Assessing Risk for Strategy Formulation in Steel Industry through Real Option Analysis

AbstractWhile the efficiency of financial systems rests primarily on proper risk assessment and management, real option valuation (ROV) grounds strategic thinking and decision making analysis. Starting with the adoption of ROV in capital budgeting process, risk is assessed in a way so that it can be prevented or exploited or both, creating future options that incorporate uncertainty and provide flexibility. Taking both statements into concrete consideration, this paper analyses the risk faced by SMEs in the steel industry, aiming to exploit it in a different perspective. Despite the fact that the participation of SMEs in this industry is growing, many of them are still facing problems in allocating limited resources, assessing risk and strategic planning - financially or non-financially. ROV is capable to provide solutions to deal with the lack of SMEs strategic management practices by providing general application guidelines on risk assessment for the purpose of strategic planning