For this assignment, you will use an options framework for the emerging technology you chose. The notion of real options pertains to tangible assets, such as capital expenditure, rather than financial instruments. Some examples of real options include the flexibility to defer making a decision; expanding, modifying, or contracting a project; investing in R&D with the intent to create new opportunities; and acquiring new technologies. Therefore, a real option is an actual business outcome that is valued in terms of strategic choices that an organization may gain by making specific decisions.
Utilizing the concepts introduced this week, address the following tasks pertaining to your project topic:
- The real option framework is based on the view that all decisions are options decisions in the sense described above. First, you will need to refine your organization’s profile, that is, whether it is a product-oriented or service-oriented company, what its size is, what its financial state is, and what its competitive posture is in the industry where it operates. Then, identify and explain some typical decisions that could apply to your organization in conjunction with the adoption of your selected emerging technology and that have the potential to derive real options.
- Select one decision that you would like to tackle that you believe has the greatest potential for creating real options. Analyze your decision using a hierarchical decision-tree structure to represent opportunities for managerial decisions through several levels. The branches of your decision tree will capture the decision alternatives and associated outcomes at each level, starting from the single root (your initial decision). Recognize and discuss all possible subsequent decisions captured in your tree from which value-adding real options can be derived. Constructing your decision tree may force you to refine your set of assumptions for your organization. See the figure provided in the Week 4 Supplemental lecture, Decision Tree for an example of a decision tree.
- Address the valuation process of your real options. Discuss the potential benefits associated with the strategic choices that you identified through your decision tree. Examples of value-adding aspects are increased revenue associated with the successful commercialization of your selected emerging technology, strategic positioning creating opportunities for a competitive advantage, and an expanded knowledge base that can be leveraged for future decisions. Include the investment costs associated with the decisions in your analysis.
- Describe a process for implementing the real options you arrived at via your decision analysis for your chosen emerging technology. Specifically, analyze how the organization will monitor progress in conjunction with the decisions, how it will test and update assumptions made in deriving the real options, and how it plans to exercise the options.
- Consider the proposition that knowledge-based firms tend to have high Price-Earnings (P/E) Ratios, low payout ratios, and low debt/capital ratios. Discuss how these financial notions apply to your organization’s adoption of your selected emerging technology. Also discuss the possible justification for synergy and diversification.
Complete the assignment in approximately 5 to 7- pages in a Microsoft Word document. In APA format, cite any sources you use on a separate page. The references you cite should be credible, scholarly, or professional sources. Any examples you cite must be supported with sources from the news media. Note that the title page and header may remain the same as in Weeks 1–3. The abstract can be similar to the one in Week 3 but modified to cover the objectives of Week 4. The references should contain your sources from Week 3 and any new sources added this week. In the interest of space economy, the content of your Week 4 paper should only include the material you need to add to address the questions in Week 4; you need not include your responses to the Weeks 1–3 questions.
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