Managing Growth Options.

The investment opportunities with the greatest value creation potential often arise at points of discontinuity caused by technological innovation, deregulation, or shifts in consumer behavior. For example, digital technology, telephone deregulation, and home computing are opening up the possibility of exciting growth prospects in pay-TV, cable and wireless telephony, and network-based services. Yet investing in these opportunities is risky since potential losses could be substantial. Companies have two obvious strategic choices in such uncertain growth …

…franchise, or when a fully committed competitor is about to extract most of the value from the underlying investment. However, there needs to be a good degree of certainty that exercising the option will pay off. Option-based approaches do not only apply in high-tech or research-intensive industries. They also apply where competitor action creates uncertainty and a potential industry discontinuity. Growth options have been successfully used in industries as diverse as retailing and financial services.