Organisational Change and Performance in Long-Lived Small Firms:A real options approach

The paper examines two key principles of real options reasoning: (a) the value of waiting; and (b) the value of staging. It tests whether real options logic applies to small firms undertaking significant change (e.g. in technology). New tests are applied to a model of small firm performance, estimated on data collected by interviews with entrepreneurs. Long run firm performance is explained by: a count of real options exercised; the level and timing of precipitators of change; the number and timing of embedded options; and interactions between these measures. Estimates are obtained by two stage regression, corrected for sample selectivity and heterosdasticity. These confirm (and refine) the two key principles of value in waiting and value in staging. However, to achieve higher value by waiting, a delicate balance of precipitators of change against precipitator time is necessary e.g. if there are just one or two precipitators, then waiting will certainly raise value. Similarly, to achieve higher value by staging, the entrepreneur needs to balance embedding against investment time. Thus, provided investment time is less than 1 ¼ years, embedding will raise value. Overall, this implies that strategic flexibility is necessary for good long run performance of the small firm