| Creating Options or Making Commitments? A Case Study of Strategic Investing Under Uncertainty |
| | Belanger, Karen L. | Columbia U. | KLBelanger@compuserve.com | 212-769-4771 |
| | The latest advice for managers from financial theory (Dixit and Pindyck 1994; Trigeorgis 1996) and strategic management (Bowman and Hurry 1993) is to use a real options framework for assessing potential investments when environmental uncertainty makes it difficult to predict future cash flows. Avoiding commitments based on flawed NPV analysis and allowing for learning and change are touted as benefits of this approach. However, do managers actually choose to create real options when investing under uncertainty? To determine whether or not managers use real options, it is critical to understand the distinction between option and commitment investments.
Case studies of actual investments made y Enron suggest that options analysis may not be used up front in the investment decision making process, but the firm may choose to treat investments as options later, or may create options through initial commitment investments. To differentiate between investment types, a list of attributes of real option investments is derived from financial option theory and prior work on real options. The definition of real options is then tested by looking at actual investments made in conditions of environmental uncertainty. The case study approach highlights the firm-specific nattier of option opportunities, attributes and value. Propositions and suggestions for further research are presented as a continuation of this initial piece of inductive case study research. |
| | Keywords: Strategic Investment Process; Real Options; Managing Uncertainty |
| Why Do Firms Behave Similarly? A Study on New Product Introduction in the Japanese Soft-drink Industry |
| | Asaba, Shigeru | Gakushuin U. | shigeru.asaba@gakushuin.ac.jp | +81-3-5992-3649 |
| | Lieberman, Marvin B. | U. of California, Los Angeles | marvin.lieberman@anderson.ucla.edu | (310)-206-7665 |
| | We analyze new product introduction in the Japanese soft-drink industry to distinguish among theories of why firms exhibit similar behavior. Some theories suggest that firms mimic others with comparable resource endowments in order to mitigate rivalry or to minimize risk. Other theories suggest that imitation economizes on information costs.
In the Japanese soft-drink industry, there is often bunching of new product introductions and imitation of competitors' offerings. As a result, Japanese beverage manufacturers duplicate each other's product lines. In the US, by comparison, the extent of such duplication is much less.
The empirical results provide support for both sets of theories, but in different contexts. The analysis of firms' initial entry into brand-new products suggests that firms enter when they observe larger competitors doing so. Entry by large firms provides information that demand for the product is likely to grow; indeed, such entry may give legitimacy to the product and stimulate consumer demand. On the other hand, the analysis of new product introduction within established product categories suggests that firms often mimic competitors that share a similar resource base. One interpretation is that the bunching of entry into emerging product markets is largely the result of economizing on information costs, whereas the bunching of product introductions within established categories is caused more by competitive interaction among similar firms.
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| | Keywords: Behavioral similarity; New product introduction; Competitive interaction |
| Ownership Structure, Myopic Loss Aversion, and the Problem of 'Presentiation' |
| | Grossman, Wayne | U. of Delaware | grossmaw@udel.edu | (302)831-6187 |
| | This study examines the influence of institutional investors on firm innovation. Institutions are segmented by their cash flow
preferences. Using traditional agency theory, a set of institutions is theorized to emphasize tight control, and reduce the
agency costs of free cash flow. Firms owned by such 'residual claimants' are hypothesized to be short-term, and were found
to expend fewer resources on innovation. Drawing on transaction cost economics, institutional investors are also modeled
as an organizational form that mitigates transaction costs between owners and innovation-intensive firms. Ownership by these
'future claimants' was found to be positively associated with firm-level innovation.
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| | Keywords: corporate governance; institutional investors; innovation |
| Betting on Technological Innovation: Towards a Competence-Based View of First Mover Advantage |
| | Lampel , Joseph | U. of Nottingham | josephlampel@hotmail.com | 44-115-951 55 00 |
| | Shamsie, Jamal | U. of California, Los Angeles | jamal.shamsie@anderson.ucla.edu | 310-206-2703 |
| | Conventional thinking holds that there is a strong link between risk and reward in launching new technological innovations. Radical innovations are more risky to launch, but they can also offer greater returns. The competitive positioning view of strategy supports this view because of the considerable technological discontinuity that is typically associated with radical moves. Due to this discontinuity, it has been assumed that radical first movers will find it easier to sustain their initial advantage in the face of late entry by rivals. In this paper, we argue that a competence-based view suggests that sustaining initial advantages will in fact be easier for incremental rather than for radical first movers. We model the competence-based view of first movement, showing that the market share of incremental first movers settles at a higher level than the market share of radical first movers. The implications of these results are then raised for researchers and practitioners |
| | Keywords: First movement; Technology; Innovation |