The elegance of real options theory and monte carlo simulation is that many strategic values can be quantified or identified from the bottom to the top. Real options analysis allows the firm to determine how much this safety downside insurance or abandonment option is worth i. The strategic management frameworks arnoldo hax alfred p. Introduction in a recent section of the financial times, on october 4, 2010, while the biggest us auto manufacturer gm was announcing shutting down its opel plant in antwerp and laying off eight. Real options analysis is a valuation, project management and strategic decision paradigm that applies finan cial option theory to real assets.
Real options valuation, also often termed real options analysis, rov or roa applies option valuation techniques to capital budgeting decisions. Analysis of land value and strategic decisions in real estate development by chun kit so timothy so submitted to the program in real estate development in conjunction with the center for real estate on july 30, 20 in partial fulfillment of the requirements for the degree of. Making strategic investment decisions real options theory and strategic cost management. The paper then discusses the theoretical issues raised by real options. The essence of real options to understand the basis of the real options argument and the reasons for its allure, it is easiest to go back to risk assessment tool that we unveiled in chapter 6 decision trees. Reuer2 1 department of accounting and finance, school of management and business, kings college london, university of cyprus, nicosia, cyprus 2 leeds school of business, university of colorado, boulder, colorado, u. Internal rate of return and net present value for valuing strategic investment decisions. Strategic decision making using real options reasoning. The influence of industry context and individual cognitive factors.
We discuss recent developments in real options theory and its applications to strategic management research, examine the potential difficulties in implementing real options in theory and practice, and propose several areas for future research. Real options analysis tools and techniques for valuing strategic. The first is through visual adaptations of the key content in the book. Pindyck massachusetts institute of technology cambridge, ma 02142 robert pindyck mit lectures on real options part i august, 2008 1 44. In this article we examine an applied investment decision in the telecommunications industry to highlight the main benefits associated with using real options. By synthesizing and critiquing research on real options, we identify a number of important challenges as well as opportunities for rot if it is to enhance its impact on strategic management and potentially develop into a theoretical pillar in the field. The real options method represents the new stateoftheart technique for the valuation and management of strategic investments. Waitingtoinvest option, growth option, flexibility option, exit option and learning option. Key topics themes illustrative strategy studies common real options and investment decisions investment opportunities as. Real options theory in strategic management lenos trigeorgis1 and jeffrey j. Real options theory in strategic management request pdf. Actually, dcf is a special case of real option theory. Despite significant progress made by each field separately toward our understanding of the theory and application of real options, opportunities exist for more crossfertilization and the development of a more interdisciplinary knowledge base and research agenda. Methods in a pod project, real options are used in the decisionmaking process for managing risk and opportunities which are the source of uncertainties.
To meet students wants and needs and thereby create a much better teaching experience for professors, mastering strategic management contains. Real options ro analysis has been of growing interest to the academic community as a promising approach to supporting investment decisions under uncertainty. We develop an alternative real options portfolio framework based on human. Strategic management theories global journals incorporation. The theory and practice of strategy in business organizations s. These real options include the option to waittoinvest or the option to defer, the options to abandon and switch, and corporate table 1. The last quarter century has witnessed substantial growth in applications of real options theory rot to international business ib research. Real options theory allows for a strategic view of corporate social responsibility. Introduction real options analysis is a research field that spreads across different academic and research disciplines such as finance, economics, operations research, engineering, supply chain management, strategic management, marketing, etc. Resourcebased theory, dynamic capabilities, and real options a lthough early contributions to resourcebased theory and dynamic capabilities came from the discipline of economics e. Managing strategic investment in an uncertain world financial management association survey and synthesis.
In the current work, an experiment using a simple uncertain development project and a simulation model capture managers perceptions of real options, including option values. Managing strategic investment in an uncertain world financial management association survey and synthesis amram, martha, kulatilaka, nalin on. Section 1 examines investment decisions, an area of real options. A financial option is a derivative security whose value is derived from the worth and characteristics of another financial security, or the socalled underlying asset. Real options theory in strategic management, strategic. Real options theory in international business springerlink. A real option strategic scorecard decision framework for. Jofre foreword the present report is the result of an ongoing study on the patterns and trends on both the theory and practice in the field of strategic management. Using the url or doi link below will ensure access to this page indefinitely. Us 26 global journal of c omp uter s cience and t echnology volume xv issue i version i y ear h 201 from person to person or from task to task. Real options theory has attracted significant interest in the field of strategic management. Real options theory rot and strategic cost management scm have been proposed as the solutions for the two criticisms. Real options theory in strategic management trigeorgis 2017.
