Strategizing your portfolio of real options for the win.
What factors make your real options portfolio valuable? How do you analyze the nature of the interactions among real options and their effects on portfolio value? Ultimately, how can your firm be most strategic in managing this in your industry’s unique market?
To begin, firms must consider growth and switching options in developing a portfolio of strategic options. Growth and switching options represent the trade-off between flexibility and commitment, according to the study, “Managing a Portfolio of Real Options” co-authored by Ohio State researcher Jaideep Anand and with researchers Raffaele Oriani in Italy and Roberto S. Vassolo in Argentina. While growth options relate to early commitment in growth opportunities, switching options give firms essential forms of flexibility to handle different sources of uncertainty. Too much commitment could create vulnerability; too little could hinder competitive advantages.
So how do you determine the right balance for your unique market? Let’s consider the sources of uncertainty within growth opportunities and switching opportunities. Some sources generate growth opportunities while others might induce switching opportunities, according to the study. For example, when market demand is the main source of uncertainty, growth opportunities may dominate the strategic decision. These elements are applied to different strategic situations of technological and market uncertainty. Managers must consider what is unique about their portfolio and how they can incorporate that when assessing its value. They must first understand how market and technological uncertainty can have different effects on the value of switching and growth options.
When the market has inconsistencies between demand and the need for new products, it affects the market size and ultimately, sales. In this case, growth options could limit firms’ losses to their initial investments. However, potential gains from future growth opportunities are unlimited.
When the market has technological uncertainty, firms must choose the “right” technology. Here firms can apply switching options that allow them to hedge against the risk of being locked out of the market because they have not invested in the right technology.
Based on your industry’s unique market and focusing on the opportunities available, these are important considerations to keep in mind in a world of quickly advancing technologies and ever shifting markets. To dig deeper into this topic, view the original research and its translation here.
Academic Director, The Risk Institute
Professor of Finance
The Ohio State University Fisher College of Business
One of the primary functions of The Risk Institute at The Ohio State University Fisher College of Business is to serve as a conduit between academic research and practitioners of risk management. New research insights, the advancement of theory, and top-tier empirical studies are at the foundation of our mission, but we also want to see the utilization and implementation of our research findings.
We often reference that The Risk Institute exists at the intersection of academia and practice of risk management. It is at this intersection where we facilitate the translation of academic research into practical application. The challenge most busy industry practitioners face is that high level research is written in the unique language of academia and their busy schedules don’t afford them the discretionary time to tackle a lengthy thesis of academic research on the off chance it might contain a relevant insight or two.
The Risk Institute is meeting the need by bridging the gap with The Risk Institute Research Translation Series – a curated collection of insightful one-page practitioner focused translations of relevant research topics. Written from the perspective of a practitioner for a practitioner this one page overview goes beyond an executive summary and focuses on the substantive insight of the research in a concise and efficient manner. A practitioner can supplement their knowledge of the latest research in a matter of minutes. Should a topic resonate, the opportunity exists for more in depth reading as well as engaging the researchers through The Risk Institute.
New translations will be coming online and I encourage you to frequently consult our digital library for new offerings. Of particular note will be the translations from each of our academic grants for research from last year, which will be available later this summer.
Risk is an ever-evolving field and we are confident that The Risk Institute can play a vital role with these translations in advancing the knowledge base and practice of enterprise risk management.
The Risk Institute at The Ohio State University Fisher College of Business brings together practitioners and researchers to engage in risk – centered conversations and to exchange ideas and strategies on integrated risk management. Through the collaboration of faculty, students and risk management professionals, The Risk Institute addresses risk at a broad cross section of industries and is dedicated to developing leading – edge approaches to risk management.