Interfaces for enterprise valuation from a real options lens

• Published date: 01 January 2018
• Author: Jackson J. Tan
• Date: 01 January 2018
• DOI: http://doi.org/10.1002/jsc.2181

RESEARCH ARTICLE

DOI: 10.1002/jsc.2181

Strategic Change. 2018;27(1):69–80. wileyonlinelibrary.com/journal/jsc © 2018 John Wiley & Sons, Ltd. 69

Abstract

Variables that expand real opons models provide interfaces by which entrepreneurs may view

prospecve ventures, or resources. Factors aecng real opon values extend from the external

environment of a venture and are forms of various terms of business between entrepreneurs, the

venture, and the external environment. The idencaon of interfaces increases the resulng

value of a real opon and provides entrepreneurs informaon by which to structure ventures that

extract value from arbitrage and innovaon opportunies.

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 INTRODUCTION

At the planning stage of a venture on to the implementaon of its

business plan, entrepreneurs must oen make the choice between

selecng the execuon of one strategy over another. Even the most

novice entrepreneurs nd that their decisions at the selecon stage

aect the qualies, and types of strategies that will be available to

them in the future. Careful of the consequences of their strategy

selecons, entrepreneurs oen deal with the issue of investment

(relave to eort, me, and capital resources) in various aspects of a

venture. In the short‐term view of investment, where a single period

of me is considered, tools as Cost‐Benet Analysis, or Breakeven

Analysis oer entrepreneurs quantave insight to strategy selec‐

on such as the Make‐or‐Buy Decision oen encountered in business

operaons. Capital Budgeng tools, as the Payback Period, Net Pres‐

ent Value, Internal Rate of Return, or the Modied Internal Rate of

Return, allow managers to analyze the values of various strategic deci‐

sions in a long‐term, mulperiod, perspecve. These tools of quan‐

tave analysis assume stac environments and a sense of certainty

of outcomes. With the connually changing commercial landscape,

economic agents (entrepreneurs, rms, instuons, as well as govern‐

ments) modify and change strategies in order to adapt to emergent

pressures in their endogenous, and exogenous environments. During

the 1980s and 1990s, Japanese rms expanded operaons to foreign

countries in response to exchange rate pressures, and a change in

naonal commercial policies. In the case of technology rms during

the dot‐com boom of the early 2000s, valuaons for these rms were

signicantly higher than the present value of their future cash ows.

During the Great Recession super‐leaguer rms in the Footwear and

Apparel Industry engaged strategies for retrenchment, and kept very

liquid posions to buer from exogenous shocks, while certain local

and regionally focused rms used the crisis to expand their markets

with the use of debt. The acvies of economic agents reect a deci‐

sion criterion that tradional valuaon methods, and frameworks,

such as the Net Present Value, cannot readily explain. Myers (1977)

discussed that the value of a rm was not just the value of its assets,

but also the value of the growth opons available to a rm. Where

the asset value may embody the book value of a rm, or the pres‐

ent value of future cash ows, the value of growth opportunies is

dependent on the volality of underlying cash ows from an invest‐

ment opportunity.

From our literature review, the expansion of variables in Real

Opons models provides the entrepreneurial interfaces by which to

value strategies and resources exclusive to a venture. The presence

of these variables aects decision making, as they indicate factors

represenng market structure; levels of knowledge and technology;

operaonal strategies; distribuon of ownership; as well as access to

quality informaon. In Secon 2 of our discourse, we dene and iden‐

fy typologies of factors in Real Opons models as forwarded in the

extant literature. It should be noted that this review does not cover

every model discussed in the extant literature, for there are over 39

years of Real Opons models. Our intent here is to discuss the various

types of models that value ventures given environmental condions

external to the rm. Secon 3 will review basic assumpons of early

Interfaces for enterprise valuaon from a real opons lens*

Jackson J. Tan

University of Santo Tomas,

The Graduate School, and Entrepreneurship,

Department College of Commerce

and Business Administraon Manila,

Philippines

Correspondence

Jackson J. Tan, 123 Molave Street, Ceris

II, Canlubang, Calamba, Laguna 4028,

Philippines.

Email: mrjivoryresearch@gmail.com

* JEL classicaon codes: D81, G12, G13, G17, G31, G32, L24, L25, L26, M21,

O31, O32, O33.