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Justifying the Origin of Real Options and their Difficult Evaluation in Strategic Management

  • Thierry Burger-Helmchen

This work explores and reviews the introduction of real option in the strategic management literature. The aim is to contribute to a better understanding of the origin of the real option. By distinguishing between shadow and real option, and implementing entrepreneurship in the traditional option valuation framework we obtain a more exhaustive representation of the strategic decision processes in the firm. We explain the creation of a real option as an entrepreneurial process, which transforms inventive ideas into profitable innovation. This constitutes a step toward an option based-theory of the firm by describing the emergence of a firm’s options and the strategic building of new competences for exercising these options. In addition, this approach offers a parallel understanding of why the real option theory is less used in practice than in theory.

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Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2006-31.

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Date of creation: 2006
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Handle: RePEc:ulp:sbbeta:2006-31
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  1. Coff, Russell W. & Laverty, Kevin J., 2001. "Real options on knowledge assets: Panacea or Pandora's box?," Business Horizons, Elsevier, vol. 44(6), pages 73-79.
  2. Busenitz, Lowell W. & Barney, Jay B., 1997. "Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making," Journal of Business Venturing, Elsevier, vol. 12(1), pages 9-30, January.
  3. Patrick Cohendet & Patrick Llerena, 2003. "Routines and incentives: the role of communities in the firm," Industrial and Corporate Change, Oxford University Press, vol. 12(2), pages 271-297, April.
  4. Witt, Ulrich, 1998. "Imagination and leadership - The neglected dimension of an evolutionary theory of the firm," Journal of Economic Behavior & Organization, Elsevier, vol. 35(2), pages 161-177, April.
  5. Sydney D. Howell & Axel J. Jägle, 1997. "Laboratory Evidence on How Managers Intuitively Value Real Growth Options," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(7&8), pages 915-935.
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