The Optimal Timing of Strategic Action – A Real Options Approach

Sollars, Gordon G.; Tuluca, Sorin

The Optimal Timing of Strategic Action – A Real Options Approach

Abstract

The possibility of a frst-mover advantage arises in a variety of strategic choices, including product introductons, business start-ups, and mergers and acquisitons. The strategic management literature reﬂects ambiguity regarding the likelihood that a frst mover can or will capture additonal value. This paper uses a real optons approach to address the optmal tming of strategic moves. Previous studies have modeled real optons using either a perpetual or a European fnancial opton. With these models, a strategic choice could only be made either without respect to a tme frame (perpetual) or at a fxed point in tme (European opton.) Neither case is realistc. Companies typically have strategic optons with only a limited tme frame due to market factors, but companies may choose to act at any tme within that constraint. To reﬂect this reality, we adapt a method for valuing an American fnancial opton on a dividend paying stock to the real optons context. The method presented in this paper proposes a soluton for the optmum value for a project that should trigger a strategic choice, and highlights the value lost by not actng optmally. We use simulaton results to show that the tme frame available to make a strategic choice has an important eﬀect on both the project value for when acton should be taken, as well as on the value of waitng to invest at the optmal tme. The results presented in this paper help to clarify the ambiguity that is found in the strategic management literature regarding the possibility of obtaining a frst-mover advantage. Indeed, a frst mover that acts sub-optmally could incur losses or at least not gain any advantage. A frst mover that waits to invest at the right tme based on the superior informaton supplied by models based on real optons could be beter positoned to obtain the benefts that might come from the frst move.

Keywords

first-mover advantage strategic action real option analysis simulation optimal investment dynamic programming

Citation

Sollars, G.G., Tuluca, S.A., The Optimal Timing of Strategic Action – A Real Options Approach. Journal of Entrepreneurship, Management and Innovation (JEMI), 2012, vol. 8, nr 2 : Contemporary Management Concepts. Ed. by P. Staliński, s. 78-95

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https://depot.ceon.pl/handle/123456789/14244

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