Additional Value in Project Portfolio Selection : Doing the right things by right valuation – Gains of real options portfolio theory

Abstract: Purpose: The purpose of this thesis is to address the, by scholars and managers alike, expressed need of development in the project portfolio selection. The research will aim to investigate how the selection of innovation projects portfolios could change if flexibility, and with it uncertainty, were added to the project portfolio selection. The aim is further to investigate how options value can be incorporated as additional value to a portfolio selection decision, with the goal to choose projects that maximize the goal function of the firm. Method: This thesis takes a qualitative approach as such approach is favourable when studying social science. The empirical research is carried out at a large international company conducting in an extensive amount of R&D as well working with innovation projects. The data is collected by unstructured and semi structured interviews with management at the company subjected to the study. Results: The results show, that by adapting the real options framework to a static way of selecting projects, the incorporation of flexibility to the selection process can add economic value by accounting for options value and handle uncertainty. The real options framework will substantiate a dynamic approach to the selection process of innovation projects, as flexibility is changing the selection process from individual project selection to the selection of portfolios.