Economic Foundations of Strategy Chapter 5: Dynamic ResourceBased Theory: Real Options

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Economic Foundations of StrategyChapter
5Dynamic Resource-Based Theory Real Options

• Joe Mahoney
• University of Illinois at Urbana-Champaign

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Resource-Based Theory, Dynamic Capabilities and
Real Options

• Trigeorgis (1997)
• Real Options Managerial Flexibility and Strategy
  in Resource Allocation

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Trigeorgis (1997) Real Options Managerial
Flexibility and Strategy in Resource Allocation

• A theoretically-accurate NPV analysis should
  include real options values.
• The asymmetry deriving from having the right but
  not the obligation to exercise an option is at
  the heart of the real options value.
• Managers making investments under uncertainty can
  create economic value by building in flexibility,
  because flexibility has economic value.

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Real Options

• Nucor Steel Mini-mill
• Stand-alone investment NPV -50
  million
• Abandonment Option High (Low sunk cost)
• Growth Option High (Follow-on investments

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