Real Options and Fatal Flaws
In the R&D world, when a new idea is proposed, it is standard practice to look for the fatal flaw. A fatal flaw is a condition that is certain to preclude, or that has a high likelihood of precluding, exercise of the option. Its existence in effect negates ownership of the option. That flaw can be technological; it can be in the revenue model; and it might be a health, legal, or environmental issue. In essence a plan with a fatal flaw is no more an option than a call on a worthless security, such as the stock of a defunct company. The absence of a fatal flaw does not imply business success—every business has known risks.
The converse of the situation may also be that a real option comes into being when the last fatal flaw is eliminated. In the case of Hook M Horns, our fictional brewer, lack of financing was the last fatal flaw to be overcome—a common occurrence. Here, financing hinged on customer commitments. Customer commitments hinged on production of samples. And production of samples hinged on gaining the services of the master brewer. Any failure in this chain would have been lethal to the project.