An Essay: Real Options in Technology Innovation and Market Competition

摘要

A firm's capabilities in recognizing real option values and its flexibility and creativity managing and creating them are at the core of a firm's competitiveness. Real option valuation is grounded in the volatilities embedded in the market, industry, and the firm itself. Suppliers and competitors' strategies and performance either add or diminish the values of a firm's real options. "Porter's Diamond" provides the soil for a firm to plant and harvest real options. Many real options simultaneously exist and interact throughout a firm's lifecycle as it engages in the market competition. A firm has different real options at different stages of technology innovation cycle. Managing the portfolio of real options increases the complexity of adopting real options as the major management tool while leaving the traditional NPV methodology obsolete. However, real option approach provides a firm with a methodology to gauge the business prosperity with accuracy and vision that the traditional NPV cannot compare. In this essay, we intertwine firms' key competitive factors with real option management. Examples of real option portfolio valuation illustrate the approach and benefits of real options management in the context of the technology innovation, market competition, and the development of firms' strategies.