Real options for innovation management

Many agree that the real option theory is a good instrument to value risky investments. The problem is that it is hard to use and generates non-intuitive results. Instead of getting bogged down in the mathematics, this paper uses the implications of the existing literature to discuss the use of real options in the management of new product development through a combination of the real option theory and the theory of design. It is argued that development processes should be structured as staged investments to allow for flexibility and monitoring of created options in the process, since all subsequent development steps are dependent on the next one. The design of new solutions is then seen as the creation of new options. This is a way to handle risky projects in uncertain environments and create controlled radical change. A single case, from the development of web services in the newspaper industry, is viewed through the 'real option design' lens.