This article proposes that the real options literature provides an appropriate theoretical foundation for the heuristic frames suggested as ways to identify and value capabilities. Since capabilities are platforms that create a generic set of resources, they represent investments in future opportunities. The distinction between exploitation and exploration has an exact correspondence in the difference between net present value and option valuation. The attractiveness of real option thinking is only superficially in the obvious characteristic of forcing managers to think about the value of...

This article proposes that the real options literature provides an appropriate theoretical foundation for the heuristic frames suggested as ways to identify and value capabilities. Since capabilities are platforms that create a generic set of resources, they represent investments in future opportunities. The distinction between exploitation and exploration has an exact correspondence in the difference between net present value and option valuation. The attractiveness of real option thinking is only superficially in the obvious characteristic of forcing managers to think about the value of flexibility in response to uncertain events. The article proceeds by first characterizing what are heuristics and how real option theory and core competencies are related through the concept of capabilities. Capabilities reflect irreversible investments, because of the costliness of transforming the organizational knowledge in a firm.