PORO and GORO are two categories of real options that stand out for their strategic nature and purpose within the company.
Here are the basic differences between these two concepts:
1. Definitions and Objectives
- PORO (Process Optimization Real Options): These are process optimization options. They aim to optimize the allocation of resources for markets where inputs and outputs are already identified (existing products, processes). The goal is to manage uncertainty related to volumes, prices or costs to maximize operational efficiency.
- GORO (Growth Opportunities Real Options): These are growth opportunity options. They allow the company to develop in the long term, or even to completely reinvent itself. The goal is to create new capabilities to capture future opportunities that are not yet fully defined.
2. Nature of the Investments
- PORO: These options often relate to tangible assets or immediate operational decisions.
- Examples: Manufacturing flexibility (a factory capable of producing two different car models), the ability to temporarily close a mine if prices fall, or the choice between two energy sources.
- GORO: These options are often based on intangible assets or structuring infrastructure.
- Examples: Investments in Research & Development (R&D), human capital, patents, software or brand reputation. These investments prepare the company to seize future markets.
3. Marginal returns (theoretical difference)
Sources point to a significant economic difference regarding the cost-effectiveness of these options:
- PORO (Diminishing Returns): Optimizing a process has its limits. An additional improvement on an already optimized process pays less than the previous one (the marginal gain decreases). There is therefore an optimal level of flexibility beyond which investing destroys value.
- GORO (Increasing Returns): Growth options can generate synergies (economies of scale, complementary technologies). A portfolio of growth projects can be worth more than the sum of individual projects, as mastering one technology or market opens the door to other cumulative opportunities.
In short, POROs are used to manage risk and optimize the existing in the face of volatility, while GOROs are used to build the future and capture new value potential.