1. Bowman and Hurry (1993) Presented by: Zhiling Lin
Strategy Through The Option Lens: An Integrated View of Resource Investments and the Incremental-Choice Process
Bowman and Hurry (1993)
Presented by: Zhiling Lin

2. Motivation
Resource investments and unfolding strategy choices are two related elements
Invested resources provide a platform for launching strategies
Strategies often generate resources

3. Option Theory How does an option work?
Using option contracts to retain the right to future investment choices without being obliged to invest
Hold a choice open at the risk of losing only the (incremental) sunk cost

4. Option Theory – Strategy through the option lens
Resources and the bundle of options:
Organization’s resources are a bundle of options for future strategic choice
When existing resources and capabilities allow preferential access to future opportunities
Firm gains preferential access as a potentially friendly bidder from a joint venture
Limiting the Sunk cost of existing assets works like an option contract in limiting downside risk

5. Option Theory – Strategy through the option lens
Shadow Options and Sense Making:
Opportunities for strategic choice come into being only when it’s recognized
Managers must “make sense” before identifying the potential action
Strategy to capture the opportunity will emerge from the bundle of options

6. Option Theory – Strategy through the option lens
Incremental Strategy and the Option Chain
Strategies are produced by sequential striking option chain
Involves the sequential recognition of shadow options and investments
Option has two basic categories: incremental and flexibility
Incremental: similar to call and put
“Strategies are continued by striking successive calls, but they are reversed by striking puts”
“The sale of a call option is equivalent to the creation of a put option”

7. The Activation of Options
A fixed sequence of actions in involved in the activation
Managers are motivated to convert the shadow option into a real option
Usually make a small investment rather than large
Option will be struck when it is ready to exploit
Investment is necessary for the option to be fully activated
New shadow options arise

8. Theoretical Refinements and Research Propositions
Downside Risk and Optimal Inertia
Bundles of options truncate the downside risk
Inertia: sunk cost in the past has pressure on organization to defer new investments
Optimal inertia is related to industry structure and the option bundle protection against downside risk
The more protection an organization has against downside risk, the wider its zone of optimal inertia
Proposition 1: Organizations holding better developed bundles of options will expand more aggressively in growing markets and economic upturns, and they will persist longer in difficult markets and economic downturns, than competitors holding less developed option bundles

9. Theoretical Refinements and Research Propositions
Perceived Environmental Uncertainty
Value of option increases as the volatility of underlying asset’s value increase
Conversely, as volatility decreases, the organization stands to gain more by striking
Managers have motivation to strike options when environmental uncertainty is low
Environmental volatility is a function of time for exogenous reason, and endogenous reasons related to the speed of organizational learning
Proposition 2: Given realistic perceptions of environmental uncertainty, organizations that hold options during unstable periods and strike options in stable periods will show superior long-term growth and profit performance compared to organizations exhibiting other types of investment behavior

10. Theoretical Refinements and Research Propositions
The size and timing of organizational investments
It is valuable to make small investments in options, followed by large investments in option strikes
Large investments such as acquisitions often fail in new areas because of a lack of appropriate management and production operating skills
Successful organizations progress from “learning” investments to full operations in a manner resembling an option chain
Rival bidder for the company will force the organization to strike its option
Proposition 3: Organizations that enter new business and markets by linking investments – so that small options are followed by large strikes – will perform better than those entering with only discrete small, or large, investments.

11. Theoretical Refinements and Research Propositions
The size and timing of organizational investments
Two signals to strike: opportunity signal and expiration signal
Opportunity signal is a necessary condition and the expiration signal is a sufficient condition
Managers tend to perceive threats more accurately than opportunities
Proposition 4: The performance of organizational investment in option strikes in related to investment timing as follows – from (a) = high performance to (e) = low performance: (a) Calls struck after receiving both signals. (b) Puts struck after receiving only the opportunity arrival signal. (c) Calls struck after receiving only the opportunity-arrival signal. (d) Calls and puts struck after receiving only the expiration signals. (e) Calls and puts struck before receiving either signal

12. Theoretical Refinements and Research Propositions
The portfolio of options
An organization’s ability to strike options effectively is also influenced by its structure
If organization allows individual options strike independently, it’s “portfolio of options”
If organization allows options to strike in hierarchy, it’s “an option on a portfolio of assets”
In general, it is more valuable to hold a portfolio of options
Proposition 5: Organizations with structures that are capable of holding a portfolio of options will show wider diversification, with fewer divestitures, than organizations with structures that restrict choices to an option on a portfolio of assets

13. Contribution to strategy and organization theory
Experience shapes manager’s cognitive lenses
Organizations learn through trial-and-error experimentation
Organizational investments provide current returns and cash flow, and they open up options.
The value of a firm is the sum of earnings generated by investments plus the option value of future strategic choices
The option bundle strengthens the conceptual bridge between strategic action and the value of the firm
Organization’s accumulated learning not only provides capabilities that give preferential access to opportunities, but it also influences sense making and the recognition of shadow options

14. Discussion What are the potential applications of this paper?
What can be improved in explaining the concept of options?