Exploration, exploitation, and mode of market entry: acquisition versus internal development by Amazon and Alphabet

Abstract

Research on the tension between exploration and exploitation has made fundamental contributions to our understanding of firm growth via entry into new businesses. While there is consensus about the merits of balancing exploration and exploitation, there has been debate about the best means for achieving balance. In our prior analysis of firms’ choices between acquisition and internal development as entry modes, we found that the role of acquisitions tends to differ inside versus outside a firm’s primary business domain: firms use within-domain acquisitions largely for exploitation, while out-of-domain acquisitions support exploration. To examine these issues in greater depth, we focus here on the historical use of acquisition versus internal development by two major technology firms, Amazon and Alphabet. We show that the two firms have been remarkably different in their use of acquisitions versus internal development. Consistent with our prior analysis, Amazon has emphasized internal development but has used acquisitions to strengthen its existing businesses and to enter new products and services that were (initially) outside Amazon’s primary business domain. In contrast, Alphabet has relied heavily on acquisitions to enter new businesses within its primary domain but has emphasized internal development of “moonshot” businesses outside this domain. These differences illuminate the use of acquisitions in market entry and make clear that there is no single right way to utilize acquisition versus internal development in the pursuit of balance between exploration and exploitation.