Real options theory in strategic management joseph t. Oct 26, 2007 a new generation in international strategic management edited by stephen tallman this book comprises eighteen cutting edge chapters by emerging scholars in international strategy, offering a variety of fresh perspectives on critical issues that the field will face in the near future. Applications of real options theory in strategic management. It is well documented that many of todays students are visual learners. We also looked at the strategic options of companies in the chemical industry in the wake of recent overcapacity and reduced demand. Mastering strategic management open textbook library. Mastering strategic management is designed to enhance student engagement in three innovative ways. Real options in management and organizational strategy. Two main academic areas that have devoted their attention to the study of real options are financial economics and strategy. By definition, a financial option gives its holder the right, but not the obligation, to buy or sell the underlying asset at a. Pdf real options theory begins by drawing an analogy between real options and financial options. While optionpricing models are indeed a superior valuation toolthe usual use of the theorywe believe that real options can also provide a systematic framework serving as a strategic tool and that the real power of real options lies in this strategic application.
Real options theory rot applies the heuristics and valuation models originally designed for financial securities to the domain of corporate investment decisions. Game theory is a powerful framework that enables managers to analyze systematically the ties among interactions between actors in a market and to develop appropriate competitive strategies. In this sense, they integrate these two aspects of your investment decision making in one tractable framework. The distinction between strategic thinking, strategic management and strategic planning 45 strategy in actionquick strategic thinking in unfavourable circumstances45 strategy in actionsony the disruptive innovator 50 principles for the successful use of strategy 61 finding the right strategic mix of entrepreneurial creativity and. The report focuses on three relevant issues regarding.
Real options theory in strategic management real options theory in strategic management trigeorgis, lenos. Risk management, real options, corporate social responsibility. Pdf real options in strategic management researchgate. Reuer2 1 department of accounting and finance, school of management and business, kings college london, university of cyprus, nicosia, cyprus 2 leeds school of business, university of. But real options can distil your strategic thinking into focussing on a few, key dynamic processes, where a decisiontree would overflow the largest boardroom whiteboard. Using real options theory, i develop the notion of corporate social responsibility as a real option its implications for risk management. Resourcebased theory, dynamic capabilities, and real options. Real options reasoning ror is a conceptual approach to strategic investment that takes into. Real options theory is a major new framework in the theory of investment decisionmaking. A real options theory of strategic human resource management traditional hr architecture, which views different employee groups as a portfolio based on specificity and value, is static and insufficient under uncertainty. Section 2 discusses how real options theory contributes to our understanding of investment mode choices, an especially relevant area to strategic management and organizational economics. A new generation in international strategic management edited by stephen tallman this book comprises eighteen cutting edge chapters by emerging scholars in international strategy, offering a variety of fresh perspectives on critical issues that the field will face in the near future. Real options theory in strategic management trigeorgis.
A real option itself, is the rightbut not the obligationto undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project. Advocates of the approach emphasize that importing concepts from financial economics holds out the potential of yielding new insights on strategic decisionmaking under uncertainty as well as boundaryofthefirm issues that are the focus of competitive and corporate strategy. Real options, property development, discounted cash flow, managerial flexibility, uncertainty 1. Real options analysis an overview sciencedirect topics.
Real options in strategic management emerald insight. Marzo, giuseppe, making strategic investment decisions real options. Real options theory and international strategic management. Making strategic investment decisions real options theory. A real option is a choice made available with business investment opportunities, referred to as real because it typically references a tangible asset instead of financial. The real options method applies financial options theory to quantify the value of management flexibilities in a world of uncertainties 10.
This paper contributes to the debate on the role of real options theory in business strategy and organisational decisionmaking. The relationship of corporate social responsibility to risk management has been treated sporadically in the business society literature. Managing a portfolio of strategic options is like growing a garden of tomatoes in an unpredictable climate. University of central florida, 1998 a dissertation submitted in partial fulfillment of the requirements for the degree of doctor of philosophy. Real options theory begins by drawing an analogy between real options and financial options. These values can only be recognized by gut feeling or personal experience. Since the end of the 70s, many researchers have been pointing out some criticisms to the application of advanced financial techniques e. By synthesizing and critiquing research on real options, we identify a number of important challenges as well as opportunities for rot if it is to enhance its impact on strategic management. Strategy, value and risk the real options approach citeseerx. The implementation of real options theory for economic. Real options theory in strategic management 15 november 2016 strategic management journal, vol. Real options analysis in strategic decision making taylor.
549 358 797 804 605 1337 849 286 398 1094 674 835 25 529 86 133 1302 346 1431 1354 1211 662 1394 393 882 888 150 1414 708 376 1347 1472 838 77 356