Strategic Investment Real Options and Games

ISBN-10: 0691010390

ISBN-13: 9780691010397

Edition: 2004

List price: $130.00
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Corporate finance and corporate strategy have long been seen as different sides of the same coin. Though both focus on the same broad problem, investment decision-making, the gap between the two sides--and between theory and practice--remains embarrassingly large. This book synthesizes cutting-edge developments in corporate finance and related fields--in particular, real options and game theory--to help bridge this gap. In clear, straightforward exposition and through numerous examples and applications from various industries, Han Smit and Lenos Trigeorgis set forth an extended valuation framework for competitive strategies. The book follows a problem-solving approach that synthesizes ideas from game theory, real options, and strategy. Thinking in terms of options-games can help managers address questions such as: When is it best to invest early to preempt competitive entry, and when to wait? Should a firm compete in R&D or adopt an accommodating stance? How does one value growth options or infrastructure investments? The authors provide a wide range of valuation examples, such as acquisition strategies, R&D investment in high-tech sectors, joint research ventures, product introductions in consumer electronics, infrastructure, and oil exploration investment. Representing a major step beyond standard real options or strategy analysis, and extending the power of real options and strategic thinking in a rigorous fashion, Strategic Investment will be an indispensable guide and resource for corporate managers, MBA students, and academics alike.
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Book details

List price: $130.00
Copyright year: 2004
Publisher: Princeton University Press
Publication date: 7/26/2004
Binding: Hardcover
Pages: 504
Size: 6.50" wide x 9.50" long x 1.75" tall
Weight: 1.892
Language: English

Lenos Trigeorgis is the Bank of Cyprus Chair Professor of Finance in the School of Economics and Management at the University of Cyprus and Professor of Finance at King's College of the University of London. He is the author of Real Options (MIT Press), Strategic Investment, and other books.

