
Strategic Investment - Real Options and Games
by Smit, Han T. J.; Trigeorgis, Lenos-
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Summary
Table of Contents
List of Figures | p. xi |
List of Tables | p. xvii |
List of Boxes | p. xix |
Acknowledgments | p. xxi |
Introduction: Strategic Investment as Real Options and Games | p. xxiii |
Introduction: About This Book | p. xxiii |
Real Options and Games: Linking Corporate Finance and Strategy | p. xxiv |
An Overview of the Book | p. xxviii |
Approaches to Strategic Investment | |
Corporate Finance and Strategic Planning: A Linkage | p. 3 |
Introduction | p. 3 |
The Market Value of Growth Opportunities | p. 5 |
From NPV to an Expanded (Strategic) NPV Criterion | p. 8 |
Value Drivers of NPV, Flexibility Value, and Strategic Value | p. 13 |
Value Drivers of NPV | p. 14 |
Drivers of Flexibility or Growth Option Value | p. 21 |
Drivers of Strategic Value and Strategic Moves | p. 24 |
Value Creation in Strategic Planning | p. 32 |
Conclusions | p. 33 |
Strategic Management: Competitive Advantage and Value Creation | p. 35 |
Introduction | p. 35 |
Views of Value Creation of the Firm | p. 38 |
Industry and Competitive Analysis | p. 40 |
Strategic Conflict and Game Theory | p. 43 |
Internal, Resource-Based View of the Firm | p. 45 |
Dynamic Capabilities | p. 49 |
Options and Games: A Linkage Approach | p. 51 |
Competitive Advantage and Industry Evolution | p. 53 |
Competitive Advantage in the Early and Growth Stages | p. 54 |
Competitive Advantage in Mature Businesses | p. 58 |
Creative Destruction and Adaptation as Source of Advantage | p. 60 |
Portfolio Planning of Growth Opportunities | p. 68 |
Boston Consulting Group Matrix | p. 70 |
Exercise Timing of Options: The Tomato Garden Analogy | p. 72 |
Real-Options Growth Matrix | p. 76 |
Conclusions | p. 90 |
Corporate Real Options | p. 93 |
Introduction | p. 93 |
Options Valuation | p. 94 |
Basic Nature of Options | p. 98 |
From Financial to Real Options Valuation | p. 100 |
Overview of Common Real Options | p. 106 |
The (Simple) Option to Defer | p. 110 |
Options to Expand or Contract | p. 114 |
The Option to Abandon for Salvage or Switch Use | p. 116 |
The Option to Temporarily Shut Down | p. 119 |
Options to Switch Inputs or Outputs | p. 122 |
Prototype Examples: Valuing an R & D Program and a Mining Concession | p. 123 |
Valuing a Research and Development Program | p. 124 |
Valuing a Mine Concession (License) Using Certainty-Equivalent Valuation | p. 127 |
An In-Depth Case Application: Valuing Offshore Oil Concessions in the Netherlands | p. 134 |
Stages of Offshore Petroleum Development on the Dutch Continental Shelf | p. 134 |
Valuation Based on Replication in Financial Markets | p. 138 |
Main Insights | p. 149 |
Summary and Conclusions | p. 154 |
Binomial Option Valuation | p. 156 |
Games and Strategic Decisions | p. 163 |
Introduction | p. 163 |
The Rules of the Game | p. 171 |
A Taxonomy of Basic Games | p. 181 |
Time to Launch under Competition (Symmetric Innovation Race) | p. 184 |
Asymmetric Innovation Race and Preemption | p. 186 |
Simultaneous Innovation Race When the Opponent's Capabilities Are Unknown | p. 189 |
Competitive Reactions in Quantity versus Price Competition | p. 191 |
Quantity Competition | p. 191 |
Price Competition | p. 198 |
Type of Competitive Reaction: Strategic Substitutes versus Complements | p. 200 |
Two-Stage Games: Strategic Value of Early Commitment | p. 202 |
Direct versus Strategic Effects of Investment Commitment | p. 203 |
Strategic Effect, Tough or Accommodating Positions, and Type of Competition | p. 205 |
Summary and Conclusions | p. 208 |
A Chronology of Game Theory Developments | p. 210 |
Competitive Strategy and Games Chapter | p. 5 |
Simple Strategic Investment Games | p. 217 |
Introduction | p. 217 |
A Road Map for Analyzing Competitive Strategies | p. 218 |
One-Stage Strategic Investments | p. 222 |
Two-Stage (Compound) Options: The Case of Proprietary R & D | p. 226 |
Two-Stage Investments with Endogenous Competition | p. 229 |
