Deferral and Growth Options Under Sequential Innovation

ADVANCES IN STRATEGIC MANAGEMENT, Vol. 24, Real Options Theory, Jeffrey J. Reuer and Tony W. Tong, eds., Elsevier: Amsterdam, 2007

Fisher College of Business Working Paper No. 950450

28 Pages Posted: 13 Dec 2006

See all articles by Michael J. Leiblein

Michael J. Leiblein

Ohio State University

Arvids A. Ziedonis

KU Leuven - Faculty of Economics and Business; Department of Management, Strategy, and Innovation

Abstract

This paper examines the application of real option theory to sequential investment decision-making. We address the apparent conflict between applications that suggest that early investments provide growth option value and those that suggest that delayed investment may provide deferral option value. In an effort to contribute to the development of criteria that discriminate between investments that confer growth options from those that confer deferral options, we introduce a conceptual model that explains technological adoption as a sequence of embedded options. Upon the introduction of each generation of a technology, a firm may either defer investment and wait for the arrival of a future generation or invest now and obtain experience that provides a preferred claim on adoption of subsequent generations. The paper considers four potential technology migration strategies; compulsive, buy-and-hold, leapfrogging, and laggard. We propose that these four technology migration strategies are dependent on the magnitude of inter-generational technological change, the frequency of inter-generational technological change, the uncertainty of inter-generational technological change, and the nature of rivalry.

Keywords: Real Options, Technology Adoption, Leapfrogging

JEL Classification: O31, O32, O33

Suggested Citation

Leiblein, Michael J. and Ziedonis, Arvids Alexander, Deferral and Growth Options Under Sequential Innovation. ADVANCES IN STRATEGIC MANAGEMENT, Vol. 24, Real Options Theory, Jeffrey J. Reuer and Tony W. Tong, eds., Elsevier: Amsterdam, 2007, Fisher College of Business Working Paper No. 950450, Available at SSRN: https://ssrn.com/abstract=950450

Michael J. Leiblein

Ohio State University ( email )

700 Fisher Hall
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Columbus, OH 43210-1144
United States
614-292-0071 (Phone)
614-292-7062 (Fax)

Arvids Alexander Ziedonis (Contact Author)

KU Leuven - Faculty of Economics and Business; Department of Management, Strategy, and Innovation ( email )

Warmoesberg 26
Brussels, 1000
Belgium

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