of one continuum;
and an increase in exploitation activities decreases the amount of resources available for exploration
efforts, and vice versa (Gupta et al., 2006; Lavie et al., 2010; Uotila et al., 2009). Note that some
authors also consider exploitation and exploration to be orthogonal constructs (He and Wong, 2004;
Jansen et al., 2006; Gupta et al., 2006). Although there are sound arguments for both types of
operationalization (cf. Gupta et al., 2006; Lavie et al., 2010), here we follow the seminal work by
Lavie et al., (2010) and assume exploitation and exploration to be on one continuum, and thus
constitute a balancing act.
Irrespective of the operationalization adopted, firm performance is largely determined by the
organizational ability to explore as well as exploit changes in the business environment (Helfat et al.,
2007; Teece et al., 1997, De Visser et al., 2010). More specifically, when the business environment
turns more competitive, pressure for higher efficiency and lower prices increases, resulting in for
instance tighter margins (Jansen et al., 2006). As such, in order to remain competitive, more emphasis
should be put on exploitation, for example by further developing the firm’s main offerings in terms of
price competitiveness. Yet, if the business environment turns more dynamic, customer preferences
change and product demand fluctuates – as dynamic environments make current offerings obsolete
(Jansen et al., 2006). Therefore, for optimal performance, the firm needs to be directed toward more
exploration, for example by developing and introducing new products and/or services that depart from
existing offerings (Leonard-Barton, 1992). As such, for sustained organizational performance,
executives need to create a particular operational exploitation-exploration distribution that aligns the
available resources with (changes in) the business environment (Gibson and Birkinshaw, 2004;
Harmancioglu et al., 2007; Walrave et al., 2011). Yet, executives often fail to make sense of
environmental changes or translate the observed changes into a particular exploitation-exploration
strategy (Smith and Tushman, 2005; Walrave et al., 2011).
Two traps are at the heart of such failure (Levinthal and March, 1993; Lavie et al., 2010; March,
1991). The first trap constitutes the situation where exploration drives out exploitation in a self-

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reinforcing fashion (Levinthal and March, 1993). More specifically, the (unavoidable) dead ends
arising from explorative R&D can cause management to step up explorative search activities; and
substitute relatively new ideas and technologies by other newly developed ideas and technologies.
Such state of affairs is especially dangerous when the firm’s resources are drying up in the context of
increasingly competitive environments, which actually drives the need for higher efficiency (Jansen et
al., 2006). This situation, where exploitative investments are (fully) suppressed by explorative
initiatives, is known as the ‘failure trap’ (March, 1991; Levinthal and March, 1993; Lavie et al.,
2010).
The second trap is commonly referred to as the ‘success trap’ (Levinthal and March, 1993; Lavie
et al., 2010; Gupta et al., 2006) and involves exploitative activities driving out explorative activities –
also in a self-reinforcing manner. Compared to the failure trap, the success trap is especially
dangerous when the environmental context becomes more dynamic, which renders existing offerings
obsolete (Jansen et al., 2006). This situation is far more commonplace (Walrave et al., 2011) and
explains our focus on the success trap in this paper. The success trap is likely to occur when past
exploitation initiatives in a given area make future exploitation investments in that same domain
(increasingly) more efficient (Gupta et al., 2006; Levinthal and March, 1993; March, 1991). As such,
the short-term virtue of exploitative refinement causes the executive team to deny or underestimate
environmental changes, as a result of managerial myopia, which motivates (further) suppression of
explorative R&D investments (Bednar et al., 2012; Greve, 2007).
Yet, it is unlikely that the executive team is completely unaware of changes in the environmental
business context, no matter how swift or implicit these changes are (Tushman et al., 2004). Therefore,
managerial myopia may delay exploration investments, but does not fully suppress explorative R&D
activities in response to increased environmental dynamism per se. As such, managerial myopia
appears to have limited explanatory power for the (often) observed consequences of the suppression
of exploration. Walrave et al. (2011) therefore developed a more comprehensive process theory
underlying the success trap. This so-called ‘suppression process’ describes the interplay between the
level of environmental dynamism, the executive team’s myopic forces, the board of directors as
gatekeeper of the capital market, and the (outcomes of) exploitation-exploration investments as the

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main cause of the suppression of exploration. Figure 1 depicts the causal loop diagram outlining how
and why the suppression process may occur.
Figure 1: Causal Loop Diagram of managerial decision making with regard to investments in
exploitation and exploration (based on Walrave et al., 2011).
More specifically, the stick to exploitation loop (Figure 1) captures the effect of managerial
myopia (Hannan and Freeman, 1984; Tripsas and Gavetti, 2000). Investments in exploitation within a
very stable (competitive yet non-dynamic) business environment tend to generate a positive operating
result, and hence, increasingly limit the decision to shift the exploitation-exploration balance (Bednar
et al., 2012; Tushman et al., 2010). This loop therefore, if left on its own, is self-reinforcing in nature
(Shibata, 2012). However, changes in the environment may result in an increasing misalignment
between the environmental context and the current exploitation-exploration balance, which in
turn―albeit delayed―may result in the executive team’s decision to shift the exploitation-exploration
balance (toward exploration), and so forth (Roome, 1994). As such, major environmental dynamism

