The performance effects of balancing exploration and exploitation within and across alliance domains

Organizational research advocates that firms balance exploration and exploitation yet acknowledges inherent challenges in reconciling these opposing activities. Studying the alliance portfolios of software firms, we demonstrate that firms do not typically benefit from balancing exploration and exploitation within the function domain (technology versus marketing and production alliances) and structure domain (new versus prior partners). Nevertheless, firms that balance exploration and exploitation across these domains gain in profits and market value. Moreover, increases in firm size that exacerbate resource allocation tradeoffs and routine rigidity reinforce the benefits of balance across domains and the costs of balance within domains. Our domain separation approach offers new insights into how firms can benefit from balancing exploration and exploitation. What matters is not simply whether firms balance exploration and exploitation in their alliance formation decisions but the means by which they achieve such balance.