This study examines the relationship between knowledge strategy (exploitation or exploration) performance in Small and Medium Enterprises (SMEs), and also the possible moderating role of external environment variables, i.e., industry dynamism, industry munificence and technology on firm's performance. Exploration strategy has been found to have a linear impact on performance, while the relationship between exploitation strategy and performance is concave. Additionally, it has been found that the competitive environment moderates the relationship between exploitation strategy and performance, such that exploitation strategy has a stronger impact on performance in stable and high-tech environments than in dynamic and low-tech environments. Exploration strategy also has a stronger impact on performance in high-tech environment than in low-tech environments.

Firms use two knowledge strategies—exploration and exploitation—to improve performance. Through exploration strategy, firms strive to develop capabilities to excel at the creation or acquisition of new knowledge, whereas exploitation strategy is used to excel at the ability to leverage the existing knowledge to rapidly create new organizational products and processes.

Past research in the field of Knowledge Strategy field has been primarily carried out in large firms and it has been found that the two strategies cannot be pursued jointly. This is because the kind of resources, culture and structures that are required to pursue the two strategies simultaneously are different. In pursuance of the two strategies, small firms as against large firms are at a disadvantageous position. By virtue of their size, they can adopt a policy of flexible production, niche strategy focusing on price and quality and disrupt status quo through innovation. Thus the two strategies can complement each other in small firms. In this study, the researchers attempt to study whether the strategies are complementary or not.