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thus tends to counteract the self-reinforcing nature of the ‘stick to exploitation’ loop (Bednar et al.,
2012).
This suppression theory assumes a specific role of the board of directors. That is, we assume
boards become especially involved in strategy formulation when organizational performance is weak
(Bednar et al., 2012; McNulty and Pettigrew, 1999; Wiersema, 2002) and they are exposed and
susceptible to pressure from outside stakeholders (e.g., institutional investors) that demand more
exploitative investments during dire times (Mayer, 2013; Tushman et al., 2004; Wiersema, 2002).
These processes constitute the basis for the balancing external pressure loop (Figure 1). This feedback
loop determines to what extent the executive team’s decision to shift the exploitation-exploration
balance toward exploration results in actual explorative R&D investments, given the perceived trend
in the current operating results. More specifically, a positive trend in financial performance creates
discretional space for the executive team to exploit and explore (i.e., the board is not expected to
intervene) (Wiersema, 2002). A negative trend, however, gradually increases the board’s pressure on
the executive team to focus on exploitation in an attempt to restore shareholder value (Bednar et al.,
2012).
Finally, the self-reinforcing attempt to explore feedback loop (Figure 1) captures the implications
of actual resource investments in exploration. After a certain delay, explorative R&D attempts,
aligned with the dynamic environment, start paying off and thus increase the operating result
(Harmancioglu et al., 2007). If the operating result improves, the pressure to exploit decreases, which
allows for further investments in exploration. In essence, an actively working ‘attempt to explore’
loop is a vital signal that the firm, within the framework in Figure 1, is making an effort to counteract
the suppression process.
The suppression process ultimately resulting in the success trap evolves over three major time
periods (cf. Walrave et al., 2011). In the first period of stability (period A), the firm’s initial focus on
exploitative product improvements is well-aligned with the competitive, yet non-dynamic,
environmental context; and, as such, it results in good financial performance. This causes
management to stick to its successful exploitation strategy and provides the foundation for the
suppression of exploration (Tushman and O’Reilly, 1996). Subsequently, as a result of upcoming

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change in period B (i.e., increasing environmental dynamism) the focus on exploitation becomes
increasingly suboptimal. Managerial awareness of such environmental change and increasing
misalignment grows only slowly, due to myopic forces (Hannan and Freeman, 1984; Tripsas and
Gavetti, 2000). In the subsequent period of major change (period C) characterized by a high level of
environmental dynamism, financial performance declines, which triggers the board to exert more
pressure to exploit. Despite the fact that the executive team becomes increasingly aware of the need
for more explorative R&D, the board’s pressure to exploit is so substantial that explorative
investments are (almost) completely abandoned. As such, the executive team is forced to respond to
further environmental dynamism with even more exploitative investments. The firm is now
completely caught in the suppression of exploration, involving a structural decline in firm
performance over time.
Despite the dramatic consequences of the suppression process (e.g., bankruptcy), not much is
known about how it can be counteracted. Some have argued that a sufficient level of early explorative
investments (i.e., before the environmental context changes) could prevent the process from unfolding
(e.g., Helfat et al., 2007); yet, what exactly constitutes ‘sufficient’ remains unclear. Looking at
numerous cases, Tushman et al. (2004) observe that successful managers foresee the need for major
strategic change by recognizing external threats and opportunities. But there is a lack of knowledge on
when or how to actually change the exploitation-exploration distribution. As such, in the remainder of
this paper we identify and investigate how management teams and boards of directors should act in
order to counteract the suppression process.
3. Propositions
A causal loop diagram (CLD) is a powerful tool for representing the feedback structure and
dynamics within systems (e.g., Van Oorschot et al., 2013; Perlow et al., 2002; Romme et al., 2010;
Sterman, 2000). In this section, we use the CLD described in the previous section to develop
propositions on how top management teams can counteract the suppression process. We will
particularly investigate the ‘stick to exploitation’ and ‘external pressure’ loops in Figure 1. The former
feedback loop involves the executive team perceiving environmental changes (i.e., an increase in

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environmental dynamism), resulting in the decision to initiate more explorative R&D, but only after a
considerable delay (due to managerial myopia). Reduction of this delay implies a faster realization by
the executive team that more explorative investments are required and, as such, may prevent firms
from getting caught in the suppression of exploration (Levinthal and March, 1993; March, 1994;
Tushman et al., 2004). In this respect, the executive board’s decision to adjust the exploitation-
exploration balance toward more explorative R&D investments constitutes the first general course of
action toward counteracting the suppression process.
The ‘external pressure’ loop controls how the board transmits the pressure of the capital market
into pressing the executive team toward enhancing its focus on exploitation. In this respect, whereas
the executive team is the primary orchestrator of adjustments to the exploitation-exploration balance,
the board of directors plays a critical role in the actual execution of such proposed changes by
reinforcing or tempering the ‘stick to exploitation’ loop via the ‘external pressure’ loop (McNulty and
Pettigrew, 1999; Walrave et al., 2011). As such, the board can play a significant role in enhancing or
undermining the effectiveness of the first course of action, by varying the external pressure to exploit.
This varying of the external pressure to exploit – in combination with the first approach – constitutes
the second general course of action toward counteracting the suppression process.
These two general principles can be ‘executed’ at different periods in time. As such, we analyze
the effectiveness of executing the two courses of action during a period of stability (period A), a
period of upcoming change (period B), and a period of change (period C) (after which, we assume, a
period of stability sets in again). Following, in the remainder of this section we explore six
propositions regarding (1) the effectiveness of attempts by the executive board to increase explorative
R&D investments and (2) the role of the board of directors in making such attempts succeed.
3.1. Changing the exploitation-exploration balance during a period of stability (period A)
When the environmental context is still stable, the CLD in Figure 1 implies that the decision to
shift the exploitation-exploration balance toward more exploration results in the following behavioral
patterns. First of all, firm performance continues to be rather good because the exploitation-
exploration balance is still well-aligned with the competitive but non-dynamic environmental

