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Book part
Publication date: 13 August 2007

Jing Li

The application of real options theory to international strategy has surged in recent years. However, it is still a relatively new and loosely defined field, and there are several…

Abstract

The application of real options theory to international strategy has surged in recent years. However, it is still a relatively new and loosely defined field, and there are several constraints on practical applications of this powerful theory. To move forward this field, the paper first provides a systematic analysis of theoretical and empirical contributions of real options theory to three critical issues in international strategy: (1) valuing multinational networks, (2) assessing market entry modes, and (3) evaluating market entry timing. The paper further suggests that future studies can focus on a refined treatment of uncertainty and the development of a dynamic theory in international strategy. Five testable propositions are developed in these directions.

Details

Real Options Theory
Type: Book
ISBN: 978-0-7623-1427-0

Article
Publication date: 17 June 2021

Claus Højmark Jensen and Thomas Borup Kristensen

This paper aims to extend the understanding of how real options reasoning (ROR) is associated with downside risk and how a firm’s portfolio (explore and exploit) of investment…

Abstract

Purpose

This paper aims to extend the understanding of how real options reasoning (ROR) is associated with downside risk and how a firm’s portfolio (explore and exploit) of investment activities affects managers’ ability to effectively apply ROR in relation to downside risk.

Design/methodology/approach

The survey method is used. It is applied to a population of Danish firms, which in 2018 had more than 100 employees. The chief financial officer was the target respondent.

Findings

This study finds that a higher level of ROR is associated with lower levels of downside risk. ROR’s association with lower levels of the downside risk is also moderated by the level of relative exploration orientation in a negative direction.

Originality/value

The field of ROR research on downside risk and portfolio subadditivity has been dominated by research focused on multinationality. This paper extends extant literature on ROR by studying ROR as a multidimensional construct of firm action, which is associated with lower levels of downside risk, also when studied outside of a multinationality setting. This is the case when ROR is implemented as a complete system. This paper also applies a framework of exploitation and exploration to show that findings on subadditivity in options portfolios caused by asset correlations extend outside the scope of multinationality and into one of product/service innovation.

Details

European Business Review, vol. 34 no. 2
Type: Research Article
ISSN: 0955-534X

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Article
Publication date: 17 May 2011

Jeffrey N. Street and Mukunthan Santhanakrishnan

Decision making for acceptance of an R&D project occurs under uncertainty and may involve predominantly quantitative analyses, such as net‐present value, predominantly intuitive…

Abstract

Purpose

Decision making for acceptance of an R&D project occurs under uncertainty and may involve predominantly quantitative analyses, such as net‐present value, predominantly intuitive analyses, such as real options logic, or some combination thereof. This paper attempts to bring together two concepts of decision theory, i.e. heuristics and framing, and real options logic into one integrated view relative to R&D project valuation. It is believed that the integration of theory helps explain expected and unexpected decisions resulting from the R&D project valuation process.

Design/methodology/approach

It is proposed here that, under a typical R&D project review, aspects of two theoretical concepts integrate to aid project valuation and decision making. The aim of this paper is to develop a research framework leading to advancement in the understanding of the relationship of heuristic principles from decision theory and the valuation methodology of real options logic. Findings – As a conceptual paper, propositions and a research model representing the conceptual framework are presented.

Research limitations/implications

Stemming from the propositions and research model, it is believed that the degree of influence that heuristics potentially exhibit on real options logic can be successfully measured. Confirming the degree of influence is a matter for future empirical research.

Originality/value

The originality of this paper is to develop a research framework leading to advancement in the understanding of the relationship of heuristic principles from decision theory and the valuation methodology of real options logic. In this framework, heuristics has been positioned as a moderator affecting project valuation derived by real options logic.

Details

Journal of Strategy and Management, vol. 4 no. 2
Type: Research Article
ISSN: 1755-425X

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Article
Publication date: 2 September 2014

Maartje van Reedt Dortland, Hans Voordijk and Geert Dewulf

The objective of this paper is to provide insights about the potential of real option thinking for corporate real estate management (CREM) from the owner-user perspective. A…

Abstract

Purpose

The objective of this paper is to provide insights about the potential of real option thinking for corporate real estate management (CREM) from the owner-user perspective. A promising approach to classifying and evaluating flexibility in real estate is the real options approach. Most literature on real options look from an investor perspective.

