A real options approach to valuing and negotiating licensing agreements

We apply real options modeling to a common pharmaceutical industry licensing arrangement to take into account various uncertainties and the flexibility value. The managerial flexibility is limited to the project abandonment option. We extend previous work by incorporating the phases required to bring the project from patent approval to market. We also incorporate a deterministic variable into the cash flow process that provides a realistic product lifecycle. We focus on the allocation of project value between licensor and licensee, i.e., the so-called “profit split” ratio (PSR) because it is commonly used in practice to negotiate terms. We find: (1) Ignoring the managerial flexibility in valuation may cause the licensee to either forego an acceptable deal or enter into an inferior deal. (2) The magnitude of project profitability as well as cost and sales uncertainty affects the licensor's bargaining power over compensation for granting abandonment flexibility to the licensee. (3) Managers must exercise care when estimating sales volatility because the flexibility value is more sensitive to sales volatility than it is to cost volatility. (4) Failure to incorporate the product lifecycle will produce suboptimal capital investment decisions.     

Creating comprehensive leadership pipelines: Applying the real options approach to organizational leadership development

Typically, firms consider leadership development (i.e., training focused on skills required for success in leadership roles) and succession planning (i.e., the creation and implementation of long-term plans that address changes in top leadership roles) as two distinct organizational initiatives. In recent years, however, scholars and practitioners have called for a new, more comprehensive approach that considers the organization as a system. Rather than considering succession planning and leadership development as distinctly different initiatives, organizations should work to create internal leadership pipelines that span entry-level employees to executives. To leverage potential advantages associated with instituting comprehensive leadership pipelines and to address practical concerns associated with risk and talent management, we propose the introduction of incremental investment in organization-wide leadership development programs via distinct, evaluative stages – a real options reasoning (ROR) approach to leadership. We argue that blending ROR with skills-based leadership models diversifies risk associated with investments in talent management and increases the ability for targeted, purposeful investment in potential organizational leaders.     

An interaction approach to global sourcing: A case study of IKEA

This study explores the process of global sourcing through a case of the Swedish furnishing retailer IKEA from an interaction perspective. With a point of departure in the streams of existing research on global sourcing and the internationalization process of firms through networks, a research question is proposed concerning supply network interactions as an influence in the global sourcing process. The study uses an in-depth qualitative case study methodology, focusing on IKEA and its development of a supply network for the PAX wardrobe system during the years 2003–2009. The findings draw on 29 interviews in Sweden and China, ranging from interviews with the supply management function of IKEA to interviews with Swedish and Chinese suppliers and sub-suppliers. The findings show that the global sourcing process is influenced by interactions and network effects between supply network actors. In particular, we find that relationships between suppliers were identified and set up by IKEA, but cascaded into deeper interactions amongst suppliers at different supply network tiers. Our study contributes to global sourcing research in indicating the importance of interaction amongst supply network actors, showing how the global sourcing strategy of one actor may significantly influence the sourcing strategies of other actors. Global sourcing decisions therefore need to be understood and coordinated across global supply networks.     

Lock-in situations in supply chains: A social exchange theoretic study of sourcing arrangements in buyer–supplier relationships

Social exchange theory is used to gain a better understanding of the relationship between a buyer and a supplier that is characterized by lock-in situations. We begin by reviewing the theoretical foundations of social exchange theory. Next, we use an illustrative multinational business example from a Danish Business Group to demonstrate the complexities of the lock-in situation. Conjectures related to lock-in behaviors are initially developed and then examined by means of a game-theoretic model. The analysis provides a basis for the development of propositions which are examined employing a behavioral experiment. The results indicate that the optimal pricing strategy of the supplier is to lower the price with increasing demand and the optimal investment intensity of the buyer decreases with increasing demand. The paper concludes by presenting directions for future research.     

