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Strategic planning: valuing and managing portfolios of real options

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Abstract:

This article presents a value-based strategic planning framework suitable for valuing and managing portfolios of corporate real options. The proposed framework combines insights from strategic management theory with novel quantitative valuation tools from finance. Strategic planning is viewed as a process of actively developing and managing portfolios of corporate real options in the context of competitive interactions. As such, the expanded valuation framework recognizes that future growth opportunity value deriving from the firm's resources and capabilities must explicitly account for uncertainty, adaptability, and competitive responsiveness. The resulting expanded valuation framework is able to capture the value of the adaptive resources and capabilities that enable a firm to adapt and re-deploy assets, develop and exploit synergies, and gain competitive advantage via time-to-market and first- or second-mover advantages. We show how two basic metrics in this value-based framework, current profitability of assets in place and future growth option value, can be obtained from financial market data and how they can be used in active portfolio planning.

Document Type: Research Article

DOI: https://doi.org/10.1111/j.1467-9310.2006.00440.x

Affiliations: Erasmus University Rotterdam, PO Box 1738, 3000 DR Rotterdam, The Netherlands., Email: jsmit@few.eur.nl

Publication date: 2006-09-01

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