Exam 6: Flexibility and Real Options

Under conditions of uncertainty,the riskiness of the cash flows generated can be reliably anticipated.

A real option exists when a firm has the ability,but not the obligation,to invest in real assets of some type.

Vertically integrating into an exchange is generally less flexible,that is,costlier to change,than using market contracts or strategic alliances to manage an exchange.

To see if valuing an investment as a real option creates any extra value for the firm,it is necessary to establish a benchmark.

Vertically integrating into an exchange is generally ________ than using market contracts or strategic alliances to manage an exchange.

The ________ value of the cash flows generated by choosing and implementing a particular strategy is equal to the sum of those cash flows,discounted by how risky they are.

Seymour Semiconductors is a major global player in the semiconductor and microchip industry. In the space that they compete in, there is tremendous technological uncertainty as disruptive innovations seemingly come out of nowhere to upend well-entrenched incumbents. These disruptions are often fast and are increasingly by companies that do not compete head-to-head with Seymour Semiconductors. In addition, market tastes for the end products that feature Seymour Semiconductors' components also change rapidly. The company was hurt financially when the market shifted away from personal computers (that accounted for a significant portion of Seymour Semiconductors' revenues), first to tablets, and then to other mobile devices. The company's new CEO, Lisa Monroe, has decided that the company's basic approach to strategy should change. Toward this, she has mandated that, at any point in time, Seymour Semiconductors should be able to choose from several different strategic options instead of a fixed and planned course of action that the company has pursued since it beginning. One of her mandates called for the company's future manufacturing plants to be built with the ability to add capacity at low cost. In addition, she wants to lay off 1,000 of the company's employees and hire contract and temporary workers in their stead. Finally, Monroe wants the company to use the real options approach to manage the combination of technological and market uncertainties. -In 2019,if Lisa Monroe decides that the market uncertainty for Seymour Semiconductors has reduced considerably while the high technological uncertainty continues,she should move the company to using ________ options.

A ________ exists when a firm has the ability,but not the obligation,to invest in real assets of some type.

A firm hiring contract and temporary employees instead of full-time employees is an example of the option to ________.

Firms seeking to implement a strategy of flexibility under conditions of uncertainty should adopt flexible forms of organization.

Real assets are tangible resources that can have an impact on a firm's production.

An oil company leasing land for potential exploration instead of buying it is an example of the option to ________.

The lower the ________ price,the greater is the value of a real option.

The lower the risk-free interest rate,the more valuable the option is.

Strategic choices are often made over time,in a staged manner.

A decision-making setting is said to be ________ when the outcome of that decision is not known with certainty,but the possible outcomes associated with that decision,and their probability,are known before a decision is made.

Which of the following is NOT an example of a real asset?

Gambling at a casino is a classic example of a(n)________ decision.

Seymour Semiconductors is a major global player in the semiconductor and microchip industry. In the space that they compete in, there is tremendous technological uncertainty as disruptive innovations seemingly come out of nowhere to upend well-entrenched incumbents. These disruptions are often fast and are increasingly by companies that do not compete head-to-head with Seymour Semiconductors. In addition, market tastes for the end products that feature Seymour Semiconductors' components also change rapidly. The company was hurt financially when the market shifted away from personal computers (that accounted for a significant portion of Seymour Semiconductors' revenues), first to tablets, and then to other mobile devices. The company's new CEO, Lisa Monroe, has decided that the company's basic approach to strategy should change. Toward this, she has mandated that, at any point in time, Seymour Semiconductors should be able to choose from several different strategic options instead of a fixed and planned course of action that the company has pursued since it beginning. One of her mandates called for the company's future manufacturing plants to be built with the ability to add capacity at low cost. In addition, she wants to lay off 1,000 of the company's employees and hire contract and temporary workers in their stead. Finally, Monroe wants the company to use the real options approach to manage the combination of technological and market uncertainties. -In 2019,if Lisa Monroe decides that the market uncertainty for Seymour Semiconductors persists while the technological uncertainty has reduced considerably,she should move the company to using ________ options.

When both technical and market uncertainty are high,Rita McGrath and Ian MacMillan suggest a ________ option.