The preceding text also alludes to the importance of distinguishing between holding a portfolio of options and holding an option on a portfolio of assets.22 In short, research23 suggests that the former (i.e., holding a portfolio of options on multiple assets) is more valuable than the latter (i.e., holding an option on a portfolio of assets). Basically, holding a portfolio of options on multiple assets affords greater flexibility and thus provides a higher value than holding an option on a portfolio of the same assets. The flexibility stems from the fact that the holder of the option portfolio is able to exercise the option on each asset individually whereas the holder of the option on the asset portfolio can only purchase all the assets in the portfolio. This is especially important in the case of pharmaceuticals since, in many cases, the technology simply does not work in practice as it did in testing (witness, for example, the efficacy of pharmaceutical candidates in animal models that is not replicated in human subjects). In other cases, competing products preempt the profitable commercial introduction of a technology. A deficiency in complimentary assets such as trained sales force, manufacturing capacities, or even a legal team needed to defend the legitimacy of the patented technology may also reduce the commercial viability of a technology. Thus, greater flexibility in terms of decisions with which to confront contingencies is critical to vitality in technological dynamic environments.


One of the more important aspects of real options application to firm strategy resides in the notion of unique value or that value idiosyncratically possessed by the firm.24 Often, due to idiosyncratic knowledge, one firm will realize investment opportunities to which other firms are not privy. We can refer back to the oil field example to demonstrate. Assume two firms, firm A and firm B, are now considering an oil field purchase.

Firm A, an owner of multiple fields, has through its previous operational experience gained a substantial understanding of oil field operations. This internal knowledge helps reduce the risk of the investment vis-à-vis firm B, and in turn would impact the value of this investment opportunity to this specific firm. On the other hand, if company B has some but limited experience on how to turn a newly purchased oil field into corporate profits, then this option to purchase may be more risky than A's and thus affect the perceived value of this option. In short, due to this knowledge asymmetry, firm A may realize greater value than does firm B due to tacit knowledge.

Polanyi's swimmer provides a descriptive example of the characteristics of tacit knowledge.25 The swimmer, by definition, possesses a proficiency in the act of swimming. Yet, the task of swimming defies description. Although proficient at performing consistently, the swimmer cannot articulate the method by which s/he accomplishes her/ his task nor can novices hope to acquire such knowledge through observation of the swimmer. Of course, swimming can be reduced to easily describable constituent acts. Physiology texts provide descriptions of the mechanisms by which a swimmer's lungs maintain buoyancy. Physics texts depict the mechanics necessary for the swimmer to accelerate and achieve a certain velocity. However, mere examination of these texts is not sufficient to provide a novice with the knowledge of swimming. As Polanyi26 suggests, knowledge of the "particulars" does not confer knowledge of the larger activity. Very few novice swimmers, after having been provided with instruction, master the skill without initial failures. Rather, novices must transform a familiarity of constituent acts (e.g., buoyancy regulation, aquatic locomotion) to an in-depth knowledge of the larger activity (i.e., swimming). In so doing, the novice must coordinate knowledge so that constituent acts effectively perform in unison. They must "routinize" the procedure. Thus, an individual can learn to swim only by experience and experimentation.27

Similarly, the ability of a firm to perform skillful activities rests on the tacit knowledge it possesses in the form of higher-order organizing capabilities.28 As is the case with a swimmer, firms are not endowed with these capabilities but must acquire them over time.29 Capabilities necessary for configuring resources can only be developed as a firm exploits resources and subsequently witnesses' resource strengths and weaknesses. As a result of such exploitation, the firm develops an in-depth familiarity with resources that, like the act of swimming, can be capitalized on but not fully codified. As experiences mount, the firm gains a greater understanding of its resources. Accordingly, capability development follows a path-dependent trajectory30 as capability acquisition is largely determined by the firm's course through history. And, for the most part, time compression diseconomies31 constrain potential imitators in their attempts to acquire a firm's entire tacit knowledge.

History not only furthers knowledge of resources but also serves to decrease the costs of its internal transfer and creation. More than simply a collection of individuals, the firm is defined by its network of social interactions.32 As the firm proceeds through history, employees develop a collective consciousness, or mind-set that is specific to that firm. One aspect of this mind-set is a familiarity employees have with one another as well as knowledge of the unwritten (i.e., tacit) rules and routines on which a firm's activities are based. Furthermore, a common language or code emerges, which serves to economize on communication costs by providing a single medium (i.e., free of parochial distortions) through which disparate groups or functions (e.g., marketing, finance, operations) can communicate.

In addition, this collective mind-set fosters communication efficiency by providing a lens through which organizational members view the world. Although learning may take place in the mind of the individual, what each individual learns is very much a function of what his/her peers (perceive to) know.33 Unwritten or tacit rules and routines dictate to managers/employees what types of knowledge are considered useful or valuable by the larger organization.34 Knowledge deemed unsuitable is discarded. Accordingly, when confronted with voluminous amounts of endogenously or exogenously derived knowledge, employees/ managers can recognize that knowledge which is deemed crucial to the vitality of the firm (i.e., it "fits" with the existing mind-set of the firm). In other words, tacit knowledge allows the organization to circumvent the bounded rationality of individual employees.35

Consequently, organizational knowledge development is largely localized as exploitation and search practices conform to historically determined parameters.36 Firms tend to search (and will, generally, be more successful in searching) for productive opportunities in "local" areas, or areas that are closely related to their expertise. As noted, learning tends to be cumulative, and thus, local search may not only lead to beneficial returns but may also provide the direction in which future learning takes place.

In short, history may allow one firm to "see" opportunities that elude its competitors.3 7 Such unique perspectives create asymmetries in the options two firms may derive from the same resource. We turn to these issues below.

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