Strategic and Cultural Contexts of Real Options Reasoning in Innovation Portfolios

Sustaining Complement Quality for Digital Product Platforms

Strategic and Cultural Contexts of Real Options Reasoning in Innovation Portfolios

Carsten Kaufmann, Alexander Kock, and Hans Georg Gemünden

kHUB post date: March 7, 2022
Originally published: February 16, 2021 (PDMA JPIM • Vol. 38, Issue 3 • May 2021)
Read time: 38 minutes

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Decision makers find creating an innovation portfolio challenging, because more innovative projects are associated with a higher degree of uncertainty. In this study, we investigate the potential benefits of applying real options reasoning (ROR) in innovation portfolio management from an attention-based view. Using a sample of 137 innovation portfolios with multiple informants, we investigate ROR's influence on portfolio innovativeness and, ultimately, on portfolio success in a mediated model. Further, we analyze the moderating influence of an innovation portfolio's organizational context—entrepreneurial orientation and innovation climate—on ROR's application. The results support ROR's positive relationship to portfolio innovativeness and portfolio success. The analysis also supports the positive interaction between entrepreneurial orientation and ROR with respect to portfolio innovativeness. This study contributes to the literature by demonstrating the relationship between ROR and portfolio success, mediated by portfolio innovativeness. In addition, the study's analysis offers an explanation of previously mixed findings regarding ROR's benefits by considering the firm's strategic and cultural innovation contexts. The findings underline the relevance of strategic support for ROR's effectiveness in innovation portfolio management. Furthermore, the findings encourage managers to implement ROR, but also stress the essential contribution an entrepreneurial orientation makes when the managers do so.

Practitioner Points

  • Portfolios with a higher degree of innovativeness are also more successful.
  • Real options reasoning (ROR) refers to portfolio managers implicitly applying real option logic when deciding on innovative projects’ funding through sequential investment, low commitment to prior investment decisions, and constant resource reallocation to more promising projects.
  • Managers should apply ROR to cope with innovative projects’ uncertainty and venture more innovative projects, which increases overall portfolio innovativeness.
  • ROR is especially effective for firms with a high entrepreneurial orientation, meaning high proactiveness, innovativeness, and risk-taking.

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