Go with the Flow: Competitive Dynamics and Firms’ Exploration

How do firms react to competitors’ exploration? Prior literature has emphasized vicarious learning and postulated that firms will follow their competitors to explore. However, such perspective overlooks the direction of competitors’ exploration. Specifically, because exploration is defined from the viewpoint of a given firm, competitors’ exploration is not necessarily considered exploratory by the focal firm. Building on the spatial competition perspective, we emphasize that competitors may explore either away from or closer towards a firm’s position, which will have very different implications for its exploration tendencies. Specifically, we argue that a firm will make more exploratory efforts if competitors explore towards its market positions, which escalates competitive pressure. However, if competitors explore to positions that are distant from the firm, it may exhibit less exploratory (more exploitative) tendencies. By analyzing product market repositioning of public firms in the U.S. from 1997 to 2017, we find general support to our conjectures. The findings extend our understanding about market competition and firm exploration.