Payment changes and default risk: The impact of refinancing on expected credit losses

This paper analyzes how access to credit and the path of mortgage rates can affect borrower credit risk. This is a crucial issue for evaluating refinance programs as a form of loss mitigation, and it became prominent in the debates around the Treasury Department's Home Affordable Refinance Program (HARP). These debates exposed gaps in the literature on the relationship between credit performance and changes in borrowers’ monthly mortgage payments. Since then, several new studies have attempted to fill these holes, each pursing a different methodology. In this paper, we review the relevant debates and look at what downward adjustments in prime adjustable-rate mortgages can tell us about modifications of prime fixed-rate mortgages. We argue that this method better addresses the various sampling biases that plague all attempts to predict HARP's impact. Our analysis indicates that typical monthly payment reductions under HARP would reduce credit losses by 56 basis points.     

An optimization approach to strategic sourcing: A case study of the United States Air Force

The DoD annually procures billions of dollars worth of systems, supplies, and services in support of the national military strategy. Faced with budget cuts and other resource constraints, the DoD must transform its procurement process to ensure cost-effective sourcing of critical supplies and services. One aspect of current transformation in the DoD is the use of a strategic sourcing approach for the procurement of services at military installations. Using the Air Force's strategic sourcing process as our context, we developed an optimization model for selecting a set of proposals from among multiple offerors for services to be performed at multiple installations. The selection achieves the most favorable objective by balancing the confidence level in an offeror's past performance with the cost of services to the Air Force. The research findings, which are based on a realistic scenario, demonstrate improvements over the current sourcing process in both overall performance and cost.     

The moderating effect of environmental uncertainty on the relationship between real options and technological innovation in high-tech firms

In the past decade, management scholars have applied aspects of real options theory to organizational settings, considering it an approach to enhancing strategic flexibility in the firm. They have also recognized that technological innovation is a critical mechanism through which high-tech firms try to secure a place in the competitive world of the future. Uncertainty about the environment makes it very important to analyze both factors, since the use of real options obligates managers to reflect constantly on future scenarios for which they will have to propose innovative solutions. This paper attempts to apply the theory of real options to innovation theory to propose a model in which real options reasoning improves the level of product/process technological innovation. We argue that this improvement will increase when the environment's level of uncertainty is higher. The proposal is supported empirically by a study performed on a sample of technology firms from different countries in the European Union.     

The council approach to collective bargaining: A report on 3 real world precedents

What will come of the unique situation in public employment to test, develop, refine, and advocate new dimensions in all employer-employee relations? Experimentation is proceeding in several states with several different approaches. The most successful mechanisms may be combined into a total program and advocated—not only to other public employers—but to the private sector as well. The employee-council approach, discussed here, may be the most productive of the possibilities.     

The effect of systematic risk factors on counterparty default and credit risk of interest rate swaps

This research investigates the effect of specific systematic risk factors on credit risk pricing and capital allocation of interest rate swaps. Because of the stochastic nature of uncertain future cash flows and interest rates, practitioners typically employ the Black-Scholes option pricing model in combination with a simulation analysis to establish capital requirements and estimate the shadow price of an interest rate swap. However, this practice of pricing swap risk excludes systematic risk factors that affect the risk shadow price, thereby underestimating the capital allocation required for financial institutions. This research demonstrates the effect of risk mispricing when simulation models ignore systematic risk factors such as model risk, convexity risk, and parameter risk on the pricing of interest rate swaps.     

基于层次分析法的电子制造企业供应商评价体系研究

本文在现有供应商评价指标与评价方法的基础上,根据我国电子制造企业的现状与特点,构建了包括质量管理、物流与交货、技术研发及生产制造4个一级指标、16个二级指标的供应商评价指标体系,并采用层次分析法确定各指标权重。最后,通过示例对本研究建立的供应商评价体系进行应用,以检验其可操作性。     

创业女性:要事业还是要家庭?

对这个问题的回答，无外乎三种答案：一是更看重事业；二是更看重家庭；三是家庭和事业兼顾。     

多伦多城市竞争力与房地产业关系研究

多伦多城市竞争力与房地产业发展具有互动关系.通过对这种互动关系的研究,可以发现,多伦多城市发展状况对房地产业有极其重要的影响,而房地产业发展又对增强城市竞争力发挥着不可替代的作用.多伦多城市发展历程可以对我国城市的发展提供诸多经验借鉴.     

