The Art of Balancing Your Eggs Between Baskets

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.

 

Leave a Reply

Your email address will not be published. Required fields are marked *