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Interactive relationship of the value of the company strategy with real options

Author: YuanYongNing¡¡XiaEnJun From: www.yourpaper.net Posted: 2009-06-10 02:24:05 Read:
Abstract: This paper introduces the company's value strategy and its impact on the value of the strategic assessment for the different value drivers of value strategies included real options, real options. The value of strategic behavior flexibility will produce the corresponding value of the options to increase the assessed value of the value of the company strategy, so as to promote the implementation of the strategy of the company's value.
Keywords: value of the value of strategic real options interaction between

The American scholar Modigliani and Miller in its cost of capital, corporate finance and investment theory "(1958) first proposed the concept of enterprise value, build a cash flow-based valuation system, laid the foundation for the development of the theory of value management. The purpose of the company has experienced profit maximization, maximizes the economic development process, maximizing the value of the company has become a the company widely accepted assumptions about the. Maximize the value of the company to become the purpose of the management activities of the Company, through management activities. Copeland (1990) constructed assess the value of value-based management system, to propose ways and means to expand the shareholder value, the study opens new areas of the value of the company management.
Value Management is a measure of value drivers and control to achieve the target growth in shareholder value. Value of management's focus these operations "value drivers" to gradually shift the focus on the management and oversight of these factors change, can effectively prevent the management at the expense of long-term value for short-term financial performance, but also help businesses find the value of growth opportunities. Black et al (2001), value-driven strategy is divided into strategic, financial layer and operating layer to build the model of the drivers of the hierarchical value from the macro to the micro. This paper focuses on the strategic level value drivers.

Real option in the value of the company management

China's business environment is unique, "discontinuous" mutations factors such as policy, a lot of the industry is still in its early stage of development is full of uncertainty, which requires the company managers set the value of strategic When should give full consideration to the value of the "flexibility". Using more traditional is the net present value method (NPV), by discounting the future cash flows with the initial investment in comparison to judge whether to create value for shareholders. NPV method assumes that investors "buy and hold" strategy does not consider the existence of the "flexibility" strategy, and only discounted future cash flow scenarios is most likely to occur. This method is only suitable for assessment of the passively managed the project. The impact of active management of the high degree of uncertainty faced by the project, as well as the manager's flexibility on project development, the real options approach will have to be better than the NPV method.
Research a company's portfolio of real options (such as options to improve production, acquisition of competitor options to enter the relevant market in the field of options, etc.) may be a more profound understanding of the growth prospects and the resulting market value. And the static price-earnings ratio of the company's value assessment methods, the ratio of the market price and the carrying value indicators compared to real options analysis methods concerned about the more important that the revenue growth. Only when the two companies have the same expected revenue growth, in order to compare the value of the two companies based on price-earnings ratio, which in reality it is rarely occur, and therefore it is necessary to analyze the value of the company a real options approach. From this opportunity by research firm the opportunity to grow and the company's ability to profit to evaluate the value of the company, and concerned about the management "initiative" management flexibility, the ability to bring the value of the company's value-added. Trigeorgis (2007) pointed out: the extended NPV = (static) NPV flexibility (option) value.
The main advantage of the real options option allows simulation management flexibility implicit in most of the investment projects. Growth option is the standard European call option, be allowed to continue to the next phase of the project, such as the completion of R & D into the product development stage. The expansion options are also very similar, allowing Once the initial end of the project to the expansion factor e to increase its profits by increasing investment, such as the expansion of production capacity. The conversion option allows administrators to choose between two different projects, for example, choose different production equipment, V is the present value of the current project, VS represents the present value of the conversion to the new project can be obtained by payment of the exercise price X. These two strategies are compared to select the kind of strategy that can produce a maximum value. The abandonment option representative to give up the option of the project, and thus access to the liquidation value of the VA as compensation. The VA representatives so far, the sale of investments. And thus the value of the decision rule is a comparison between the present value V of the liquidation value of the VA and project future earnings. The postponed options to the right of owners to postpone a decision to a certain point in time, thus solving some uncertainties. Table 1 gives the company contains options and their option value, the present value of the V stands for the base, X is the strike price.

The value of the company influencing factors

In order to obtain the value of the company's growth, the company's strategy should not only consider the traditional value drivers; Also to be considered important to take advantage of future growth opportunities, value-driven factors, as well as the strategic actions how can we take advantage of the benefits of growth opportunities and to limit the adverse circumstances emerging risks. Shapiro (1985) mentioned company value drivers: economies of scale; product differentiation capacity, including increasing product innovation and R & D expenditures, and build a reputation; cost advantages, including the effects of learning and experience, economies of scale; developed distribution channels; government policies . Remove government policy outside influence factors, the corresponding rise to the internal value of the company's strategy: product innovation, build a reputation advantage, a cost advantage, as well as the construction of distribution channels. In four during the execution of the strategy, often there will be a certain degree of flexibility, and its flexibility will generate the corresponding value of the options, to form the expanded NPV value.
In short, the Company has made the the value strategic decision before this decision in advance to assess, extended NPV increase in the value of the value of the value of the company strategic behavior, to promote the implementation of the strategy of the company's value, as shown in Figure 1.
The corresponding real option value strategy and its impact
(A) Product innovation strategy
Product innovation can be effective in helping the company the ability to form a product differentiation, a valuable source of product innovation and use of new knowledge and new technology, and judge the success criteria whether the number of new value for customers to create new products. The value strategy is especially suitable for high-tech innovation industries, such as bio-pharmaceuticals, information technology, and electronic products. The strategy contains a composite portfolio of real options in the research and development of new products, the initial decision-maker can choose to continue research and development projects, to give up the R & D projects, or postpone the project to a mature technology, and corresponding growth in these decisions, to give up, to postpone options; product testing phase to contain growth, abandoned, postponed, and the conversion option; to-market stage contains growth, abandoned, postponed, conversion and expansion options. Product development technical uncertainty is very large, and thus in the early development of new products and product testing phase will be based on the actual development of the technology, and the re-development of product innovation strategy. For example, if the R & D results or product test results are not satisfactory, the management can choose to stop (to give up the option), or to convert the technology to other product development (conversion option) to pause for a while before the technology R & D time, waiting for R & D in key technical breakthrough in the future and then (postponed options).
(B) to establish a reputation advantage
The company established its reputation through a lot of advertising spending and marketing activities. Good reputation can improve the product price, foster customer loyalty, stability or increase market share. Reputation is often seen as a brand asset, is a valuable intangible assets. Brand capital is very important to build a reputation and strategic industries such as the food industry, the cigarette industry is very important. In order to build a reputation advantage usually requires a lot of investment in advertising and marketing activities for its products. Lower this uncertainty in the investment process, but also constitute a real option for future expansion. Based on early feedback for advertising and marketing activities carried out in stages, you can choose different adjustment program (conversion option) in order to achieve the best results, or choose to stop (to give up the option) to reduce the error of the advertising and marketing program brought losses. In view of the conversion options and give up the existence of an option to improve the value of the investment projects of the Company's investment in advertising and marketing activities to further promote the investment of the company in this regard.
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