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Why, When and How Are Real Options Used in Strategic Technology Venturing? Open Access

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This research was motivated by the role of real options as a risk management and an uncertainty filtering methodology that helps minimize downside risk and maximize upside potential of a firm's investments. It sought to answer "why, when and how are real options used in strategic technology venturing?" This research tested for the role of real options in decision making involving three types of firms in decreasing order of technology-dependence - technology-driven (TD) (where the profit is fully dependent on new technology creation and leveraging), technology-based (TB) (where the profit is enabled and supported by technology) and technology-neutral (TN) (where the profit is almost independent of technology). It also deals with strategic and non-strategic types of decisions driven by real options.This research showed that an environment presenting co-opetitive (simultaneous competition and collaboration) conditions trigger the use of real options (why), that serve to transform the position, posture and propensity of businesses to innovate and thus they co-evolve (when) into more effective and efficient forms of businesses (co-specialization) (how). The simulation presented evidence that embracing risk and uncertainty can increase level of new venture formation and probability of new venture formation. However, it also showed that it should be adapted to the risk profile of the firm and that timing is also a factor to be considered. While increasing risk at firm creation increases both the level and probability of new venture formation, increasing the rate of early adoption did not significantly affect it. For more risk-averse firms, lowering the rate of early adoption actually significantly increased the level of new venture formation as well as the probability of new venture formation. Finally, evidence seems to point that there may be an optimal level of risk inclination, as the results from the two most risk-taking subpopulations were not statistically significant.A real options approach allows for a better mitigation and management of risk and therefore increase the return per unit of asset invested. It brings about a higher potential return per unit of asset while minimizing over-, under- and mis-investing. The systematic use of real options is a possible powerful methodology and device for optimal risk management and risk filter under variable configuration and operationalization of resources allocation. It optimizes the allocation of scarce resources with timing, selection and sequencing decisions, improving cost/benefit and cost/efficiency (public sector view) and maximization of performance and strategic benefit (private sector view). Although engaging the concepts of real options, this research does not focus on a specific investment valuation methodology, but highlights the relationship between knowledge and risk and rather addresses the management of mindsets, as moving towards a systematic conceptualization of real options represents a different paradigm in decision making.

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