Design/methodology/approach

First, a review on real option thinking in the real estate and large engineering projects literature is provided using Flyvbjerg’s (2001) typology of knowledge systems. Next, the effects of exercising real options for various stakeholders in CREM is analysed in two case studies.

Findings

The literature review shows that little research has been done on conditions and values needed to make real options applicable in the CREM practice of the owner-user of real estate. The case studies show that real options are more valuable to one stakeholder than to another.

Practical implications

Based on the knowledge on conditions for and the consequences of exercising real options for various stakeholders, insight can be gained into the applicability of real options to the owner-user of real estate and how real options reasoning fits within this practice. A phronetic type of knowledge is needed that incorporates stakeholders’ interests.

Originality/value

Creating phronetic knowledge would allow understanding why and how real options are used, or could be used in the future, and heuristics could be developed. In this way, real estate management should become more resilient to changes.

Details

Journal of Corporate Real Estate, vol. 16 no. 3
Type: Research Article
ISSN: 1463-001X

Keywords

Article
Publication date: 11 November 2013

John H. Humphreys, Dragan Loncar, Milorad Novicevic and Foster Roberts

The purpose of this article is to broaden our understanding of the relationship between footholds and feints, particularly within a context of judo strategy, and propose a…

Abstract

Purpose

The purpose of this article is to broaden our understanding of the relationship between footholds and feints, particularly within a context of judo strategy, and propose a framework whereby organizational decision makers might differentiate foothold attacks from strategic feints as competitive moves.

Design/methodology/approach

The paper used utilized an inductive approach to framework development using an in-depth case study for contextual explanation of firm rivalry between Nectar and Coca Cola in the Balkans region. To identify the framework dimensions, the paper integrated real options reasoning with game-theoretic and competitive dynamics perspectives. It also used a market multiples approach to conduct a retrospective valuation analysis to support our framework.

Findings

The examination of the competitive interplay between Nectar and Coke in the Balkans region provides meaningful intimation of the linkages between foothold moves, feints, and judo strategy techniques. Based on insights from the case, we develop a framework for practical differentiation of foothold attacks from feints.

Research limitations/implications

A limiting factor is that only a case approach to framework development was used. However, we accept that the framework dimensions could have been identified using other methods. Another limiting factor is that our analysis only considered foothold moves for the geographic markets, but not for product markets.

Practical implications

The paper offers management practitioners an operative framework for differentiating foothold attacks from strategic feints.

Originality/value

This unique contribution is the development of an operable framework for practical differentiation of competitive foothold attacks from feints. The extant literature offers no guidance as to how one might differentiate a true foothold attack from a feint. The ability to do so from a competitive standpoint could prove profound for firm success.

Details

Management Decision, vol. 51 no. 9
Type: Research Article
ISSN: 0025-1747

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Book part
Publication date: 13 August 2007

Yong Li, Barclay E. James, Ravi Madhavan and Joseph T. Mahoney

We discuss recent developments in real options theory and its applications to strategic management research, examine the potential difficulties in implementing real options in…

Abstract

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. Our review shows that real options theory has provided substantial insights into investment and exit decisions as well as into the choice of investment modes. In addition, extant research studies have contributed significantly to our understanding of whether and how organizations can benefit from real options. Future research that addresses difficulties in applications will further advance both real options theory and practice in strategic management. We call for future generations of research to enhance the impact of real options as an emerging dominant conceptual lens in strategic management.

Details

Real Options Theory
Type: Book
ISBN: 978-0-7623-1427-0

Book part
Publication date: 13 August 2007

Tony W. Tong and Jeffrey J. Reuer

Real options theory begins by drawing an analogy between real options and financial options. A financial option is a derivative security whose value is derived from the worth and…

Abstract

Real options theory begins by drawing an analogy between real options and financial options. A financial option is a derivative security whose value is derived from the worth and characteristics of another financial security, or the so-called underlying asset. By definition, a financial option gives its holder the right, but not the obligation, to buy or sell the underlying asset at a specified price (i.e., the exercise price) on or before a given date (i.e., the expiration date). Financial economists Black and Scholes (1973) and Merton (1973) pioneered a formula for the valuation of a financial option, and their methodology has opened up the subsequent research on the pricing of financial assets and paved the way for the development of real options theory.

