In recent years, practitioners and academics have argued that traditional discounted cash flow (DCF) valuation models do not adequately capture the value of managerial…
In recent years, practitioners and academics have argued that traditional discounted cash flow (DCF) valuation models do not adequately capture the value of managerial flexibility to delay, grow, scale down or abandon projects. The insight is that a business investment opportunity can be conceptually compared to a financial option. The purpose of this paper is to develop a theoretical model based on option pricing theory to value managerial flexibility arising in stock for stock exchanges. The paper shows how a mergers and acquisition (M&A) deal may be optimally structured as a real options swap by including managerial flexibility of both the acquiring and target firms when stock prices are volatile. Using a recent acquisition case example from US banking industry the paper illustrates how the proposed exchange ratio swap optimize deal value and avoids earnings per share (EPS) dilution to both parties. Appropriate valuation of managerial flexibility is important given the historical premiums paid in takeovers. While the fact that such premiums exist lends some credibility to the idea that at least implicitly managerial flexibility is valued, the real options approach allows for more explicit valuation of such flexibility.
The purpose of this paper is to relate the balanced scorecard (BSC) to strategy and teams.
This paper proposes deriving performance targets and weights using a multiparty collaborative decision model that can be integrated into team-based bonus formulas.
Cross-functional division managers face a more complex problem in setting goals for individual managers. The proposed approach is intended to develop such goals and link them for team-based incentives. An example illustrates the application of the proposed BSC model and the team-based pay formula.
The model can be used to determine group bonus.
The paper has two objectives: to relate the BSC to the team setting with a participative flavor rather than with imposed targets and weights, and to develop a better way of relating behaviors and outcomes to the team’s and/or the organization’s goals. Integrating the strategies of various units adds a new dimension that differs from rationalizing the superior’s and the subordinate’s goals. The proposed model considers input from all value chain functional managers involved in implementing an organizational strategy. A methodology is provided to operationalize (Hope and Fraser, 2003) beyond the budgeting model principles.
Empirical evidence indicates that effective management of resources to implement strategy in a balanced scorecard (BSC) system is essential. We present a mathematical…
Empirical evidence indicates that effective management of resources to implement strategy in a balanced scorecard (BSC) system is essential. We present a mathematical model for allocating limited resources in the BSC strategy implementation process.
The proposed facilitated negotiation model provides a systematic approach to prioritizing strategic initiatives in the design and implementation of a BSC.
Our joint decision model prioritizes strategic initiatives and concurrently calculates the optimal (or approximately optimal) set of BSC targets and weights, given multiyear resource restrictions.
The model assumes full, open, and truthful exchange of information between the parties; an assumption that may exclude many organizations.
We address an important gap in the BSC literature on how organizations can effectively link strategy to the potential constraint of resource budgets.
Quantitative models are being used in practice for allocating resources, but we are not aware of their use by organizations for allocating resources in a BSC application.
The balanced scorecard (BSC) allows firms to place importance on both financial and nonfinancial performance measures in four perspectives for developing and implementing…
The balanced scorecard (BSC) allows firms to place importance on both financial and nonfinancial performance measures in four perspectives for developing and implementing corporate strategy and performance evaluation. The BSC literature however provides minimal insight on how to set targets, how to weigh measures when evaluating managers and the firm, and how to resolve conflicts that arise in the BSC process. Researchers have attempted to fill these gaps using two contending approaches. In particular, Datar et al. (2001) uses an agency model to select the optimal set of weights and more recently Herath et al. (2009) develop a mathematical programming–based collaborative decision model to find the optimal (or approximately optimal) set of target and weights considering inputs from two parties. In this article, we apply the Herath et al. (2009) model to a detailed BSC example. We demonstrate how the collaborative BSC model can be implemented in Microsoft Excel by practitioners to minimize BSC conflicts. Finally, we discuss how the model facilitates alignment and a culture of open reporting (information sharing) around the BSC that is necessary for its effective implementation.
The flexibility of managers to respond to risk and uncertainty inherent in business decisions is clearly of value. This value has historically been recognized in an ad hoc…
The flexibility of managers to respond to risk and uncertainty inherent in business decisions is clearly of value. This value has historically been recognized in an ad hoc manner in the absence of a methodology for more rigorous assessment of value. The application of real option methodology represents a more objective mechanism that allows managers to hedge against adverse effects and exploit upside potential. Of particular interest to managers in the merger and acquisition (M&A) process is the value of such flexibility related to the particular terms of a transaction. Typically, stock for stock transactions take more time to complete as compared to cash given the time lapse between announcement and completion. Over this period, if stock prices are volatile, stock for stock exchanges may result in adverse selection through the dilution of shareholder wealth of an acquiring firm or a target firm.
The paper develops a real option collar model that may be employed by managers to measure the market price risk involved to their shareholders in offering or accepting stock. We further discuss accounting issues related to this contingency pricing effect. Using an acquisition example from U.S. banking industry we illustrate how the collar arrangement may be used to hedge market price risk through flexibility to renegotiate the deal by exercising managerial options.
Aims to promote an integrated performance measurement system.
Aims to promote an integrated performance measurement system.
The literature on R&D performance measurement identifies the need for an integrated performance measurement system for strategy implementation. Develops a theoretical framework for R&D performance measures, incorporating real options to define strategic net present value, which values the plan to make R&D investments.
Real options techniques can be used to value managers' options to shelter investments from adverse effects and exploit upside potential. The shift in valuation paradigms from a naïve net present value model to active risk management implicit in real options requires performance measures that reflect real option value and defines strategic value created (SVC), which is based on residual income concepts. Since residual income is known to be superior to ROI in motivating goal congruence, infers that SVC has similar advantages.
Illustrates how SVC would be used as a performance measure for a new drug in the commercialization stage, considers several relevant questions and discusses how SVC could be used in a firm's balanced scorecard.