Flexibility and Games in Strategic Investment

Smit, Han T.J.; Trigeorgis, Lenos

Volume 14, Numbers 1 & 2 / March/June , Pages 1-151

Multinational Finance Journal, 2010, vol. 14, no. 1/2, pp. 125-151

Han T.J. Smit , Erasmus University Rotterdam, Netherlands Corresponding Author

Lenos Trigeorgis , University of Cyprus, Cyprus

Abstract:
We present a framework for value-based strategic planning combining concepts and tools from strategy and finance. Our ‘Expanded NPV’ framework reconciles flexibility and strategic commitment, viewing strategic planning as managing a portfolio of real options with competitive interactions. The flexibility and strategic value of a business strategy are interwoven with that strategy’s design. We synthesize real options and game theory to evaluate projects or acquisitions. We connect strategic planning and the underlying sources of value creation with the market value of the firm and its three main value components: expected cash flows or assets in place (NPV), flexibility (growth options), and strategic value (moves and games). We develop implications depending on simple or compound growth options, the type and competitive impact of the investment, and relative market power.

Keywords : strategic planning; real options; game theory; option games; competition
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