List of Figures
List of Tables
List of Boxes
Introduction: Strategic Investment as Real Options and Games
Introduction: About This Book
Real Options and Games: Linking Corporate Finance and Strategy
An Overview of the Book
Approaches to Strategic Investment
Corporate Finance and Strategic Planning: A Linkage
The Market Value of Growth Opportunities
From NPV to an Expanded (Strategic) NPV Criterion
Value Drivers of NPV, Flexibility Value, and Strategic Value
Value Drivers of NPV
Drivers of Flexibility or Growth Option Value
Drivers of Strategic Value and Strategic Moves
Value Creation in Strategic Planning
Strategic Management: Competitive Advantage and Value Creation
Views of Value Creation of the Firm
Industry and Competitive Analysis
Strategic Conflict and Game Theory
Internal, Resource-Based View of the Firm
Dynamic Capabilities
Options and Games: A Linkage Approach
Competitive Advantage and Industry Evolution
Competitive Advantage in the Early and Growth Stages
Competitive Advantage in Mature Businesses
Creative Destruction and Adaptation as Source of Advantage
Portfolio Planning of Growth Opportunities
Boston Consulting Group Matrix
Exercise Timing of Options: The Tomato Garden Analogy
Real-Options Growth Matrix
Corporate Real Options
Options Valuation
Basic Nature of Options
From Financial to Real Options Valuation
Overview of Common Real Options
The (Simple) Option to Defer
Options to Expand or Contract
The Option to Abandon for Salvage or Switch Use
The Option to Temporarily Shut Down
Options to Switch Inputs or Outputs
Prototype Examples: Valuing an R & D Program and a Mining Concession
Valuing a Research and Development Program
Valuing a Mine Concession (License) Using Certainty-Equivalent Valuation
An In-Depth Case Application: Valuing Offshore Oil Concessions in the Netherlands
Stages of Offshore Petroleum Development on the Dutch Continental Shelf
Valuation Based on Replication in Financial Markets
Main Insights
Summary and Conclusions
Binomial Option Valuation
Games and Strategic Decisions
The Rules of the Game
A Taxonomy of Basic Games
Time to Launch under Competition (Symmetric Innovation Race)
Asymmetric Innovation Race and Preemption
Simultaneous Innovation Race When the Opponent's Capabilities Are Unknown
Competitive Reactions in Quantity versus Price Competition
Quantity Competition
Price Competition
Type of Competitive Reaction: Strategic Substitutes versus Complements
Two-Stage Games: Strategic Value of Early Commitment
Direct versus Strategic Effects of Investment Commitment
Strategic Effect, Tough or Accommodating Positions, and Type of Competition
Summary and Conclusions
A Chronology of Game Theory Developments
Competitive Strategy and Games
Simple Strategic Investment Games
A Road Map for Analyzing Competitive Strategies
One-Stage Strategic Investments
Two-Stage (Compound) Options: The Case of Proprietary R & D
Two-Stage Investments with Endogenous Competition
Competition in Last (Production) Stage: Contrarian versus Reciprocating Competition
Competition in Innovation Investment: Time-to-Market Races and Strategic Alliances
Cooperation in the First Stage: Joint R & D Ventures
Summary and Conclusions
Flexibility and Commitment
The Basic Two-Stage Game
Equilibrium Quantities, Prices, and Payoff Values
Valuation of Competitive Strategies
Numerical Examples of Different Competitive Strategies under Contrarian versus Reciprocating Competition
Competitive R & D Strategies under Quantity Competition
Goodwill/Advertising Strategies under Price Competition
Summary and Conclusions
Reaction Functions, Equilibrium Actions, and Values in Different Market Structures under Quantity or Price Competition
Value Dynamics in Competitive R & D Strategies
Literature on R & D Options
The Basic Two-Stage R & D Game
Critical Demand Zones/Sensitivity
Technical R & D Uncertainty, Stochastic Reaction Functions, and Asymmetric Information with Signaling
Technical R & D Uncertainty (under Symmetric Information)
Imperfect/Asymmetric Information and Stochastic Reaction Functions
Signaling Effects
Learning Experience Cost Effects
Competition versus Cooperation in R & D
Summary and Conclusions
Applications and Implications
Case Applications
Strategic Games in Consumer Electronics
Winner Takes All versus Strategic Alliances in the Launch of Video Recorder Systems
The Competition versus Coordination Game of the High-Density Disk
Buy-and-Build Platform Acquisition Strategies
Classifying Acquisitions Based on Options and Games
Growth Option Value in a Buy-and-Build Strategy
Competition in a Buy-and-Build Strategy
Infrastructure Investment: The Case of European Airport Expansion
Infrastructure Investment and Aviation Developments
Infrastructure Valuation as an Options Game
Implementation in the Case of Schiphol Airport
Conclusions and Implications
Continuous-Time Models and Applications
Introduction and Overview
Continuous-Time Version of Smit-Trigeorgis Framework
Equilibrium Output and Values
Strategic Entry Decisions
Equilibrium Entry and Critical Demand Thresholds
Benchmark Cases: Symmetric Competition and Monopoly
Strategic Investment Timing under Uncertainty
Strategic Interactions and the Timing of Investment
Innovation with Uncertainty over Completion and Time Delays
Exercise Strategies under Incomplete Information with Applications
Entry and Preemption under Incomplete Information
General Equilibrium Investment Strategies under Imperfect Competition and Asymmetric Information
Equilibrium Investment Strategies under Imperfect Competition
Investment Strategies under Asymmetric Information
Derivation of Option-Pricing Differential Equation
Discounted Profit Flow and Value Function
Sequential Stackelberg Leader-Follower Entry
Overview and Implications
Linking Corporate Finance and Strategic Planning
An Expanded Valuation Framework to Capture Flexibility and Strategic Value
Implications of the Strategic Options and Games Framework
Timing Games for Simple Commercial Options
Investment Games Involving Strategic Options
Empirical Implications
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