Options Thinking and Platform Investments: Investing in Opportunity

  • Kogut B
  • Kulatilaka N
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Abstract

There are many factors which bias managers towards a myopic view of the world: pressures from financial markets, strategy techniques, and incomplete rules of financial evaluation. A major casualty of myopic rules is the underinvestment in new capabilities, such as increasing the speed to the market, or the quality delivery of product and services. Investments in new capabilities are investments in opportunity: to be a player in new but uncertain markets requires learning new ways of doing things. This article analyzes the costs of myopic rules and proposes an evaluation technique based on option pricing theory as a way to demonstrate the value of long-term investments in new capabilities as platforms into new markets. It examines investments in core technologies, joint ventures, flexible manufacturing, and entry into foreign markets in terms of their platform value.

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Authors

  • Bruce Kogut

  • Nalin Kulatilaka

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