CHAPTER 7 Real Option Analysis—A Support Framework for Corporate Strategy. Strategy, according to the Oxford Dictionary, is a plan intended to achieve a particular purpose, such as the planning of movements of armies in a battle of war. The origin of the word is Greek; strategia refers to the office of the general. | Real Option Analysis A Support Framework for Corporate Strategy Strategy according to the Oxford Dictionary is a plan intended to achieve a particular purpose such as the planning of movements of armies in a battle of war. The origin of the word is Greek strategia refers to the office of the general. Strategy is science and art and it involves three components resources understanding of a situation and a goal. From these three components the strategic plan is derived. Strategy addresses uncertainty irreversibility and flexibility. The cornerstones of real option analysis are uncertainty irreversibility and the managerial flexibility to respond to future changes. Rumelt1 noticed some time ago a growing closeness between strategic management research and economic theory the main goal of real option analysis is to align corporate strategy with financial markets2 in times of great uncertainty and complexity. Several concepts and frameworks feature in the strategic management literature to assist management in drawing the road map for future value creation. Real options are an excellent analytical tool to integrate internally project management budget decisions and overall corporate strategy while also establishing the link to internal and external uncertainties. Key ingredients for reliable and helpful real option analysis include a very good understanding of corporate capabilities and resources the competitive environment and market dynamics. Strategy requires predictions about the future and so does real option analysis but in the words of Niels Bohr the Danish physicist Prediction is very difficult especially about the future. Or as Eugene Ionesco the Romanian-born French writer states You can only predict things after they have happened. Still patterns of the past provide comforting guidance they serve to collect data as projections for future what-if scenarios and as such deliver the scaffold for planning. 217 218 REAL OPTIONS IN PRACTICE A look at the strategic .
