Strategic Options and Games in Analysing Dynamic Technology Investments

This article demonstrates how to use strategic options and games to quantify the option value of technology investments. Research and product development in electronics, capacity expansion in telecommunications or strategic acquisitions to enter new markets are examples of strategic investments that are difficult to analyse based on standard discounted cash flow approaches. Yet these decisions determine a firm's competitive success in a dynamic technological and competitive landscape. How much is such a strategic option worth? How does one analyse strategic options in a dynamic, competitive environment? We describe basic principles for analysing competitive strategies under uncertainty by incorporating game theory in real options analysis. We show how executives can analyse high-stakes multi-stage investment decisions under uncertainty, both under a proprietary setting and under different kinds of competitive structures. The analysis can apply in the last stage of commercialisation or in the innovation/R&D stage. Our proposed valuation of competitive investment strategies can help answer strategic questions such as: When should an innovator take a tough stance to pre-empt market share and force its rival to retreat, and when should it take an accommodating stance to avoid a retaliation and intensified competition? When should a firm co-operate (e.g. via joint R&D ventures) and when should it choose head-on competition (e.g. innovation races)? Step-by-step illustrative analyses provide guidelines that practitioners can adapt in realistic settings.

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