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Valuing Strategic Growth Options: A Portfolio Approach

Valuing Strategic Growth Options: A Portfolio Approach This study analyzes the trade‐off between strategic flexibility and commitment for cases of simultaneous and related strategic investments under high levels of uncertainty. It develops a model that, using a Cournot game and real option theory, demonstrates that (1) a correlated strategic investment adds value to a portfolio of ongoing strategic investments in a decreasing marginal fashion, and (2) the new investment delays the development of the other investments. Managers who fail to recognize these properties may make strategic commitments that destroy value, even in the presence of options with individual positive values. An important feature of the model is that competitive advantages may flow from market power or from the capability of managing the portfolio. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Research: The Journal of the Iberoamerican Academy of Management Emerald Publishing

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Publisher
Emerald Publishing
Copyright
Copyright © 2005 Emerald Group Publishing Limited. All rights reserved.
ISSN
1536-5433
DOI
10.1108/15365430580001315
Publisher site
See Article on Publisher Site

Abstract

This study analyzes the trade‐off between strategic flexibility and commitment for cases of simultaneous and related strategic investments under high levels of uncertainty. It develops a model that, using a Cournot game and real option theory, demonstrates that (1) a correlated strategic investment adds value to a portfolio of ongoing strategic investments in a decreasing marginal fashion, and (2) the new investment delays the development of the other investments. Managers who fail to recognize these properties may make strategic commitments that destroy value, even in the presence of options with individual positive values. An important feature of the model is that competitive advantages may flow from market power or from the capability of managing the portfolio.

Journal

Management Research: The Journal of the Iberoamerican Academy of ManagementEmerald Publishing

Published: Apr 1, 2005

Keywords: Strategy; Investment; Portfolio management; Cournot game; Real option theory

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