Real Options @ Work…

Tathagat Varma VP, Strategic Process Innovations and HR Innovation Labs

“stories” per story!

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“…people who were right a lot of the time

were people who often changed their minds.”

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Moral of the story?Genius. Idea. Smart. Plan A, Luck. Vision + Common sense + Hard work + Baby steps + Continuos feedback + Constant steering + Plan B + Plan C +… fail.fail.pass.fail.fail.fail.pass.fail…SUCCESS!!! but, how???

http://steveblank.files.wordpress.com/2010/11/two-assumptions.jpg

Problems?

✴Slow ✴Rigid$$$……..??….$…???

✴Risky ✴Costly

So, why do we make such commitments?

Do we have options?

Confers ‘rights’, but not an obligation

Options represent choice

Commitment or

Option?

Traditional decision-makingAssumes and expects all knowledge and smartness upfront

Upfront decisions => Comfort, but no options :(

Single decision-point => Stuck with it!

Prefer being wrong (“Bad Decision”) than being uncertain (“No Decision”) !

Best travel choices in London?

TheoryThe notion of real options was developed from Myers’ (1977) seminal idea that one can view firms’ discretionary investment opportunities as a call option on real assets, in much the same way as a financial call option provides decision rights on financial assets.

By way of analogy, a real option has as its underlying asset the gross project value of expected operating cash flows; its exercise price is the investment required to obtain this underlying asset; and the time to maturity is the period of time during which the decision maker can defer the investment before the investment opportunity expires.

Formally stated, real options are investments in real assets, as opposed to financial assets, which confer the firm the right, but not the obligation, to undertake certain actions in the future.

REAL OPTIONS THEORY - Jefrey Reuer & Tony Wong

What is a Real Option?An alternative or a choice ‘Real’ because it pertains to real assets Defer commitments till the last responsible moment Not procrastination!!!

Real Options Meme

Options have Value

Options Expire

Never commit early unless you know why

http://commitment-thebook.com/pages/about-us

Agile, Lean and Real Options

Agile = Change Lean = Efficiency Real Options = Effectiveness

Using Real OptionsFor each problem, look at all the options

Each option has some conditions, cost and expiry

Put all options on a timeline

Identify how long you can hold off a decision

Until that time, keep looking for new options

Decisions are made when options expire

Once you need to act…act quickly!

Conclusions

Real options are everywhere! Treat is like a decision-making aid Remember the Real Options meme…

ReferencesCommitment - A Novel About Managing Project Risk, http://commitment-thebook.com/

http://www.infoq.com/articles/real-options-enhance-agility

Strategy as a Portfolio of Real Options - Timothy A. Luehrman, http://hbr.org/1998/09/strategy-as-a-portfolio-of-real-options/ar/1

Making Real Options Really Work - Alexander B. van Putten and Ian C. MacMillan, http://hbr.org/2004/12/making-real-options-really-work/ar/1

A Real-World Way to Manage Real Options - Tom Copeland and Peter Tufano, http://hbr.org/2004/03/a-real-world-way-to-manage-real-options/ar/1

http://vimeo.com/30604063

https://vimeo.com/75978656

http://theitriskmanager.wordpress.com/

https://vimeo.com/30605539