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Real Options

Real options refer to the strategic decision-making process in business where managers have the flexibility to take different courses of action based on the evolution of market conditions. This concept is derived from the financial options theory and applies to investment projects, product development, and other strategic initiatives.

One example of real options is the decision to invest in research and development for a new product. Instead of committing all resources upfront, managers can choose to delay or abandon the project based on the market feedback during the development process.

Another example is the choice to expand into new markets or territories. By having the option to scale up or down based on market conditions, companies can minimize risks and maximize returns.

Real options provide companies with the flexibility to adapt to changing environments and make better decisions over time. By considering the potential outcomes and uncertainties, managers can create more value for their organizations.

  • Flexibility: Real options allow managers to adapt to changing circumstances and make informed decisions.
  • Risk management: By having the option to delay or abandon projects, companies can mitigate risks and preserve capital.
  • Value creation: Real options help companies maximize returns by making strategic choices based on market conditions.

For more information on real options, you can visit Wikipedia.