A patent race in a real options setting: Investment strategy, valuation, CAPM beta, and return volatility

In this paper, we study financial properties of R&D intensive firms through a continuous-time real-options patent-race model. Numerical analysis in this study shows that intense competition drives a firm to invest more aggressively, which then pushes up its cost of capital and return volatility while introducing negative return correlation with its competitor. Furthermore, we find that a firm's position in competition has important impacts on its financial properties. For instance, a firm's cost of capital is a non-monotonic function of its relative position in the race. In addition, the relationship between cash flow uncertainty and investment can be negative when a firm is far ahead or far behind, or positive when firms are close in the race.     

Privatization of businesses and flexible investment: a real option approach

In this article, we study the situation, where the opportunity is given to invest into a government-owned business by partial privatization to a private company. After payment of an initial installment cost, the private company’s investments are flexible within a range [0, k] until the business is completed. We model the problem in a real option framework, using geometric mean reversion to describe the dynamics of the business. We determine the optimal time for the private company to enter and pay the initial installment cost as well as the optimal dynamic investment strategy that it follows afterward. For the latter, analytic solution cannot be obtained. We use quadratic splines in order to solve the corresponding dynamic programming problem. Finally, we determine the optimal degree of privatization in our model from the government’s perspective.     

Technology sourcing and outward FDI: A study of IT industry in India

Dunning’s eclectic or the OLI framework suggests that MNCs exist and grow due to possession of ownership (O) advantages consisting of the tangible and intangible assets of the firm (including technology); location (L) advantages consisting of production factors such as transportation, infrastructure, and human and natural resources available in the host country; and internalisation (I) advantages owing to firm’s competitive advantage in producing internally rather than selling or licensing technologies to others. There are several studies that have analysed MNCs of developed country origin from the perspective of both developed (home) and other developed or developing (host) countries. Recently, however, MNCs from developing countries are also making their presence felt in the world. Yet, there are hardly any studies that analyse MNCs of developing country origin.Using data on 130 firms from the high-tech Information Technology (IT) industry of India, we investigate whether ownership advantages (O), as proposed in the eclectic theory, holds true for the presence of MNCs from developing countries. Specifically, we analyse whether firm-specific technological advantages generated through differential technology sourcing at home (India) are important in determining inter-firm differences in the decision to invest abroad. The technological sources considered are in-house R&D efforts, import of designs, drawing and blueprints, and import of capital goods. The study reveals that in-house R&D efforts are indeed important for the firms to invest abroad. Size and export intensity of the firm also influence the decision of the firm to invest abroad. The study recommends a proper innovation and resource management strategy for developing country firms for efficient allocation of resources, technology sourcing, and technology assimilation.     

Evaluation of supplier capability and performance: A method for supply base reduction

Development of partnership with suppliers is widely recognised today as a potent tool for supply chain improvement. To develop an effective partnership, it is necessary to have a small supply base and an effort to reduce the supply base to a manageable level. Despite its overwhelming importance, models of supply base reduction are rare. Supplier sorting methods, used for pre-selection of suppliers and sometimes seen as methods for supply base reduction, have limitations ranging from (1) requirement of an exhaustive database of historical information (case-based reasoning), (2) inability to predefine the number of elements in a cluster (cluster analysis) and (3) inability to identify suppliers who are both highly capable as well as high performers (data envelopment analysis). In the present work, we develop a systematic framework for carrying out the supply base reduction process. The study assumes two important dimensions of suppliers—performance and capability. Performance of a supplier represents short-term effects on the achievement of supply chain objectives while supplier capability indicates long-term effects. Many of the performance and capability factors are imprecise in nature. In order to account for the imprecision involved in numerous subjective characteristics of suppliers, we use fuzzy set approach to measure the imprecision of these factors and rank a potential list of suppliers against their performance and capability. We then display their ranks in a ‘capability–performance matrix’ that helps a decision maker arrange the suppliers in decreasing order of preference. The desired numbers of suppliers are finally selected on the basis of this ordered list. The suggested framework will be of immense help to the practising managers in reducing the supply base—a prerequisite for building a strong supplier partnership and developing an effective supply chain.