Managing Growth Options.

Essay by ngslC+, October 2003

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The investment opportunities with the greatest value creation potential often arise at points of discontinuity caused by technological innovation, deregulation, or shifts in consumer behavior. For example, digital technology, telephone deregulation, and home computing are opening up the possibility of exciting growth prospects in pay-TV, cable and wireless telephony, and network-based services. Yet investing in these opportunities is risky since potential losses could be substantial.

Companies have two obvious strategic choices in such uncertain growth situations. Either they can commit themselves to full investment and hope it pays off, or they can wait and reevaluate once market trends become clearer ? by which time bolder competitors may have taken the lead. However, in many markets there is a third possibility ? that of acquiring a growth option.

A growth option buys a company the ability to participate in future growth without substantial risk to shareholder value. An approach has been developed ? the growth option stairway ? to help companies in a wide range of industries and competitive situations use growth options successfully


Buying growth options should not be an excuse for random investments lacking strategic logic. Growth options have three distinct features. They carry no obligation to make a full investment; they are considerably cheaper than full investment; and, most importantly, they give the buyer a preferential position from which to make a full investment over competitors without an option. This preferential position may arise from one of four sources: the exclusive ability to make the investment due to a proprietary license or technology; better information on markets, customer behavior, or technology performance; higher expected revenues deriving from establishing a brand or developing distribution channels; lower expected costs due to skills developed and supplier relationships.

Take as an example the emergence of digital television technology and the...