Samenvatting Geïntegreerde Bedrijfseconomie –
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Chapter 6: Flexibility and Real Options
Strategic flexibility: a firm can choose among several different strategic
options. For a firm to have strategic flexibility, it must possess strategic
options (exist when firms have the ability, but not the obligation, to invest
in a particular strategy. It’s an example of a real option (exists when a
firm has the ability, but not the obligation, to invest in real assets of some
type). Real assets: tangible resources that can have an impact on a
firm’s production, including land, buildings, raw materials, finished goods
inventories, distribution systems, information technology etc.
Type of flexibility Example
The option to defer An oil company leases land for potential
exploration instead of buying it
The option to grow A firm builds a plant with the ability to add
capacity at low cost
The option to A firm hires contract and temporary employees
contract instead of full-time employees
The option to shut A firm outsources distribution to a firm that
down and restart distributes the products of many firms instead of
outsourcing distribution to a firm that distributes
only its production
The option to A firm builds a manufacturing plant that employs
abandon only general-purpose machinery
The option to A firm invests to create one product because that
expand investment could lead to the development of other
products in the future
Risky decision: the outcome of the decision is not known with certainty,
but the possible outcomes associated with that decision, and their
probability, are known before a decision is made. Uncertain decision:
the outcome of the decision is not known with certainty, and the possible
outcomes associated with that decision, and their probability, are also not
known before a decision is made.
Characterizing the Value of a Real Option Subjectively – Qualitatively
Valuing Strategic Flexibility
Attribute of a Real Option Effect on Value of Real Option
Exercise price The lower the exercise price, the
greater the value of a real option
Cash flows generated The higher the cash flows
generated by exercising an option,
the greater the value of a real
option
Time to maturity The longer the time to maturity,
the greater is the value of a real
option
, Risk-free interest rate The higher the risk-free interest
rate, the greater is the value of a
real option
Uncertainty about future cash flows The greater the uncertainty about
future cash flows, the greater is the
value of a real option
Quantitatively Valuing Strategic Flexibility – Steps
1. Recognize Real Options
2. Describe a Real Option Using Financial Option Parameters
3. Establishing a Benchmark
4. Calculate Option Value Metrics
5. Estimate the Value of the Option from a Black-Scholes Option Pricing
Table
6. Compare Full Present Value with the Benchmark value
Real Options under Technical Uncertainty and Market Uncertainty
Positioning Technical uncertainty is high: take multiple small
options positions in alternative technologies and wait until
technological uncertainty resolves, then invest
Scouting Market uncertainty is high: put several new offerings
options in consumers hands to gauge their reactions; once
consumer preferences are clear, invest
Stepping- Technical uncertainty and market uncertainty are
stone options high: avoid fixing on a particular design or set of
features early; fail fast, fail cheap; learn fast, and try
again
Because some options – especially stepping stone options or options that
evolve in a sequence – are embedded in path dependent process, firms
that don’t use options logic may have difficulty imitating firms that have
used this logic. In this way, strategic flexibility and real options may be a
source of sustained competitive advantage for a firm. Organizing for
strategic flexibility involves the adoption of flexible organizational
structures, management controls, and compensation policies. However,
these organizational policies may put significant burdens on some of the
resources critical to a firm’s success, especially its employees.
Chapter 7: Collusion
Collusion: the ability of a group of firms to work together to reduce
competition in their market or industry.
Decisions to not compete in the same geographic market.
Decisions to not do research and development in the same
technological area.
Decisions to reduce production below a competitive level.
Explicit collusion: exists when firms in an industry directly negotiate
agreements about how to reduce competition. Tacit collusion: exists
when firms cooperate in reducing competition, but engage in no face-to-
face negotiations to do so. Dead weight loss: this loss is equal to the
economic benefits foregone by consumers who would buy a product if it
boek
Chapter 6: Flexibility and Real Options
Strategic flexibility: a firm can choose among several different strategic
options. For a firm to have strategic flexibility, it must possess strategic
options (exist when firms have the ability, but not the obligation, to invest
in a particular strategy. It’s an example of a real option (exists when a
firm has the ability, but not the obligation, to invest in real assets of some
type). Real assets: tangible resources that can have an impact on a
firm’s production, including land, buildings, raw materials, finished goods
inventories, distribution systems, information technology etc.
Type of flexibility Example
The option to defer An oil company leases land for potential
exploration instead of buying it
The option to grow A firm builds a plant with the ability to add
capacity at low cost
The option to A firm hires contract and temporary employees
contract instead of full-time employees
The option to shut A firm outsources distribution to a firm that
down and restart distributes the products of many firms instead of
outsourcing distribution to a firm that distributes
only its production
The option to A firm builds a manufacturing plant that employs
abandon only general-purpose machinery
The option to A firm invests to create one product because that
expand investment could lead to the development of other
products in the future
Risky decision: the outcome of the decision is not known with certainty,
but the possible outcomes associated with that decision, and their
probability, are known before a decision is made. Uncertain decision:
the outcome of the decision is not known with certainty, and the possible
outcomes associated with that decision, and their probability, are also not
known before a decision is made.
Characterizing the Value of a Real Option Subjectively – Qualitatively
Valuing Strategic Flexibility
Attribute of a Real Option Effect on Value of Real Option
Exercise price The lower the exercise price, the
greater the value of a real option
Cash flows generated The higher the cash flows
generated by exercising an option,
the greater the value of a real
option
Time to maturity The longer the time to maturity,
the greater is the value of a real
option
, Risk-free interest rate The higher the risk-free interest
rate, the greater is the value of a
real option
Uncertainty about future cash flows The greater the uncertainty about
future cash flows, the greater is the
value of a real option
Quantitatively Valuing Strategic Flexibility – Steps
1. Recognize Real Options
2. Describe a Real Option Using Financial Option Parameters
3. Establishing a Benchmark
4. Calculate Option Value Metrics
5. Estimate the Value of the Option from a Black-Scholes Option Pricing
Table
6. Compare Full Present Value with the Benchmark value
Real Options under Technical Uncertainty and Market Uncertainty
Positioning Technical uncertainty is high: take multiple small
options positions in alternative technologies and wait until
technological uncertainty resolves, then invest
Scouting Market uncertainty is high: put several new offerings
options in consumers hands to gauge their reactions; once
consumer preferences are clear, invest
Stepping- Technical uncertainty and market uncertainty are
stone options high: avoid fixing on a particular design or set of
features early; fail fast, fail cheap; learn fast, and try
again
Because some options – especially stepping stone options or options that
evolve in a sequence – are embedded in path dependent process, firms
that don’t use options logic may have difficulty imitating firms that have
used this logic. In this way, strategic flexibility and real options may be a
source of sustained competitive advantage for a firm. Organizing for
strategic flexibility involves the adoption of flexible organizational
structures, management controls, and compensation policies. However,
these organizational policies may put significant burdens on some of the
resources critical to a firm’s success, especially its employees.
Chapter 7: Collusion
Collusion: the ability of a group of firms to work together to reduce
competition in their market or industry.
Decisions to not compete in the same geographic market.
Decisions to not do research and development in the same
technological area.
Decisions to reduce production below a competitive level.
Explicit collusion: exists when firms in an industry directly negotiate
agreements about how to reduce competition. Tacit collusion: exists
when firms cooperate in reducing competition, but engage in no face-to-
face negotiations to do so. Dead weight loss: this loss is equal to the
economic benefits foregone by consumers who would buy a product if it