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situation. This provides the executive team with the means to actually shift the exploitation-
exploration balance toward more explorative R&D. That is, there is no external pressure from the
board to invest (mainly) in exploitative ends, causing the ‘attempt to explore’ loop to prevail over the
‘external pressure’ loop at this moment in time. However, early explorative R&D investments in such
a business environment tend to raise significant opportunity costs (Jansen et al., 2006); that is, costs
associated with investing in exploration at the expense of exploitative investments. This is likely to
decrease the financial performance of the firm, as short-term exploitative opportunities remain
unused. As such, as firm performance decreases, the ‘external pressure’ loop becomes increasingly
dominant. In this respect, if the opportunity costs are high enough, the shift in the exploitation-
exploration balance toward more exploration during period A can cause the firm to get trapped in the
suppression process.
Consider Philips. In 1988, about 750 million Philips television sets were globally in use and the
quest for the high-definition (HD) standard was ongoing within Philips. In this respect, Philips made
hefty investments into the HD television project and expected to sell its first sets early 1994 (Adner,
2012). Although Philips, from a technical point of view, was perfectly capable of developing HD
television sets, its environmental context was not ready for this new technology because HD
television cameras and transmission standards were not yet available. This resulted in significant
opportunity costs, and in 1992 Philips was forced to sell assets in order to cut its debt and reduce its
annual interest costs. This left Philips with a $2.5 billion write-down that seriously undermined the
financial stability of the company (Adner, 2012). It was not until 2006 that flat-panel HDTVs became
the mainstream standard (McBride et al., 2005). The introduction of the first MP3-players (there was
no legal content at that moment in time), light and alcohol-free beer (initial cultural disagreement), the
Newton (Apple’s version of a PDA) all suffered from similar strategic failures: these new products
were simply ahead of its time (Adner, 2012).
In this relatively stable situation (period A), the main goal of the board of directors is to limit
opportunity costs by minimizing the influence of the ‘attempt to explore’ loop. This is achieved by
increasing the pressure to exploit while firm performance is still adequate – which thus constitutes
rather counterintuitive behavior by the board. This board intervention would limit the executive

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team’s resources for shifting the exploitation-exploration balance toward more explorative R&D.
Again consider the Philips case: the executive team invested heavily in HD technology in period A
(Adner, 2012). In this particular situation, Philips’ board of directors could have pressed the executive
team to follow a more moderate, slower path in adjusting the exploitation-exploration portfolio
toward more exploration – for example, by putting a cap on the amount of explorative R&D
investments per year. This would have constrained the ‘attempt to explore’ loop by enhancing the
‘external pressure’ loop, and would have likely reduced the opportunity costs – and subsequent
problems – significantly. We therefore propose that in the context of the suppression process:
Proposition 1. In a relatively stable business environment:
(1a) The executive team’s decision to shift the exploitation-exploration balance toward
more exploration is likely to initiate the suppression process, which (over time) is
likely to decrease firm performance.
(1b) The board of directors can potentially reverse the negative outcome predicted by
proposition 1a by convincing or pressing the executive team to invest more in
exploitation.
3.2. Changing the exploitation-exploration balance during a period of upcoming change
(period B)
The executive team’s decision to increase explorative R&D investments during a period of
upcoming environmental change may result in completely different dynamics. Initially, the
exploitation-exploration balance is well aligned with the described environmental context and gives
rise to good financial results: the ‘stick to exploitation’ loop is dominant. Nevertheless, as
environmental dynamism increases, the growth in performance stagnates. An increase in the
explorative R&D initiatives taking place before the ‘external pressure’ loop becomes dominant,
causes the ‘attempt to explore’ to grow stronger. Explorative investments in this period are more
likely to result, after a certain delay, in actual performance improvement (compared to similar
investments in period A) due to the alignment between environmental context and these investments !
that is, explorative R&D investments on par with the dynamic context (Jansen et al., 2006; Walrave et

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al., 2011). As such, adjustments to the exploitation-exploration balance during period B can keep the
external pressure from growing dominant, which enhances the likelihood that management
successfully prevents the suppression process from unfolding.
In 1999 Lou Gerstner, IBM’s CEO, noticed that IBM failed to create sufficient value from 29
separate technologies and businesses that the company had developed (O’Reilly et al., 2009). A
detailed internal analysis of the situation resulted in a rapidly growing awareness of the misalignment
between the exploitation-exploration portfolio and environmental context and, subsequently, in an
increase in the managerial awareness to explore (cf. O’Reilly et al., 2009). IBM’s executive team
discovered that the existing management systems primarily rewarded execution targeting short-term
results (i.e., stick to exploitation) and did not value and reward efforts to explore and build strategic
awareness of environmental changes (i.e., attempt to explore). At that moment in time, IBM was
driven by processes that emphasized the firm’s ability to exploit the current product portfolio, which
led to IBM’s financial successes during a period of relative stability (Applegate et al., 2005; O’Reilly
et al., 2009). The decision to shift the exploitation-exploration balance (period B) allowed IBM’s top
management team to introduce its Emerging Business Opportunities (EBO) program, focused at
renewing its exploration efforts (O’Reilly et al., 2009). The EBO program served to adequately
address environmental changes by activating the ‘attempt to explore’ loop. In this respect, several
EBO projects grew to become highly profitable businesses (O’Reilly et al., 2009). Between 2000 and
2005, projects such as Business Transformation Services and Linux generated $US 15.2 billion in
sales (Applegate et al., 2005). As such, the executive decision to step up explorative R&D, in the face
of upcoming change, prevented the firm from getting trapped in the suppression process.
Some other firms are also known for their ability to successfully transform themselves alongside
changing environmental contexts. For example, the 250 years old GKN morphed from the iron ore to
steel industry, to automotive parts, then to aerospace, and today is an industrial services company
(Macdonald, 1995; O’Reilly et al., 2009). The Dutch company DSM has also repeatedly demonstrated
such adaptive behavior. DSM, founded in 1902 as a coal mining business, diversified into the
fertilizers business, then became a petrochemical company, subsequently moved into chemicals, and
is now active in the nutrition, pharmaceutical, performance materials, and polymer industries (Grant,

