SUMMARY

• Illustrates and analyses the variety of real options applications in a spectrum of industries including pharmaceutical R&D and evaluating e-business start-ups

• Structured to provide conceptual linkages to key issues in business strategy, value-based management and other value drivers to maximise usefulness to both the practitioner and theoretician

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  TABLE OF CONTENTS

CONTENTS
Introduction

Project Evaluation, Strategy and Real Options
Alberto Micalizzi and Lenos Trigeorgis

Growth Options, Competition and Strategy: An Answer to the Market Valuation Puzzle?
Han Smit and Lenos Trigeorgis

Creating and Managing Shareholder Value: A View through a Real Options Lens
Alexander Triantis

Applications in Real Options and Value-Based Strategy
Justin Pettit

The Flexibility of Discontinuing Product Development and Market Expansion: The Glaxo Wellcome Case
Alberto Micalizzi

A Business Shift Approach to R&D Option Evaluation
Onno Lint and Enrico Pennings

Airline Long-Term Planning Under Uncertainty: The Benefits of Asset Flexibility Created through Product Commonality and Manufacturer Lead Time Reductions
John Stonier

Real Options Evaluation for E-Business: A Case Study
Richard Chatwin, Yann Bonduelle, Anne Goodchild, Franchee Harman, Joao Mazzuco

Using Real Options to Frame the IT Investment Problem
Nalin Kulatilaka, P. Balasubramanian, John Storck

Software Design as an Investment Activity: A Real Options Perspective
Kevin Sullivan, Prasad Chalasani, Somesh Jha, Vibha Sazawal

Valuation of Natural Resources
Gonzalo Cortazar

Exercising Options to Reduce Capital Project Risk
L. G. Chorn and P. P. Carr

The Value of Market Research when a Firm is learning: Real Options Pricing and Optimal Filtering
Paul Wilmott, N Mayor, P. Schonbucher, E. Whalley and D. Epstein

Valuing the Operational Flexibility of a Multinational Enterprise (with Implications for Investment Location and Capacity Choice Decisions)
A. Muralidhar

A Note on Bibliographical Evolution of Real Options
Marco Dias

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  QUOTES

″This book and its extensive bibliographical notations serve as a solid foundation for readers looking for an introduction to a growing body of real options research and applications.″
Bill Brocato, Platts

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  REVIEW

Reviewed by Bill Brocato, Platts Products Editor for the U.S. Midwest, West Coast, and Northwest markets

Although often mistaken for a risk management tool or technique, real options is actually a decision-making methodology--as the subtitle makes clear. The term itself refers to the value inherent in a physical asset that is derived from some future contingent decision (Global Energy Business, March/April 2001, p. 31). Business strategists with insufficient background in mathematical modeling will find the theory and practice of real options difficult to grasp. But it behooves them to get up to speed, because the corporate boardrooms of energy and other global companies can ill afford not to leverage the rigor that real options brings to strategic decision-making.

Real Options and Business Strategy comprises 14 chapters of theory and practice on the subject, as well as extensive bibliographic references. The compilation's structure is ideal, because it points both readers with different levels of expertise and specialists in different industries in the direction they need to take to learn more about real options.

For example, the first chapters describe the application of real options methodologies to decision-making about shareholder value, business strategy, and value-based management. The following chapters detail actual applications in industries ranging from pharmaceuticals to airlines to e-commerce. The book concludes with discussions of the value of acquiring information about natural resources--information that can help managers make better use of technology to run multinational operations.

Diverse voices, diverse uses

However, the real value of Real Options and Business Strategy derives from the range of distinguished authors whose voices are heard in the book. From P. Balasubramanian, a professor of management information systems at Boston University, to Peter Carr, a principal at Bank of America Securities LLC and head of equity derivatives research at Columbia University, the reader is given plenty of insight to guide his or her further investigation of both the theoretical and practical sides of real options.

Can such academic insight inform practical decision-making? Absolutely. In fact, the recent collapse of stock prices listed on the technology-heavy Nasdaq might have been avoided had investors in, and managers of, new economy companies read the case study in Chapter 8, ″Real Option Valuation for E-Business.″

In the case study, the authors--partners and associates of PricewaterhouseCoopers' financial advisory services in the U.S. and Europe--explain how structured discussions among the company's management team can identify the key decisions and uncertainties a company faces. They then describe the development and application of a ″learning model″ that captures changes in the level of uncertainty about the adoption of a new product or service over time by using accumulated information about the product of service it replaces. This model, in their words, ″drives the valuation of the capacity expansion investment options available to the company's management.″

Where real options is--and isn't--a good fit

Energy company decision-makers will find Chapter 11, ″The Valuation of Natural Resources,″ especially pertinent. The author, Gonzalo Cortazar, a professor at the Pontificia Catolica de Chile and president of Cortazar & Schwartz Financial Research and Consulting, has worked extensively on real options valuation for natural resource companies for nearly 10 years.

Cortazar demonstrates why real options is a better methodology for valuing natural resource investments assets than the traditional discounted cash-flow technique. But he also emphasizes that ″real option methodology is not an important tool″ for all types of investments. What Cortazar then provides is eminently useful--a framework that decision-makers can use to decide whether their particular business question lends itself to solution via real options techniques.

If there is a single thread that runs through the book, it is that the real options methodology is evolving--from its genesis as an equity-valuation into a serious tool for evaluating and managing capital investments. The mathematical complexity of real options and problems associated with gathering and quantifying data for analysis will likely continue to stall the adoption of real options by most industries. However, this book and its extensive bibliographical notations serve as a solid foundation for readers looking for an introduction to a growing body of real options research and applications.

Reviewed by Bill Brocato, Platts Products Editor for the U.S. Midwest, West Coast, and Northwest markets. He is based in Houston.
www.platts.com

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  AUTHOR BIOGRAPHY

Alberto Micalizzi and Lenos Trigeorgis; Han Smit and Lenos Trigeorgis; Alexander Triantis; Justin Pettit; Alberto Micalizzi; Onno Lint and Enrico Pennings; John Stonier; Franchee Harman, Joao Mazzuco; Nalin Kulatilaka, P. Balasubramanian, John Storck; Kevin Sullivan, Prasad Chalasani, Somesh Jha, Vibha Sazawal; Gonzalo Cortazar; L. G. Chorn and P. P. Carr; Paul Wilmott, N Mayor, P. Schonbucher, E. Whalley and D. Epstein; A. Muralidhar; Marco Dias;

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  CONTRIBUTORS

Alberto Micalizzi and Lenos Trigeorgis; Han Smit and Lenos Trigeorgis; Alexander Triantis; Justin Pettit; Onno Lint and Enrico Pennings; John Stonier; Franchee Harman, Joao Mazzuco; Nalin Kulatilaka, P. Balasubramanian, John Storck; Kevin Sullivan, Prasad Chalasani, Somesh Jha, Vibha Sazawal; Gonzalo Cortazar; L. G. Chorn and P. P. Carr; Paul Wilmott, N Mayor, P. Schonbucher, E. Whalley and D. Epstein; A. Muralidhar; Marco Dias;
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