Strategy, Heuristics, and Real Options

Bruce Kogut and Nalin Kulatilaka

in The Oxford Handbook of Strategy

Published in print April 2006 | ISBN: 9780199275212
Published online September 2009 | | DOI:

Series: Oxford Handbooks in Business and Management C

 Strategy, Heuristics, and Real Options

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  • Business and Management
  • Business Strategy
  • Organizational Theory and Behaviour


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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.

Keywords: heuristic frames; business strategy; net present value; option valuation; real option theory; core competencies

Article.  12129 words. 

Subjects: Business and Management ; Business Strategy ; Organizational Theory and Behaviour

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