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

L.J.O. Lint, H.P.G. Pennings

Research output: Chapter in Book/Report/Conference proceedingChapterAcademicpeer-review

Abstract

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.
Original languageEnglish
Title of host publicationReal options: New developments and applications
Place of PublicationNew York
PublisherOxford University Press
Publication statusPublished - 2002

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Product standards
Option value
Standardization
Interdependence
Uncertainty
Option theory
Financial options
Managerial flexibility

Cite this

Lint, L. J. O., & Pennings, H. P. G. (2002). The option value of developing two product standards simultaneously when the final standard is uncertain. In Real options: New developments and applications New York: Oxford University Press.
Lint, L.J.O. ; Pennings, H.P.G. / The option value of developing two product standards simultaneously when the final standard is uncertain. Real options: New developments and applications. New York : Oxford University Press, 2002.
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Lint, LJO & Pennings, HPG 2002, The option value of developing two product standards simultaneously when the final standard is uncertain. in 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.

Real options: New developments and applications. New York : Oxford University Press, 2002.

Research output: Chapter in Book/Report/Conference proceedingChapterAcademicpeer-review

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Lint LJO, Pennings HPG. The option value of developing two product standards simultaneously when the final standard is uncertain. In Real options: New developments and applications. New York: Oxford University Press. 2002