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TECHNOLOGY INVESTMENT ADVISOR: An Options-Based Approach to Technology Strategy

Recent years have seen increased efforts to link technology strategies to business strategies, which requires expressing returns on technology investments in terms of business impacts. These impacts are usually many years in the future and highly uncertain. These factors are typically addressed by applying discounted cash flow methods to valuing alternative investments. This approach often shows long-term technology investments to be of low present value because of the compounding of the discount rate several years into the future. Proponents of such investments often counter this heavy discounting by inflating projections. This debate can be recast by defining the purpose of technology investments, and the RD efforts enabled by these investments, to be creation of options for achieving business results, not necessarily for creating business results directly. This article develops and illustrates this approach in terms of integrated models for options pricing, market/technology maturity, production learning, and competitive scenarios. These models are embodied in the Technology Investment Advisor, a computer-based tool that supports formulation and evaluation of technology strategies.