Real Options and Strategic Technology Venturing: A New Paradigm in Decision Making

135 Pages·2013·1.909 MB·English

by  Caroline M. Sipp, Elias G. Carayannis (auth.)

SpringerBriefs in Business
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Caroline M. Sipp (cid:129) Elias G. Carayannis
Real Options and Strategic
Technology Venturing
A New Paradigm in Decision Making
Caroline M. Sipp Elias G. Carayannis
Inter-American Development Bank The George Washington University
Washington, DC , USA Washington, DC , USA
ISSN 2191-5482 ISSN 2191-5490 (electronic)
ISBN 978-1-4614-5813-5 ISBN 978-1-4614-5814-2 (eBook)
DOI 10.1007/978-1-4614-5814-2
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Library of Congress Control Number: 2012951426
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Abstract and Keywords
Abstract This book is motivated by the role of real options as a risk management
and an uncertainty- fi ltering methodology that helps minimize downside risk and
maximize upside potential of a fi rm’s investments. It seeks to answer “w hy, when,
and how are real options used in strategic technology venturing ?” This work tests
for the role of real options in decision making involving three types of fi rms in
decreasing order of technology dependence – technology-driven (TD) (where the
pro fi t is fully dependent on new technology creation and leveraging), technology-
based (TB) (where the pro fi t is enabled and supported by technology), and technol-
ogy-neutral (TN) (where the pro fi t is almost independent of technology). It also
deals with strategic and nonstrategic types of decisions driven by real options.
This analysis shows that an environment presenting co-opetitive (simultaneous
competition and collaboration) conditions triggers the use of real options (w hy ) that
serve to transform the position, posture, and propensity of businesses to innovate and
thus they coevolve (w hen ) into more effective and ef fi cient forms of businesses (co-
specialization) (h ow ). The simulation presents evidence that embracing risk and
uncertainty can increase level of new venture formation and probability of new ven-
ture formation. However, it also shows that it should be adapted to the risk pro fi le of
the fi rm and that timing is also a factor to be considered. While increasing risk at fi rm
creation increases both the level and probability of new venture formation, increas-
ing the rate of early adoption does not signi fi cantly affect it. For more risk-averse
fi rms, lowering the rate of early adoption actually signi fi cantly increases 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 are not statistically signi fi cant.
A real-options approach allows for a better mitigation and management of risk
and therefore increases 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 fi lter under variable con fi guration and opera-
tionalization of resource allocation. It optimizes the allocation of scarce resources
with timing, selection and sequencing decisions, improving cost/bene fi t and cost/
v
vi Abstract and Keywords
ef fi ciency (public sector view), and maximization of performance and strategic
bene fit (private sector view). Although engaging the concepts of real options, this
analysis does not focus on a speci fi c investment valuation methodology, but high-
lights the relationship between knowledge and risk and rather addresses the man-
agement of mindsets, as moving toward a systematic conceptualization of real
options represents a different paradigm in decision making.
Keywords: knowledge management, innovation, real options, research and
development (R&D), risk management, strategic decision making, strategic investments,
technology management, technology venturing
Contents
1 Conceptual Framework ............................................................................. 1
1 Motivation .............................................................................................. 2
2 Framework of Analysis .......................................................................... 2
3 Co-opetition, Coevolution, and Co-specialization
(C3) and Creative Destruction ............................................................... 3
3.1 Transitioning from an Ecosystem to the
Next Through Co-opetition, Coevolution,
and Co-specialization (C3) ............................................................ 4
4 Strategic Knowledge Arbitrage and Serendipity (SKARSETM)
as Drivers of Real Options ..................................................................... 6
4.1 Real-Options Analysis Versus “Traditional”
Valuation Methods ......................................................................... 6
4.2 Real Options and Schumpeter’s Creative Destruction .................. 7
5 The Cognition Spiral and Strategic Themes Viewed
Through the Option Lens ....................................................................... 9
6 Summary of the Conceptual Framework ............................................... 12
7 Empirical Findings ................................................................................. 12
8 Contribution to the Literature ................................................................ 14
9 Book Structure ....................................................................................... 14
2 Literature Review ...................................................................................... 15
1 A Review of the Theory of Decision Making ........................................ 15
1.1 The Bounded Rationality Model ................................................... 15
1.2 The Incrementalist View ............................................................... 16
1.3 The Organizational Procedure View ............................................. 16
1.4 The Garbage Can Model ............................................................... 16
1.5 The Individual Differences Perspective ........................................ 17
1.6 Naturalistic Decision-Making Perspective .................................... 17
vii
viii Contents
