Innovation is inherently risky, with some (radical) innovation projects being more risky than others (incremental). Therefore, any proposed investment in innovation needs to be evaluated taking into account the nature of the innovation (incremental versus radical), the risk tolerance of the investor, the intensity and nature of competition and the operational flexibility embedded in the project under consideration (in terms of timing and scale). Based on utility-based real options frameworks and dynamic programming models, we derive insights into the impact of these characteristics on the optimal investment strategy.
The success of an innovative product or service is susceptible to uncertainty regarding the (technical) success of its development, and its commercial success, which is inﬂuenced by competitors and market conditions. Therefore, a firm developing such innovations should explicitly consider these uncertainties and its ability to cope with or react to them, when making investment decisions. Existing research has looked at the impact of risk, competition or operational flexibility, but no frameworks exist that take a holistic view. This is what we aspire to in this research programme, revealing interesting interactions between risk, the competitive environment and embedded flexibility.
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