How can you evaluate a potential investment if there are several possibilities to change the course of action in the future depending on different emerging situations? And even more challenging: How can you do so if you cannot come up with point estimates - but you have to use several ranges of input values? Both - managerial flexibility as well as so called continuous uncertainty - are highly relevant as they reflect most of the investment decisions realistically. But if you apply standard valuation techniques like a simple Discounted Cash Flow model, the computed value will be significantly distorted, potentially prompting you to make a wrong decision. Given the practical urgent need for a suitable valuation technique, the real option valuation approach was developed as an advanced valuation approach. It follows a non-trivial but doable four-step process, quantifying the value of investments in situations of managerial flexibility and continuous uncertainty. While real option valuation is considered to be an opaque technique, Ms. Kang proves that it can be explained in an understandable way, even for someone approaching the matter with limited or no prior exposure to the topic. The author outlines the major issues of current product innovation valuation with traditional valuation techniques. On the basis of this analysis she explains the basic concepts of valuing product innovation through the use of real option valuation. Supported by a few practical examples the author clarifies how to value different types of real options. So based on the actual Financial Statement 2006 of Research In Motion (RIM), the author develops a sample 5-year business plan for the product innovation of BlackBerry 9900. This is done through the highly advanced model of Binomial Trees. Overall with this thesis, you'll get a head-start into one of the more advanced management tools - the real option valuation.

Inhaltsangabe:Abstract: Global competition, emerging technologies, and an ever increasing need for superior products in shorter time frames all contribute to drive companies to adopt new and innovative approaches to product innovation. Effective product innovation is imperative for the survival, growth and profitability of most design and manufacturing enterprises. In the current dynamic manufacturing environment, companies must innovate successfully if they wish to remain competitive. Product innovation is a complex, cross-functional and contingent, dynamic process, which is difficult to manage. Anticipating change and expeditiously responding to the dynamics of the business environment via product innovation are important precursors for achieving sustainable competitive positions and exceptional performance. The heart of a product innovation is its value. Traditional discounted cash flow approaches, such as net present value (NPV), have traditionally been the preferred methods for evaluating investments in product innovation. The traditional NPV method, which was initially developed to value bonds or stocks by passive investors, implicitly assumes that corporations hold a collection of real assets passively. Managerial choices (as delay, expand, switching etc.) are thus presumed to be limited to the initial decision. Therefore, traditional valuation methods undervalue the product innovation because they are unable to capture the value of management flexibility. Recently, real options emerged as an alternative to simplistic discounted cash flow methods. Real option valuation (ROV) values the managerial flexibility to make ongoing decisions regarding implementation of investment projects and deployment of real assets. ROV extends valuation models used to price financial options and applies them to investments in real assets. Black and Scholes developed the Black-Scholes model to value financial options that focus on factors affecting the value of the underlying financial asset over time. Proof by Cox, Ross, Rubinstein (1979), binomial tree model is simpler to understand for the practitioner and less elegant than Black-Scholes model. It uses the discrete mathematics to achieve the isomorphic results to the calculation used by Black-Scholes model. From an intuition point of view, the managerial flexibility is easy to understand. But, how much it is worth is most difficult or even impossible to think about and measure with the traditional [...]

Real R&D options are among the earliest modelled real options, with now ten primary practical uses: general R&D planning, planning R&D in stages, evaluating test information, new product development timing, operations, abandonment, risk sharing, market funding, industry strategy and regulation. This book was partly motivated by requests to identify and develop real option models for R&D in telecommunications, petroleum technology and biotechnology. Nine new models cover information and implementation costs, analytical solutions for mean reverting, or fat tailed revenues, endogenous learning and exogenous and experiential shocks, American sequential options, and innovator advantages. Four new applications include forward start development options, exploration options, innovation with information costs, and innovator's real values with changing market share. R&D directors and researchers will find several uses for these models: - general R&D planning - evaluating test information - new product development timing - risk sharing - industry strategy and regulation - A practical guide to how organizations can use Real Option techniques to effectively value research and development by companies - Provides a rigorous theoretical underpinning of the use of Real Option techniques - Real Options applications are orientated around the economies of North America, Europe and Asia, for an international perspective

Examines the ways in which real options theory can contribute to strategic management. This volume offers conceptual pieces that trace out pathways for the theory to move forward and presents research on the implications of real options for strategic investment, organization, and firm performance.

The study of investment under uncertainty was stagnant for several decades until developments in real options revitalized the field. The topics covered in this book include the reasons behind the under-investment programme.

In the 1990s shareholder value was applied to all aspects of corporate strategy and management decisions as a result of intense competition, globalization, advances in technology, deregulation and the financial markets. As we enter the twentyfirst century the business environment is one of increasing creative destruction, where competitive advantage is much harder to sustain. Real Options , a type of advanced financial analysis, applies financial option theory to real assets and offers a strategic framework that recognizes the need for management flexibility and to leverage risk in this corporate environment.

Explores real option theory applied in practice Real options are quickly becoming the valuation and decision-making method of choice for many companies, including oil and gas companies, utilities and natural resource companies, pharmaceutical and biotech companies, Internet companies, and many others. Real Options in Practice allows readers to view the world of real options from the vantage point of a corporate practitioner applying real option valuation techniques on a regular basis. Expert Marion Brach describes the challenges of implementing a real option framework in practice within a corporate setting. Touching on the real options most firms care about, Real Options in Practice identifies the classic types of real options-deferral, abandonment, switching, expansion, and compound-and explores the main concepts critical to understanding real option theory. Through Brach's own three-step real option valuation method readers will learn how the theory of real options is now being applied to drive better, more profitable corporate decision-making. Marion A. Brach, MD, MBA (Hagen, Germany), has undertaken financial valuation of business opportunities and acquisitions using scenario and real option valuation in the biotech industry. A recognized expert on real option theory and practice, Brach received her MBA from the Manchester Business School and frequently speaks at real option seminars.