Strategy Process Dilemmas in Exercise Decisions for Options on Core Competencies

Strategy Process Dilemmas in Exercise Decisions for Options on Core Competencies
Author(s): Coff, Russell and Laverty, Kevin J.
Year: 2002
Paper Number: GBS-OM-2002-001
Goizueta Department: Organization and Management

Abstract

Although a real options heuristic may offer a powerful process innovation to help firms invest in strategic assets under great uncertainty, it has never been studied from the perspective of strategy process. We explore how organizational structures and processes may cause dilemmas for firms applying real options heuristics to investments in core competencies. The financial options analogy misses key organizational issues faced in exercise decisions. First, uncertainty about the value of a core competence may persist when making exercise decisions due to the nature of intangible, knowledge-based assets. This is compounded by a path-dependent process initiated by the asset’s initial state (integrated or isolated). When options are initially integrated, structural and political forces may push for further investment in options that should be killed. In contrast, firms may be biased toward killing promising options that are initially isolated. A real options heuristic may hurt firms if they initiate many projects that become locked in or incur the costs of establishing options that cannot be exercised. Our integration of real options theory, resource-based theory, and the strategy process literature delineates boundary conditions on when a real options heuristic may be used to generate a resource-based competitive advantage.