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Strategic Resource Investments via Option Lens

Explore a comprehensive view of resource investment strategies and the incremental-choice process through the option lens. Understand how organizations make strategic choices and manage a bundle of options for future growth and sustainability.

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Strategic Resource Investments via Option Lens

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  1. STRATEGY THROUGH THE OPTION LENS: AN INTEGRATED VIEW OF RESOURCE INVESTMENTS AND THE INCREMENTAL-CHOICE PROCESS BOWMAN & HURRY, 1994 Academy of Management Review Slides by Minjae Lee, BADM 545 Fall 2013

  2. Overview • Strategies emerge from resources. • Strategies, in turn, often generate further resources. • Through the option lens, strategy is seen as a process of organizational resource-investment choices, or options. • Rather than using specific strategies centered around specific options - global expansion and alliances, technology development, corporate acquisition and restructuring -, this paper is concerned with the strategy process itself.

  3. The development of option theory • The investor makes a small investment to buy the option, holds it open until the opportunity arrives, and finally decides between striking the option to capture the opportunity or abandoning it.

  4. Strategy through option lens • Resource and the bundle of options • Option lens provide a view of an organization's resources as a bundle of options for future strategic choice • These options arise from the interplay of the organization’s existing investment, its knowledge and capacities, and its environmental opportunities. • Existing resources and capabilities, Accumulated learning and capabilities, Organizational slack allow preferential access to future opportunities. • Sunk of existing asset works like an option contract in limiting downside risk.

  5. Strategy through option lens • Shadow options and sense making • Through retrospective sense making • Incremental strategy and the option chain • When an option is struck, the resulting configuration of resources will, in turn, yield new options for future exercise. Strategies are produced by the sequential striking of this option chain. • The activation of options

  6. Theoretical framework and research propositions Proposition 1. • Organizations holding better developed bundles of options will expand more aggressively in growing markets and economic upturns, and they will persist longer in difficult markets and economic downturns, than competitors holding less developed option bundles. • An organization's bundle of options cushions the downside risk of future investments, strengthening its ability to expand aggressively and to withstand losses during the course of growth. • In reality, investment inertia, slow investment adjustment(entry or exit)

  7. Theoretical framework and research propositions Proposition 2. • Given realistic perceptions of environmental uncertainty, organizations that hold options during unstable periods and strike options in stable periods will show superior long-term growth and profit performance compared to organizations exhibiting other types of investment behavior.

  8. Theoretical framework and research propositions Proposition 3. • Organizations that enter new businesses and markets by linking investments-so that small options are followed by large strikes-will perform better than those entering with only discrete small, or large, investments.

  9. Theoretical framework and research propositions Proposition 4. • The performance of organizational investment in option strikes is related to investment timing as follows from (a) = high performance to (e) = low performance: • (a) Calls struck after receiving both signals. • (b) Puts struck after receiving only the opportunity-arrival signal. • (c) Calls struck after receiving only the opportunity-arrival signal. • (d) Calls and puts struck after receiving only the expiration signal. • (e) Calls and puts struck before receiving either signal.

  10. Theoretical framework and research propositions Proposition 5. • Organizations with structures that are capable of holding a portfolio of options will show wider diversification, with fewer divestitures, than organizations with structures that restrict choices to an option on a portfolio of assets.

  11. New type of explanation for empirical findings • Strategy and Selection • The Garbage Can • Means Consensus • The Risk-Return Paradox • Future Research

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