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2004). This also implies that the role of the board of directors in this situation is to monitor and advise
– rather than to actively intervene in the exploitation-exploration strategy. Therefore, we propose:
Proposition 2. In a business environment characterized by upcoming change:
(2a) The executive team’s decision to shift the exploitation-exploration balance toward
more exploration is likely to counteract the suppression process.
(2b) The board of directors does not need to intervene by increasing or decreasing the
pressure to exploit (unless the executive team fails to act in line with proposition 2a).
3.3. Changing the exploitation-exploration balance during a period of change (period C)
Finally, another dynamic pattern arises from the executive’s team decision to increase their
firm’s exploration activities during a period of major environmental change. At first, the ‘stick to
exploitation’ loop is dominant in a stable business environment, resulting in good financial results.
The period of upcoming change ends and environmental change sets in, causing firm performance to
start declining, because insufficient explorative R&D investments have been made to counter the
increase in environmental dynamism. This triggers management to decide to shift the exploitation-
exploration balance toward more exploration, but the declining performance also makes the ‘external
pressure’ loop increasingly dominant. Even if the executive team now starts investing in exploration,
such R&D initiatives only start contributing to firm performance after a substantial delay. As such, it
is very likely that the ‘external pressure’ loop is enhanced and becomes increasingly dominant; any
explorative initiatives are, therefore, prematurely abandoned. In the absence of (major) explorative
investments, the firm then completely suppresses exploration.
Consider the case of Gamma Holding that achieved substantial growth in the technical textile
industry until 2007. This growth was mainly realized by pursuing an exploitation strategy for an
extended period of time – a strategy largely in line with the relatively stable context (period A)
(Walrave et al., 2011). Nevertheless, around 2000, customer preferences for technical textiles were
drastically changing (period B). However, the dominant ‘stick to exploitation’ loop caused a
significant delay in the executive team’s decision to shift the exploitation-exploration balance toward
more exploration. In 2008, the executive team attempted to adjust the firm’s strategy toward

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innovation and product development – about eight years after the business environment started
changing (Walrave et al., 2011). At the same time financial results were already deteriorating – a
downward trend that was further reinforced by the global economic downturn. The subsequent
external pressure for short-term performance improvements made Gamma Holding’s executive team
abandon the new strategy. From this point onward (period C), the value of Gamma Holding on the
stock exchange continued to decline rapidly until it reached the lowest value ever, and the board of
directors decided to appoint a new CFO and CEO to enforce and facilitate a strategy with an enhanced
focus on exploitation (Walrave et al., 2011). Gamma Holding was now completely stuck in the
suppression of exploration. As of January 2011, the company was bought out by a group of investors,
taken of the stock exchange, and sold in separate parts.
In a similar vein, Kmart Corporation, once the largest retailer of the U.S., struggled for survival
around 1994 (Wiersema, 2002). After years of significant growth in a relatively stable environment, in
which Kmart grew rapidly, the business landscape changed significantly in the early 1990’s, also as a
result of the rise of Wal-Mart and Target (Hakim and Kaufman, 2002). The pressure from Kmart’s
shareholders to restore previous levels of performance was significant and a new CEO was assigned,
who immediately focused on protecting shareholder value by means of exploitative efforts
(Wiersema, 2002). The new strategy involved, for example, reducing advertisements in circulars and
trying to beat the competition by lowering prices. Kmart Corporation thus got trapped in the
suppression of exploration, with no means left to adapt to the changing environmental context. Less
than two years later, Kmart filed for bankruptcy (Hakim and Kaufman, 2002; Wiersema, 2002).
In this situation, where the executive team decides to adjust the exploitation-exploration balance
during period C, the main role of the board of directors is to keep the ‘external pressure’ loop from
becoming dominant. Once more, this behavior is rather counterintuitive for most boards. Executives
and directors now need to work together to prevent any further delays in explorative R&D
investments (Hillman and Dalziel, 2003; Rosenblatt et al., 1993; Walrave et al., 2011). More
specifically, through minimizing the external pressure, the ‘attempt to explore’ loop can (relatively)
quickly become more dominant, which may mitigate the effects of the ‘too late’ response by the

