Managing Uncertainty in a Formal Standards-Based Industry: A Real Options Perspective on

Scholars have theorized that firms can intervene in the creation of formal technology standards to reduce uncertainty and influence the outcome to their advantage. One approach is through early acquisition: Firms can acquire targets with relevant technology prior to standardization. Using real options logic, the authors show how early acquisitions can be considered a growth option under certain circumstances. They find that acquisitions are more likely to occur before the passage of the standard when (a) acquirers lacked relevant technical knowledge, (b) target firms possessed relevant technical knowledge, and (c) acquirers had a prior equity investment in the target firm. †An earlier version of this article was presented at the 2004 annual meeting of the Southern Management Association in San Antonio, Texas. This article has greatly benefited from the thoughtful and constructive comments of Allen Amason, associate editor, and three anonymous reviewers. This article was accepted under the editorship of Daniel Feldman. When new technologies compete for market space, firms face uncertainty regarding which will prevail and, concurrently, when to enter a technology. Entry timing in technologically intensive industries is strategically significant to managers and investors because it affects subsequent firm performance (Christensen, Suarez, & Utterback, 1998), particularly because firms that enter early might select the wrong technology (Barney, 1986). The downside risks of early entry are particularly evident in " winner-take-all " markets (such as the information and telecommunications [ITC] industry) where initial investments are typically very high (Arthur, 1996). One branch of real options logic suggests that because this uncertainty is outside of managerial control, the ability to defer irreversible investments is strategically valuable firms continue to enter emerging technologies through acquisition (Chaudhuri & Tabrizi, 1999), which would seem to defy the logic of deferral. One reason might be that the way formal technology standards are crafted illustrates that firms might not regard uncertainty as completely exogenous and, if so, might pursue growth rather than deferral options. Formal technology standards assure interconnectivity and interoperability among components from multiple producers (Farrell, Monroe, & Saloner, 1994; Ozsomer & Cavusgil, 2000) and define which technologies will successfully enter the market and which will not. McGrath (1997) noted that uncertainty accompanying such technological change can be decomposed into technical and exogenous market factor components. However, she also argued for a third form of uncertainty: factors outside the firm but subject to strategic action, such that the firm may influence outcomes to its …