A real options perspective of platform investments in service firms: An application in the nursing home industry

Abstract

Purpose

Real options theory has been used to examine how manufacturing firms make incremental investments under conditions of uncertainty. However, it has not been extensively applied to service firms. Using real options theory, the purpose of this article is to explore how service firms make platform investments.

Design/methodology/approach

Data come from a survey of Florida nursing homes. Several hypotheses examine the extent to which organizational characteristics, environmental scanning, internal and external slack, and entrepreneurial orientation impact the degree of investment in a portfolio of services to community based clients. Data were analyzed via ordinary least squares regression.

Findings

Results indicate a positive relationship between platform investments and customer preferences and nursing home innovativeness. Risk‐taking behavior and internal slack received mixed support.

Research limitations/implications

The study did not include measures of economic performance; therefore, it is unclear if differences in market strategies yield better financial outcomes for the nursing homes. The study was set in the nursing home industry that is a highly regulated service industry. It is possible that specific attributes of this industry impacted our results.

Practical implications

In deciding whether an options approach to managing customer value is appropriate for any individual service firms, managers should consider that a firm's strategic posture and the availability of slack resources.

Originality/value

There has been relatively little research in the management literature that examines how firms in a service context employ strategies and tactics consistent with options theory to reduce uncertainty. This lack of research is problematic given that service firms compromise an increasing percentage of the GDP of many developed countries.

Citation

Davis, J.A., Marino, L. and Aaron, J. (2006), "A real options perspective of platform investments in service firms: An application in the nursing home industry", International Journal of Organizational Analysis, Vol. 14 No. 2, pp. 107-129. https://doi.org/10.1108/10553180610742755