1. A Real Options Logic for Initiating Technology Positioning Investments
Rita Gunther McGrath
Academy of Management Review, 1997
Youngsoo Kim, October 9, 2013

2. Objective
Specify how boundary conditions and uncertainty influences the value of technology options
Take a strategic perspective on uncertainty itself, arguing that value can be amplified by investments to shift boundaries

3. Technology Positioning Projects Generate Real Options
Financial options vs. Technology options
Difference: core assumptions for pricing
Similarity: volatility and option price
Technical and External uncertainty
Timing dilemmas: early mover or second follower
Technical uncertainty makes option approach more attractive to the firm

4. Technology Positioning Projects Generate Real Options
Value of the Option to Wait

5. Technology Positioning Projects Generate Real Options
Uncertainty and Value of Option to Wait
Conventional NPV rule
0.5 * 180 – 100 = –10
Wait and see
0.5 * (180 – 100) = 40
Amplifying Pre-investments
If the lobbyists could guarantee favorable rules
180 – (0.5 * * 100) – 10 = 95
Firms need to influence key legal boundary conditions rather than by investing in technology itself

6. Effects of Boundary Conditions on Variance of Net Returns and Option Value

7. Boundary Conditions and Uncertainty – Two Factors to Determine the Cumulative Returns
Size of Rent
Demand: Hard to predict ex ante, but possible to identify attractive demand structures
Ameliorate widespread vs. Cure 1 over 100,000
Speed of adoption: The slower the adoption rates, the smaller the cumulative returns
Delay in revenue inflow, Much room for competitors
Blocking: Blocking reduces the value of the option
Expropriation: Similar effects as blocking

8. Boundary Conditions and Uncertainty – Two Factors to Determine the Cumulative Returns
Sustainability of Rent
Matching: Rent streams are appropriated under matching – not through imitation but through substitution
Likelihood of matching are influenced by three factors: (1) motivation and capacity of rivals, (2) customer immobilities, and (3) order of entry and lock-out effects
Imitation: Increases supply of a product, thereby decreasing its scarcity and, thence, price
One solution to imitation problem: Take tight appropriability regimes for organizational assets as patents, trademarks, and copyrights

9. Boundary Conditions and Commercialization Costs
Costs for commercialization of technology
Investments in production assets: The more asset intensive the project, the more expensive it is likely to be (Greer & Moses, 1992)
Accessibility to necessary infrastructure: To the extent that the availability of such infrastructures is uncertain, expected costs of commercialization and their variance will be greater, setting a lower boundary on the option value
Availability of parallel technologies: Creating complementary assets can be both costly and uncertain, increasing the variance of the cost

10. Factors Influencing Price of the Option: Development Cost
Spillover effects
Investments intended to create new knowledge for the firm often have important spillover effects
A firm amplifies spillover benefits when it utilizes the developing technology as a springboard to target other markets
Life cycle
During periods of incremental change, learning is “exploited”; however, during periods of disruption, investments in “exploration” must be made

11. Rent streams, commercialization cost, and their relationship to technology option value