AFM241 Study Guide - Final Guide: Real Options Valuation, Data Warehouse, Business Analytics
30 May 2018
School
Department
Course
Professor
7.4 Real Options
7.4.1. Flexibility as an Option
• Agility or flexibility (ability to respond to changes in competitive environment) is one of the
often-mentioned benefits associated with IT investments
• Example 1: firm A has invested in an enterprise system (ES) in the past. If the right
opportunity arises for firm A to integrate its supply chain with that of a customer or
supplier, he firm will be able to do it relatively easy
o Benefits of integration through the implementation of software like Collaborative
Planning Forecasting Replenishing (CPFR) are substantial
• Flexibility contributes to competitive advantage that firm A has versus competitors that
have not invested in an ES
• Example 2: firm B has developed a data warehouse that contained detailed information
about customers, their preferences, purchasing patterns, loyalty, etc.
o Firm can invest in appropriate BA tool (sentiment analytics) in order to gauge
relevant revealed feeling of consumers in social networks
o Analysis may reveal feelings towards firm B, its products, and management
practices
o Results of sentiment analysis can be integrated with structured data from the
data warehouse in order to respond to customer needs or develop new products
• Firm’s flexibility (ability to make appropriate investment needed to exploit an opportunity –
e.g. CPFR or sentiment analytics) depends on whether the firm has already completed
the first investment
o Investments like CPFR or BA/sentiment analytics are path dependent
(competitors that want to exploit similar opportunities will have to first invest in
the ES or development of a data warehouse)
o Investments in path dependent resources are a source of sustainable
advantage
• Important:
o When firm A considers the investment in the ES does not have to decide whether
to invest in the CPFR or not
o Investment in ES provides the firm with option but no obligation to invest in the
CPFR at a future point, if and only if the investment at that point is profitable
o When firm B considers the investment in the data warehouse, the firm does not
have to decide whether to invest in BA tools
o At future point, if conditions are such that investing in BA tools presents a
profitable opportunity firm B will make use of the investment
Traditional NPV analysis does not allow us to incorporate the element of
flexibility (option but not obligation) to continue with a second stage of an
investment, if and only if conditions are right
• From management standpoint, NPV analysis has been described s buy and hold type of
approach
o Managers cannot and will not try to influence the future direction of an IT
investment
7.4.2 Financial Options
• Option: the right but not the obligation to buy or sell a certain financial asset at future date
at a predefined price
o Option to buy is call option and option to sell is put option
o Call option gives you the right, but not the obligation to buy a stock at a definite
price (known as the strike price) for a limited period of time
• Stock price of firm today (July 7) is $52.02
o For $2.50, you could buy a call option that gives you the right at any time from
now and until the January 15, to buy a share of this company for $50 per share
o Price of stock rises to $62, you could purchase the stock for the strike price of $5
and earn profit of $7.50 (60-50-2.50)
Document Summary
Investments like cpfr or ba/sentiment analytics are path dependent (competitors that want to exploit similar opportunities will have to first invest in the es or development of a data warehouse) Investments in path dependent resources are a source of sustainable advantage. Important: when firm a considers the investment in the es does not have to decide whether to invest in the cpfr or not. Investment in es provides the firm with option but no obligation to invest in the. Afm 241 textbook chapter 7 notes part 4. A financial option provides the flexibility to postpone the decision to purchase a security. There are both short-term apparent and long-term indirect effects of investments. For example, a retail firm considers a investment in an integrated point of sales system (pos). The immediate impact of the investment is that the firm can generate financial reports faster and more accurately.
