Falling Off the Fence? A Realistic Appraisal of a Real Options Approach to Corporate Strategy

Abstract:     
Finance's option theoretic framework has recently been extended into a prescriptive approach to corporate strategy. This "real options" approach has refocused managerial attention on the strategic value of holding flexible positions in increasingly turbulent environments. However, emerging descriptive research on real options has begun to reveal isolated examples of the problems inherent in doing so. I embed the real options approach within an organizational setting to gain a more general understanding of how the pursuit of firm-wide flexibility can carry with it unintended consequences. Drawing broadly from organization theory, I note how the normative implications of real options reasoning can sometimes lead to excessive flexibility that disrupts the internal operations of a firm and threatens its external legitimacy over time. I then discuss how a firm may alleviate some of these problems, allowing it to gain more of the benefits of a real options approach without suffering the pitfalls. I conclude with a brief summary and suggestions for future research.

Keywords: Real options, flexibility, strategy, legitimacy

JEL Classifications: M10

Accepted Paper Series