Many organisations face intense pressure to produce radical innovations. Common innovation frameworks include: co-creation with customers (Nishikawa et al., 2013) fuzzy logic, modelling or emulating human reasoning when data is vague or imprecise (Machacha and Bhattacharya, 2000) a model of reasoning called the Product-DNA model (Haase et al, 2018) an earlier version, New Concept Development (NCD) model (Koen et al., 2001) and analytic hierarchy process (AHP) -a method of multi-criteria decision making developed in clinical healthcare setting and imported into innovation (Salgado et al., 2012 Liu et al., 2015) real options theory (Perlitz and Peske, 1999) and, more recently, 'open evaluation' (Velamuri et al., 2017) where a community of consumers and interested parties outside the company develop criteria for determining which ideas to progress dynamic knowledge feedback loops, recursive cycles of interaction over the course of the project (Akbar et al., 2018) and, finally, decision making based on knowledge (DeBK) (de Oliveira et al., 2018).
Researchers have looked at several approaches to aid decision making at the front end of innovation, though Bagno et al (2017) have critiqued the most popular innovation frameworks, suggesting that they tend to overemphasize one specific dimension. One main goal of the paper is to broaden and deepen the discussion on real option models in R&D and Technology Management, which has in some cases been limited to stressing the advantages of the method rather than reflecting on applicability and concrete way of application of the method. On the other hand, roads to application of the method are shown using the Geske model of option evaluation. This paper describes some basic properties of the real options approach and sheds light on existing problems for the application in R&D project evaluation. Of course these problems even gain importance when the R&D environment with its discontinuities and lack of regulation or institutionalized trade is assumed. Even under these conditions, several assumptions made and difficulties left are subject to controversial discussions. The theoretical base behind options valuation is derived from the capital markets and thus assumes market conditions that are closer to the theoretical construct of ‘perfect competition’ than most other settings. However, there is a certain concern about the applicability to a wide range of R&D related problems. Recent empirical findings by Ellis (1997) and Busby and Pitts (1997) also report growing attention and use in practical investment decisions. The real options approach has recently received growing attention in R&D and Technology Management research.
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