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Strategic Valuation of Investment Under Competition

Author

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  • Patricio Del Sol

    (Pontificia Universidad Católica de Chile, Vicuña Mackenna 4860, Santiago, Chile)

  • Pankaj Ghemawat

    (Harvard Graduate School of Business Administration, Soldiers Field, Boston, Massachusetts 02163)

Abstract

The most serious problem with the widely used discounted-cash-flow (DCF) methods of investment valuation is that they are commonly applied without explicit regard to competition. As a result, the prescriptions they afford are often inconsistent with those given by competitive strategy frameworks. To remedy this, we show how such frameworks can be integrated with DCF methods to value investments (and disinvestments) in competitive and uncertain contexts. We recommend that the DCF analysis be carried out within a framework that includes the following three analytical steps: positioning, which focuses on competitive advantages; sustainability, which focuses on competitive dynamics; and flexibility, which focuses on options to revise the initial investment plan in the face of uncertainty. Valuators using this framework will reduce the likelihood that the DCF analysis misses relevant competitive-strategy considerations. Firms that have used this framework for positioning, sustainability, and flexibility have shaped and clarified their choices, solving apparent inconsistencies between DCF results and the competitive-strategy argument.

Suggested Citation

  • Patricio Del Sol & Pankaj Ghemawat, 1999. "Strategic Valuation of Investment Under Competition," Interfaces, INFORMS, vol. 29(6), pages 42-56, December.
    • Handle: RePEc:inm:orinte:v:29:y:1999:i:6:p:42-56
    DOI: 10.1287/inte.29.6.42
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    References listed on IDEAS

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    1. Kaplan, Steven N & Ruback, Richard S, 1995. "The Valuation of Cash Flow Forecasts: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 50(4), pages 1059-1093, September.
    2. Baldwin, Carliss Y. & Clark, Kim B., 1994. "Capital-Budgeting Systems and Capabilities Investments in U.S. Companies after the Second World War," Business History Review, Cambridge University Press, vol. 68(1), pages 73-109, April.
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    Cited by:

    1. Emili Grifell-Tatjé & P. Marquès-Gou, 2002. "Measuring Sustained Superior Performance at the Firm Level," Working Papers 0208, Departament Empresa, Universitat Autònoma de Barcelona, revised Jul 2002.
    2. Shigufta Hena Uzma & J.P. Singh & Naveen Kumar, 2010. "Discounted Cash Flow and Its Implication on Intangible Valuation," Global Business Review, International Management Institute, vol. 11(3), pages 365-377, October.
    3. Kobari, L. & Jaimungal, S. & Lawryshyn, Y., 2014. "A real options model to evaluate the effect of environmental policies on the oil sands rate of expansion," Energy Economics, Elsevier, vol. 45(C), pages 155-165.
    4. Li, X. & Zuidwijk, R.A. & de Koster, M.B.M. & Dekker, R., 2016. "Competitive Capacity Investment under Uncertainty," ERIM Report Series Research in Management ERS-2016-005-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    5. Chevalier-Roignant, Benoît & Flath, Christoph M. & Huchzermeier, Arnd & Trigeorgis, Lenos, 2011. "Strategic investment under uncertainty: A synthesis," European Journal of Operational Research, Elsevier, vol. 215(3), pages 639-650, December.
    6. Eva Regnier & Craig Tovey, 2007. "Time horizons of environmental versus non‐environmental costs: evidence from US tort lawsuits," Business Strategy and the Environment, Wiley Blackwell, vol. 16(4), pages 249-265, May.

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