16
executive team and possibly save the company from getting fully trapped in the suppression process.
Therefore:
Proposition 3. In a relatively unstable business environment:
(3a) The executive team’s decision to shift the exploitation-exploration balance toward
more exploration is likely to be ineffective in counteracting the suppression process.
(3b) The board of directors can possibly mitigate the negative outcome predicted by
proposition 3a by convincing or pressing the executive team to invest in exploration.
4. Simulation method and results
4.1. Method
We will test the propositions presented in the previous section by performing simulation
experiments. System dynamics (SD) simulation modeling, adopted in this study, is particularly useful
when addressing a fundamental tension between competing metrics and intertwined processes (e.g.,
management-board interactions), characterized by multiple interacting processes, feedback loops,
time delays, and other non-linear effects (e.g., Addison et al., 1976; Oliva and Sterman, 2001;
Sterman, 2000). The SD simulation model developed by Walrave et al. (2011) will be used here. This
model pertains to a top management team, historically favoring incremental improvements over
exploring new horizons, that is then faced with a relatively swift change in environmental dynamism.
Adopting this model allows for experimentation with the relevant variables by means of so-called if-
then simulation experiments.
More specifically, the experiments are directed toward identifying the minimum shift in the
exploitation-exploration balance (toward exploration) that the executive team needs to realize in order
to counteract the suppression process. Here, we assume that the executive team can adjust the firm’s
exploitation-exploration balance by a quarter percent per week more toward exploration (without
considering the influence of the normal system’s dynamics). Subsequently, the shift required, at any
given t, can be calculated by counting the amount of weeks the executive team would need to keep
pressing toward more explorative R&D, in order to successfully counter the suppression process.

17
Although this represents a rather abstract measurement, it does allow for comparing different
scenarios in terms of both magnitude and timing.
Furthermore, in order to consider the financial viability of the managerial decision to adjust the
exploitation-exploration balance, the opportunity costs need to be considered. The opportunity costs
capture the difference between what is (i.e., financial performance as a result of change in the
exploitation-exploration balance), compared to what could have been when the development of the
exploitation-exploration balance would have remained ‘untouched’. We refer to the model
documentation for detailed information about the model and simulation experiments. (This document
can be obtained from the authors.)
In the first experiment we investigate propositions 1a, 2a, and 3a. We do so by calculating the
shift to the exploitation-exploration balance required, and the associated opportunity costs, to
counteract the suppression process. Subsequently, in the second experiment, we investigate
propositions 1b, 2b, and 3b by varying the ‘external pressure to exploit’ (with 10 percent) while
conducting the first experiment again: any adjustment to the exploitation-exploration balance
executed in period A increases the pressure to exploit; while any adjustment executed in period C
decreases the external pressure to exploit. By comparing the results of the first experiment with those
of the second experiment, we can isolate the action the board needs to take to effectively counteract
the suppression process.

18
4.2. Results
The solid black lines represent the results from the first experiment. The dotted black lines denote the
findings from the second experiment. For the latter experiment, the external pressure was increased
(for period A) or decreased (for period C) by 10 percent (! +/- 3 percent; ! +/- 5 percent).
Figure 2: results of the simulation experiments.
Figure 2 depicts the simulation results. The graphs in Figure 2a denotes the tipping points
regarding the time the executive team started to adjust their firm’s exploitation-exploration balance (t
= 0 till t = 450; capturing period A, B, and C of the suppression process). That is, when the executive
team directs a shift toward exploration for a smaller amount of weeks than the tipping point indicates,
0
20
40
60
80
100
0
52
104
156
208
260
312
364
416
Fi gur e 2b
0
0.05
0.1
0.15
0.2
0
52
104
156
208
260
312
364
416
Shift required in exploitation-
exploration balance (weeks)
Opportunity Costs
in Eu r o s (x 1,000,000)
Fig ure 2 a
Period C
Period A
Period B
80
60
40
20
Change to the exploitation-exploration balance started in week
Res ults experiment 1
Res ults experiment 2
(incl. confidence interval)
Res ults experiment 1
Res ults experiment 2
(incl. confidence interval)

19
the firm gets caught in the suppression of exploration, and vice versa. The graph should therefore not
be interpreted as a continuous line unfolding over time. For example, an increase in explorative R&D
activities (Figure 2a – solid black line) starting around t = 70 requires the executive team to push for
more explorative R&D for at least 20 weeks to prevent the suppression process toward the success
trap. Following that same logic, Figure 2b denotes the opportunity costs arising from the required shift
to the exploitation-exploration balance as illustrated in Figure 2a – at the end of a model run. For the
example previously mentioned, the opportunity costs are higher than 100 million Euros.
Propositions 1a, 2a, and 3a (experiment 1) can be evaluated by the results in Figure 2 – solid
black lines. These results suggest a significant increase in the explorative R&D investments during
period A is likely to result in very high opportunity costs (Figure 2b). Such a ‘too early’ increase in
exploration activities by the executive team easily triggers the suppression process toward the success
trap. As such, these simulation results support proposition 1a. However, an increase in explorative
activities during period B is likely to counter the suppression process. Such ‘timely’ adjustment of the
exploitation-exploration balance is characterized by a small managerial effort to shift the exploitation-
exploration balance required (Figure 2a) as well as low opportunity costs (Figure 2b). Therefore, these
results illustrate and support proposition 2a. Finally, increasing exploration during period C is likely
to suffer from a rather difficult to realize shift to the exploitation-exploration balance required to
counteract the suppression process (Figure 2a). As such, these interventions by the executive team are
‘too late’ and no longer likely to counter the suppression process ― in line with proposition 3a.
The results of the second experiment are shown in the dotted black lines (Figure 2). These results
demonstrate that an increase in the external pressure, in the case of a too early change in the
exploitation-exploration balance, lowers the executive team’s effort required to realize sufficient
change to the exploitation-exploration balance, thereby increasing the success chances of
counteracting the suppression process. Whereas the results indicate that the opportunity costs decrease
significantly, they still remain very high (as such, this result is not clearly visible in Figure 2b). This is
caused by the fact that the simulation setup suppresses, rather than delays, exploration initiatives. As
such, it may be paramount that, in line with proposition 2a, in period A the board delays executive
efforts to step up exploration until period B. As such, this supports proposition 1b, but only under the

