What IsNotA Real Option: Considering Boundaries for the Application of Real Options to Business Strategy

Abstract

We argue that the greater the extent to which choice sets evolve as a consequence of firms' exploration activities, the less structured the firms' abandonment decisions become and, in turn, the less distinguishable a real option is from more generic notions of path dependence—a sequential stream of investment in and of itself does not constitute a real option. While organizational adaptations can extend the applicability of real options, they impose tradeoffs that may lead to the underutilization of discoveries made in the course of exploration.