Real Options Meet Organizational Theory: Coping with Path Dependencies, Agency Costs, and Organizational Form
Advances in Strategic Management, Volume 24, 333–361, 2007
29 Pages Posted: 29 May 2002 Last revised: 27 Jul 2012
Date Written: February 1, 2007
Scholars have begun to recognize the importance of integrating organizational issues into real options theory. In doing so, some argue that options are inappropriate for evaluating critical strategic investments. In a more in-depth analysis, we argue that the organizational form that an option takes has a profound effect on exercise decisions. When options are initially integrated, organizational elements such as routines and culture become increasingly intertwined over time, raising the cost of abandoning the option – in effect, pushing firms to exercise options. In contrast, initially isolated options become idiosyncratic and more costly to integrate over time – pushing firms to kill them. There are also reputational and social capital effects that may bias exercise decisions beyond the mere consideration of costs, leading to escalation or missed opportunities.
Keywords: Real options, Core Competencies, Resource-based view, Knowledge
JEL Classification: M1, O31, O32, O33, O34
Suggested Citation: Suggested Citation