20
condition that the external pressure to exploit merely delays (rather than suppresses) attempts to
explore. Moreover, in line with proposition 2b, the role of the board in period B is merely to monitor
and advise. Finally, the simulation results indicate that, in the case of too late adjustments to the
exploitation-exploration balance, decreasing the external pressure to exploit in the first half of period
C is likely to lower the executive effort required (to realize sufficient explorative R&D) as well as the
opportunity costs so that the suppression of exploration can be effectively countered ― in line with
proposition 3b.
5. Discussion and conclusion
The success trap, in which a firm fails to adapt to environmental changes due to an excessive
focus on exploitative investments, is an important cause of organization decline and failure (Levinthal
and March, 1993). In this paper, we explore whether and how the suppression of exploration can be
successfully prevented or counteracted. Suppression process theory is employed to explain how a
publicly traded firm can get trapped in suppressing exploration activities due to the dynamic
interaction between top executives, board members, and exploitative versus explorative investments.
By means of CLD analysis and system dynamics modeling we developed a deeper understanding of
how the suppression process can be countered and, as such, prevent the success trap from bringing
about organizational failure. The question of how to guard against the suppression of exploration
remains an under-researched, yet important, topic within the exploitation-exploration literature
(Vermeulen, 2010). In this respect, our study contributes to the literature by codifying courses of
action by both executives and directors for counteracting the suppression of exploration in publicly
traded firms.
Badly timed decisions and wrong expectations are a core source of innovation failure (Adner,
2012). Our findings underline the importance of timing (Hannan and Freeman, 1984). That is,
resources need to be appropriately divided among explorative R&D initiatives and exploitative
product enhancement at the right moment in time, in order to prevent the suppression process from
unfolding. This study identified three phases: ‘too early’ (period A), ‘timely’ (period B), and ‘too late’

21
(period C). Each phase has different characteristics and, therefore, requires a particular approach –
with a different likelihood of success – to counter the suppression process. In this respect, an increase
in the explorative R&D activities conducted ‘too early’ (period A) can carry high opportunity costs
due to the fact that many short-term opportunities remain unused. In this competitive but non-dynamic
setting, ‘successful companies stick to what works well’ (Tushman et al., 2004, p. 586), while keeping
a keen eye on new developments and upcoming changes. This implies the executive team should not
aim, or be allowed by the board, to engage in major investments in exploration that are in clear
misbalance with the firm’s exploitative efforts, while the suppression process is still in its infancy. In
a way, this finding partially contradicts the popular idea that early explorative investments will
prevent firms from getting caught in the suppression of exploration (Levinthal and March, 1993;
March, 1994; Tushman et al., 2004). This popular thesis is only valid under the condition that there is
a thoughtful balance between such early investments in exploration and sustained investments in the
current product portfolio.
The ‘timely’ phase implies relatively low or moderate amounts of investments in exploration are
required to counteract the suppression process. That is, financial performance is likely to remain
adequate, as the correct timing of changing the exploitation-exploration balance brings along only
limited opportunity costs and the ‘external pressure’ loop thus does not grow dominant. Timely
executed shifts toward more exploration are best conducted at the moment in time when the
environmental situation is starting to become more dynamic (period B). As such, the likelihood of
successfully countering the suppression process is highest during this period. This also implies that
the role of the board is to monitor and advise, but not to actively intervene in the increasing levels of
explorative R&D.
Finally, an increase in explorative R&D activities executed ‘too late’ has very little chance of
being effective. Too late shifts in the exploitation-exploration balance are common but also dangerous
(March, 1991; Walrave et al., 2011), as these need to be conducted in the context of substantial
external pressure. In most cases, firm survival then depends on drastic turnarounds, such as a stock-
market exit (Helfat et al., 2007; Tushman et al., 2004). More leeway created by the board to explore

