### Abstract

Original language | English |
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Title of host publication | Real options: New developments and applications |

Place of Publication | New York |

Publisher | Oxford University Press |

Publication status | Published - 2002 |

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### Cite this

*Real options: New developments and applications*New York: Oxford University Press.

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*Real options: New developments and applications.*Oxford University Press, New York.

**The option value of developing two product standards simultaneously when the final standard is uncertain.** / Lint, L.J.O.; Pennings, H.P.G.

Research output: Chapter in Book/Report/Conference proceeding › Chapter › Academic › peer-review

TY - CHAP

T1 - The option value of developing two product standards simultaneously when the final standard is uncertain

AU - Lint, L.J.O.

AU - Pennings, H.P.G.

PY - 2002

Y1 - 2002

N2 - This paper presents a framework for valuing managerial flexibility within the context of product standardization. The framework originates in a major standardization problem concerning digital tape recording at Philips Electronics. We use insights from financial option theory to calculate the option value of simultaneously developing two correlated product standards, and then compare this value to the option value of developing a single standard. We determine a threshold level such that for lower follow-on investment outlays development of both standards is optimal while for higher investment levels development of a single standard is optimal. This threshold is negatively related to the correlation between the value of the two standards. Finally, we show that properly incorporating uncertainty and the interdependence between the payoffs to the two standards leads to significantly different conclusions from standard NPV-analysis.

AB - This paper presents a framework for valuing managerial flexibility within the context of product standardization. The framework originates in a major standardization problem concerning digital tape recording at Philips Electronics. We use insights from financial option theory to calculate the option value of simultaneously developing two correlated product standards, and then compare this value to the option value of developing a single standard. We determine a threshold level such that for lower follow-on investment outlays development of both standards is optimal while for higher investment levels development of a single standard is optimal. This threshold is negatively related to the correlation between the value of the two standards. Finally, we show that properly incorporating uncertainty and the interdependence between the payoffs to the two standards leads to significantly different conclusions from standard NPV-analysis.

M3 - Chapter

BT - Real options: New developments and applications

PB - Oxford University Press

CY - New York

ER -