Real Options Logic Revisited: The Performance Effects of Alternative Resource Allocation Regimes

We delineate three dimensions of resource allocation behavior that allow us to distinguish between real options logic and alternative resource allocation regimes: sequencing, low initial commitment, and reallocation. We then measure these in a product innovation context to test for the performance effect of real options logic vis-à-vis its alternatives. Sequencing, which distinguishes dynamic allocation regimes more generally, is associated with higher new product sales. Low initial commitment and reallocation do not show individual direct effects on new product sales. However, when assessed as a match, we find that the fit between low initial commitment and reallocation (yes–yes; no–no) increases performance significantly. After controlling for such fit as well as sequencing, we find no significant performance difference between real options logic and other regimes. Our findings imply that insufficient identification of real options logic picks up confounding effects, which may provide an explanation for the inconclusive results in prior studies of real options and performance. In addition to bounding the concept more precisely, we contribute to theory by situating real options logic within the broader set of allocation regimes conducive to innovation performance in uncertain, competitive markets.