RATIONALE FOR THE DEVELOPMENT STRATEGY OF SMALL BUSINESS ORGANIZATIONS USING THE REAL OPTIONS METHOD.

Author:Morozko, Natalia
Position:Report - Abstract
 
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INTRODUCTION

Modern corporations have ample opportunities to develop development strategies with an alternative choice of different options. For small businesses such opportunities are limited. According to Russian legislation, small business organizations include entities with a staff of up to 100 people, the volume of proceeds from the sale of goods (works, services) to 800 million roubles. This shows the significant economic potential of this type of business. However, a significant number of small organizations, according to statistics, function on the market from one to three years. This situation is due to the lack of sound strategic decisions, uncertainty and accompanied risks in production and economic activities.

The functioning of companies based on the financial strategy allows you to choose the appropriate areas of development in a changing environment. A tactical decision is recognized as rational if it is aimed at achieving the main strategic goal-improving the welfare of owners through maximizing the value of the organization. The use of the financial strategy allows ensuring the effective development of the organization, in which the mechanism of economic development of the organization is realized on the basis of mobilizing the internal potential and the possibility of manoeuvring financial resources. Strategic management of the organization can be considered as the management of its value. The advantage of the value model is the consideration of managerial flexibility. Management flexibility is based on the dynamics of development, which is expressed in taking into account possible changes in the strategy, depending on the transformation of the operating conditions.

Management flexibility in changing conditions, the presence of uncertainty is most adequately provided when using real options. A real option allows you to use business situations or implement an investment project to use changing situations to increase the value of your business. The effectiveness of the application of real options under conditions that are transformed is confirmed by the use in the activities of many companies, ensuring the flexibility of management decisions.

A study of developments on the application of real options in the development strategy of small businesses showed that at the present stage such problems are not completely resolved. In this article Torani, Rausser & Zilberman (2016) (develops a stochastic dynamic model of the adoption of solar PV in the residential and commercial sector under two sources of uncertaintythe price of electricity and cost of solar). In development Mun (2002) (real options are a useful tool to guide a firm's strategic planning and can create or enhance a firm's value). In development Trigeorgis & Reuer (2017) provides a review of Real Options Theory (ROV) in strategic management research, review the fundamentals of ROV and provide taxonomy of this research. In other studies (Kent Baker, Shantanu Dutta & Samir Saadi), it is noted that flexible management decisions in business practice are not widely used: Only 16.8% of enterprises in Canada use real options in the budgeting of capital. Research (Bartolomeu Fernandes, Jorge Cunha & Paula Ferreira) showed the effectiveness of using real options when justifying investments in the energy sector. A number of authors Mei & Clutter (2015) in this study, the real options approach are applied to analyse the timberland market. Integration of cooperation between large and small companies in the field of innovation is aimed at using real options in these processes, noted in other developments (David, Duane Ireland & Charles). In the work of Trigeorgis & Driouchi (2017) note that a contribution is made to the theory of multinationality and real options, considering the role of solid heterogeneity in realizing the real options for multinational corporations. The authors (Ahammad, Leone, Tarba, Glaister & Arslan, 2017) investigate the factors influencing the share of equity ownership sought in cross-border mergers and acquisitions (CBM&As). Drawing on real options theory and Transaction Cost Economics (TCE) they address and hypothesize key factors linked to commitment under exogenous uncertainty and the separation of desired and non-desired assets' influence on share of equity sought by acquiring firms in CBM&As. In the study by Moschieri & Mair (2017), within the framework of corporate entrepreneurship, they quote "data on how partial alienation can be considered as real variants". Chen, Shen, Xue & Xia (2017) are investigating the (models the toll-adjustment mechanism as a real option to assess the value of flexibility of the right (but not obligation) to toll adjustments. Aretz & Pope (2017) reviews (Real Options Models of the Firm, Capacity Overhang and the Cross-Section of Stock Returns). Rau & Spinler (2017) note that (In light of low profitability and frequent alliance changes, the optimal choice of investment approach is addressed. This is achieved by comparing the performance of three investment approaches: Real options analysis and individual and collective discounted cash flow). Lawryshyn, Collan, Luukka & Fedrizzi (2017) note in their work (that the cash flow is used as an input in the continuous-time real option of valuation of each patent).

When investigating the applicability of real options in a small business, it is necessary to take into account the characteristics determined by the type of economic activity. The development strategy of small business organizations using the real options method allows taking into account risk situations in the activities of organizations.

The purpose of this study is to develop a methodology for determining the effectiveness of the application of real options (ROV) by small business organizations in conditions of uncertainty and risk.

The hypothesis is increasing the flexibility of the management decisions taken to justify the development strategy of small business organizations using the real options method.

METHODS

Methods for making flexible management decisions based on real options are justified in high-risk situations. Real options for evaluating investments in the development of new drugs have been used by the pharmaceutical company Merck for many years. Another company Texaco, using an optional real method, estimated the oil fields in the initial stage of development, where the level of risks is much higher than at the stage of operation. Increased risks were accompanied by the evaluation and development of a strategy for the development of oil fields in the North Sea by British Petroleum. The method of real options was used to estimate the value of many companies.

The use of real options in Russian practice is not enough. In individual firms, the real option method is used in valuation: Pricewaterhouse Coopers Standard & Poor's, Baker Tilly, Rus Audit. At present, the process of using this method for choosing investment options begins in Russia.

In the areas of activity where changing factors negatively affect financial...

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