Deferral and Growth Options Under Sequential Innovation

Abstract

This paper examines the application of real option theory to sequential investment decision-making. 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 successive technological generation, a firm may either defer investment and wait for the arrival of a future generation or invest immediately to obtain experience that provides a claim on adoption of subsequent generations. We propose that deferral and growth option value is dependent on the magnitude, frequency, and uncertainty of inter-generational change, and the nature of rivalry.

Citation

Leiblein, M.J. and Ziedonis, A.A. (2007), "Deferral and Growth Options Under Sequential Innovation", Reuer, J.J. and Tong, T.W. (Ed.) Real Options Theory (Advances in Strategic Management, Vol. 24), Emerald Group Publishing Limited, Leeds, pp. 225-245. https://doi.org/10.1016/S0742-3322(07)24008-2