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Strategic planning: valuing and managing portfolios of real options
Author(s) -
Smit Han T. J.,
Trigeorgis Lenos
Publication year - 2006
Publication title -
randd management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.253
H-Index - 102
eISSN - 1467-9310
pISSN - 0033-6807
DOI - 10.1111/j.1467-9310.2006.00440.x
Subject(s) - valuation (finance) , competitive advantage , exploit , portfolio , profitability index , strategic planning , strategic management , adaptability , business , strategic fit , industrial organization , computer science , economics , finance , marketing , computer security , management
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.