Competition in Last (Production) Stage: Contrarian versus Reciprocating Competition | p. 229 |
Competition in Innovation Investment: Time-to-Market Races and Strategic Alliances | p. 242 |
Cooperation in the First Stage: Joint R & D Ventures | p. 247 |
Summary and Conclusions | p. 251 |
Flexibility and Commitment | p. 255 |
Introduction | p. 255 |
The Basic Two-Stage Game | p. 258 |
Equilibrium Quantities, Prices, and Payoff Values | p. 260 |
Valuation of Competitive Strategies | p. 262 |
Numerical Examples of Different Competitive Strategies under Contrarian versus Reciprocating Competition | p. 268 |
Competitive R & D Strategies under Quantity Competition | p. 268 |
Goodwill/Advertising Strategies under Price Competition | p. 278 |
Summary and Conclusions | p. 285 |
Reaction Functions, Equilibrium Actions, and Values in Different Market Structures under Quantity or Price Competition | p. 289 |
Value Dynamics in Competitive R & D Strategies | p. 295 |
Introduction | p. 295 |
Literature on R & D Options | p. 296 |
The Basic Two-Stage R & D Game | p. 298 |
Critical Demand Zones/Sensitivity | p. 300 |
Technical R & D Uncertainty, Stochastic Reaction Functions, and Asymmetric Information with Signaling | p. 309 |
Technical R & D Uncertainty (under Symmetric Information) | p. 309 |
Imperfect/Asymmetric Information and Stochastic Reaction Functions | p. 311 |
Signaling Effects | p. 313 |
Learning Experience Cost Effects | p. 315 |
Competition versus Cooperation in R & D | p. 319 |
Summary and Conclusions | p. 322 |
Applications and Implications Chapter | p. 8 |
Case Applications | p. 329 |
Introduction | p. 329 |
Strategic Games in Consumer Electronics | p. 346 |
Winner Takes All versus Strategic Alliances in the Launch of Video Recorder Systems | p. 346 |
The Competition versus Coordination Game of the High-Density Disk | p. 350 |
Buy-and-Build Platform Acquisition Strategies | p. 352 |
Classifying Acquisitions Based on Options and Games | p. 353 |
Growth Option Value in a Buy-and-Build Strategy | p. 356 |
Competition in a Buy-and-Build Strategy | p. 360 |
Infrastructure Investment: The Case of European Airport Expansion | p. 366 |
Infrastructure Investment and Aviation Developments | p. 367 |
Infrastructure Valuation as an Options Game | p. 370 |
Implementation in the Case of Schiphol Airport | p. 382 |
Conclusions and Implications | p. 389 |
Continuous-Time Models and Applications | p. 393 |
Introduction and Overview | p. 393 |
Continuous-Time Version of Smit-Trigeorgis Framework | p. 396 |
Equilibrium Output and Values | p. 397 |
Strategic Entry Decisions | p. 401 |
Equilibrium Entry and Critical Demand Thresholds | p. 405 |
Benchmark Cases: Symmetric Competition and Monopoly | p. 408 |
Strategic Investment Timing under Uncertainty | p. 408 |
Strategic Interactions and the Timing of Investment | p. 408 |
Innovation with Uncertainty over Completion and Time Delays | p. 411 |
Exercise Strategies under Incomplete Information with Applications | p. 414 |
Entry and Preemption under Incomplete Information | p. 414 |
Applications | p. 416 |
General Equilibrium Investment Strategies under Imperfect Competition and Asymmetric Information | p. 419 |
Equilibrium Investment Strategies under Imperfect Competition | p. 419 |
Investment Strategies under Asymmetric Information | p. 421 |
Conclusions | p. 423 |
Derivation of Option-Pricing Differential Equation | p. 425 |
Discounted Profit Flow and Value Function | p. 427 |
Sequential Stackelberg Leader-Follower Entry | p. 428 |
Overview and Implications | p. 429 |
Introduction | p. 429 |
Linking Corporate Finance and Strategic Planning | p. 429 |
An Expanded Valuation Framework to Capture Flexibility and Strategic Value | p. 431 |
Implications of the Strategic Options and Games Framework | p. 439 |
Timing Games for Simple Commercial Options | p. 440 |
Investment Games Involving Strategic Options | p. 442 |
Empirical Implications | p. 445 |
References | p. 447 |
Index | p. 461 |
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