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Firm Capabilities and Experience In Reactivating Idled Resources: The Case of Oil & Gas Drilling Rigs In Texas

How does industry uncertainty influence the decision to reactivate idled resources? While existing theory suggests that uncertainty increases the value of waiting and that external factors, such as competitive moves, erode the value of deferring investment, we argue that internal conditions related to a firm’s capabilities are an unacknowledged source of heterogeneity in reactivations. We posit that extended idleness can lead to an erosion of operational capabilities and increase the cost of returning the resource to an active state. This effect reduces the value of delaying reactivation when there is demand uncertainty. By contrast, we argue that a firm’s reactivation experience enhances the waiting option under uncertainty as it enables the firm to maintain preferential access over time and preserve the option to invest. Examining decisions to reactivate idled rigs of oil and gas drilling firms in Texas, we find that firms with superior operational capabilities are more likely to reactivate resources under demand uncertainty and that a firm’s reactivation experience increases the likelihood of delay reactivations. Our findings shed new light on the role of different organizational capabilities (i.e., lower and higher-order capabilities) in the trade-off between commitment and flexibility when making resource allocation decisions under uncertainty.