1. Strategy as a Portfolio of Real Options.
- Author
-
Luehrman, Timothy A.
- Subjects
STRATEGIC planning ,PORTFOLIO management (Investments) ,REAL options (Finance) ,OPTIONS (Finance) ,INVESTMENTS ,VALUATION ,FINANCIAL management ,ASSET management ,INVESTMENT analysis ,FINANCIAL planning ,DISCOUNTED cash flow ,OPTION value - Abstract
The article considers business strategies as portfolios of related real options by exploiting a framework presented in an article by Luehrman in the July-August 1998 issue, which explained how to get from conventional discounted-cash-flow value to option value for a typical project. This article explores how option pricing can be used to improve decision making about the sequence and timing of a portfolio of strategic investments. For finance to play an important creative role, it must be able to contribute insightful interpretive analyses of sequences of decisions that are purely hypothetical. By building option pricing into a framework designed to evaluate hard assets and opportunities, financial insight can be added earlier to the creative work of strategy.
- Published
- 1998