Firm-Level Experimentation:Joining Dynamic Adjustment Costs, Real Options, and Dynamic Capabilities

Abstract

This paper suggests that cognitive, organizational, political, and economic factors can contribute to low (dynamic) adjustment costs. These low adjustment costs lead to low firm-level costs of experi- mentation, which enables high-accumulated firm-level experimentation, such as (internal and/or collaborative) market context, product/technology, and business model experimentation. Such accumulated experience can lead to an increase in a firm’s real options, which can enable it to realize dynamic capabilities. The sequencing of lower adjustment costs, higher experimentation, greater awareness of subsequent real options, and realized dynamic capabilities can become a virtuous circle. That is, a firm’s dynamic capabilities can further lower its dynamic adjustment costs in a positive feedback loop. We provide a theoretical framework in which experimentation in an uncertain environment is a core construct to bridge dynamic adjustment costs, real options theory, and a dynamic capabilities approach for the purpose of better explaining and predicting the firm’s sustainable competitive advantage.