Options Thinking and Platform Investments: Investing in Opportunity

See Myers Stewart , “Determinants of Corporate Borrowing,” Journal of Financial Economics, 5 (1977): 147–175; see also Myers S. , “Finance Theory and Financial Strategy.” in Hax A. , ed., Readings on Strategic Management (Cambridge, MA: Ballinger, 1984). These ideas have been expanded by Kester Carl , “Today's Options for Tomorrow's Growth,” Harvard Business Review (March/April 1984); Hamilton William Mitchell Graham , “What Is Your R&D Worth,” The McKinsey Quarterly (1990), pp. 150–160: And Copeland Tom Weiner Jon , “Proactive Management of Uncertainty,” The McKinsey Quarterly (1990), pp. 133–152; Trigeorsis Leon Mason Scott , “Valuing Managerial Flexibility,” Midland Corporate Finance Journal (1988), pp. 14–21.

See Barney Jay , “Strategic Factor Markets: Expectations, Luck, and Business Strategy,” Management Science, 32 (1986): 1231–1241; Rumelt Richard , “Towards a Strategic Theory of the Firm,” in Lamb Robert Boyden , ed., Competitive Strategic Management (Englewood Cliffs, NJ: Prentice-Hall, Inc., 1984); Winter Sidney , “Knowledge and Competence as Strategic Assets,” in Teece D. , ed., The Competitive Challenge—Strategies for Industrial Innovation and Renewal (Cambridge, MA: Ballinger, 1987); and Teece David Pisano Gary Shuen Amy , “Resource-Based View of the Firm,” mimeo, 1991.

There are more technical obstacles to the application of exact formulations, with a principal problem being the strong assumptions of “risk-neutral” valuations in the absence of arbitrage opportunities. Techniques, such as Monte Carlo simulations or decision trees, generally ignore entirely the option value, even they treat uncertainty explicitly.

Johnson Kaplan , Relevance Lost: The Rise and Fall of Management Accounting (Boston, MA: Harvard Business School Press, 1987).

For two explanations, see Dertouzos Michael Lester Richard Solow Robert , Made in America: Regaining the Productive Edge (Cambridge, MA: MIT Press. 1989); and Porter Michael , ed., Investment Horizons in American Business (Boston, MA: Harvard Business School Press, forthcoming).

Useem and Gottlieb estimate the share of institutions holding equity in the U.S. to have risen from 29% in 1980 to 46% in 1990. See Useem Michael Gottlieb Martin , “Corporate Restructuring, Ownership-Disciplined Alignment, and the Reorganization of Management,” Human Resource Management, 29 (1990): 285–306. Unpublished data from the Tokyo Stock exchange shows financial institutions holding 38.5% of Japanese equity in 1980 and 42.5% in 1988. For an overview, see Porter Michael , “Capital Disadvantage: America's Failing Capital Investment System,” Harvard Business Review (September/October 1992), pp. 65–82.

Prowse Stephen , “Institutional Investment Patterns and Corporate Financial Behavior in the United States and Japan,” Journal of Financial Economics, 27 (1990), pp. 43–66; Gerlach Michael , “The Japanese Corporate Network: A Blockmodel Approach.” Administrative Science Quarterly, 37 (1992): 105–139; and Berglof Erik Perotti Enrico , “The Japanese Financial Keiretsu as a Collective Enforcement Mechanism.” working paper #91-09, MIT Japan Program, 1991.

The data are summarized in Kogut Bruce , “Capital Structure and Financial Institutions in the Federal Republic of Germany,” unpublished manuscript, 1982; primary data are drawn from Studienkommission, Grundsatzfragen der Kreditwirtschaft, Bericht der Studienkommission, Ministry of Finance, (Bonn: Wilhelm Stollfuss Verlag, 1979): Reliance on short-term debt is described in Charles Calomiris. “Regulation, Industrial Structure, and Instability in U.S. Banking: An Historical Perspective,” mimeo, Wharton School, University of Pennsylvania, 1992.

Hoshi Takeo Kashyap Anil Schaftstein David , “Bank Monitoring and Investment: Evidence from the Changing Structure of Japanese Corporate Banking Relationships,” in Hubbard R. Glenn , ed., Information, Investment, and Capital Markets (Chicago, IL: University of Chicago, 1990).

Long J. Bradford , “Did J.P. Morgan's Men Add Value?” in Temin Peter , ed., Inside the Business Enterprise: Historical Perspectives on the Use of Information (Chicago, IL: University of Chicago Press, 1991).

Michael Porter's Competitive Strategy (New York, NY: Free Press, 1980) represents the most well-known statement of this approach.

See Kogut Bruce Zander Udo , “Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology,” Organization Science, 3 (1992): 383–397. Baldwin Carliss Clark Kim [“Capabilities and Capital Investment: New Perspectives on Capital Budgeting,” working paper 92-004, 1991, Harvard Business School] develop in detail the link between options and capabilities.

Prahalad Hamel , “The Core Competence of the Corporation,” Harvard Business Review (May/June 1990), pp. 79–91.

See the fascinating account by Adler Paul , “The Learning Bureaucracy: New United Motor Manufacturing.” forthcoming in Staw B. Cummings L. , eds., Research in Organizational Behavior (Greenwich, CT: JAI Press, forthcoming).

See also, Kogut Bruce , “Joint Ventures and the Option to Acquire and to Expand,” Management Science (1991). pp. 19–33.

Fortune, 1992, p. 60; cited by Wolf Bernard Globerman Steven , “Strategic Alliances in the Automotive Industry: Motives and Implications,” mimeo, York University, 1992.

See also, Kulatilaka Nalin , “The Value of Flexibility: The Case of a Dual-fuel Industrial Steam Boiler,” Financial Management Association, 1993, pp. 271–280.

See also, Kogut Bruce Kulatilaka Nalin , “Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network,” Management Science (forthcoming).

See Carroll Glenn Hannan Michael , “Density Delay in the Evolution of Organizational Populations: A Model and Five Empirical Tests,” Administrative Science Quarterly, 34/3 (1989).

See Hall Bronwyn , “Corporate Restructuring and Investment Horizons,” Working Paper #3794, National Bureau of Economic Research, 1991.