22
new knowledge (in spite of disappointing performance) is likely to provide more time to counteract
the suppression process.
Interestingly, many executive teams postpone frame-breaking changes until severe financial
underperformance forces them into drastic action (Tushman et al., 2004). That is, the executive team
discovers the performance problem, diagnoses its cause(s), and subsequently implements solutions.
Our findings underline that this ‘traditional’ procedure, implied by many theories of decision making
(e.g., Levinthal and March, 1993), may not be effective against the self-reinforcing nature of the
suppression process.
5.1. Role of the board of directors
Our findings also provide an interesting perspective on the role of boards of directors. A
thoughtful collaboration between the executive team and the board appears to yield the best chances
to successfully counteract the suppression process. In this respect, it appears that management-board
independence might actually contribute to the self-reinforcing dynamics that can capture the firm in
the suppression process (cf. Bednar et al., 2012; Mayer, 2013). This effectively counters the idea that
the board of directors needs to work quite independently from the executive team (Hillman and
Dalziel, 2003; Walrave et al., 2011).
Furthermore, our findings illustrate that directors need to operate in a more anti-cyclical manner:
during times of prosperity and stability, directors should strive to minimize opportunity costs (i.e.,
delaying explorative R&D investments by enhancing external pressure on the executive team),
whereas during times of decline the focus should be on enabling executives in making explorative
investments as soon as possible. These findings are critical because executives and directors often act
in the opposite manner (Mayer, 2013; Vermeulen, 2010). Frequently, the main aim of the board of
directors is to satisfy the firm’s shareholders and, as such, it typically pays more attention to pleasing
the investment community than to ‘fixing’ the company (Mayer, 2013). Such anti-cyclical behavior of
the board thus requires an enhanced collaboration between executives and board members as well as a
certain degree of independence of the board toward the shareholders (Mayer, 2013).

23
5.2. Managerial implications
The results of this study imply the board needs to take a proactive position between shareholders
and top executives to both monitor results and provide resources (Hillman and Dalziel, 2003;
McNulty and Pettigrew, 1999). One approach to accomplish this has been coined the ‘trust firm’,
involving a board of directors that functions as a ‘board of trustees’. This type of board does not
interfere in the day-to-day running of the firm, yet guards the long-term values and principles the firm
stands for. This strengthens existing governance arrangements by providing oversight that is distinct
from, yet complementary to, the executive team. In this respect, the ‘trust firm’ structure allows the
board to commit credibly to the principles and values of stakeholders and shareholders, to which
shareholders would otherwise fail to adhere (Mayer, 2013). The notion of a trust firm aligns with
Hayward’s (2007) recommendation that an executive should have a foil. A foil is somebody who
helps to advance managerial decision making through complementary capabilities and perspectives,
by providing important feedback about performance and the quality of decisions. In this respect, a
well-informed board of directors can act as foil by questioning, underscoring, informing, enhancing
and complementing the executive team and its agenda (Hayward, 2007).
Evidently, the success trap is best avoided early on (period B), when change sets in. In this
respect, the executive team must monitor how other (leading) firms distribute their exploitation and
exploration activities. Furthermore, continuous data collection regarding changes in customer needs,
emerging technologies and other changes within the business environment should take place. For
instance, venturing with new businesses can help to establish insights and deduce potential
consequences of decisions on exploitation-exploration ahead of time (Hayward, 2007; Schildt et al.,
2005). This information can be combined with information gathered from customer and/or supplier
involvement in the innovation process. The resulting dataset can be used to assess the characteristics
of the current business environment (e.g., its level of dynamism) and predict possible changes in the
environmental context, allowing for the development of a shared and long-term vision on
exploitation-exploration investment levels.
A tell-tail sign with respect to a period of stability (period A) is the healthy returns made on
exploitative investments. Product demand levels then are high due to stable customer needs (Walrave

24
et al., 2011). Moreover, leading competitors have not significantly increased their R&D investments
or not clearly started developing radically new products; furthermore, the broader environmental
context indicates no upcoming changes that are likely to affect customer needs or preferences.
The period of upcoming change (period B) is characterized by (gradual) changes in customer
preferences and gradually stalling growth in the return on exploitative investments. Other indications
of such increases in environmental dynamism may involve new product ideas and prototypes
developed and presented by competitors or other firms. These new solutions may breed the interest of
again other firms, resulting in the acquisition and/or (further) development of such solutions. Note
that many new products are likely to underperform compared to established product solutions at the
time of introduction. Furthermore, macro-economic trends may or may not reinforce the appeal of the
current offering.
Finally, a period of major change (period C) is characterized by rapidly decreasing demand
levels of the ‘old’ offerings. Consumers adopt the new solution that, by now, offers a superior
experience compared to the established product. Furthermore, the newer solution is likely to quickly
gain in functionality and appeal, due to sustained investments in the technology, a growing number of
users (network externalities), or even governmental support. As such, exploitative investments in the
established solution are no longer likely to generate significant returns. In this respect, other firms are
likely to have both the established and new products in their product portfolio.
Table 1 summarizes the key findings in terms of indicators of each period as well as loop
dominance of the ‘too early’, ‘timely’ and ‘too late’ responses. The notion of loop dominance implies
that the behavior of the system in the CLD in Figure 1 over time depends on the evolution of the
dominance of feedback processes. That is, at any moment, some feedback loops are highly influential
– the dominant loops – while others are inactive.

