Towards a plant level theory of capabilities: The definitions and measurement

The notion of exploitation and exploration has drawn wide interest from management scholars for several decades. However, little research on exploitation and exploration is conducted at the manufacturing plant level. Drawing on the resource-based view (RBV), we conceptualize exploitation and exploration as two plant level capabilities, each consisting of a bundle of interrelated yet distinct routines. We propose a second-order factor model for measuring exploitation and exploration capabilities that captures the unobservable nature of the two capabilities. We then develop a reliable and valid set of measurement for the two capabilities. Lastly, for each of exploitation and exploration capabilities, we compare two performance models: 1) a second-order performance model in which the second order factor (capability) is related to a multi-dimensional performance measure, and 2) a first-order factor performance model in which we allow each first-order factor (routine) to directly impact performance. The results suggest that the second-order factor performance model is a sufficiently close yet more parsimonious representation of the relationships between the bundle of routines and the operational performance when compared with the first-order factor performance model.