Deferral and Growth Options Under Sequential Innovation

This paper examines the application of real option theory to sequential investment decision-making. We address the apparent conflict between applications that suggest that early investments provide growth option value and those that suggest that delayed investment may provide deferral option value. 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 generation of a technology, a firm may either defer investment and wait for the arrival of a future generation or invest now and obtain experience that provides a preferred claim on adoption of subsequent generations. The paper considers four potential technology migration strategies; compulsive, buy-and-hold, leapfrogging, and laggard. We propose that these four technology migration strategies are dependent on the magnitude of inter-generational technological change, the frequency of inter-generational technological change, the uncertainty of inter-generational technological change, and the nature of rivalry