25
Table 1: Overview of key findings.
Period
(A) Stability
(B) Upcoming
change
(C) Change
(A) New cycle
starts
Indicators for top
management
Exploitative
investments
generate a healthy
return on
investment.
No sign of changes
in customer
preferences or
enhanced levels of
explorative R&D
investments at
competing firms.
Growth in the
return on
exploitative product
improvements
gradually stalls.
Signs of early
adopters of new
(emerging)
products. Enhanced
explorative
investment levels at
competing firms
(e.g., R&D
investments but
also acquisitions).
Actual change in
customer
preferences; sales of
established product
decreases rapidly,
while sales of the
new offerings ramp
up rapidly.
Competitors offer
established as well
as new products.
Investments in the
new offering cause
rapid performance
increase.
Idem as A.
Loop dominance
for corporations
that get caught in
‘success trap’ (too
early shifts)
Attempt to explore.
External pressure.
Stick to
exploitation.
Stick to exploitation
of existing product
portfolio.
Loop dominance
for corporations
that get caught in
‘success trap’ (too
late shifts)
Stick to
exploitation.
Stick to
exploitation.
External pressure.
Stick to exploitation
of existing product
portfolio.
Loop dominance
for corporations
that counteract the
‘success trap’
(timely shifts)
Stick to exploitation
(made possible
through increased
external pressure).
Stick to exploitation
& Attempt to
explore.
Attempt to explore
(made possible
through decreased
external pressure).
Stick to exploitation
of new product
portfolio.
5.3. Limitations and future research
The model and simulation experiments in this paper are, of course, highly stylized
representations of the real dynamics in the executive and boardrooms of public companies. Thus, the
kind of managerial actions analyzed in this paper would, if conducted in a real-world corporate
context, interfere with many other dimensions and dynamics of the incumbent corporation. Any
modeling approach entails a compromise between simplicity for communication and completeness for
validity (Sterman, 2000; Wolstenholme, 2003). Therefore, the true added value of the conducted
analyses does not arise from its comprehensiveness, but from producing theories that cannot be
developed by other means (Perlow et al., 2002).

26
The dynamics captured in our model apply primarily to those publicly traded firms that have
historically favored incremental improvements over exploring new horizons (Walrave et al., 2011).
The separation between control and ownership is strongly present in public companies following the
Rhineland governance model, used mainly in continental Europe (Barca and Becht, 2001). The
Anglo-American governance practice involves a single-tier governance approach (Lhuillery, 2011)
that at first glance appears not to fit the dynamics discussed so far. Within the Anglo-American
model, however, non-executive board members tend to represent the voice of the shareholders, which
also frequently raises agency conflicts between executive and non-executive board members (Barca
and Becht, 2001; Tribo et al., 2007). In this respect, institutional shareholders favoring short-term
returns tend to dominate the stock markets in the UK/US system (Boyd, 1990).
Future research should more systematically translate the general courses of action, investigated
in this paper, in specific interventions by the CEO and/or the board of directors. In this respect, there
is only a limited amount of systematic knowledge about the different tools (and their effects) used by
strategy consultants, planners and managers, which limits the opportunities to develop evidence-based
strategies and interventions (Jarzabkowski, 2004; Whittington, 2006; Whittington, 1996). Therefore,
there is a strong need to study and incorporate the lived experiences of executives and directors, in
order to further uncover the dynamics underlying the suppression process, the success trap, and its
potential remedies. In this respect, future work may involve describing, modeling and simulating
detailed longitudinal cases in which particular interventions are conducted.
Finally, in line with Walrave et al., (2011) we considered the exploitation-exploration
relationship as a zero-sum game, that is two ends of one continuum. However, exploitation and
exploration can also considered to be two fundamentally different orthogonal aspects (e.g., Gibson &
Birkinshaw, 2004; He & Wong, 2004; Jansen et al., 2006). One argument in favor for such
operationalization is that certain types of resources, such as knowledge, are potentially infinite (e.g.,
through networks and alliances); and therefore exploration and exploitation cannot be on a single
continuum. In this respect, future work in this area could study the proposed dynamics by considering
a potentially infinite pool of learning opportunities in a networked setting, thereby operationalizing
exploitation-exploration as orthogonal constructs.

27
5.4. Conclusion
All firms will ultimately fail (Stubbart and Knight, 2006), but some firms appear to exist
significantly longer than others (Geus, 1999). A common mode of failure arises from the suppression
of exploration, which constitutes a serious threat to the long-term viability of firms. We studied
several ways to counteract the suppression process. Our research approach and results provide an
interesting perspective on the timing of shifts in the exploitation-exploration balance as well as (the
interaction between) the actors involved. A key implication is that a strong separation between
executives and directors in publicly traded corporations constitutes a major handicap in any effort to
avoid the suppression of exploration.
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Author Biographies
Bob Walrave is assistant professor of Strategic Management and System Dynamics at
Eindhoven University of Technology. He holds an MSc in Industrial Engineering and a PhD
from the same university. Bob’s research interests mainly center around the investigation of
strategic decision-making in dynamically complex situations. His work has been published in
the Journal of Management Studies and several other journals.
Kim van Oorschot is associate professor Project Management & System Dynamics at the BI
Norwegian Business School. Kim obtained an MSc as well as PhD degree at Eindhoven University of
Technology (TU/e). Her current research focuses on decision-making, trade-offs, and tipping points in
dynamically complex settings such as new product development (NPD) projects. Before moving to
BI, she worked as a consultant at Minase Consulting, postdoc at Tilburg University, research fellow at
INSEAD, and assistant professor at Eindhoven University of Technology. Kim has published in
leading journals such as Academy of Management Journal, Production and Operations Management
and Journal of Product Innovation Management.
Georges Romme is professor of Entrepreneurship & Innovation at Eindhoven University of
Technology (TU/e). He holds an MSc in economics from Tilburg University and a PhD in
management studies from Maastricht University. Before moving to TU/e, Georges held
academic positions at Maastricht University and Tilburg University. He also was an
international visiting fellow at the Advanced Institute for Management Research (UK), and
has published in Organization Science, Strategic Management Journal, Industrial and
Corporate Change, Journal of Management Studies, Journal of Product Innovation
Management, Technovation, and many other journals. He currently serves on the editorial
boards of Organization Studies, Journal of Organization Design and several other journals.