The Optimal Timing of Strategic Action – A Real Options Approach

The possibility of a first-mover advantage arises in a variety of strategic choices, including product introductions, business start-ups, and mergers and acquisitions. The strategic management literature reflects ambiguity regarding the likelihood that a first mover can or will capture additional value. This paper uses a real options approach to address the optimal timing of strategic moves. Previous studies have modeled real options using either a perpetual or a European financial option. With these models, a strategic choice could only be made either without respect to a time frame (perpetual) or at a fixed point in time (European option.) Neither case is realistic. Companies typically have strategic options with only a limited time frame due to market factors, but companies may choose to act at any time within that constraint. To reflect this reality, we adapt a method for valuing an American financial option on a dividend paying stock to the real options context. The method presented in this paper proposes a solution for the optimum value for a project that should trigger a strategic choice, and highlights the value lost by not acting optimally. We use simulation results to show that the time fram