Real options theory in strategic management

By Lenos Trigeorgis, Jeffrey J. Reuer. 2017

452 citations recorded by the source corpus.

Research summary: This article provides a review of real options theory (ROT) in strategic management research. We review the fundamentals of ROT and provide a taxonomy of this research. By synthesizing and critiquing research on real options, we identify a number of important challenges as well as opportunities for ROT if it is to enhance its impact on strategic management and potentially develop into a theoretical pillar in the field. We examine how ROT can inform the key tensions that managers face between commitment versus flexibility as well as between competition versus cooperation, and we show how it can uniquely address the fundamental issues in strategy. We conclude with suggestions on future research directions that could enhance and unify the thus-far distinct main approaches to real options research. Managerial summary: Real options theory (ROT) applies the heuristics and valuation models originally designed for financial securities to the domain of corporate investment decisions (e.g., joint ventures [JVs], foreign direct investment, research and development [R&D], etc.) and strategic decision making under uncertainty. This article provides a synthesis of this body of research in strategic management and related disciplines. We suggest how ROT can address fundamental issues of strategy, including the dilemmas managers face between commitment versus flexibility as well as between competition versus cooperation. We discuss how three distinct approaches to real options analysis can complement each other, and we identify some of the main challenges and opportunities for ROT to become a theoretical pillar in strategy. Copyright © 2016 John Wiley & Sons, Ltd.

Subfields: Economics and Econometrics, Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/45e81439b186c10ff9199c3dec14d69151d81a80

How researchers see this paper

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In Economics and Econometrics

1. Lorraine Eden
2. Li Dai
3. Pilar Velasco
4. G. D. L. Fuente
5. Margarita Ortiz
6. Paul W. Beamish
7. J. Lu
8. Mike W. Peng

In Finance

1. Pilar Velasco
2. Lorraine Eden
3. G. D. L. Fuente
4. Margarita Ortiz
5. Paul W. Beamish

In Management Science and Operations Research

1. Pilar Velasco
2. Lorraine Eden
3. G. D. L. Fuente
4. Margarita Ortiz
5. Paul W. Beamish
6. Li Dai

Citations in the corpus

• The value of a firm’s engagement in ESG practices: Are we looking at the right side? (2021, background): “The real options perspective provides a major conceptual bridge between the strategic and the financial analyses of corporate decisions, such as the ESG practices, in terms of promoting a better understanding of its underlying value creation mechanisms (Trigeorgis and Reuer, 2017).”
• Caught in the crossfire: Dimensions of vulnerability and foreign multinationals' exit from war‐afflicted countries (2017, background): “In addition, we demonstrate how real options thinking – structuring redundancy into a portfolio of options and acquiring experience in similar contexts – can turn environmental uncertainty into a source of value as opposed to loss (Trigeorgis and Reuer, 2016).”