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By integrating Herbert Simon's theory of artifact and Brian Arthur's concept of functionality in technology, we propose a novel conceptual framework for analyzing the process by which shadow options embedded in a firm's existing technologies emerge and are converted into real options. We apply this framework to examine the shadow options of Corning's photosensitive glass technologies. The core of our model is that technologies subsume options, most of which are shadow because they refer to functions of those resources that were unknown when they were originally acquired or created. Shadow options are hidden in functionalities. Functionalities and functions are relational entities that exist at the interface between an artifact's inner and outer environments. The transformation of shadow into real options occurs along a continuum, with two distinct types represented at its extremes: the Schumpeterian and Kirznerian types. We examine organizational attributes that enable Schumpeterian and Kirznerian shadow options and explain how firms can systematically pursue an innovation strategy that exploits the shadow options embedded in their technologies.

Although normal distributions and related current quantitative methods are still relevant for some organizational research, the growing ubiquity of power laws signifies that Pareto rank/frequency distributions, fractals, and underlying scale-free theories are increasingly pervasive and valid characterizations of organizational dynamics. When they apply, researchers ignoring power-law effects risk drawing false conclusions and promulgating useless advice to practitioners. This is because what is important to most managers are the extremes they face, not the averages. We show that power laws are pervasive in the organizational world and present 15 scale-free theories that apply to organizations. Next we discuss research implications embedded in Pareto rank/frequency distributions and draw statistical and methodological implications.

Exaptation, the emergence of latent functionality in existing artifacts, is an underexplored mechanism of novelty generation in innovation. In this paper, we measure the frequency of exaptation in the pharmaceutical industry. We find that about 42% of new functions derived from existing drugs have an exaptive nature. We think that this constitutes the first measure of exaptation in any industry. We also link exaptation with radical innovation and find that most radical innovations in our sample are exaptive. Also, nearly all radical innovations occur in market areas very distant from the drug's original market. We propose that exaptive innovation constitutes a different search mechanism and problem-solving approach from deliberate innovation and discuss the role of context and serendipity in innovation.