Strategy-Structure Fit in the Shadow of Exploration-Exploitation

Abstract

This study provides the first large-sample test of Chandler’s famous strategy-structure hypothesis in the context of the exploration-exploitation trade-off. To this end, we construct measures of the degree to which strategies and organizational structure are oriented towards exploration as opposed to exploitation for a representative panel dataset of all Canadian business firms. We obtain three main results. First, high intensity of exploration strategies is negatively related to high intensity of exploitation strategies, as implied by a strategic exploration-exploitation trade-off. Second, higher relative importance of exploration (exploitation) in strategy is systematically correlated with more adoption of organizational practices that support exploration (exploitation). We show that this pattern holds dynamically as well, as strategic repositioning towards exploration is systematically correlated with restructuring towards exploration-supporting practices. Additionally, this strategy-structure relationship continues to hold if we instrument strategic positioning using firm peers. Third, intensifying low-cost competition, which reduces the benefits of exploitation strategies leads to a systematic shift towards more exploration strategies, while increasing misalignment between strategy and structure.