a value because now you don't have to be all in with those expenditures.
Real options analysis, in its technical way, is a way of calculating that
actual optionality that is created by a stage gate process.
Now, we can go through the specifics of how to calculate a real option, but for
our brief note here, I'll just talk it more conceptually.
The idea very simply, again, is if you can imagine an investment opportunity like R&D
or Innovation, or you might abandon or develop a project or a product.
At various points in that development process you might collect additional data,
and then make a decision whether to continue or not.
So as you see in this little decision tree here,
there are various decision points in which you can decide to abandon the product
versus continuing to commercialize it and develop it.
That again, that value and
having the ability to stage, gives you optionality value.
So it's often useful, when thinking about innovation or even other capital
investments, to think about to what degree is there optionality provided?
To what degree could I stop investment at a point in time?
So you think about something like a merger in acquisition,
that tends to be an all-in type of investment there,
as opposed to internally developing some product or service.
At which point, you might be able to learn some and cut back at a future date.
This is the underlying logic of a real options analysis.
And again, one can get quite technical and try to calculate those, but
one could also just simply use that as a decision logic when thinking about whether
one choice, or one decision, is better than another.