Details

Real Options Theory
Type: Book
ISBN: 978-0-7623-1427-0

Book part
Publication date: 13 August 2007

Jaideep Anand, Raffaele Oriani and Roberto S. Vassolo

This study analyses the determinants of the value of a portfolio of real options and explores implications for strategic management. It focuses the analysis on four elements: the…

Abstract

This study analyses the determinants of the value of a portfolio of real options and explores implications for strategic management. It focuses the analysis on four elements: the number of real options in the portfolio, constraints on the number of options that can be exercised, the volatility of underlying assets, and the correlation between underlying assets. These elements are articulated around a trade-off between growth options and switching options and are applied to different strategic situations of technological, market, and macroeconomic uncertainty.

Details

Real Options Theory
Type: Book
ISBN: 978-0-7623-1427-0

Article
Publication date: 15 June 2010

Lieh‐Ming Luo and Her‐Jiun Sheu

The paper aims to evaluate the real research and development (R&D) options value through the proposed model that can jointly consider the two types of risk management activities…

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Abstract

Purpose

The paper aims to evaluate the real research and development (R&D) options value through the proposed model that can jointly consider the two types of risk management activities, i.e. hedging risks and making use of risks. Hedging is an important risk‐management tool that can diversify R&D risk internally since R&D organizations cannot transfer technological risks to another entity by conventional loss financing methods. Making use of risks means R&D organizations can benefit from proactively managing risks, and then can create management‐flexibility value from the real option reasoning viewpoint.

Design/methodology/approach

Using the real options pricing approach, the paper provides an applicable assessment method for R&D projects that can jointly consider the aforementioned two types of risk management activities. The paper also investigates the value‐enhancing effects of R&D risk management activities via interviews survey and secondary data analyses in the pharmaceutical industry of Taiwan.

Findings

Through numerical analyses, the results indicate that the hedging management can serve to be effective mechanisms of risk reduction as well as value enhancement for R&D projects. Additionally, the value‐enhancing effect of hedging management is more significant for those R&D projects with even higher risk‐level. The results of empirical study also are consistent with the model prediction.

Originality/value

To achieve great performance of R&D risk management, R&D organizations need to implement both the types of risk management activities. By this realoptions valuation approach incorporating together those risk management activities, R&D projects portfolio can be evaluated adequately.

Details

Kybernetes, vol. 39 no. 5
Type: Research Article
ISSN: 0368-492X

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Article
Publication date: 21 March 2016

Nattharika Rittippant and Abdul Rasheed

This paper aims to develop and test a real-options model investigating the antecedents predicting the types of options exercise (i.e. growth, delay and exit options) by…

Abstract

Purpose

This paper aims to develop and test a real-options model investigating the antecedents predicting the types of options exercise (i.e. growth, delay and exit options) by multinational enterprises (MNEs) after their initial foreign direct investment (FDI) announcements. Firm-, industry- and country-specific factors that influence the real options’ processes and different subsequent options to exercise were examined.

Design/methodology/approach

Binomial and multinomial logistic regressions were performed on the data collected from 281 pairs of initial FDI (mostly within Asia) announcements and subsequent announcements regarding further investment decisions by 41 Thai MNEs listed in the Securities Exchange of Thailand for 1995-2005.

Findings

The empirical evidence shows that host country factors (i.e. economic growth rate and economic freedom), industry competition and ownership concentration have significant effects on the MNEs’ further decisions on whether to grow, delay or exit out of their initial FDI.

Originality/value

The findings of this study suggest that the options’ lens is an appropriate approach to study managerial decisions and actions in the face of uncertainty. While the majority of prior empirical literature has dealt with situations that involve option creation, this study goes a step further by examining decisions subsequent to option creation. Option creation is not an end in itself, and only by studying subsequent exercise of options, one can fully appreciate the value of the real options’ approach. The empirical evidence from this study showed that the host country’s factors (i.e. economic growth rate and economic freedom), industry competition and ownership concentration have significant effects on the MNEs’ further decisions on whether to grow, delay or exit out of their initial FDI.

Details

Management Research Review, vol. 39 no. 3
Type: Research Article
ISSN: 2040-8269

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