The moderating effect of innovative capacity on the relationship between real options and strategic flexibility Ignacio Tamayo-Torres a, ⁎, Antonia Ruiz-Moreno a,1 , Antonio J. Verdú b,2 a Management Department, University of Granada, Campus Cartuja s/n. 18071 Granada, Spain b Finance and Economics Department, Miguel Hernandez University, Avda de la Universidad, s/n, 03202 Elche, Spain abstract article info Article history: Received 16 February 2008 Received in revised form 28 November 2008 Accepted 21 May 2009 Available online 17 November 2009 Keywords: Strategic flexibility Operative real options Strategic real options Innovative capacity In dynamic sectors, organizations should be capable of adapting to unpredictable environmental conditions. Strategic flexibility grants organizations the capacity to respond to the changes in their environment in the direction required, renewing their strategies and making the required organizational changes. The goal of this study is to analyze how the use of real options relates to strategic flexibility from a managerial capacity perspective. Through an empirical study performed on European firms, we confirm that innovative capacity exercises a moderating role between real options and strategic flexibility. The fact that a firm's management has foreseen and contemplated real options does not necessarily lead to their execution; they must also be accompanied by some innovative capacity. © 2009 Elsevier Inc. All rights reserved. 1. Introduction Organizations today face unpredictable changes in the environ- ment that surrounds them. They have different strategies and courses of action to confront this uncertainty (Hitt, Ireland, & Lee, 2000). Strategic flexibility is a valuable capability for acting in the face of technological changes, the development of knowledge and growing globalization (Hitt, Keats, & DeMarie, 1998). Organizations should be able to modify their position in the market, adapting to these usually unpredictable environmental conditions. In such complex and dynamic environments, strategic flexibility grants organizations the capacity to respond to environmental changes in the required direction. That is, it permits firms to respond to unstable environ- ments (Miles & Snow, 1978) and develop resources and capacities to adapt to changing conditions. From a dynamic point of view, strategic flexibility is necessary for the firm's growth (Hamel & Heene, 1994). Long-term growth is supported by a continuous process of acquiring new resources and capacities that generate competitive advantages. The ultimate goal of the whole firm is to maximize the value of its actions, which means anticipating the competition through processes of internal and external change (Hamel & Heene, 1994; Hamel & Prahalad, 1994). Strategic flexibility enables the firm to modify its resource base and capacities to respond to dynamic changes in the environment. Changes in the environment mean new threats and opportunities that firms must face by redefining their strategies and internal context to achieve a good fit between the environment and the organization's strategy. Firms should thus seek mechanisms that help to encourage this process of adaptation to their environment. In recent years, real options are achieving greater importance as a source of strategic flexibility. From the manager's perspective, they have become an interesting resource to cultivate, as they can provide an organization with capacities and mechanisms of adaptation to required changes, on both the operative and the strategic level. Managers' acceptance of real options has not been easy, mainly due to the complexity of the calculations and the fact that their results often differ from intuition, to which managers have been accustomed. Firms operate in an imperfectly competitive market, therefore “the profitability of each firm's project is affected by the other firm's decision to invest” (Pawlina & Kort, 2006, p. 24). Managers are the ones responsible for the presence or absence of real options in an organization, as decisions about which options to exercise are made at managerial level. Executives who assume the presence of real options as a source of flexibility for their firm will facilitate their presence in the organization. On the other hand, we see that, for many firms, the creation of new products, ideas or processes is central to how they adapt and sometimes even transform themselves in changing environments (Brown & Eisenhardt, 1995; Dougherty, 1992). Thus, in the face of intense international competition, rapid technological evolution, and customers' maturing expectations, innovation is a primary way that firms actually adapt (Eisenhardt & Tabrizi, 1995). Innovation can provide the organization with the ability to stay one step ahead of the competition and, in a sense, influence the choices and direction of Industrial Marketing Management 39 (2010) 1120–1127 ⁎ Corresponding author. Tel.: +34 958 24 09 37; fax: +34 958 24 62 32. E-mail addresses: igtamayo@ugr.es (I. Tamayo-Torres), aruizmor@ugr.es (A. Ruiz-Moreno), ajverdu@umh.es (A.J. Verdú). 1 Tel.: +34 958 24 09 16; fax: +34 958 24 62 32. 2 Tel.: +34 966 65 89 65; fax: +34 966 65 85 64. 0019-8501/$ – see front matter © 2009 Elsevier Inc. All rights reserved. doi:10.1016/j.indmarman.2009.10.003 Contents lists available at ScienceDirect Industrial Marketing Management