1.7 The Multiple Perspectives Approach ............................................ 17
1.8 The Effect of Speed on Decision Making ..................................... 17
1.9 Conclusion .................................................................................... 18
2 Growth of the Firm ................................................................................ 18
2.1 The Resource-Based View of the Firm ......................................... 18
2.2 Technology-Driven Firm Growth.................................................. 19
2.3 Conclusion .................................................................................... 19
3 Innovation .............................................................................................. 19
3.1 Incremental, Generational, Radical,
and Architectural Innovation ......................................................... 19
3.2 Creativity and Innovation .............................................................. 21
3.3 Heterogeneity, Diversity, and Innovation ...................................... 23
3.4 Conclusion .................................................................................... 23
4 A Review of Options Theory ................................................................. 24
4.1 Financial Options .......................................................................... 24
4.2 Overview of Real Options ............................................................. 25
4.3 Overview Real Options and Strategic Investments ....................... 27
4.4 Real Options in Entrepreneurship ................................................. 28
4.5 Real Options in Innovation and R&D ........................................... 30
4.6 Real Options in the International Development of Firms ............. 31
4.7 Real Options in Merger and Acquisitions
and Restructuration of Firms ......................................................... 32
4.8 Organizational Strategy and Real Options .................................... 33
5 Innovation Networks and Knowledge Clusters ...................................... 34
5.1 Knowledge Creation Within the Firm ........................................... 34
5.2 Knowledge Creation Across Firms ............................................... 35
5.3 Knowledge Creation Across Clusters ........................................... 35
5.4 Toward a Mode 3 Ecosystem ........................................................ 36
5.5 Conclusion .................................................................................... 36
6 Strategic Knowledge Arbitrage and Serendipity (SKARSETM) ............. 37
6.1 Definition of Terms ....................................................................... 37
6.2 Leveraging SKARSETM for Real Options ..................................... 38
6.3 Conclusion .................................................................................... 38
7 Conclusion ............................................................................................. 38
3 Findings ....................................................................................................... 39
1 Survey Analysis ..................................................................................... 39
1.1 Overview of the Survey Respondents ........................................... 39
1.2 Hypotheses Analysis ..................................................................... 40
2 Interview Analysis ................................................................................. 44
2.1 Interview Participants’ Profile ...................................................... 44
2.2 Interview Findings ........................................................................ 44
3 Simulation Analysis ............................................................................... 46
3.1 Graphical Analysis ........................................................................ 46
3.2 Statistical Analysis ........................................................................ 48
Contents ix
3.3 Summary ....................................................................................... 49
4 Validity, Reliability, and Generalizability of the Work .......................... 51
4 Conclusions ................................................................................................. 53
1 Value Proposition (So What?) ................................................................ 54
1.1 Contribution to the Theory ............................................................ 54
1.2 Contribution to the Empirical Research ........................................ 54
1.3 Implications for Policy Makers, Academic
Scholars, and Expert Practitioners ................................................. 55
2 Future Research ..................................................................................... 56
2.1 Increased Wealth of Empirical Data ............................................. 56
2.2 Refined Conceptual Framework .................................................... 56
3 Impact of the Financial Crisis on the Topic ........................................... 57
Glossary ............................................................................................................ 59
References ......................................................................................................... 61
Annex I Bibliography on Real Options
and Strategic Decision Making .................................................. 67
Annex II List of Survey Questions ............................................................. 85

Annex III List of Interview Topics .............................................................. 89

Annex IV Simulation Design ....................................................................... 91

Annex V Survey TD and TB Pro fi les ........................................................ 103
Annex VI Wilcoxon Rank-Sum (Mann–Whitney) Tests ........................... 109
Index .................................................................................................................. 123